<Page>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 18, 2004
REGISTRATION NUMBER 333-117346
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------
iBASIS, INC.
(Exact Name of Registrant as Specified in its Charter)
<Table>
DELAWARE 4813 04-3332534
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</Table>
20 SECOND AVENUE
BURLINGTON, MA 01803
(781) 505-7500
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
OFER GNEEZY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
iBASIS, INC.
20 SECOND AVENUE
BURLINGTON, MA 01803
(781) 505-7500
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
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COPIES TO:
Johan V. Brigham, Esq. Jonathan D. Draluck
Matthew J. Cushing, Esq. Vice President of Business Affairs
Bingham McCutchen LLP and General Counsel
150 Federal Street iBASIS, Inc.
Boston, MA 02110 20 Second Avenue
(617) 951-8000 Burlington, MA 01803
(781) 505-7500
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE HEREOF.
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If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box. /X/
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
<Table>
<Caption>
=================================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED PER SECURITY OFFERING PRICE FEE
=================================================================================================================
8% Secured Convertible Notes due 2007 $29,000,000 100% $29,000,000 $3,674.30
Common stock, $0.001 par value per share (2)
Common stock, $0.001 par value per share 5,286,296(3) $1.72 $ 9,092,429 $1,152.01(4)
Guarantees(5) (6) (6) (6) (6)
- -----------------------------------------------------------------------------------------------------------------
Total: $4,826.31
=================================================================================================================
</Table>
(1) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457 under the Securities Exchange Act of 1933, as
amended.
(2) Includes 15,675,675 shares of common stock issuable upon conversion
of the 8% Secured Convertible Notes. Pursuant to Rule 457(i), no
additional filing fee is required with respect to these shares of
common stock because no additional consideration will be received in
connection with the exercise of the conversion privilege.
(3) Includes 5,176,065 shares of common stock issuable upon the exercise of
certain warrants, dated as of June 18, 2004, and 110,231 shares of
common stock issued to the Registrant's investment banker as partial
compensation for services provided.
(4) The registration fee is calculated in accordance with Rule 457(c),
based on the offering of up to 5,286,296 shares of common stock at a
purchase price of $1.72 per share, which was the closing price of
shares of the Registrant's common stock on the OTC Bulletin Board on
July 9, 2004, such amount representing 5,176,065 shares of common
stock issuable upon the exercise of the warrants, dated as of June 18,
2004, and 110,231 shares of common stock issued to the Registrant's
investment banker as partial compensation for services provided.
(5) iBasis Global, Inc., iBasis Holdings, Inc. and iBasis Securities
Corporation, wholly-owned subsidiaries of iBasis, Inc., have jointly and
severally, fully and unconditionally guaranteed the repayment of the 8%
Secured Convertible Notes due 2007. Such Subsidiary Guarantors are
registering their Guarantees. No separate consideration will be received
for such Guarantees. Pursuant to Rule 457(n) under the Securities Act of
1933, as amended, no separate registration fee is required with respect
to such Guarantees. The primary standard industrial classification
number for each such Subsidiary Guarantor is 4813. The address of each
such Subsidiary Guarantor is 20 Second Avenue, Burlington, MA 01803. The
state of incorporation of iBasis Global, Inc. and iBasis Holdings, Inc.
is Delaware. The state of incorporation of iBasis Securities Corporation
is Massachusetts. The I.R.S. Employer Identification Numbers of iBasis
Global, Inc., iBasis Holdings, Inc. and iBasis Securities Corporation are
04-3524321, 04-3527573 and 04-3446596, respectively.
(6) Not applicable.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
<Page>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD UNTIL THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO
SELL AND IS NOT A SOLICITATION OF AN OFFER TO BUY IN ANY STATE IN WHICH AN
OFFER, SOLICITATION, OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED AUGUST 18, 2004
PROSPECTUS
iBASIS, INC.
$29,000,000 OF 8% SECURED CONVERTIBLE NOTES DUE 2007
20,961,971 SHARES OF COMMON STOCK
This prospectus relates to the offer and sale of the following
securities by the selling securityholders named in this prospectus:
- $29,000,000 of 8% Secured Convertible Notes due 2007, referred
to herein as the "New Secured Notes";
- Up to 20,851,740 shares of our common stock issuable upon the
conversion of the New Secured Notes and upon exercise of certain
warrants; and
- 110,231 shares of our common stock issued to our investment
banker, Imperial Capital, LLC, as partial compensation for
services provide to us in connection with the recent refinancing
of our debt obligations.
We will not receive any of the proceeds from the sale of securities by
the selling securityholders.
Our common stock is traded on the OTC Bulletin Board under the symbol
"IBAS." On August 13, 2004, the last sale price of our common stock, as quoted
on the OTC Bulletin Board, was $1.90 per share.
INVESTING IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK.
YOU SHOULD PURCHASE SECURITIES ONLY IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR
INVESTMENT.
SEE "RISK FACTORS" BEGINNING ON PAGE 20.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
NOTE TO CALIFORNIA INVESTORS: THE OFFERING OF THE COMMON STOCK AND
THE NEW SECURED NOTES PURSUANT TO THIS PROSPECTUS IS LIMITED TO SUITABLE
INVESTORS. PLEASE SEE "SPECIAL NOTE TO CALIFORNIA INVESTORS" ON PAGE 2 OF
THIS PROSPECTUS FOR A DESCRIPTION OF THE SUITABILITY REQUIREMENTS.
THE DATE OF THIS PROSPECTUS IS , 2004.
1
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TABLE OF CONTENTS
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PAGE
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SPECIAL NOTE TO CALIFORNIA INVESTORS 2
PROSPECTUS SUMMARY 3
SUMMARY CONSOLIDATED FINANCIAL INFORMATION 12
RATIO OF EARNINGS TO FIXED CHARGES 13
RISK FACTORS 14
USE OF PROCEEDS 27
MARKET FOR OUR COMMON STOCK 28
DIVIDEND POLICY 28
SELLING SECURITYHOLDERS 29
SELECTED CONSOLIDATED FINANCIAL INFORMATION 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 34
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 54
BUSINESS 54
MANAGEMENT 65
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 73
PRINCIPAL STOCKHOLDERS 73
DESCRIPTION OF SECURITIES TO BE REGISTERED 76
PLAN OF DISTRIBUTION 96
LEGAL MATTERS 98
WHERE YOU CAN FIND MORE INFORMATION 98
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS F-1
</Table>
We have not authorized any dealer, salesperson or other person to give
any information or to make any representations not contained in this prospectus
or any prospectus supplement. You must not rely on any unauthorized information.
Neither this prospectus nor any prospectus supplement is an offer to sell or a
solicitation of an offer to buy any of these securities in any jurisdiction
where an offer or solicitation is not permitted. No sale made pursuant to this
prospectus shall, under any circumstances, create any implication that there has
not been any change in our affairs since the date of this prospectus.
SPECIAL NOTE TO CALIFORNIA INVESTORS
The offering of the common stock and the New Secured Notes offered by
the selling securityholders pursuant to this prospectus is limited to, and
such securities may be sold in California only to, suitable investors who
have (A) a minimum net worth of at least $75,000 and a minimum gross income
of $50,000, or (B) in the alternative, a minimum net worth of $150,000,
in both instances exclusive of their home, home furnishings and automobile,
PROVIDED, that in either case, the investment may not exceed 10% of the
investor's total net worth. Also, a "small investor" who, including the
offering pursuant to this prospectus, has not purchased more than $2,500
worth of our securities in the past twelve months, may also purchase common
stock or New Secured Notes offered pursuant to this prospectus in an amount
not to exceed $2,500 in the aggregate. Each California investor will be
required to confirm in writing to the applicable selling securityholder its
compliance with the foregoing suitability standards.
2
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PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary does not contain all the information you should
consider before investing in shares of our common stock or our New Secured
Notes. You should read this entire prospectus carefully, including "Risk
Factors" beginning on page 20 and our financial statements and the notes to
those financial statements beginning on F-1 before making an investment
decision.
ABOUT iBASIS
COMPANY OVERVIEW
We are an international telecommunications carrier that utilizes the
Internet to provide economical international telecommunications services. Our
continuing operations consist of our Voice-Over-Internet-Protocol, or VoIP,
business. We offer wholesale services through our worldwide network to carriers,
telephony resellers and others around the world by operating through various
service agreements with local service providers in the United States, Europe,
Asia, the Middle East, Latin America, Africa and Australia.
During the third quarter of 2003, we introduced our retail prepaid
calling card services and have marketed such services primarily to ethnic
communities within major domestic markets through distributors. Our entry into
the retail prepaid calling card business is based on our strategy to leverage
our existing international VoIP network with additional enhanced services that
have the potential to deliver higher margins than our wholesale international
telecommunications services. In addition, the retail prepaid calling card
business typically has a faster cash collection cycle than wholesale
international telecommunications services. Beginning in the second quarter of
2004, our recently created operating segment, retail prepaid calling card
services and other enhanced services ("Retail") became a reportable business
segment, in addition to our international wholesale VoIP telecommunications
services. Since we introduced our retail prepaid calling card services,
revenue from our Retail business had been less than 10% of total revenue. In
the second quarter of 2004, revenue from our Retail business exceeded 10% of
total net revenue.
We have a history of operating losses and, as of June 30, 2004, our
accumulated deficit was $427.5 million and our stockholders' deficit was
$54.2 million. We used $2.4 million and $3.2 million in cash from operations
in the six months ended June 30, 2004 and the year ended December 31, 2003,
respectively. These results are primarily attributable to the expenditures
necessary to build our network and develop and expand our market. In June
2004, we completed a refinancing of our outstanding debt obligations. As part
of the refinancing, we completed an exchange offer (the "Exchange Offer"),
pursuant to which $37.3 million of our outstanding 5 3/4% Convertible
Subordinated Notes due in March 2005 ("Existing Notes"), representing
approximately 98% of the total amount of Existing Notes outstanding, were
tendered for the same principal amount of new 6 3/4% Convertible Subordinated
Notes due in June 2009 ("New Subordinated Notes"). Approximately $0.9 million
of the Existing Notes remain outstanding after the Exchange Offer.
Simultaneously with the Exchange Offer, we prepaid all $25.2 million of our
11 1/2% Senior Secured Notes due in January 2005 ("Existing Senior Notes")
for cash equal to the principal amount plus accrued but unpaid interest and
the issuance of warrants exercisable for an aggregate of 5,176,065 shares of
our common stock, $0.001 par value per share ("common stock"), at $1.85 per
share (the "Warrants"). We issued $29.0 million of new 8% Secured Convertible
Notes due in June 2007, of which $25.2 million was used to prepay the
Existing Senior Notes. The New Secured Notes are convertible into shares of
common stock at $1.85 per share.
We were incorporated as a Delaware corporation in 1996. Our principal
executive offices are located at 20 Second Avenue, in Burlington, Massachusetts
01803 and our telephone number is (781) 505-7500.
SUMMARY OF THE OFFERING
We recently prepaid all $25.2 million of our Existing Senior Notes,
pursuant to the terms of a Note Repurchase, Exchange and Termination
Agreement, by and among us and the holders of our outstanding Existing Senior
Notes, for cash equal to the principal amount of the Existing Senior Notes
plus accrued interest and the issuance of the Warrants. Pursuant to the terms
of a Note Purchase Agreement by and among us and the purchasers of the New
Secured Notes, we simultaneously issued $29.0 million aggregate principal
amount of our New Secured Notes, of which $25.2 million was used to prepay
the Existing Senior Notes. The New Secured Notes are convertible into shares
of common stock at $1.85 per share.
3
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We are registering the New Secured Notes and the shares of common stock
underlying the New Secured Notes and the Warrants in accordance with
registration rights agreements we entered into with holders of our Existing
Senior Notes and our New Secured Notes. We are also registering 110,231 shares
of our common stock that we issued to our investment banker, Imperial Capital,
LLC, as partial compensation for services provided to us in connection with the
Exchange Offer and the refinancing of the Existing Senior Notes. Our
registration of the securities does not necessarily mean that the selling
securityholders will convert the New Secured Notes or exercise any of the
Warrants or sell any or all of the underlying securities we have registered.
Although we may receive cash upon the exercise of the Warrants, we will
not receive any of the proceeds from the sale by the selling securityholders of
the New Secured Notes, the common stock issuable upon conversion of the New
Secured Notes or upon exercise of the Warrants, or the common stock issued to
our investment banker, Imperial Capital, LLC.
For information regarding the selling securityholders and the resale of
the securities, see "Selling Securityholders" and "Plan of Distribution."
SUMMARY OF NEW SECURED NOTES
<Table>
ISSUER iBasis, Inc.
NOTES OFFERED $29,000,000 aggregate principal amount of 8% Secured Convertible
Notes due 2007.
INTEREST PAYMENT DATES Interest is payable on June 15 and December 15 of each year,
beginning on December 15, 2004.
INTEREST 8% per annum in cash.
MATURITY June 18, 2007
CONVERSION The New Secured Notes are convertible, in whole or in part, at
any time prior to maturity into shares of common stock at a
conversion price of $1.85 per share, subject to adjustment upon
the occurrence of certain events.
PROVISIONAL REDEMPTION The New Secured Notes are not redeemable prior to June 18, 2005,
the twelve-month anniversary of the date of issuance. Thereafter,
we will have the right to redeem some or all of the New Secured
Notes at a redemption price equal to $1,000 per New Secured Note
plus accrued and unpaid interest to the redemption date if the
closing price of our common stock exceeds 150% of the conversion
price for at least 20 trading days in any consecutive 30-trading
day period ending on the trading day prior to the mailing of the
notice of redemption.
OPTIONAL REDEMPTION After June 18, 2006, the second anniversary of the date of
issuance, we will be able to redeem the New Secured Notes, in
whole or in part, at our option, at a redemption price equal to
102% of the principal amount plus accrued and unpaid interest to,
but excluding, the redemption date.
REPURCHASE UPON A REPURCHASE EVENT Upon the occurrence of a repurchase event, the holders of the New
Secured Notes will have the right to require us to repurchase
</Table>
4
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<Table>
the New Secured Notes in cash, or upon satisfaction of certain
conditions and at our option, in shares of common stock, at a
repurchase price of 105% of the principal amount of the New
Secured Notes submitted for repurchase, plus accrued and unpaid
interest to, but excluding, the repurchase date. A "repurchase
event" includes a change of control under certain circumstances
or a termination of listing of our common stock on a U.S.
national securities exchange or trading on an established
over-the-counter trading market in the U.S.
SECURITY The New Secured Notes are secured by a perfected, second priority
secured interest in substantially all of our tangible and
intangible assets.
The New Secured Notes are guaranteed by iBasis Global, Inc.,
iBasis Holdings, Inc. and iBasis Securities Corporation, each
of which is a wholly-owned subsidiary of ours.
SUBORDINATION The New Secured Notes are subordinated to the prior payment in
full of our existing and future senior indebtedness.
EVENTS OF DEFAULT The following events constitute "events of default" under the
Indenture for the New Secured Notes by and between us and The
Bank of New York as trustee (the "New Secured Note Indenture"):
- failure to pay the principal or premium, if any, on any
of the New Secured Notes when due;
- failure to pay interest on the New Secured Notes when due
if such failure continues for 30 days;
- failure to deliver shares of our common stock, including
cash for fractional shares, 5 days after conversion of a
New Secured Note;
- failure to perform any covenant in the New Secured Note
Indenture if such failure continues for 45 days after
notice is given;
- failure to repurchase any New Secured Notes upon a
repurchase event, or to provide written notice to the
holders of the New Secured Notes of such an event;
- our failure or the failure of any of our significant
subsidiaries to make payment at maturity of other
indebtedness in an aggregate principal amount in excess
of $5 million if such failure continues for a period of
30 days after notice of such default;
- our default or the default of any of our significant
subsidiaries that results in the acceleration of
indebtedness in an aggregate principal amount in excess
of $5 million if such indebtedness shall not have been
discharged or such acceleration shall not have been
rescinded or annulled within 30 days after notice of such
default;
- we or any of our significant subsidiaries commences a
voluntary proceeding seeking liquidation, reorganization
</Table>
5
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<Table>
or other relief, or consents to any such relief or the
appointment a trustee, receiver, liquidator, custodian or
similar official in an involuntary case against us or any
such subsidiary, or makes a general assignment for the
benefit of creditors or otherwise fails to pay debts when
they become due;
- an involuntary case or other proceeding is commenced
against us or any of our significant subsidiaries seeking
liquidation, reorganization or other relief with respect
to us or our debts or seeking the appointment of a
trustee, receiver, liquidator, custodian or similar
official, and such case remains undismissed and unstayed
for a period of 60 days;
- a default occurs under any of the security documents, the
liens created by the security documents do not constitute
valid and perfected liens, or any of the security
documents ceases to be in full force and effect (other
than expiration in accordance with their terms or
modification, waiver, termination or release in
accordance with the terms of the New Secured Note
Indenture), and such default continues for a period of 15
days following written notice of such default;
- our failure to make, when due, any transfer, delivery,
pledge, assignment or grant of collateral required to be
made by us, and such failure continues for 10 business
days after notice of such failure; or
- Any guarantee given by one of our subsidiaries pursuant
to the New Secured Note Indenture is held to be
unenforceable or invalid in any material respect or
ceases to be in full force and effect, or any subsidiary
denies its guarantee obligations.
If an event of default occurs and continues to occur, the
principal and premium on the New Secured Notes may be declared to
be immediately due and payable. After acceleration, but before a
judgment or decree based on acceleration, the holders of a
majority in aggregate principal amount of outstanding New Secured
Notes under circumstances set forth in the New Secured Note
Indenture, will be able to rescind the acceleration of all events
of default, other than the payment of principal of the New
Secured Notes that becomes due solely because of the acceleration
and events of defaults that are cured or waived as provided in
the New Secured Note Indenture.
COVENANTS FINANCIAL COVENANTS
Under the New Secured Note Indenture, we are prohibited from:
- incurring additional indebtedness other than (i)
indebtedness under the New Secured Notes and the
subsidiary guarantees, (ii) issuing in excess of $38.18
million aggregate principal amount of the Existing Notes
</Table>
6
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and the New Subordinated Notes, (iii) additional
indebtedness that is PARI PASSU with or subordinate to
the New Secured Notes, not to exceed $20,000,000 in
principal amount outstanding at any time, (iv)
indebtedness not otherwise covered by any other clause
which is outstanding on the date of execution of the New
Secured Note Indenture, (v) our indebtedness to any of
our designated subsidiaries and indebtedness of any of
our designated subsidiaries to us or another subsidiary,
(vi) indebtedness secured by our assets that is incurred
by us or any of our designated subsidiaries from any
bank, commercial finance company, other commercial lender
or financial institution in an amount not to exceed
specified maximum thresholds set forth in the New Secured
Note Indenture, (vii) our indebtedness or indebtedness of
any of our subsidiaries incurred or issued in exchange
for, or the net proceeds of which are used to extend,
refinance, renew, replace, defease or refund other
indebtedness of ours or any of our subsidiaries (other
than intercompany indebtedness) outstanding on the date
of execution of the New Secured Note Indenture or other
indebtedness permitted to be incurred by us or our
subsidiaries pursuant to the terms of the New Secured
Note Indenture, (viii) indebtedness of a person existing
at the time such person becomes one of our subsidiaries
or assumed in connection with the acquisition by us of
assets from such person, in an amount not to exceed $25
million in the aggregate, (ix) indebtedness that is
subordinate to the New Secured Notes, not to exceed
$114.5 million in the aggregate, (x) indebtedness arising
from bonds or instruments securing our obligations or
obligations of any of our designated subsidiaries
incurred in the ordinary course of business, which bonds
or other instruments do not secure other indebtedness,
(xi) issuing capital stock that, by its terms, or by the
terms of any security into which it is convertible or for
which it is exchangeable, or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to
a sinking fund obligation or otherwise, or redeemable at
the option of the holder thereof, in whole or in part, on
or prior to the date that is 121 days after the date on
which the New Secured Notes mature (such stock is referred
to hereafter as "disqualified stock"), PROVIDED, that we
may issue shares of disqualified stock if: (A) the fixed
charge coverage ratio for our most recently ended four
full fiscal quarters for which internal financial
statements are available immediately preceding the date
on which such disqualified stock is issued would have
been at least 1.5 to 1, determined on a pro forma basis
(including a pro forma application of the net proceeds
therefrom), as if the disqualified stock had been issued
at the beginning of such four-quarter period; (B) no
default or event of default shall have occurred and be
continuing or would occur as a consequence thereof, and
(C) the terms of such disqualified stock expressly
provide that we shall not be required to redeem such
disqualified stock at
</Table>
7
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<Table>
any time prior to the date on which all amounts due under
the New Secured Note Indenture, including without
limitation all principal and interest due under the New
Secured Notes, have been indefeasibly paid in full; (xii)
indebtedness incurred to finance the purchase, lease or
improvements of property, provided that the aggregate
amount of indebtedness does not exceed the lesser of 10%
of our total assets or $10 million, (xiii) indebtedness
incurred under foreign currency exchange agreements
entered into for bona fide hedging purposes and not for
speculative purposes, (xiv) indebtedness arising from
honoring by a bank or other financial institution of a check,
draft or similar instrument inadvertently drawn against
insufficient funds in the ordinary course of business,
provided that such indebtedness is extinguished within 4
business days, and (xv) indebtedness of ours or any of our
designated subsidiaries consisting of guarantees, indemnities
or obligations in respect of purchase price adjustments in
connection with the acquisition or disposition of assets.
Under the New Secured Note Indenture, we may not, and we may not
permit any of our subsidiaries to:
- incur any lien on any property or proceeds except with
respect to liens existing on the issue date or to be
incurred pursuant to agreements existing on the issue
date, or debt incurred to refinance such debt, liens on
property that is acquired by us, or liens securing
certain permitted secured indebtedness;
- declare any dividend or make any distribution to any
equity holders, purchase, redeem or otherwise acquire or
retire for value any equity (other than permitted
employee equity repurchases or pursuant to a permitted
open-market stock repurchase plan), subject to a basket
based on our consolidated net income after the issue date
of the New Secured Notes, prepay any indebtedness that is
contractually subordinated to the New Secured Notes prior
to their stated maturity, or make certain other
"restricted payments";
- make certain investments that are not consistent with our
line of business;
- issue preferred capital stock that could be redeemed
prior to the maturity date of the New Secured Notes;
- permit any restrictions to be imposed on the ability of
our subsidiaries to pay dividends or transfer assets to
us;
- enter into any transactions with our affiliates on
less-favorable terms than would have been obtained in a
comparable transaction with an unrelated party and, in
the event of any such transaction involving aggregate
consideration in excess of $5.0 million, without an
opinion of an investment banking firm of national
</Table>
8
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<Table>
standing as to the fairness of such transaction from a
financial point of view;
- consummate any asset sale unless we or one of our
designated subsidiaries receives consideration equal to
the fair market value of the assets sold, receives at
least 75% of the net proceeds in cash, and, with respect
to an asset sale involving equity interests of a
designated subsidiary, we sell all of the equity
interests we own. We must invest the proceeds from any
asset sale in the development, manufacture, marketing,
provision or sale of communications and
communications-related services and products or any other
business conducted by us on the issue date of the New
Secured Notes, or use the proceeds to reduce our
indebtedness;
- permit any of our designated subsidiaries to guarantee
our indebtedness, other than indebtedness under that
certain Loan and Security Agreement, dated December 29,
2003, among us, iBasis Global, Inc. and Silicon Valley
Bank ("Credit Agreement"), the New Secured Notes, the
PARI PASSU indebtedness, and, to the extent permitted by
the New Secured Note Indenture, currency hedge
obligations;
- acquire or create any additional domestic subsidiary
after the date of the New Secured Note Indenture, unless
such subsidiary shall become a subsidiary guarantor and
execute a supplemental indenture; or
- sell any shares of capital stock of a designated
subsidiary, except to ourselves or another wholly-owned
subsidiary, issuances of director's qualifying shares or
sales to foreign nationals of shares of capital stock of
foreign subsidiaries, or sales of common stock of a
designated subsidiary, provided that the designated
subsidiary would no longer be a designated subsidiary.
NON-FINANCIAL COVENANTS
Under the New Secured Note Indenture, we are required to:
- duly and punctually pay the principal of and premium, if
any, and interest on each of the New Secured Notes;
- maintain an office or agency in the Borough of Manhattan,
The City of New York, where the New Secured Notes may be
surrendered for registration of transfer or exchange or
for presentation for payment or for conversion,
redemption or repurchase and where notice and demands to
or upon us in respect of the New Secured Notes and New
Secured Note Indenture may be served;
- appoint a Trustee whenever necessary to avoid or fill a
</Table>
9
<Page>
<Table>
vacancy in the office of Trustee, so that at all times
there will be a Trustee under the New Secured Note
Indenture;
- cause any paying agent that we appoint other than the
Trustee to execute and deliver to the Trustee an
instrument in which it agrees to (i) hold all sums in
trust for the benefit of the holders of the New Secured
Notes, (ii) give the Trustee notice of any failure by us
to make any payment of the principal of and premium, if
any, or interest on the New Secured Notes when the same
is due and payable, and (iii) pay to the Trustee all sums
held in trust upon an event of default under the New
Secured Note Indenture. If we act as our own paying
agent, we must, on or before each due date of the
principal of, premium, if any, or interest on the New
Secured Notes, set aside and hold in trust for the
benefit of the holders of the New Secured Notes a sum
sufficient to pay such principal, premium, if any, or
interest becoming due, and we must notify the Trustee of
our failure to take any such action or any failure to
make any payment when due;
- do all things necessary to preserve and keep in full
force and effect our corporate existence and the
corporate, partnership or other existence of the
designated subsidiaries and our rights, licenses and
franchises and the rights, licenses and franchises of any
designated subsidiary;
- agree not to claim or take advantage of any stay,
extension or usury law or other law, whenever enacted,
that would prohibit or forgive us from paying all or any
portion of the principal of or interest on the New
Secured Notes;
- deliver to the Trustee within 120 days after the end of
each fiscal year an officer's certificate, signed by our
principal executive, principal financial or principal
accounting officer, stating whether, to the best of their
knowledge, the signer knows of any default under the New
Secured Note Indenture that occurred during such period,
and describing the nature of such default;
- execute and deliver any further instruments and do any
further acts, as may be requested by the Trustee, that
are reasonably necessary to carry out the purposes of the
New Secured Note Indenture;
- pay or discharge any material tax, assessment, charge, or
claim;
- maintain with financially sound and reputable insurance
companies insurance in at least such amounts and against
at least such risks (but including in any event public
liability, product liability and business interruption)
as are usually insured against in the same general area
by
</Table>
10
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<Table>
companies engaged in the same or a similar business; and
- file reports with the SEC in a timely manner.
LISTING The New Secured Notes will not be listed on any national
securities exchange or the Nasdaq Stock Market, but we expect
that they may be eligible for trading in the PORTAL Market of the
National Association of Securities Dealers, Inc.
SUMMARY OF COMMON STOCK
COMMON STOCK OFFERED BY iBASIS None.
COMMON STOCK OFFERED BY SELLING Up to 20,851,740 shares of common stock that may be issued upon
SECURITYHOLDERS conversion of the New Secured Notes and upon exercise of the
Warrants, subject to adjustment upon the occurrence of certain
events, and 110,231 shares of common stock that were issued to
our investment banker, Imperial Capital, LLC, as partial
compensation for services provided to us in connection with the
Exchange Offer and the refinancing of the Existing Senior Notes.
COMMON STOCK OUTSTANDING PRIOR TO THIS
OFFERING 46,897,108 shares
USE OF PROCEEDS Although we may receive cash upon the exercise of the Warrants,
we will not receive any of the proceeds from the sale by the
selling securityholders of the common stock issuable upon
conversion of the New Secured Notes or upon the exercise of the
Warrants.
RISK FACTORS An investment in our securities is highly speculative and
involves a high degree of risk. You should carefully read the
"Risk Factors" section and all other information provided to you
in this document in deciding whether to invest in our securities.
OTC BULLETIN BOARD TRADING SYMBOL "IBAS"
</Table>
11
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SUMMARY CONDENSED CONSOLIDATED FINANCIAL INFORMATION
THE FOLLOWING SUMMARY CONDENSED CONSOLIDATED FINANCIAL INFORMATION AS OF
AND FOR THE YEARS ENDED DECEMBER 31, 2003, 2002, 2001, 2000 AND 1999 HAVE
BEEN DERIVED FROM OUR AUDITED FINANCIAL STATEMENTS. THE FINANCIAL INFORMATION
AS OF AND FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003 IS
DERIVED FROM OUR UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS. THE SUMMARY
CONDENSED CONSOLIDATED FINANCIAL INFORMATION SET FORTH BELOW SHOULD BE READ
IN CONJUNCTION WITH "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND THE FINANCIAL STATEMENTS AND NOTES
THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS.
<Table>
<Caption>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------- -------------------------
2004 2003 2004 2003
---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenue ............................... $ 61,175 $ 39,119 $118,183 $80,960
Total costs and operating expenses ........ 63,792 47,312 124,398 96,566
------------------------------------------------
Loss from operations ...................... (2,617) (8,193) (6,215) (15,606)
Loss from continuing operations ........... (5,913) (5,505) (15,255) (1,473)
Income (loss) from discontinued
operations ............................. -- -- -- --
------------------------------------------------
Net loss .................................. $ (5,913) $ (5,505) $(15,255) $(1,473)
Basic and diluted net loss per share:
Loss from continuing operations ........... $ (0.13) $ (0.12) $ (0.33) $ (0.03)
Income (loss) from discontinued
operations ............................. -- -- -- --
Basic and diluted net loss per share ...... $ (0.13) $ (0.12) $(0.33) $ (0.03)
------------------------------------------------
Basic and diluted weighted average common
shares outstanding:
Basic .................................. 46,287 44,652 45,674 44,651
Diluted ................................ 46,287 44,652 45,674 44,651
Ratio of earnings to fixed charges ........ (5.4) (1.5) (7.6) (0.8)
Excess (deficiency) of earnings to fixed
charges ................................ $ (5,913) $ (5,505) $(15,255) $(1,473)
</Table>
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenue ............................... $ 178,159 $ 164,942 $ 110,180 $ 61,218 $ 19,417
Total costs and operating expenses ........ 201,569 236,533 257,711 130,489 41,049
----------------------------------------------------------
Loss from operations ...................... (23,410) (71,591) (147,531) (69,271) (21,632)
Loss from continuing operations ........... (10,938) (56,501) (140,918) (62,291) (21,087)
Income (loss) from discontinued
operations ............................. 1,251 (65,222) (49,771) -- --
----------------------------------------------------------
Net loss .................................. $ (9,687) $ (121,723) $ (190,689) $ (62,291) $ (21,087)
Basic and diluted net loss per share:
Loss from continuing operations ........... $ (0.24) $ (1.25) $ (3.30) $ (1.85) $ (2.29)
Income (loss) from discontinued
operations ............................. 0.03 (1.45) (1.17) -- --
Basic and diluted net loss per share ...... $ (0.21) $ (2.70) $ (4.47) $ (1.85) $ (2.29)
----------------------------------------------------------
Basic and diluted weighted average common
shares outstanding:
Basic .................................. 44,696 45,164 42,645 33,612 9,655
Diluted ................................ 44,696 45,164 42,645 33,612 9,655
Ratio of earnings to fixed charges ........ (0.1) (3.7) (7.3) (3.7) (10.5)
Excess (deficiency) of earnings to fixed
charges ................................ $ (10,938) $ (56,501) $ (140,919) $ (62,292) $ (22,107)
</Table>
<Table>
<Caption>
DECEMBER 31,
------------
JUNE 30,
2004 2003 2002 2001 2000 1999
---- ---- ---- ---- ---- ----
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents, restricted cash and
marketable securities .......................... $ 18,217 $ 17,270 $ 32,317 $ 118,690 $ 300,327 $ 123,666
Working capital ................................... 955 3,264 21,906 155,509 258,513 27,915
Total assets ...................................... 59,150 67,538 98,524 328,825 447,818 153,473
Long term debt and other long term liabilities, net
of current portion ............................. 66,285 65,829 93,590 171,343 190,880 11,689
Total stockholders' (deficit) equity .............. (54,164) (42,108) (33,972) 86,717 206,896 126,904
</Table>
12
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RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth our ratio of earnings to fixed charges
for each of the periods indicated. The ratio of earnings to fixed charges has
been calculated on a consolidated basis and should be read in conjunction with
our consolidated financial statements and the related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<Table>
<Caption>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------- -----------------------
2004 2003 2004 2003
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Excess (deficiency) of earnings to
fixed charges .......................... $ (5,913) $ (5,505) $ (15,255) $ (1,473)
Ratio of earnings to fixed charges
and preferred stock dividends .......... (5.4) (1.5) (7.6) (0.8)
</Table>
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Excess (deficiency) of earnings to
fixed charges .......................... $ (10,938) $ (56,501) $ (140,919) $ (62,292) $ (22,107)
Ratio of earnings to fixed charges
and preferred stock dividends .......... (0.1) (3.7) (7.3) (3.7) (10.5)
</Table>
The ratios of earnings to fixed charges presented above were computed by
dividing our earnings by fixed charges. For this purpose, earnings have been
calculated as fixed charges plus loss from continuing operations. Fixed charges
consists of interest expense, interest charged to the gains on bond repurchases
and exchanges, amortization of deferred financing costs and preferred stock
dividends. We had no capitalized interest for any of the periods presented.
13
<Page>
RISK FACTORS
ANY INVESTMENT IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK. YOU
SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, WHICH WE BELIEVE ARE ALL
THE MATERIAL RISKS TO OUR BUSINESS, TOGETHER WITH THE INFORMATION CONTAINED
ELSEWHERE IN THIS PROSPECTUS, BEFORE YOU MAKE A DECISION TO INVEST IN OUR
COMPANY.
RISKS RELATED TO THE COMPANY
A FAILURE TO OBTAIN NECESSARY ADDITIONAL CAPITAL IN THE FUTURE COULD JEOPARDIZE
OUR OPERATIONS.
We will need additional capital in the future to fund our operations,
finance investments in equipment and corporate infrastructure, expand our
network, increase the range of services we offer and respond to competitive
pressures and perceived opportunities. We have had a history of negative cash
flows from operations. In the six months ended June 30, 2004 and the year
ended December 31, 2003, our negative cash flow from operations was $2.4 million
and $3.2 million, respectively. Cash flow from operations and cash on hand may
not be sufficient to cover our operating expenses, working capital, interest on
and repayment of our debt and capital investment needs. We may not be able to
obtain additional financing on terms acceptable to us, if at all. If we raise
additional funds by selling equity securities, the relative equity ownership of
our existing investors could be diluted or the new investors could obtain terms
more favorable than previous investors. A failure to obtain additional funding
could prevent us from making expenditures that are needed to allow us to grow or
maintain our operations.
OUR FINANCIAL CONDITION, AND THE RESTRICTIVE COVENANTS CONTAINED IN OUR CREDIT
FACILITY MAY LIMIT OUR ABILITY TO BORROW ADDITIONAL FUNDS OR RAISE ADDITIONAL
EQUITY AS MAY BE REQUIRED TO FUND OUR FUTURE OPERATIONS.
We incurred significant losses from continuing operations of $15.3
million, $10.9 million and $56.5 million for the six months ended June 30,
2004 and for the years ended December 31, 2003 and 2002, respectively. Our
accumulated deficit and stockholders' deficit was approximately $427.5 million
and $54.2 million, respectively, as of June 30, 2004. Moreover, the terms of
our $15 million revolving credit facility and our new debt may limit our ability
to, among other things:
- incur additional debt;
- retire or exchange outstanding debt;
- pay cash dividends, redeem, retire or repurchase our stock or
change our capital structure;
- acquire assets or businesses or make investments in other
entities;
- enter into certain transactions with affiliates;
- merge or consolidate with other entities;
- sell or otherwise dispose of assets or use the proceeds from any
asset sale or other disposition;
- create additional liens on our assets; or
- issue certain types of redeemable preferred stock.
Our available cash, and the remaining borrowing capacity under our
credit facility may not be sufficient to fund our operating and capital
expenditure requirements in the foreseeable future. Our ability to borrow
additional funds or raise additional equity is limited by the terms of our
outstanding debt instruments and/or our financial condition.
Additionally, events such as our inability to continue to reduce our
loss from continuing operations, could adversely affect our liquidity and our
ability to attract additional funding as required.
14
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WE MAY NOT BE ABLE TO PAY OUR DEBT AND OTHER OBLIGATIONS AND OUR ASSETS MAY BE
SEIZED AS A RESULT.
We may not generate the cash flow required to pay our liabilities as
they become due. Following the completion of the Exchange Offer and
refinancing of our Existing Senior Notes, our outstanding debt included
approximately $0.9 million of the Existing Notes due in March 2005, $37.3
million of the New Subordinated Notes due in June 2009 and $29.0 million of
New Secured Notes due in June 2007. We must pay interest on all of the
Existing Notes, the New Subordinated Notes and the New Secured Notes twice a
year. If our cash flow is inadequate to meet our obligations, we will default
on the notes. Any default of the Existing Notes, the New Subordinated Notes
or the New Secured Notes could allow our note holders to seize our assets or
try to force us into bankruptcy.
Additionally, as of June 30, 2004 we had an outstanding balance of
$2.3 million on our line of credit totaling $15.0 million, and had
approximately $1.6 million of outstanding letters of credit issued under
these agreements. If we fail to pay our liabilities under these lines of
credit, the bank may enforce all available remedies and seize our assets or
receivables, to satisfy any amounts owed.
WE MAY BE UNABLE TO REPAY OR REPURCHASE THE NEW SECURED NOTES, EXISTING NOTES OR
NEW SUBORDINATED NOTES UPON A REPURCHASE EVENT AND BE FORCED INTO BANKRUPTCY.
The holders of the New Secured Notes may require us to repurchase or
prepay all of the outstanding New Secured Notes upon a "repurchase event." A
repurchase event under the New Secured Notes includes a change of control under
certain circumstances or a termination of listing of our common stock on a U.S.
national securities exchange or trading on an established over-the-counter
trading market in the U.S. In addition, upon the receipt of proceeds of certain
asset sales by us that generate proceeds in excess of $10,000,000 (or if an
event of default exists, regardless of the amount) that is not invested or used
to reduce existing indebtedness and does not result in a change of control, we
are required to use the proceeds from the asset sale to prepay or repurchase the
New Secured Notes. We may not have sufficient cash reserves to repurchase the
New Secured Notes at such time, which would cause an event of default under the
New Secured Note Indenture and under our other debt obligations.
The holders of the Existing Notes and New Subordinated Notes may require
us to repurchase all or any portion of the outstanding Existing Notes or New
Subordinated Notes upon a "repurchase event." A repurchase event under the
Existing Notes and New Subordinated Notes includes a change in control under
certain circumstances or a termination of listing of our common stock on a U.S.
national securities exchange or trading on an established over-the-counter
trading market in the U.S. We may not have sufficient cash reserves to
repurchase the Existing Notes or New Subordinated Notes at such time, which
would cause an event of default under the Existing Note Indenture or the New
Subordinated Note Indenture and under our other debt obligations and may force
us to declare bankruptcy.
INVESTOR INTEREST IN THE COMMON STOCK MAY BE NEGATIVELY AFFECTED BY OUR
CONTINUED TRADING ON THE OVER-THE-COUNTER BULLETIN BOARD.
On November 13, 2002, we received a determination from the Nasdaq Stock
Market that shares of the common stock would no longer trade on the Nasdaq
National Market because we failed to meet certain minimum listing requirements.
Our common stock began trading on the NASD-operated Over-the-Counter Bulletin
Board on November 14, 2002. The Over-the-Counter Bulletin Board market is
generally considered to be less efficient and not as liquid as the Nasdaq
National Market. Trading in this market may decrease the market value and
liquidity of our common stock, which could materially and adversely affect our
ability to attract additional investment to finance our operations.
15
<Page>
PROVISIONS OF OUR GOVERNING DOCUMENTS AND DELAWARE LAW COULD ALSO DISCOURAGE
ACQUISITION PROPOSALS OR DELAY A CHANGE IN CONTROL.
Our certificate of incorporation and by-laws contain anti-takeover
provisions, including those listed below, that could make it more difficult for
a third party to acquire control of our company, even if that change in control
would be beneficial to stockholders:
- our board of directors has the authority to issue common stock
and preferred stock, and to determine the price, rights and
preferences of any new series of preferred stock, without
stockholder approval;
- our board of directors is divided into three classes, each
serving three-year terms;
- our stockholders need a supermajority of votes to amend key
provisions of our certificate of incorporation and by-laws;
- there are limitations on who can call special meetings of
stockholders;
- our stockholders may not take action by written consent; and
- our stockholders must provide specified advance notice to
nominate directors or submit stockholder proposals.
In addition, provisions of Delaware law and our stock option plan may
also discourage, delay or prevent a change of control of our company or
unsolicited acquisition proposals.
INTERNATIONAL GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES AND OTHER LAWS
COULD LIMIT OUR ABILITY TO PROVIDE OUR SERVICES, MAKE THEM MORE EXPENSIVE, OR
SUBJECT US TO LEGAL OR CRIMINAL LIABILITY.
A number of countries currently prohibit or limit competition in the
provision of traditional voice telephony services. In some of those countries,
licensed telephony carriers as well as government regulators have questioned our
legal authority and/or the legal authority of our service partners or affiliated
entities and employees to offer our services. We may face similar questions in
additional countries. Our failure to qualify as a properly licensed service
provider, or to comply with other foreign laws and regulations, could materially
adversely affect our business, financial condition and results of operations,
including subjecting us or our employees to taxes and criminal or other
penalties and/or by precluding us from, or limiting us in, enforcing contracts
in such jurisdictions.
It is also possible that countries may apply to our activities laws
otherwise relating to services provided over the Internet, including laws
governing:
- sales and other taxes, including payroll-withholding
applications;
- user privacy;
- pricing controls and termination costs;
- characteristics and quality of products and services;
- qualification to do business;
- consumer protection;
- cross-border commerce, including laws that would impose tariffs,
duties and other import restrictions;
- copyright, trademark and patent infringement; and
16
<Page>
- claims based on the nature and content of Internet materials,
including defamation, negligence and the failure to meet
necessary obligations.
If foreign governments or other bodies begin to impose related
restrictions on Internet telephony or our other services or otherwise enforce
criminal or other laws against us, our affiliates or employees, such activities
could have a material adverse effect on our ability to attain and maintain
profitability.
THE TELECOMMUNICATIONS INDUSTRY IS SUBJECT TO DOMESTIC GOVERNMENTAL REGULATION
AND LEGAL UNCERTAINTIES AND OTHER LAWS THAT COULD MATERIALLY INCREASE OUR COSTS
AND PREVENT US FROM EXECUTING OUR BUSINESS PLAN.
We are not licensed to offer traditional telecommunications services in
any U.S. state and we have not filed tariffs for any service at the Federal
Communications Commission (FCC) or at any state regulatory commission.
Nonetheless, aspects of our operations may currently be, or become, subject to
state or federal regulations governing licensing, universal service funding,
access charges, advertising, disclosure of confidential communications or other
information, excise taxes, transactions restricted by U.S. embargo and other
reporting or compliance requirements.
While the FCC to date has maintained an informal policy that information
service providers, including Internet telephony providers, are not
telecommunications carriers for regulatory purposes, various entities have
challenged this idea, before the FCC and at various state government agencies.
The FCC recently ruled against AT&T, finding that certain traffic AT&T carried
in part utilizing an Internet protocol format was nonetheless regulated
telecommunications for which terminating access charges were due. The FCC has
also held hearings and announced a Notice of Proposed Rulemaking on IP-enabled
services. Adverse rulings or rulemakings could subject us to licensing
requirements and additional fees and subsidies.
The IRS and the U.S. Department of Treasury have issued a notice of
proposed rulemaking suggesting that VoIP calls may be subject to a 3% federal
excise tax.
We have offered our prepaid international calling card services on a
wholesale basis to international carrier customers, and others, some of which
provide these services to end-user customers, enabling them to call
internationally over The iBasis Network from the U.S. We have also made
arrangements to participate in the selling and marketing of such cards on a
retail basis. Although the calling cards are not primarily marketed for domestic
interstate or intrastate use, we have not blocked the ability to place such
calls or required our wholesale customers or distributors to show evidence of
their compliance with U.S. and state regulations. As a result, there may be
incidental domestic use of the cards. Domestic calling may employ transport and
switching that is not connected to the Internet and, therefore, may not enjoy
the lighter regulation to which our Internet-based services are subject. Because
we provide services that are primarily wholesale and/or international, we do not
believe that we are subject to federal or state telecommunications regulation
for the possible uses of these services described here and, accordingly, we have
not obtained state licenses, filed state or federal tariffs, posted bonds, or
undertaken other possible compliance steps. Under current standards or as-yet
undetermined rules, the FCC and state regulatory authorities may not agree with
our position. If they do not, we could become subject to regulation at the
federal and state level for these services, and could become subject to
licensing and bonding requirements, and federal and state fees and taxes,
including universal service contributions and other subsidies, and other laws,
all of which could materially affect our business.
We are also subject to federal and state laws and regulations regarding
consumer protection and disclosure regulations. These rules could substantially
increase the cost of doing business domestically and in any particular state.
Law enforcement authorities may utilize their powers under consumer protection
laws against us in the event we do not meet legal requirements in that
jurisdiction.
The Telecommunications Act of 1996 requires that payphone service
providers be compensated for all completed calls originating from payphones in
the United States. When calling cards are used, the FCC's prior rules required
the first switch-based carrier to compensate the payphone service provider, but
newly adopted rules require the last switched-based carrier to do so, and
further require that all carriers in the call chain implement a call-tracking
system, utilize it to identify such calls, provide an independent audit of the
adequacy of such system, and provide a report on these matters to the FCC and
others in the call chain. We maintain that as an international Internet
telephony provider, we sell an information service. We therefore are not a
"carrier" for regulatory purposes
17
<Page>
and, in any case, our Internet-based systems do not rely on traditional long
distance switches. Thus, there is a good faith legal basis for concluding that
our services are not subject to payphone compensation requirements. Nonetheless,
we have indirectly paid, and intend to continue paying, payphone service
providers as part of our prepaid calling card business. To date, we have
reimbursed certain of our toll-free access vendors - facilities-based long
distance carriers from which we have received payphone calls that could be
construed to be compensable under the payphone compensation rules - who have
indeed paid payphone compensation for such calls. In the future, we intend to
contract with a clearinghouse to remit funds directly to payphone service
providers for calls originating from payphones utilizing our prepaid calling
cards. For all other types of traffic related to our wholesale transport
business, we believe that we are not responsible for payphone compensation, but
rather that the carrier that precedes us is.
In addition to specific telecommunications regulation, we are subject to
other laws. As an example, the Office of Foreign Asset Control of the U.S.
Department of the Treasury, or OFAC, administers the United States' sanctions
against certain countries. OFAC rules restrict many business transactions with
such countries and, in some cases, require that licenses be obtained for such
transactions. We may currently, or in the future, transmit telecommunications
between the U.S. and countries subject to U.S. sanctions regulations and
undertake other transactions related to those services. We have undertaken such
activities via our network or through various reciprocal traffic exchange
agreements to which we are a party. We have received licenses from OFAC to send
traffic to some countries and, if necessary, will remain in contact with OFAC
with regard to other transactions. Failure to obtain proper authority could
expose us to legal and criminal liability.
RISKS RELATED TO OUR OPERATIONS
WE MAY NEVER ACHIEVE SUSTAINED PROFITABILITY AND THE MARKET PRICE OF OUR COMMON
STOCK AND CONVERTIBLE SECURITIES MAY FALL.
Our revenue and results of operations have fluctuated and will continue
to fluctuate significantly from quarter to quarter in the future due to a number
of factors, some of which are not in our control, including, among others:
- the amount of traffic we are able to sell to our customers, and
their decisions on whether to route traffic over our network;
- increased competitive pricing pressure in the international long
distance market;
- the percentage of traffic that we are able to carry over the
Internet rather than over the more costly traditional
public-switched telephone network;
- loss of arbitrage opportunities resulting from declines in
international settlement rates or tariffs;
- our ability to negotiate lower termination fees charged by our
local providers if our pricing deteriorates;
- our continuing ability to negotiate competitive costs to
interconnect our network with those of other carriers and
Internet backbone providers;
- capital expenditures required to expand or upgrade our network;
- changes in call volume among the countries to which we complete
calls;
- the portion of our total traffic that we carry over more
attractive routes could fall, independent of route-specific
price, cost or volume changes;
- technical difficulties or failures of our network systems or
third party delays in expansion or provisioning system problems;
18
<Page>
- our ability to manage distribution arrangements and provision of
retail offerings, including card printing, marketing, usage
tracking, web-based offerings and customer service requirements,
and resolution of associated disputes;
- our ability to manage our traffic on a constant basis so that
routes are profitable;
- our ability to collect from our customers; and
- currency fluctuations and restrictions in countries where we
operate.
Because of these factors, you should not rely on quarter-to-quarter
comparisons of our results of operations as an indication of our future
performance. It is possible that, in future periods, our results of operations
will be significantly lower than the estimates of public market analysts,
investors or our own estimates. Such a discrepancy could cause the price of our
common stock and any securities exchangeable for or convertible into our common
stock to decline significantly and prevent us from achieving profitability.
WE MAY NEVER GENERATE SUFFICIENT REVENUE TO ATTAIN PROFITABILITY IF
TELECOMMUNICATIONS CARRIERS AND OTHER COMMUNICATIONS SERVICE PROVIDERS OR OTHERS
ARE RELUCTANT TO USE OUR SERVICES OR DO NOT USE OUR SERVICES, INCLUDING ANY NEW
SERVICES, IN SUFFICIENT VOLUME.
If the market for Internet telephony and new services does not develop
as we expect, or develops more slowly than expected, our business, financial
condition and results of operations will be materially and adversely affected.
Our customers may be reluctant to use our Internet telephony services
for a number of reasons, including:
- perceptions that the quality of voice transmitted over the
Internet is low;
- perceptions that Internet telephony is unreliable;
- our inability to deliver traffic over the Internet with
significant cost advantages;
- development of their own capacity on routes served by us; or
- an increase in termination costs of international calls.
The growth of our core business depends on carriers and other
communications service providers generating an increased volume of international
voice and fax traffic and selecting our network to carry at least some of this
traffic. Similarly, the growth of any retail services we offer depends on these
factors as well as acceptance in the market of the brands that we service,
including their respective rates, terms and conditions. If the volume of
international voice and fax traffic and associated or other retail services fail
to increase, or decrease, and these parties or other customers do not employ our
network or otherwise use our services, our ability to become profitable will be
materially and adversely affected.
WE MAY NOT BE ABLE TO COLLECT AMOUNTS DUE TO US FROM OUR CUSTOMERS AND WE MAY
HAVE TO DISGORGE AMOUNTS ALREADY PAID.
Some of our customers have closed their businesses or filed for
bankruptcy owing us millions of dollars for services we have provided to them in
the past. Despite our efforts to collect these overdue funds, we may never be
paid. The bankruptcy court may require us to continue to provide services to
these companies during their reorganizations. Other customers may discontinue
their use of our services at any time and without notice, or delay payments that
are owed to us. Additionally, we may have difficulty in collecting amounts from
them. Although we have internal credit risk policies to identify companies with
poor credit histories, we may not effectively manage
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these policies and provided services to companies that refuse to pay. The risk
is even greater in foreign countries, where the legal and collection systems
available may not be adequate or impartial for us to enforce the payment
provisions of our contracts. Our cash reserves will be reduced and our results
of operations will be materially adversely affected if we are unable to collect
amounts from our customers.
We have received claims including lawsuits from estates of bankrupt
companies alleging that we received preferential payments prior to bankruptcy
filing. We may be required to return amounts received from bankrupt estates. We
intend to employ all available defenses in contesting such claims or, in the
alternative settle such claims. The results of any suit or settlement may have a
material adverse affect on our business.
WE MAY INCREASE COSTS AND RISKS IN OUR BUSINESS BY RELYING ON THIRD PARTIES.
VENDORS. We rely upon third-party vendors to provide us with the equipment,
software, circuits, and other facilities that we use to provide our services.
For example, we purchase a substantial portion of our Internet telephony
equipment from Cisco Systems. We may be forced to try to renegotiate terms with
vendors for products or services that have become obsolete. Some vendors may be
unwilling to renegotiate such contracts, which could affect our ability to
continue to provide services and consequently render us unable to generate
sufficient revenues to become profitable.
PARTIES THAT MAINTAIN PHONE AND DATA LINES AND OTHER TELECOMMUNICATIONS
SERVICES. Our business model depends on the availability of the Internet and
traditional telephone networks to transmit voice and fax calls. Third parties
maintain and own these networks, other components that comprise the Internet,
and business relationships that allow telephone calls to be terminated over the
public switched telephone network. Some of these third parties are telephone
companies. They may increase their charges for using these lines at any time and
thereby decrease our profitability. They may also fail to maintain their lines
properly, fail to maintain the ability to terminate calls, or otherwise disrupt
our ability to provide service to our customers. Any such failure that leads to
a material disruption of our ability to complete calls or provide other services
could discourage our customers from using our network, which could have the
effect of delaying or preventing our ability to become profitable.
LOCAL COMMUNICATIONS SERVICE PROVIDERS. We maintain relationships with local
communications service providers in many countries, some of whom own the
equipment that translates calls from traditional voice networks to the Internet,
and vice versa. We rely upon these third parties both to provide lines over
which we complete calls and to increase their capacity when necessary as the
volume of our traffic increases. There is a risk that these third parties may be
slow, or fail, to provide lines, which would affect our ability to complete
calls to those destinations. We may not be able to continue our relationships
with these local service providers on acceptable terms, if at all. Because we
rely upon entering into relationships with local service providers to expand
into additional countries, we may not be able to increase the number of
countries to which we provide service. Finally, any technical difficulties that
these providers suffer, or difficulties in their relationships with companies
that manage the public switched telephone network, could affect our ability to
transmit calls to the countries that those providers help serve.
STRATEGIC RELATIONSHIPS. We depend in part on our strategic relationships to
expand our distribution channels and develop and market our services. In
particular, we depend on our joint marketing and product development efforts
with Cisco Systems to achieve market acceptance and brand recognition in certain
markets. Strategic relationship partners may choose not to renew existing
arrangements on commercially acceptable terms, if at all. In general, if we lose
these key strategic relationships, or if we fail to maintain or develop new
relationships in the future, our ability to expand the scope and capacity of our
network and services provided, and to maintain state-of-the-art technology,
would be materially adversely affected.
DISTRIBUTORS OF PREPAID CALLING CARDS TO RETAIL OUTLETS. We make arrangements
with distributors to market and sell prepaid calling cards to retail outlets. In
some cases, we rely on these distributors to print cards, prepare marketing
material, activate accounts, track usage and other data, and remit payments
collected from retailers. There is a risk that distributors will not properly
perform these responsibilities, comply with legal requirements, or pay us monies
when due. We may not have adequate contractual or credit protections against
these risks. There is also a risk that we will be ineffective in our efforts to
implement new systems, customer care and disclosure policies, and certain
technical and business processes. The result of any attendant difficulties may
have a material impact on our business.
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WE MAY NOT BE ABLE TO SUCCEED IN THE INTENSELY COMPETITIVE MARKET FOR OUR
VARIOUS SERVICES.
We compete in our wholesale business principally on quality of service
and price. In recent years, prices for long distance telephone services have
been declining as a result of deregulation and increased competition. We face
competition from major telecommunications carriers, such as AT&T, British
Telecom, Deutsche Telekom, MCI WorldCom and Qwest Communications, as well as new
emerging carriers. We also compete with Internet protocol and other Internet
telephony service providers who route traffic to destinations worldwide. Also,
Internet telephony service providers that presently focus on retail customers
may in the future enter the wholesale market and compete with us. If we can not
offer competitive prices and quality of service our business could be materially
adversely affected.
WE MAY NOT BE ABLE TO SUCCEED IN THE INTENSELY COMPETITIVE MARKET FOR PREPAID
CALLING SERVICES.
The market for prepaid calling services is extremely competitive.
Hundreds of providers offer calling card products and services. We have just
recently begun offering prepaid calling card services and have little prior
experience in this business and no established distribution channel for these
services. If we do not successfully establish a distribution channel and enter
geographic markets in which our rates, fees, surcharges, country services, and
our other products and service characteristics, can successfully compete, our
business could be materially adversely affected.
WE ARE SUBJECT TO DOWNWARD PRICING PRESSURES AND A CONTINUING NEED TO
RENEGOTIATE OVERSEAS RATES, WHICH COULD DELAY OR PREVENT OUR PROFITABILITY.
As a result of numerous factors, including increased competition and
global deregulation of telecommunications services, prices for international
long distance calls have been decreasing. This downward trend of prices to
end-users has caused us to lower the prices we charge communications service
providers and calling card distributors for call completion on our network. If
this downward pricing pressure continues, we may not be able to offer Internet
telephony services at costs lower than, or competitive with, the traditional
voice network services with which we compete. Moreover, in order for us to lower
our prices, we have to renegotiate rates with our overseas local service
providers who complete calls for us. We may not be able to renegotiate these
terms favorably enough, or fast enough, to allow us to continue to offer
services in a particular country on a cost-effective basis. The continued
downward pressure on prices and our failure to renegotiate favorable terms in a
particular country could have a material adverse effect on our ability to
operate our network and Internet telephony business profitably.
A VARIETY OF RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS COULD MATERIALLY
ADVERSELY AFFECT OUR BUSINESS.
Because we provide many of our services internationally, we are subject
to additional risks related to operating in foreign countries. In particular, in
order to provide services and operate facilities in some countries, we have
established subsidiaries or other legal entities or have forged relationships
with service partners or entities set up by our employees. Associated risks
include:
- unexpected changes in tariffs, trade barriers and regulatory
requirements relating to Internet access or Internet telephony;
- economic weakness, including inflation, or political instability
in particular foreign economies and markets;
- difficulty in collecting accounts receivable;
- tax, consumer protection, telecommunications, and other laws;
- compliance with tax, employment, securities, immigration, labor
and other laws for employees living and traveling, or conducting
business, abroad, which may subject them or us to criminal or
civil penalties;
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- foreign taxes including withholding of payroll taxes;
- foreign currency fluctuations, which could result in increased
operating expenses and reduced revenues;
- political or economic instability;
- exposure to liability under the Foreign Corrupt Practices Act;
- other obligations or restrictions, including, but not limited
to, criminal penalties incident to doing business or operating a
subsidiary or other entity in another country;
- the personal safety of our employees and their families who at
times have received threats of, or who may in any case be
subject to, violence, and who may not be adequately protected by
legal authorities or other means; and
- inadequate insurance coverage to address these risks.
These and other risks associated with our international operations may
materially adversely affect our ability to attain or maintain profitable
operations.
IF WE ARE NOT ABLE TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGE IN A
COST-EFFECTIVE WAY, THE RELATIVE QUALITY OF OUR SERVICES COULD SUFFER.
The technology upon which our services depends is changing rapidly.
Significant technological changes could render the hardware and software that we
use obsolete, and competitors may begin to offer new services that we are unable
to offer. If we are unable to respond successfully to these developments or do
not respond in a cost-effective way, we may not be able to offer competitive
services.
WE MAY NOT BE ABLE TO EXPAND AND UPGRADE OUR NETWORK ADEQUATELY AND
COST-EFFECTIVELY TO ACCOMMODATE ANY FUTURE GROWTH.
Our Internet telephony business requires that we handle a large number
of international calls simultaneously. As we expand our operations, we expect to
handle significantly more calls. If we do not expand and upgrade our hardware
and software quickly enough, we will not have sufficient capacity to handle the
increased traffic and growth in our operating performance would suffer as a
result. Even with such expansion, we may be unable to manage new deployments or
utilize them in a cost-effective manner. In addition to lost growth
opportunities, any such failure could adversely affect customer confidence in
The iBasis Network and could result in us losing business outright.
WE DEPEND ON OUR CURRENT PERSONNEL AND MAY HAVE DIFFICULTY ATTRACTING AND
RETAINING THE SKILLED EMPLOYEES WE NEED TO EXECUTE OUR BUSINESS PLAN.
WE DEPEND HEAVILY ON OUR KEY MANAGEMENT. Our future success will depend, in
large part, on the continued service of our key management and technical
personnel, including Ofer Gneezy, our President and Chief Executive Officer,
Gordon VanderBrug, our Executive Vice President, Richard Tennant, our Chief
Financial Officer, Paul Floyd, our Senior Vice President of Research &
Development, Engineering, and Operations, and Dan Powdermaker, our Senior Vice
President of Worldwide Sales. If any of these individuals or others we employ
are unable or unwilling to continue in their present positions, our business,
financial condition and results of operations could suffer. We do not carry key
person life insurance on our personnel. While each of the individuals named
above has entered into an employment agreement with us, these agreements do not
ensure their continued employment with us.
WE WILL NEED TO RETAIN SKILLED PERSONNEL TO EXECUTE OUR PLANS. Our future
success will also depend on our ability to attract, retain and motivate highly
skilled employees, particularly engineering and technical personnel. Past
workforce reductions have resulted in reallocations of employee duties that
could result in employee and contractor
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uncertainty and dissatisfaction. Reductions in our workforce or restrictions on
salary increases or payment of bonuses may make it difficult to motivate and
retain employees and contractors, which could affect our ability to deliver our
services in a timely fashion and otherwise negatively affect our business.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, OUR COMPETITIVE POSITION
WOULD BE ADVERSELY AFFECTED.
We rely on patent, trademark and copyright law, trade secret protection
and confidentiality and/or license agreements with our employees, customers,
partners and others to protect our intellectual property. Unauthorized third
parties may copy our services or reverse engineer or obtain and use information
that we regard as proprietary. End-user license provisions protecting against
unauthorized use, copying, transfer and disclosure of any licensed program may
be unenforceable under the laws of certain jurisdictions and foreign countries.
We may seek to patent certain processes or equipment in the future. We do not
know if any of our patent applications will be issued with the scope of the
claims we seek, if at all. In addition, the laws of some foreign countries do
not protect proprietary rights to the same extent as do the laws of the United
States. Our means of protecting our proprietary rights in the United States or
abroad may not be adequate and third parties may infringe or misappropriate our
copyrights, trademarks and similar proprietary rights. If we fail to protect our
intellectual property and proprietary rights, our business, financial condition
and results of operations would suffer.
We believe that we do not infringe upon the proprietary rights of any
third party. It is possible, however, that such a claim might be asserted
successfully against us in the future. Our ability to provide our services
depends on our freedom to operate. That is, we must ensure that we do not
infringe upon the proprietary rights of others or have licensed all such rights.
A party making an infringement claim could secure a substantial monetary award
or obtain injunctive relief that could effectively block our ability to provide
services in the United States or abroad.
We have received letters and other notices claiming that certain of our
products and services may infringe patents or other intellectual property of
other parties. To date, none of these has resulted in a material restriction on
any use of our intellectual property or has had a material adverse impact on our
business. We may be unaware of intellectual property rights of others that may,
or may be claimed, to cover our technology. Current or future claims could
result in costly litigation and divert the attention of management and key
personnel from other business issues. The complexity of the technology involved
and the uncertainty of intellectual property litigation increase these risks.
Claims of intellectual property infringement also might require us to enter into
costly royalty or license agreements to the extent necessary for the conduct of
our business. However, we may be unable to obtain royalty or license agreements
on terms acceptable to us or at all. We also may be subject to significant
damages or an injunction against use of our proprietary or licenses systems. A
successful claim of patent or other intellectual property infringement against
us could materially adversely affect our business and profitability.
WE RELY ON A VARIETY OF TECHNOLOGIES, PRIMARILY SOFTWARE, WHICH IS LICENSED FROM
THIRD PARTIES.
Continued use of this technology by us requires that we purchase new or
additional licenses from third parties. We may not be able to obtain those
third-party licenses needed for our business or that the third party technology
licenses that we do have will continue to be available to us on commercially
reasonable terms or at all. The loss or inability to maintain or obtain upgrades
to any of these technology licenses could result in delays or breakdowns in our
ability to continue developing and providing our services or to enhance and
upgrade our services.
WE MAY UNDERTAKE STRATEGIC ACQUISITIONS OR DISPOSITIONS THAT COULD DAMAGE OUR
ABILITY TO ATTAIN OR MAINTAIN PROFITABILITY.
We may acquire additional businesses and technologies that complement or
augment our existing businesses, services and technologies. We may need to raise
additional funds through public or private debt or equity financing to acquire
any businesses, which may result in dilution for stockholders and the incurrence
of indebtedness. We may not be able to operate acquired businesses profitably or
otherwise implement our growth strategy successfully.
We may need to sell existing assets or businesses in the future to
generate cash or focus our efforts in making our core business, Internet
telephony, profitable. As with many companies in the telecommunications sector
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that experienced rapid growth in recent years, we may need to reach
profitability in one market before entering another. In the future, we may need
to sell assets to cut costs or generate liquidity.
RISKS RELATED TO THE INTERNET AND INTERNET TELEPHONY INDUSTRY
IF THE INTERNET DOES NOT CONTINUE TO GROW AS A MEDIUM FOR VOICE AND FAX
COMMUNICATIONS, OUR BUSINESS WILL SUFFER.
Historically, the sound quality of calls placed over the Internet was
poor. As the Internet telephony industry has grown, sound quality has improved,
but the technology may require further refinement. Additionally, as a result of
the Internet's capacity constraints, callers could experience delays, errors in
transmissions or other interruptions in service. Transmitting telephone calls
over the Internet, and other uses of the Internet, must also be accepted by
customers as an alternative to traditional services. Because the Internet
telephony market is evolving, predicting the size of these markets and their
growth rate is difficult. If our market fails to continue to develop, then we
will be unable to grow our customer base and our results of operations will be
materially adversely affected.
IF THE INTERNET INFRASTRUCTURE IS NOT ADEQUATELY MAINTAINED, WE MAY BE UNABLE TO
MAINTAIN THE QUALITY OF OUR SERVICES AND PROVIDE THEM IN A TIMELY AND CONSISTENT
MANNER.
Our future success will depend upon the maintenance of the Internet
infrastructure, including a reliable network backbone with the necessary speed,
data capacity and security for providing reliability and timely Internet access
and services. To the extent that the Internet continues to experience increased
numbers of users, frequency of use or bandwidth requirements, the Internet may
become congested and be unable to support the demands placed on it and its
performance or reliability may decline thereby impairing our ability to complete
calls and provide other services using the Internet at consistently high
quality. The Internet has experienced a variety of outages and other delays as a
result of failures of portions of its infrastructure or otherwise. Future
outages or delays could adversely affect our ability to complete calls and
provide other services. Moreover, critical issues concerning the commercial use
of the Internet, including security, cost, ease of use and access, intellectual
property ownership and other legal liability issues, remain unresolved and could
materially and adversely affect both the growth of Internet usage generally and
our business in particular. Finally, important opportunities to increase traffic
on The iBasis Network will not be realized if the underlying infrastructure of
the Internet does not continue to be expanded to more locations worldwide.
OUR ABILITY TO PROVIDE OUR SERVICES USING THE INTERNET MAY BE ADVERSELY AFFECTED
BY COMPUTER VANDALISM.
If the overall performance of the Internet is seriously downgraded by
website attacks or other acts of computer vandalism or virus infection, our
ability to deliver our communication services over the Internet could be
adversely impacted, which could cause us to have to increase the amount of
traffic we have to carry over alternative networks, including the more costly
public-switched telephone network. In addition, traditional business
interruption insurance may not cover losses we could incur because of any such
disruption of the Internet. While some insurers are beginning to offer products
purporting to cover these losses, we do not have any of this insurance at this
time.
RISKS RELATED TO THIS OFFERING
WE MAY BE UNABLE TO REPAY THE NEW SECURED NOTES.
At maturity, the principal amount of the New Secured Notes then
outstanding will become due and payable. The New Secured Notes do not have the
benefit of a sinking fund or other requirement that we prepay principal. At
maturity we may not have sufficient funds and may be unable to arrange for
additional financing to pay the principal amount or repurchase price due on the
New Secured Notes then outstanding.
THE NEW SECURED NOTES ARE SUBORDINATE TO OUR SENIOR INDEBTEDNESS.
The New Secured Notes are subordinated to the prior payment in full of
all our existing and future senior indebtedness. As a result, we will not be
able to make payments on the New Secured Notes until we have paid in full all of
our senior indebtedness in the event of our insolvency, liquidation,
reorganization or payment default on senior
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indebtedness. We may, therefore, not have sufficient cash to pay the amounts
due on the New Secured Notes. Under the New Secured Note Indenture, we and
our subsidiaries may only incur specified permitted indebtedness as more
fully described in the New Secured Note Indenture. If we incur additional
senior debt, our ability to pay amounts due on the New Secured Notes could be
adversely affected. After the completion of the refinancing of our debt, we
had $2.3 million in outstanding borrowings pursuant to a credit agreement
with our bank and approximately $0.8 million in outstanding capital lease
obligations. We may also incur additional senior debt in the future. The New
Secured Notes are secured by a perfected, second priority security interest
in substantially all of our tangible and intangible assets and certain of our
subsidiaries have guaranteed the payment of amounts due on the New Secured
Notes.
WE MAY BE REQUIRED TO REPURCHASE THE NEW SECURED NOTES UPON A REPURCHASE EVENT.
You may require us to repurchase all or any portion of your New Secured
Notes upon a repurchase event. A repurchase event under the New Secured Notes
includes a change of control or a termination of listing of our common stock on
a U.S. national securities exchange or trading on an established
over-the-counter trading market in the U.S. A "change of control" includes the
acquisition by any person or group of more than 50% of the voting power of our
outstanding securities entitled to generally vote for directors, stockholder
approval of any plan or proposal for our liquidation, dissolution or winding up,
any consolidation or merger or sale of substantially all assets and certain
changes in the constitution in our board of directors. We may not have
sufficient cash funds to repurchase the New Secured Notes upon a change of
control. Under our senior indebtedness documents, including our bank revolving
line of credit, the New Secured Notes may prevent us from paying the purchase
price. If we are prohibited from repurchasing the New Secured Notes we could
seek consent from our lenders to repurchase the New Secured Notes. If we are
unable to obtain their consent, we could attempt to refinance the New Secured
Notes. If we were unable to obtain a consent or refinance, we would be
prohibited from repurchasing the New Secured Notes. If we were unable to
repurchase the New Secured Notes upon a change of control, it would result in an
event of default under the New Secured Note Indenture. An event of default under
the New Secured Note Indenture could result in a further event of default under
our other then-existing debt. In addition, the occurrence of a change of control
may be an event of default under our other debt. As a result, we would be
prohibited from paying amounts due on the New Secured Notes under the
subordination provisions of the New Secured Note Indenture.
WE MAY NOT BE ABLE TO PAY OUR DEBT AND OTHER OBLIGATIONS.
There can be no assurance that we will be able to pay interest and other
amounts due on the New Secured Notes as and when they become due and payable. If
our cash flow from operations is inadequate to meet our obligations, we could
face substantial liquidity problems. If we are unable to generate sufficient
cash flow from operations or otherwise obtain funds necessary to make required
payments on the New Secured Notes or our other obligations, we would be in
default under their terms, which would permit the holders of the New Secured
Notes to accelerate the maturity of the New Secured Notes and could also cause
defaults under current indebtedness or future indebtedness we may incur. Any
default could have a material adverse effect on our financial condition, results
of operations and cash flows. In addition, there can be no assurance that we
would be able to repay amounts due on the New Secured Notes if payment of the
New Secured Notes were to be accelerated following the occurrence of an event of
default as defined in the New Secured Note Indenture.
THERE IS A LIMITED PUBLIC MARKET FOR THE EXISTING NOTES AND WE ANTICIPATE A
LIMITED PUBLIC MARKET FOR THE NEW SECURED NOTES.
The New Secured Notes were issued in a "private placement", and there is
a limited trading market for the New Secured Notes. We do not intend to apply
for listing of the New Secured Notes on any security exchange or other stock
market, although we expect that they may be eligible for trading in the PORTAL
Market of the National Association of Securities Dealers, Inc.
ANY RATING OF THE NEW NOTES MAY CAUSE THEIR TRADING PRICE TO FALL.
One or more rating agency may rate the New Secured Notes. If the rating
agencies rate the New Secured Notes, they may assign a lower rating than
expected by investors. Rating agencies may also lower ratings on the New Secured
Notes in the future. If the rating agencies assign a lower than expected rating
or reduce their ratings in the future, the trading price of the New Secured
Notes could decline.
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THE MARKET PRICE OF OUR SHARES MAY EXPERIENCE EXTREME PRICE AND VOLUME
FLUCTUATIONS FOR REASONS OVER WHICH WE HAVE LITTLE CONTROL.
The trading price of our common stock has been, and is likely to
continue to be, extremely volatile. Our stock price could be subject to wide
fluctuations in response to a variety of factors, including, but not limited to,
the following:
- new products or services offered by us or our competitors;
- failure to meet our publicly announced revenue projections;
- actual or anticipated variations in quarterly operating results;
- changes in financial estimates by securities analysts;
- announcements of significant acquisitions, strategic
partnerships, joint ventures or capital commitments by us or our
competitors;
- issuances of debt or equity securities; and
- other events or factors, many of which are beyond our control.
In addition, the stock market in general, and the OTC Bulletin Board
market and companies in our industry, have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating
performance of these companies. Broad market and industry factors may negatively
affect the market price of our common stock, regardless of our actual operating
performance. In the past, following periods of volatility in the market price of
a company's securities, securities class action litigation has often been
instituted against companies. This type of litigation, if instituted, could
result in substantial costs and a diversion of management's attention and
resources, which would harm our business.
SHARES ELIGIBLE FOR SALE IN THE FUTURE COULD NEGATIVELY AFFECT OUR STOCK PRICE.
The market price of our common stock could decline as a result of
sales of a large number of shares of our common stock, including sales of
shares as a result of this offering, or the perception that these sales could
occur. This may also make it more difficult for us to raise funds through the
issuance of debt or the sale of equity securities. As of June 30, 2004, we
had outstanding 46,655,867 shares of common stock, of which 29,691,955 shares
are freely tradable. The remaining 16,963,912 shares of common stock
outstanding are not registered securities. These unregistered securities may
be sold in the future pursuant to registration statements filed with the SEC
or without registration under the Securities Act of 1933, as amended (the
"Securities Act"), to the extent permitted by Rule 144 or other exemptions
under the Securities Act.
As of June 30, 2004, there were an aggregate of 14,782,168 shares of
common stock issuable upon exercise of outstanding stock options and warrants,
including 6,168,819 shares issuable upon exercise of options outstanding under
our option plans and 8,613,349 shares of common stock issuable upon exercise of
outstanding warrants. We may register additional shares in the future in
connection with acquisitions, compensation or otherwise. We have not entered
into any agreements or understanding regarding any future acquisitions and
cannot ensure that we will be able to identify or complete any acquisition in
the future.
WE HAVE IMPLEMENTED ANTI-TAKEOVER PROVISIONS THAT COULD DISCOURAGE,
PREVENT OR DELAY A TAKEOVER, EVEN IF THE ACQUISITION WOULD BE BENEFICIAL TO OUR
STOCKHOLDERS.
The existence of our stockholder rights plan and provisions of our
amended and restated certificate of incorporation and bylaws, as well as
provisions of Delaware law, could make it difficult for a third party to acquire
us, even if doing so would benefit our stockholders.
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FORWARD-LOOKING STATEMENTS
This prospectus contains "forward-looking statements" within the meaning
of Section 27A of the Securities Act and Section 21E of the Exchange Act. We
intend the forward-looking statements to be covered by the safe harbor for
forward-looking statements in these sections. These forward-looking statements
include, without limitation, statements about our market opportunity,
strategies, competition, expected activities, expected profitability and
investments as we pursue our business plan, and the adequacy of our available
cash resources. These forward-looking statements are usually accompanied by
words such as "believe," "anticipate," "plan," "seek," "expect," "intend" and
similar expressions. The forward-looking information is based on various factors
and was derived using numerous assumptions.
Forward-looking statements necessarily involve risks and uncertainties,
and our actual results could differ materially from those anticipated in the
forward-looking statements due to a number of factors, including those set forth
below under "Risk Factors" and elsewhere in this prospectus. The factors set
forth below under "Risk Factors" and other cautionary statements made in this
prospectus should be read and understood as being applicable to all related
forward-looking statements wherever they appear in this prospectus. The
forward-looking statements contained in this prospectus represent our judgment
as of the date of this prospectus. We caution readers not to place undue
reliance on such statements. Except as required by law, we undertake no
obligation to update publicly any forward-looking statements for any reason,
even if new information becomes available or other events occur in the future.
USE OF PROCEEDS
We received $29.0 million in proceeds from the issuance of the New
Secured Notes. These proceeds were used to prepay the $25.2 million of
Existing Secured Notes and the $1.9 million in refinancing transaction costs,
with the remainder of the proceeds to be used for working capital purposes.
The selling securityholders will receive all of the net proceeds from the
sale of their securities. Accordingly, we will not receive any proceeds from
the sale of those securities. We may however, receive up to approximately
$9.6 million upon exercise of the Warrants in the event that the Warrants are
exercised for cash. If the Warrants are exercised on a "net basis" as
provided in the Warrants, we will not receive any proceeds from the exercise
of the Warrants.
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MARKET FOR OUR COMMON STOCK
Our common stock began trading publicly on the Nasdaq National Market on
November 10, 1999 and was traded under the symbol "IBAS" On November 13, 2002,
we received a determination from Nasdaq that shares of our common stock would no
longer trade on the Nasdaq National Market because we failed to meet certain
minimum listing requirements. Our common stock began trading on the Nasdaq
operated Over-the-Counter Bulletin Board on November 14, 2002 under the same
symbol "IBAS." The following table shows the range of the high and low per share
prices of our common stock, as reported by the Nasdaq National Market and the
Over-the-Counter Bulletin Board for the period indicated. Over-the-Counter
market quotations reflect interdealer prices, without retail mark-up, mark-down
or commission and may not necessarily reflect actual transactions.
<Table>
<Caption>
HIGH LOW
-------- -------
FISCAL 2002:
First Quarter $ 1.78 $ 0.71
Second Quarter 1.10 0.31
Third Quarter 0.65 0.22
Fourth Quarter 0.55 0.20
FISCAL 2003:
First Quarter $ 0.54 $ 0.38
Second Quarter 1.37 0.38
Third Quarter 1.92 0.88
Fourth Quarter 1.96 1.27
FISCAL 2004:
First Quarter $ 1.80 $ 1.44
Second Quarter 1.95 1.17
Third Quarter (through August 17, 2004) 1.93 1.68
</Table>
As of July 30, 2004, there were 229 record holders of our common stock.
DIVIDEND POLICY
We have never declared or paid cash dividends on our common stock. Our
existing financing arrangements place restrictions on our ability to pay cash
dividends. We intend to retain all future earnings to finance future growth,
and, therefore, do not anticipate paying any cash dividends in the foreseeable
future.
28
<Page>
SELLING SECURITYHOLDERS
All of the securities covered by this prospectus are being offered by
the selling securityholders listed in the table below. No offer or sale under
this prospectus may be made by a holder of the securities unless that holder is
listed in the table below.
The following table sets forth certain information regarding the
beneficial ownership of the selling securityholders as of July 1, 2004. The
selling securityholders covered by this prospectus include (a) persons who hold
New Secured Notes and may receive 15,675,675 shares of our common stock upon
conversion of the New Secured Notes, subject to adjustment upon the occurrence
of certain events, (b) persons who hold the Warrants and will receive up to
5,176,065 shares of our common stock upon exercise of the Warrants, and (c) our
investment banker, Imperial Capital, LLC, which received 110,231 shares of our
common stock as partial compensation for services provided to us in connection
with the Exchange Offer and the refinancing of the Existing Senior Notes.
We obtained the information in the following table from the selling
securityholders. Except as otherwise disclosed below, none of the selling
securityholders has, or within the past three years has had, any position,
office or other material relationship with us or any of our predecessors or
affiliates. The information provided in the table below assumes that each
selling securityholder will sell all of its securities. Our registration of the
securities covered by this prospectus does not necessarily mean that the selling
securityholders will sell all or any of their securities. Because the selling
securityholders may sell all or some portion of the securities beneficially
owned by them, only an estimate (assuming each selling securityholder sells all
of their securities offered in this registration statement) can be given as to
the number of securities that will be beneficially owned by the selling
securityholders after this offering.
<Table>
<Caption>
SECURITIES
BENEFICIALLY PERCENT OF
OWNED CLASS (%)
NAME OF BENEFICIAL SECURITIES BENEFICIALLY OWNED AMOUNT OF SECURITIES AFTER THE AFTER THE
OWNER PRIOR TO THE OFFERING BEING OFFERED OFFERING OFFERING
- ---------------------- ------------------------------------- ------------------------------------- ------------ ----------
Greywolf Capital LLC New Secured Notes $ 2,500,000 New Secured Notes $ 2,500,000 0 *
Common stock 1,647,552(1) Common stock 1,351,352
Imperial Capital, LLC Common stock 110,231 Common Stock 110,231 0 *
JMG Triton Offshore New Secured Notes $ 5,000,000 New Secured Notes $ 5,000,000 689,227 1.48%
Fund, Ltd.
Common Stock 4,209,203(2) Common Stock 3,519,976
JMG Capital Partners, LP New Secured Notes $ 5,000,000 New Secured Notes $ 5,000,000
Common Stock 2,702,703(3) Common Stock 2,702,703
LC Capital Master
Fund, Ltd. New Secured Notes $ 3,500,000 New Secured Notes $ 3,500,000 2,883,734 6.18%
Common stock 4,775,626(4) Common stock 1,891,892
Loeb Partners Corp. New Secured Notes $ 3,500,000 New Secured Notes $ 3,500,000 2,980,284 6.39%
Common stock 4,872,176(5) Common stock 1,891,892
Schottenfeld
Qualified Associates New Secured Notes $ 500,000 New Secured Notes $ 500,000 0 *
Common stock 670,270(6) Common stock 270,270
</Table>
29
<Page>
<Table>
Singer Children's New Secured Notes $ 3,500,000 New Secured Notes $ 3,500,000 2,712,713 5.81%
Management Trust
Common stock 4,604,605(7) Common stock 1,891,892
Entities affiliated
with Symphony Asset
Management Common stock 4,975,795(8) Common stock 3,104,611 1,871,184 4.01%
Tejas Securities
Group, Inc. New Secured Notes $ 500,000 New Secured Notes $ 500,000 0 *
Common stock 270,270(9) Common stock 270,270
Windward Capital New Secured Notes $ 5,000,000 New Secured Notes $ 5,000,000 0 *
LLC
Common stock 3,956,884(10) Common stock 3,956,883
</Table>
- ----------
* Less than 1%.
Beneficial ownership is determined in accordance with Rule 13d-3(d)
promulgated by the Commission under the Securities and Exchange Act of 1934, as
amended. Shares of common stock issuable pursuant to options, warrants and
convertible securities are treated as outstanding for computing the percentage
of the person holding such securities but are not treated as outstanding for
computing the percentage of any other person. Unless otherwise noted, each
person or group identified possesses sole voting and investment power with
respect to shares, subject to community property laws where applicable. Shares
not outstanding but deemed beneficially owned by virtue of the right of a person
or group to acquire them within 60 days are treated as outstanding only for
purposes of determining the number of and percent owned by such person or group.
(1) Includes 1,351,352 shares of common stock which entities affiliated with
Greywolf Capital LLC have the right to acquire within 60 days of July 1,
2004 upon the conversion of New Secured Notes. Includes the ownership by
the following funds managed by Greywolf Capital LLC: 1,010,654 shares
held by Greywolf Capital Overseas Fund and 636,898 held by Greywolf
Capital Partners II LP.
(2) Includes 3,519,976 shares of common stock which JMG Triton Offshore
Fund Ltd. (the "Fund") has the right to acquire within 60 days of
July 1, 2004, including 2,702,703 shares of common stock upon the
conversion of New Secured Notes and 817,273 shares of common stock
upon exercise of Warrants. The Fund is an international business
company organized under the laws of the British Virgin Islands. The
Fund's investment manager is Pacific Assets Management LLC, a Delaware
limited liability company ("Pacific Assets"). Pacific Assets is an
investment adviser registered with the Securities and Exchange
Commission and has voting and dispositive power over the Fund's
investments. The equity interests of Pacific Assets are owned by
Pacific Capital Management, Inc., a Delaware corporation ("Pacific")
and Asset Alliance Holding Corp., a Delaware corporation. The equity
interests of Pacific are owned by Messrs. Roger Richter, Jonathan M.
Glaser and Daniel A. David. Messrs. Glaser and Richter have sole
investment discretion over the Fund's portfolio holdings.
(3) Includes 2,702,703 shares of common stock which JMG Capital
Partners, LP ("JMG Partners") has the right to acquire
within 60 days of July 1, 2004, upon the conversion of
New Secured Notes. JMG Partners is a California
limited partnership. Its general partner is JMG Capital
Management, LLC (the "Manager"), a Delaware limited liability company
and an investment adviser registered with the Securities and Exchange
Commission. The Manager has voting and dispositive power over JMG
Partners' investments. The equity interests of the Manager are owned
by JMG Capital Management, Inc. ("JMG Capital"), a Delaware
corporation, and Asset Alliance Holding Corp., a Delaware corporation.
Jonathan M. Glaser is the Executive Officer and Director of JMG
Capital and has sole investment discretion over JMG Partners'
portfolio holdings.
(4) Includes 3,275,676 shares of common stock which LC Capital Master Fund,
Ltd. has the right to acquire within 60 days of July 1, 2004 upon the
conversion of New Secured Notes and New Subordinated Notes.
(5) Includes 4,575,676 shares of common stock which Loeb Partners
Corporation has the right to acquire within 60 days of July 1, 2004 upon
conversion of New Secured Notes and New Subordinated Notes.
(6) Includes 270,270 shares of common stock which Schottenfeld Qualified
Associates has the right to acquire within 60 days of July 1, 2004 upon
the conversion of New Secured Notes.
30
<Page>
(7) Includes 4,085,019 shares of common stock which Singer Children's
Management Trust has the right to acquire within 60 days of July 1, 2004
upon the conversion of New Secured Notes and New Subordinated Notes and
upon the exercise of warrants to purchase shares of common stock. Karen
Singer is the trustee of Singer Children's Management Trust and
exercises sole voting and investment power with respect to all 4,604,605
shares. Ms. Singer, as trustee, may be deemed to beneficially own all
4,604,605 shares.
(8) Includes 3,104,611 shares of common stock which entities affiliated with
Symphony Asset Management have the right to acquire within 60 days of
July 1, 2004 upon the exercise of Warrants. Includes the ownership by
the following funds managed by Symphony Asset Management: 50,098 shares
held by Adagio Fund, 283,894 shares held by Andante Fund, LP, 2,011,453
shares held by Arpeggio Fund, 183,729 shares held by CSV Limited,
185,497 shares held by International Monetary Fund, 2,085,477 shares
held by Rhapsody Fund, LP and 175,647 shares held by Vivace Fund, LP.
Symphony Asset Management is a wholly owned subsidiary of Nuveen
Investments, Inc. and Symphony Asset Management exercises sole voting
and investment power with respect to all shares held by Adagio Fund,
Andante Fund, Arpeggio Fund, CSV International Monetary Fund, Rhapsody
Fund and Vivace Fund. Symphony Asset Management may be deemed to
beneficially own all 4,975,795 shares.
(9) Includes 270,270 shares of common stock which Tejas Securities Group,
Inc. has the right to acquire within 60 days of July 1, 2004 upon the
conversion of New Secured Notes.
(10) Includes 3,956,884 shares of common stock which Windward Capital, L.P.
has the right to acquire within 60 days of July 1, 2004, including
2,702,703 shares of common stock it has the right to acquire upon the
conversion of New Secured Notes and 1,254,181 shares of common stock
which it has the right to acquire upon exercise of Warrants.
31
<Page>
SELECTED CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following summary condensed consolidated financial information as
of and for the years ended December 31, 2003, 2002, 2001, 2000 and 1999 have
been derived from our audited financial statements. The financial information
as of and for the three and six months ended June 30, 2004 and 2003 is
derived from our unaudited consolidated financial statements. The summary
condensed consolidated financial information set forth below should be read
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and notes
thereto included elsewhere in this Prospectus.
<Table>
<Caption>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------- ----------------
2004 2003 2004 2003
---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net revenue ................................. $ 61,175 $ 39,119 $ 118,183 $ 80,960
Costs and operating expenses:
Data communications and telecommunications
(excluding depreciation and amortization) 52,066 33,370 100,656 68,297
Research and development .................... 3,542 3,442 7,080 7,125
Selling and marketing ....................... 2,131 1,903 4,132 3,896
General and administrative .................. 3,266 2,820 6,219 5,329
Depreciation and amortization ............... 2,787 5,749 6,311 11,862
Non-cash stock-based compensation ........... -- 28 -- 57
Loss on sale of messaging business .......... -- -- -- --
Restructuring costs ......................... -- -- -- --
(Gain) loss on disposal of property and
equipment ................................ -- -- -- --
Total costs and operating expenses .......... 63,792 47,312 124,398 96,566
Operating loss............................... (2,617) (8,193) (6,215) (15,606)
Interest income ............................. 14 41 28 111
Interest expense ............................ (809) (971) (1,548) (2,398)
Gain on bond repurchases and exchanges ...... -- 3,716 -- 16,615
Impairment in investment in long-term
non-marketable security................... -- -- (5,000) --
Other (expense), income net ................. (66) (98) (85) (195)
Refinancing transaction costs................ (1,954) -- (1,954) --
Refinancing related interest expense......... (481) -- (481) --
Loss from continuing operations ............. (5,913) (5,505) (15,255) (1,473)
Income (loss) from discontinued operations -- -- -- --
Net loss..................................... $ (5,913) $ (5,505) $ (15,255) $ (1,473)
Accretion of dividends on redeemable
convertible preferred stock ..............
Net loss applicable to common stockholders ..
Pro forma net loss applicable to common
stockholders .............................
Basic and diluted net loss per share:
Loss from continuing operations ............. $ (0.13) $ (0.12) $ (0.33) $ (0.03)
Income (loss) from discontinued operations .. -- -- -- --
Basic and diluted net loss per share......... $ (0.13) $ (0.12) $ (0.33) $ (0.03)
Basic and diluted weighted average common
shares outstanding(1)
Basic .................................... 46,287 44,652 45,674 44,651
Diluted .................................. 46,287 44,652 45,674 44,651
Pro forma basic and diluted net loss per
share(1)(2) ..............................
Pro forma basic and diluted weighted average
common shares outstanding(1)(2) ..........
</Table>
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net revenue ................................. $ 178,159 $ 164,942 $ 110,180 $ 61,218 $ 19,417
Costs and operating expenses:
Data communications and telecommunications
(excluding depreciation and amortization) 152,853 142,847 102,320 60,594 21,007
Research and development .................... 13,387 17,781 23,939 15,168 6,183
Selling and marketing ....................... 7,513 11,279 20,323 19,352 5,568
General and administrative .................. 7,665 24,186 25,563 18,596 5,111
Depreciation and amortization ............... 20,065 31,871 32,364 15,718 2,997
Non-cash stock-based compensation ........... 86 967 1,368 1,061 198
Loss on sale of messaging business .......... -- 2,066 -- -- --
Restructuring costs ......................... -- 5,536 51,834 -- --
(Gain) loss on disposal of property and
equipment ................................ -- -- -- -- (15)
Total costs and operating expenses .......... 201,569 236,533 257,711 130,489 41,049
Operating loss............................... (23,410) (71,591) (147,531) (69,271) (21,632)
Interest income ............................. 161 1,290 9,169 19,824 1,329
Interest expense ............................ (3,967) (11,608) (16,518) (12,844) (836)
Gain on bond repurchases and exchanges ...... 16,615 25,790 14,549 -- --
Impairment in investment in long-term
non-marketable security................... -- -- -- -- --
Other (expense), income net ................. (337) (382) (587) -- 3
Minority interest in loss of joint venture .. -- -- -- -- 49
Loss from continuing operations ............. (10,938) (56,501) (140,918) (62,291) (21,087)
Income (loss) from discontinued operations 1,251 (65,222) (49,771) -- --
Net loss..................................... (9,687) (121,723) (190,689) (62,291) (21,087)
Accretion of dividends on redeemable
convertible preferred stock .............. -- -- -- -- (1,020)
Net loss applicable to common stockholders .. $ (9,687) $ (121,723) $ (190,689) $ (62,291) $ (22,107)
Pro forma net loss applicable to common
stockholders ............................. $ (21,087)
Basic and diluted net loss per share:
Loss from continuing operations ............. $ (0.24) $ (1.25) $ (3.30) $ (1.85) $ (2.29)
Income (loss) from discontinued operations .. 0.03 (1.45) (1.17) -- --
Basic and diluted net loss per share......... $ (0.21) $ (2.70) $ (4.47) $ (1.85) $ (2.29)
Basic and diluted weighted average common
shares outstanding(1)
Basic .................................... 44,696 45,164 42,645 33,612 9,655
Diluted .................................. 44,696 45,164 42,645 33,612 9,655
Pro forma basic and diluted net loss per
share(1)(2) .............................. $ (0.89)
Pro forma basic and diluted weighted average
common shares outstanding(1)(2) .......... 23,678
</Table>
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------
JUNE 30,
2004 2003 2002 2001 2000 1999
---- ---- ---- ---- ---- ----
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents, restricted cash
and marketable securities ................ $ 18,217 $ 17,270 $ 32,317 $ 118,690 $ 300,327 $ 123,666
Working capital ............................. 955 3,264 21,906 155,509 258,513 27,915
Total assets ................................ 59,150 67,538 98,524 328,825 447,818 153,473
Long term debt, net of current portion ...... 66,285 65,829 93,590 171,343 190,880 11,689
Total stockholders' (deficit) equity ........ (54,164) (42,108) (33,972) 86,717 206,896 126,904
</Table>
32
<Page>
- -----------
(1) Computed on the basis described in Note 2 of the notes to our
consolidated financial statements appearing elsewhere in this
Prospectus.
(2) Adjusted to give effect to the conversion of all shares of preferred
stock, Class A and Class B common stock from the date of original
issuance. Does not include the shares of common stock issued upon the
conversion of any Existing Notes.
SUPPLEMENTARY FINANCIAL INFORMATION
The information required by this item is set forth in Note 13, Summary
of Quarterly Information (Unaudited), of the notes to our Consolidated Financial
Statements appearing elsewhere in this Prospectus.
33
<Page>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL
STATEMENTS AND THE RELATED NOTES TO THOSE STATEMENTS AND OTHER FINANCIAL
INFORMATION INCLUDED ELSEWHERE IN THIS PROSPECTUS. THIS DISCUSSION CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. AS A RESULT OF
MANY FACTORS, SUCH AS THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS
PROSPECTUS, OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN
THESE FORWARD-LOOKING STATEMENTS.
OVERVIEW
We are an international telecommunications carrier that utilizes the
Internet to provide economical international telecommunications services. Our
continuing operations consist primarily of our Voice-Over-Internet-Protocol
("VoIP") business. We offer wholesale services through our worldwide network to
carriers, telephony resellers and others around the world by operating through
various service agreements with local service providers in the United States,
Europe, Asia, the Middle East, Latin America, Africa and Australia.
During 2003, many major telecommunications carriers announced plans to
deploy VoIP technology in their networks, to migrate their traffic to VoIP, and
to introduce VoIP-based services to their retail customers. In addition, new
providers of retail telephony services based on VoIP emerged during 2003. We
believe this trend may have a positive impact on our business in the future by
lowering the level of capital investment required for our network and
potentially positioning us to receive a larger volume of international traffic
in the future. Telephone calls that enter The iBasis Network as traditional PSTN
(TDM) calls must be converted into Internet protocol (IP) for transport through
our VoIP infrastructure and over the public Internet. In contrast, telephone
calls that enter our network already in the form of IP do not require conversion
from traditional PSTN to IP through a VoIP gateway. Thus, VoIP-based traffic we
receive requires a lower capital investment in our network. These major carriers
have initially focused their VoIP plans on their U.S. networks, rather than
their international network. We believe that it may be more economical for these
major carriers to send their VoIP-based international traffic to our network
rather than making the capital investment necessary in their international
network infrastructure. Many of the new providers of VoIP-based telephony
services do not have an international infrastructure in place and, similarly, we
believe it may be more economical for these emerging carriers to send their
VoIP-based international traffic to us.
During the third quarter of 2003, we introduced our retail prepaid
calling card services and have marketed such services primarily to ethnic
communities within major domestic markets through distributors. Our entry
into the retail prepaid calling card business is based on our strategy to
leverage our existing international VoIP network with additional services
that have the potential to deliver higher margins than our wholesale
international telecommunications services. In addition, the retail prepaid
calling card business typically has a faster cash collection cycle than
wholesale international telecommunication services. Beginning in the second
quarter of 2004, our recently created operating segment, retail prepaid
calling card services and other enhanced services ("Retail"), became a
reportable business segment, in addition to our international wholesale VoIP
telecommunications services. Since we introduced our retail prepaid calling
card services, revenue from our Retail business had been less than 10% of
total revenue. In the second quarter of 2004, revenue from our Retail
business exceeded 10% of our total net revenue.
We have a history of operating losses and, as of June 30, 2004, our
accumulated deficit was $427.5 million and our stockholders' deficit was $54.2
million. We used $2.4 million and $3.2 million in cash from operations
in the six months ended June 30, 2004 and the year ended December 31, 2003,
respectively.
We continue to expand our market share in VoIP telecommunications
services by expanding our customer base and by introducing cost-effective
solutions for our customers to interconnect with our network. During the first
quarter of 2004, we introduced our DirectVoIP service which eliminates the need
for certain switches for our customers to interconnect to our network, thus
reducing capital equipment costs for both us and our customers. Our strategy is
to continue the deployment of our retail prepaid calling card services which
leverage our international VoIP network with our real time back office systems,
and have the potential to deliver higher margins and improve cash flow. In
addition, we continue to increase the traffic we terminate to mobile phones,
which generally delivers higher average revenue per minute and margins than
typical fixed-line traffic. We also continue to control operating expenses and
capital expenditures, as well as to monitor and manage accounts payable and
accounts receivable and restructure existing debt to enhance cash flow.
34
<Page>
Our plans include:
- expanding our market share for our retail prepaid calling card
services;
- increasing revenues generated through mobile phone terminations;
- increasing our customer base by introducing cost-effective
solutions to interconnect with our network;
- use of our switchless architecture, which eliminates the need
for costly telecommunications switches and other equipment; and
- aggressive management of credit risk.
From 2001 to date, we took a series of actions to reduce operating
expenses, restructure operations, reduce outstanding debt and provide additional
liquidity. Such actions primarily included:
- reductions in workforce and consolidation of Internet Central
Offices. As a result of our past restructuring programs and our
continued focus on controlling expenses, our research and
development, selling and marketing and general and
administrative expenses, in total, declined to $28.6 million in
2003 from $53.2 million in 2002;
- sale of our previous messaging business and the assets
associated with our previous Speech Solutions business;
- settlement of certain capital lease agreements;
- repurchase of a portion of our 5 3/4% Convertible Subordinated
Notes for cash;
- exchange of a portion of our 5 3/4% Convertible Subordinated
Notes for 11 1/2% Senior Secured Notes and warrants to purchase
common stock;
- establishment of a new credit facility with a bank; and
- completing our refinancing plan, pursuant to which $37.3
million (98% of the total outstanding) of our outstanding 5 3/4%
Convertible Subordinated Notes due in March 2005 were
tendered for the same principal amount of our new 6 3/4%
Convertible Subordinated Notes due in June 2009 and we issued
$29.0 million of 8% Secured Convertible Notes due in June 2007
to finance the prepayment of all $25.2 million of our 11 1/2%
Senior Secured Notes due in January 2005.
35
<Page>
In June 2004, we completed a refinancing of our outstanding debt
obligations. As part of the refinancing, we completed an exchange offer,
pursuant to which $37.3 million of our 5 3/4% Convertible Subordinated Notes
due in March 2005, representing approximately 98% of the total amount
outstanding, were tendered for the same principal amount of new 6 3/4%
Convertible Subordinated Notes due in June 2009. Approximately $0.9 million
of the 5 3/4% Convertible Subordinated Notes due in March 2005 remain
outstanding after the exchange offer. Simultaneously with the exchange offer,
we prepaid all $25.2 million of our 11 1/2% Senior Secured Notes due in
January 2005 for cash equal to the principal amount plus accrued but unpaid
interest and the issuance of warrants exercisable for an aggregate of
5,176,065 shares of our common stock at $1.85 per share. We issued $29.0
million of new 8% Secured Convertible Notes due in June 2007, of which $25.2
million was used to prepay the 11 1/2% Senior Secured Notes due in January
2005. The 8% Secured Convertible Notes due in June 2007 are convertible into
shares of common stock at $1.85 per share.
We anticipate that the June 30, 2004 balance of $18.2 million in
cash and cash equivalents, together with cash flow from operations, will be
sufficient to fund our operations and debt service requirements for the next
twelve months.
The following discussion and analysis of our financial condition and
results of operations for the three and six months ended June 30, 2004 and
2003 should be read in conjunction with the unaudited condensed consolidated
financial statements and footnotes for the three and six months ended June
30, 2004 and the year ended December 31, 2003, included herein.
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION. For our wholesale business, our revenue transactions are
derived from the resale of international minutes of calling time. We recognize
revenue in the period the service is provided, net of revenue reserves for
potential billing disputes. Such disputes can result from disagreements with
customers regarding the duration, destination or rates charged for each call.
For our retail prepaid calling card business, revenue is deferred upon
activation of the cards and is recognized as the prepaid calling card balances
are reduced based upon minute usage and service charges. Revenue from both the
resale of minutes as well as the usage of the prepaid calling cards is
recognized when all of the following criteria are met: persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, the
seller's price to the buyer is fixed or determinable and collectibility is
reasonably assured.
Increased competition from other providers of telephony services and
greater expansion into new markets, such as prepaid calling services could
materially adversely affect revenue in future periods. The loss of a major
customer could have a material adverse affect on our business, financial
condition, operating results and future prospects.
ACCOUNTS RECEIVABLE. We perform ongoing credit evaluations of our customers and
adjust credit limits based upon payment history and the customer's current
credit worthiness, as determined by our review of their current credit
information. We continuously monitor collections and payments from our customers
and maintain a provision for estimated credit losses based upon our historical
experience and any specific customer collection issues that we have identified.
We have been able to mitigate our credit risk by using reciprocal arrangements
with customers, who are also our suppliers, to offset our outstanding
receivables. A majority of our accounts receivable are from international
carriers. A significant change in the liquidity or financial position of our
customers, or a change in the telecommunications industry, could have a material
adverse impact on the collectibility of our accounts receivables and our future
operating results.
IMPAIRMENT OF LONG LIVED ASSETS. Our long lived assets consist primarily of
property and equipment. We have assessed the realizability of these assets and
determined that there was no asset impairment as of June 30, 2004 for these
assets. Any future impairment would not impact cash flow but would result in an
additional charge in our statement of operations.
LONG TERM INVESTMENT IN NON-MARKETABLE SECURITY. Our long-term investment in a
non-marketable security represents an equity investment in a privately-held
company that was made in connection with a round of financing with other
third-party investors. As our investment does not permit us to exert significant
influence or control over the entity in
36
<Page>
which we have invested, the recorded amount represents our cost of the
investment less any adjustments we make when we determine that an investment's
carrying value is other-than-temporarily impaired.
The process of assessing whether the equity investment's net realizable
value is less than its carrying cost requires a significant amount of judgment
due to the lack of a mature and stable public market for investments of this
type. In making this judgment, we carefully consider the investee's most recent
financial results, cash position, recent cash flow data, projected cash flows
(both short and long-term), financing needs, recent financing rounds, most
recent valuation data, the current investing environment, management or
ownership changes, and competition. This valuation process is based primarily on
information that we request, receive and discuss with the investees' management
on a quarterly basis.
We consider our equity investment to be other than temporarily impaired
if, as of the end of any quarter, we believe that the carrying value of the
investment is greater than the estimated fair value. Such evaluation is
performed on a quarterly basis.
Based on our evaluation for the quarter ended March 31, 2004, we
determined that our investment in this privately-held company has been other
than temporarily impaired and, as a result, we recorded a $5.0 million non-cash
charge to continuing operations for the first quarter of 2004. Our evaluation
considered the investee's current cash position, its historical and planned
operating results, as well as the status of its current fund raising activities,
to support its continued operations. Since March 31, 2004, based on our
on-going monitoring of this privately-held company, we continue to believe
that our investment has been other than temporarily impaired.
RESTRUCTURING CHARGES. During 2002 and 2001, we recorded significant charges to
operations in connection with our restructuring programs. The related reserves
reflect estimates, including those pertaining to severance costs and facility
exit costs. We assess the reserve requirements to complete each restructuring
program at the end of each reporting period. Actual experience may be different
from these estimates. We had no restructuring charges in 2003 or the six
months ended June 30, 2004.
RESULTS FROM CONTINUING OPERATIONS
The following table sets forth for the periods indicated the principal
items included in the Consolidated Statements of Operations as percentages of
net revenue.
<Table>
<Caption>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------- ----------------
2004 2003 2004 2003
---- ---- ---- ----
Net revenue 100.0% 100.0% 100.0% 100.0%
Costs and operating expenses:
Data communications and telecommunications 85.1 85.3 85.2 84.3
Research and development 5.8 8.8 6.0 8.8
Selling and marketing 3.5 4.8 3.5 4.8
General and administrative 5.3 7.2 5.3 6.6
Depreciation and amortization 4.6 14.7 5.3 14.7
Non-cash stock-based compensation -- 0.1 -- 0.1
Total costs and operating expenses 104.3 120.9 105.3 119.3
Loss from operations (4.3) (20.9) (5.3) (19.3)
Interest income 0.0 0.1 0.0 0.1
Interest expense (1.3) (2.5) (1.3) (2.9)
Gains on bond repurchases and exchanges -- 9.5 -- 20.5
Impairment of investment in long-term non-marketable security -- -- (4.2) --
Other expenses, net (0.1) (0.3) (0.1) (0.2)
Refinancing transaction costs (3.2) -- (1.6) --
Refinancing related interest expense (0.8) -- (0.4) --
Loss from continuing operations -- -- -- --
Income (loss) from discontinued operations -- -- -- --
Net (loss) income (9.7)% (14.1)% (12.9)% (1.8)%
</Table>
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------
2003 2002 2001
---- ---- ----
Net revenue 100.0% 100.0% 100.0%
Costs and operating expenses:
Data communications and telecommunications 85.8 86.6 92.9
Research and development 7.5 10.8 21.7
Selling and marketing 4.2 6.8 18.4
General and administrative 4.3 14.6 23.3
Depreciation and amortization 11.3 19.3 29.4
Non-cash stock-based compensation -- 0.6 1.2
Loss on sale of messaging business -- 1.3 --
Restructuring costs -- 3.4 47.0
Total costs and operating expenses 113.1 143.4 233.9
Loss from operations (13.1) (43.4) (133.9)
Interest income 0.1 0.8 8.3
Interest expense (2.2) (7.1) (15.0)
Gains on bond repurchases and exchanges 9.3 15.6 13.2
Impairment of investment in long-term non-marketable security -- -- --
Other expenses, net (0.2) (0.2) (0.5)
Loss from continuing operations (6.1) (34.3) (127.9)
Income (loss) from discontinued operations 0.7 (39.5) (45.2)
Net loss (5.4)% (73.8)% (173.1)%
</Table>
37
<Page>
<Table>
Net loss (16.4)% 9.6% (5.4)% (73.8)% (173.1)%
</Table>
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO JUNE 30, 2003
NET REVENUE. Our primary source of revenue is the fees that we charge customers
for completing voice and fax calls over our network. 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. Our average revenue per minute is based
upon our total net revenue divided by the number of minutes of traffic over our
network for the applicable period. Average revenue per minute is a key
telecommunications industry financial measurement. We believe this measurement
is useful in understanding our financial performance, as well as industry
trends. Although the long distance telecommunications industry has been
experiencing declining prices in recent years, due to the effects of
deregulation and increased competition, our average revenue per minute can
fluctuate from period to period as a result of shifts in traffic over our
network to higher priced, lower priced, destinations.
Net revenue increased by approximately $22.1 million, or 56%, to $61.2 million
for 2004 from $39.1 million for 2003. Traffic carried over our network increased
30% to just over 1.1 billion minutes for 2004 from 854 million minutes for 2003
and our average revenue per minute was 5.5 cents in 2004 compared to 4.6 cents
per minute in 2003. Revenues from our wholesale telecommunications services
increased $15.3 million, or 40%, to $53.5 million for 2004 from $38.2 million in
2003. Revenues for our retail prepaid calling card services and other enhanced
services, were $7.7 million in 2004 compared to $0.9 million in 2003. This
increase reflects the rapid growth we have achieved with our retail prepaid
calling card services, which we introduced in the third quarter of 2003.
DATA COMMUNICATIONS AND TELECOMMUNICATIONS COSTS. Data communications and
telecommunications expenses are composed primarily of termination and circuit
costs. Termination costs are paid to local service providers to terminate voice
and fax calls received from our network. Terminating costs are negotiated with
the local service provider. Should competition cause a decrease in the prices we
charge our customers and, as a result, a decrease in our profit margins, our
contracts, in some cases, provide us with the flexibility to renegotiate the
per-minute termination fees. Circuit costs include charges for Internet access
at our Internet Central Offices, fees for the connections between our Internet
Central Offices and our customers and/or service provider partners, 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 $18.7 million,
or 56%, to $52.1 million for 2004 from $33.4 million for 2003. Data
communications and telecommunications expenses were $45.8 million and $6.3
million for our Wholesale and Retail business segments, respectively. The
increase in data communications and telecommunications expense primarily
reflects the increase in traffic, as discussed above. The largest component of
this expense, termination costs, increased to $50.8 million for 2004 from $32.0
million for 2003 while circuit costs decreased slightly to $1.3 million for 2004
from $1.4 million for 2003. As a percentage of net revenues, data
38
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communications and telecommunications expenses decreased to 85.1% for 2004 from
85.3% in 2003. We expect data communications and telecommunications expenses to
decrease as a percentage of net revenue to continue to decrease over the balance
of 2004 as we further increase utilization and efficiency of our network and
achieve economies of scale and we increase our revenues from our higher-margin
retail prepaid calling card 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 centers, salaries, and payroll taxes and benefits paid
for employees directly involved in the development and operation of our global
network operations centers 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 $0.1 million to $3.5 million for
2004 from $3.4 million for 2003. The small increase in research and development
expenses is due to expenditures related to the support of The iBasis Network. As
a percentage of net revenue, research and development expenses decreased to 5.8%
for 2004 from 8.8% for 2003. We expect that research and development expenses
will remain relatively level and continue to decrease as a percentage of net
revenue over the balance of 2004.
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.
Selling and marketing expenses increased by $0.2 million, to $2.1 million in
2004, from $1.9 million in 2003. The slight increase in expenses primarily
relates to sales incentive compensation on the higher level of revenues. As a
percentage of net revenue, selling and marketing expenses decreased to 3.5% for
2004 from 4.8% for 2003. We anticipate that selling and marketing expenses will
remain relatively level and will continue to decrease as a percentage of net
revenue over the balance of 2004.
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 $0.5 million to $3.3 million
for 2004 from $2.8 million for 2003. The increase in expenses relates to costs
associated with complying with the Sarbanes-Oxley Act of $0.1 million and the
effect of foreign currency fluctuations of $0.4 million. As a percentage of net
revenue, general and administrative expenses decreased to 5.3% for 2004 from
7.2% for 2003. We expect general and administrative expenses to remain
relatively level and decrease as a percentage of net revenue over the balance of
2004.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization expenses
decreased by $2.9 million to $2.8 million for 2004 from $5.7 million for 2003.
This decrease was primarily due to the end of the useful life of certain
networking equipment. As a percentage of net revenue, depreciation and
amortization expenses decreased to 4.6% for 2004 from 14.7% for 2003. We expect
depreciation and amortization expenses to continue to decrease over the balance
of 2004, both in absolute dollars and as a percentage of net revenue.
NON-CASH STOCK-BASED COMPENSATION. Non-cash stock-based compensation represents
compensation expense incurred in connection with the grant of stock options to
our employees with exercise prices less than the fair value of our common stock
at the respective dates of grant. Such grants were made prior to our initial
public stock offering and are being expensed over the vesting periods of the
options granted. Non-cash stock-based
39
<Page>
compensation was $28,000 in 2003. There was no non-cash stock-based compensation
expense in 2004 as these options became fully vested in 2003.
INTEREST INCOME. Interest income was $14,000 and $41,000 for 2004 and 2003,
respectively. The decrease in interest income reflects our lower average cash
balance in 2004.
INTEREST EXPENSE. Interest expense is primarily composed of interest expense
paid on the Existing Notes and various capital lease agreements financing
certain hardware and software components of our network. Interest expense
decreased by $0.2 million to $0.8 million in 2004 from $1.0 million in 2003.
This decrease primarily relates to the bond exchanges in 2003, which reduced our
debt level by $25.2 million, as well as reduced interest expense relating to a
lower level of capital lease obligations. As a result of the completion of the
refinancing of our debt in June 2004, interest expense in the future will
include interest on the New Secured Notes. All of the interest associated with
the Existing Senior Notes, which were prepaid in full as part of the
refinancing, had been charged to the gain on bond exchanges in 2003. As a
result, we expect that interest expense will increase by approximately $0.6
million per quarter over the balance of 2004.
GAIN ON BOND EXCHANGES. In 2003, we recognized a gain of $3.7 million in
connection with the early extinguishment of $12.2 million of the Existing Notes.
OTHER EXPENSES, NET. Other expenses, net were $66,000 and $98,000 in 2004 and
2003, respectively, and relate mostly to state excise and franchise taxes.
REFINANCING TRANSACTION COSTS. Transaction costs relating to the refinancing of
our debt in June 2004 were $1.9 million. These costs consisted primarily of
investment banking services, legal and audit fees.
REFINANCING RELATED INTEREST EXPENSE. We issued warrants to purchase a total of
5.2 million shares of our common stock, at $1.85 per share, to the holders of
the Existing Senior Notes as partial consideration for the prepayment of these
notes. The fair value of $2.1 million for these warrants has been charged to the
statement of operations as additional interest expense. Future interest on the
Existing Senior Notes of $1.6 million, that had originally been charged to the
gain on bond exchanges in 2003 and will not be paid as a result of the
prepayment of these notes, was recorded as a reduction to the additional
interest expense associated with the refinancing.
INCOME TAXES. We have not recorded an income tax benefit for the losses
associated with our operating losses in 2004 and 2003 as we believe that it is
more likely than not that these benefits will not be realized.
NET LOSS. Net loss was $5.9 million in 2004 compared to a net loss of $5.5
million in 2003. Excluding refinancing charges of $2.4 million, the loss in 2004
was $3.5 million. Excluding the gain on bond exchanges of $3.7 million, the loss
in 2003 was $9.2 million. The reduction in the net loss in 2004 compared to 2003
of $5.7 million, excluding refinancing charges and gain on bond exchanges,
primarily relates to the proportionately lower level of costs and operating
expenses on the higher level of revenues year-to-year.
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO JUNE 30, 2003
NET REVENUE. Net revenue increased by approximately $37.2 million, or 46%, to
$118.2 million for 2004 from $81.0 million for 2003. Traffic carried over our
network increased 29% to just over 2.1 billion minutes for 2004 from 1.6 billion
minutes for 2003 and our average revenue per minute was 5.5 cents in 2004
compared to 4.9 cents per minute in 2003. Revenues from our wholesale
telecommunications services increased $27.4 million, or 35%, to $106.7 million
for 2004 from $79.3 million in 2003. Revenues for our retail prepaid calling
card services and other enhanced services, were $11.5 million in 2004 compared
to $1.7 million in 2003. This increase reflects the rapid growth we have
achieved with our retail prepaid calling card services,
40
<Page>
which we introduced in the third quarter of 2003.
DATA COMMUNICATIONS AND TELECOMMUNICATION COSTS. Data communications and
telecommunications expenses increased by $32.4 million, or 47%, to $100.7
million for 2004 from $68.3 million for 2003. Data communications and
telecommunications expenses were $91.5 million and $9.2 million for our
Wholesale and Retail business segments, respectively. The increase in data
communications and telecommunications expense primarily reflects the increase in
traffic, as discussed above. The largest component of this expense, termination
costs, increased to $98.1 million for 2004 from $65.7 million for 2003 while
circuit costs remained level at $2.6 million for 2004 and 2003. As a percentage
of net revenues, data communications and telecommunications expenses increased
to 85.2% for 2004 from 84.3% in 2003.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
approximately the same at $7.1 million for 2004 and 2003. As a percentage of net
revenue, research and development expenses decreased to 6.0% for 2004 from 8.8%
for 2003.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased by $0.2
million, to $4.1 million in 2004, from $3.9 million in 2003. The slight increase
in expenses primarily relates to sales incentive compensation on the higher
level of revenues. As a percentage of net revenue, selling and marketing
expenses decreased to 3.5% for 2004 from 4.8% for 2003.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $0.9 million to $6.2 million for 2004 from $5.3 million for 2003.
The increase in expenses relates to costs associated with complying with the
Sarbanes-Oxley Act of $0.1 million and the effect of foreign currency
fluctuations of $0.4 million. As a percentage of net revenue, general and
administrative expenses decreased to 5.3% for 2004 from 6.6% for 2003.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization expenses
decreased by $5.6 million to $6.3 million for 2004 from $11.9 million for 2003.
This decrease was primarily due to the end of the useful life of certain
networking equipment. As a percentage of net revenue, depreciation and
amortization expenses decreased to 5.3% for 2004 from 14.7% for 2003.
NON-CASH STOCK-BASED COMPENSATION. Non-cash stock-based compensation represents
compensation expense incurred in connection with the grant of stock options to
our employees with exercise prices less than the fair value of our common stock
at the respective dates of grant. Such grants were made prior to our initial
public stock offering and are being expensed over the vesting periods of the
options granted. Non-cash stock-based compensation was $57,000 in 2003. There
was no non-cash stock-based compensation expense in 2004 as these options became
fully vested in 2003.
INTEREST INCOME. Interest income was $28,000 and $111,000 for 2004 and 2003,
respectively. The decrease in interest income reflects our lower average cash
balance in 2004.
INTEREST EXPENSE. Interest expense is primarily composed of interest expense
paid on the Existing Notes and various capital lease agreements financing
certain hardware and software components of our network. Interest expense
decreased by $0.9 million to $1.5 million in 2004 from $2.4 million in 2003.
This decrease primarily relates to the bond exchanges in 2003, which reduced our
debt level by $25.2 million, as well as reduced interest expense relating to a
lower level of capital lease obligations.
GAIN ON BOND EXCHANGES. In 2003, we recognized a gain of $16.6 million in
connection with the early extinguishment of $50.4 million of the Existing Notes.
REFINANCING TRANSACTION COSTS. Transaction costs relating to the refinancing of
our debt in June 2004 were $1.9 million. These costs consisted primarily of
investment banking services, legal and audit fees.
41
<Page>
REFINANCING RELATED INTEREST EXPENSE. We issued warrants to purchase a total of
5.2 million shares of our common stock, at $1.85 per share, to the holders of
the Existing Senior Notes as partial consideration for the prepayment of these
notes. The fair value of $2.1 million for these warrants has been charged to the
statement of operations as additional interest expense. Future interest on the
Existing Senior Notes of $1.6 million, that had originally been charged to the
gain on bond exchanges in 2003 and will not be paid as a result of the
prepayment of these notes, was recorded as a reduction to the additional
interest expense associated with the refinancing.
INCOME TAXES. We have not recorded an income tax benefit for the losses
associated with our operating losses in 2004 and 2003 as we believe that it is
more likely than not that these benefits will not be realized.
NET LOSS. Net loss was $15.3 million in 2004 compared to a net loss of $1.5
million in 2003. Excluding refinancing charges of $2.4 million and the loss on a
long-term non-marketable security, the loss in 2004 was $7.8 million. Excluding
the gain on bond exchanges of $16.6 million, the loss in 2003 was $18.1 million.
The reduction in the net loss in 2004 compared to 2003 of $10.3 million,
excluding refinancing charges, loss on a non-marketable security and gain on
bond exchanges, primarily relates to the proportionately lower level of costs
and operating expenses on the higher level of revenues year-to-year.
42
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YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
NET REVENUE. Our primary source of revenue is fees that we charge customers for
completing voice and fax calls over our network. 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. Our average revenue per minute is based
upon our total net revenue divided by the number of minutes of traffic over our
network for the applicable period.
During the third quarter of 2003, we introduced our retail prepaid
calling card services and have marketed such services primarily to ethnic
communities within major domestic markets through distributors. Revenue
for these services were not material for 2003.
Our net revenue increased by approximately $13.3 million to $178.2
million for 2003 from $164.9 million for 2002. While traffic carried over our
network increased to 3.5 billion minutes for 2003 from 2.6 billion minutes for
2002, such increase was partially offset by the decline in the average revenue
per minute. The average revenue per minute was 5.1 cents per minute in 2003
compared to 6.4 cents per minute in 2002. The long distance telecommunications
industry has been experiencing declining prices in recent years, due to the
effects of deregulation and increased competition. In addition, our average
revenue per minute can fluctuate from period to period as a result of shifts in
traffic over our network to higher priced, or lower priced, destinations.
DATA COMMUNICATIONS AND TELECOMMUNICATIONS EXPENSES. Data communications and
telecommunications expenses are composed primarily of termination and circuit
costs. Termination costs are paid to local service providers to terminate voice
and fax calls received from our network. Terminating costs are negotiated with
the local service provider. Should competition cause a decrease in the prices we
charge our customers and, as a result, a decrease in our profit margins, our
contracts, in some cases, provide us with the flexibility to renegotiate the
per-minute termination fees. Circuit costs include charges for Internet access
at our Internet Central Offices, fees for the connections between our Internet
Central Offices and our customers and/or service provider partners, 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 $10.0
million to $152.9 million for 2003 from $142.9 million for 2002. The increase in
data communications and telecommunications expense was primarily driven by the
increase in traffic, as discussed above, offset by a decline in the average rate
per minute and a reduction in our circuit costs. The largest component of this
expense, termination costs, increased $15.4 million, or 11.7%, to $147.2 million
for 2003 from $131.8 million for 2002 while circuit costs decreased $5.3
million, or 48.4%, to $5.7 million for 2003 from $11.0 million for 2002. The
decrease in circuit costs was due to our efforts to further improve our network
operations and make it more cost efficient. We achieved cost savings by
renegotiating prices with vendors and service provider partners, entering into
more variable rather than fixed cost arrangements, reducing the number of
service providers, conducting extensive studies of our circuit needs and
eliminating under-utilized circuits by re-engineering more cost-effective
solutions. As a percentage of net revenue, data communications and
telecommunications expenses decreased to 85.8% for 2003 from 86.6% for 2002.
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 centers, salaries, and payroll taxes and benefits paid
for employees directly involved in the development and operation of our global
network operations centers and the rest of our
43
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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 decreased by $4.4 million to $13.4
million for 2003 from $17.8 million for 2002. The decrease in expenses reflect
the effect of our 2002 restructuring program, which included the consolidation
of our Internet central offices and a workforce reduction of 19 engineers, as
well as our on-going efforts to improve the operations of The iBasis Network. As
a result, third-party network maintenance costs declined by $2.1 million and
personnel-related costs declined by $2.3 million. As a percentage of net
revenue, research and development expenses decreased to 7.5% for 2003 from 10.8%
for 2002.
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. Selling and marketing
expenses decreased by $3.8 million, or 33.4%, to $7.5 million for 2003 from
$11.3 million for 2002. The decrease in expenses reflects the effect of our 2002
restructuring program, which included a workforce reduction of 10 sales and
marketing personnel. As a result, personnel-related costs, including sales
commissions, declined by $3.4 million and travel expenses declined by $0.7
million. As a percentage of net revenue, selling and marketing expenses
decreased to 4.2% for 2003 from 6.8% for 2002.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
include salary, payroll taxes and benefits 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 decreased by $16.5 million, or 68.3%, to
$7.7 million for 2003 from $24.2 million for 2002. During 2003, we recognized a
$0.8 million expense for potentially uncollectible customer accounts compared to
$10.0 million in 2002. In addition, during 2003, we had a bad debt recovery of
$4.3 million, resulting from the collection of a previously reserved customer
receivable balance, which was recorded as a credit in the 2003 statement of
operations. As a percentage of net revenue, general and administrative expenses
decreased to 4.3% for 2003 from 14.6% for 2002. Excluding the above-mentioned
collection of a previously reserved receivable balance, general and
administrative expenses decreased to 6.5% of net revenue for 2003.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization expenses
decreased by $11.8 million, or 37.0%, to $20.1 million for 2003 from $31.9
million for 2002. This decrease was largely due to the $28.5 million reduction
in historical cost value of our network equipment due to our agreement to settle
the majority of our capital lease obligations with our primary equipment vendor
in August 2002, the write-off of property and equipment as a part of our
restructuring plans that were executed in 2002 as well as the end of the useful
lives of certain networking equipment. As a percentage of net revenue,
depreciation and amortization expenses decreased to 11.3% for 2003 from 19.3%
for 2002.
NON-CASH STOCK-BASED COMPENSATION. Non-cash stock-based compensation represents
compensation expense recorded in connection with the grant of stock options to
our employees with exercise prices less than the fair value of the common stock
at the respective dates of grant. Such grants were either made prior to our
initial public stock offering or were assumed in connection with our acquisition
of PriceInteractive, Inc. in 2001, and were expensed over the vesting periods of
the options granted. The decrease in non-cash stock-based compensation to $0.1
million in 2003 from $1.0 million in 2002 was due to the expiration of certain
option agreements issued in connection with acquisition of PriceInteractive,
Inc. in 2001, as well as our stock option exchange program which was completed
in December 2002.
LOSS ON DISPOSAL OF MESSAGING BUSINESS. In March 2002, we sold our messaging
line of business to Call Sciences, an enhanced communications service provider.
During 2002, we recognized a loss on the sale of $2.1 million, net of the
royalty stream.
RESTRUCTURING AND OTHER NON-RECURRING COSTS. During 2002, we announced cost
reduction measures and recorded a net charge of approximately $5.5 million in
the statement of operations in 2002. The charge included the write off of
leasehold improvements as well as termination costs for the Miami facility space
and telecommunication circuits and employee severance costs. We did not have any
restructuring charges in 2003.
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The components of the restructuring charge were as follows:
<Table>
<Caption>
(IN THOUSANDS)
Write-off of property and equipment $ 2,427
Termination of contractual obligations 2,794
Employee severance costs 750
Less: Change in estimate of 2001 restructuring costs (435)
Total $ 5,536
--------
</Table>
INTEREST INCOME. Interest income is primarily composed of income earned on our
cash and cash equivalents and marketable securities. Interest income decreased
by $1.1 million, or 87.5%, to $0.2 million in 2003 from $1.3 million in 2002.
The decrease is primarily a result of our average cash balance during the
period, including marketable securities, declining by approximately 70% in 2003
compared to 2002. In addition, lower average interest rates in 2003, compared to
2002, contributed to the decline in interest income.
INTEREST EXPENSE. Interest expense is primarily composed of interest paid on
the Existing Notes and various capital lease agreements established to finance a
substantial majority of the hardware and software components of our network.
Interest expense decreased by $7.6 million, or 65.8%, to $4.0 million in 2003
from $11.6 million in 2002. This decrease was attributable to reduced interest
paid on capital equipment financing, the impact in 2003 of both the early
termination of $40.6 million of the Existing Notes throughout 2002 and the early
termination of $50.8 million of our capital lease obligations in August 2002.
Our interest expense was also reduced as a result of the exchange of $50.4
million of the Existing Notes for $25.2 million of Existing Senior Notes during
2003.
In accordance with SFAS No. 15, "Accounting by Debtors and Creditors
Regarding Troubled Debt Restructuring," we recorded a gain on the exchange of
approximately $16.6 million during 2003. SFAS No. 15 requires that the gain on
the exchange be recorded net of the future payments on the Existing Senior
Notes, the fair value of the warrants issued, the write off of the net book
value of the deferred financing costs originally capitalized with the issuance
of the Existing Notes and any other fees or costs. While our future cash flows
relating to interest payments will not be affected by the exchange, our future
statements of operations will show a reduction of interest expense due to the
inclusion of the interest payments on the Existing Senior Notes within the gain.
GAIN ON BOND REPURCHASES AND EXCHANGES. During 2003, we entered into agreements
with principal holders of the Existing Notes which resulted in the retirement of
$50.4 million of such notes in exchange for new debt instruments at 50% of the
face value of the retired notes. Under the terms of the agreement, the holders
of the retired notes received $25.2 million of Existing Senior Notes and
warrants for 4,915,416 shares of the common stock. Each warrant has an initial
exercise price of $0.65 per share and is exercisable over a five-year term. The
Existing Senior Notes, which mature on January 15, 2005, share in a second
priority lien on our assets and are subordinated to our bank revolving line of
credit.
The gain we recognized in 2003 was calculated as follows:
<Table>
<Caption>
2003(IN THOUSANDS)
Face value of surrendered Existing Notes $ 50,350
Less: Face value of issued Existing Senior Notes (25,175)
Future interest payments on Existing Senior Notes (5,527)
Fair value of warrants issued (1,375)
Reduction of deferred debt financing costs (723)
Professional fees (935)
Gain $ 16,615
----------
</Table>
45
<Page>
During 2002, we repurchased a portion of the Existing Notes and recorded
gains. The gains were calculated as follows:
<Table>
<Caption>
2002 (IN THOUSANDS)
Carrying value of repurchased Notes $ 40,588
Less: Cost of repurchase of Notes (13,993)
Write-off of deferred debt financing costs (805)
Gain $ 25,790
----------
</Table>
OTHER EXPENSES, NET. Other expenses, net were $0.3 million and $0.4 million in
2003 and 2002, respectively, and relate mostly to state excise and franchise
taxes.
LOSS FROM CONTINUING OPERATIONS. Our loss from continuing operations was $10.9
million and $56.5 million for 2003 and 2002, respectively. The reduction in the
loss from continuing operations in 2003 was primarily a result of substantially
lower costs and operating expenses as a percentage of net revenue. As a result
of our restructuring programs and our continued focus on controlling expenses,
our research and development, selling and marketing and general and
administrative expenses, in total, declined to $28.6 million for 2003 from $53.2
million for 2002. In addition, our data communications and telecommunications
costs have declined to 85.8% of net revenue for 2003 from 86.6% of net revenue
for 2002.
INCOME (LOSS) FROM DISCONTINUED OPERATIONS. On July 15, 2002, we completed the
sale of substantially all the assets of our Speech Solutions Business for $18.5
million in cash ($1.5 million of this amount is in escrow). The loss from
discontinued operations of $65.2 million in 2002 represents the operating loss
of the Speech Solutions Business for 2002. In the fourth quarter of 2003, we
recognized additional consideration of $1.3 million for an earn-out payment
based on the achievement of certain 2003 revenue-based milestones associated
with our former Speech Solutions Business. The cash payment associated with the
earn-out was $1.0 million and was received in February 2004.
INCOME TAXES. We have not recorded an income tax benefit for the loss
associated with our operating losses as it is more likely than not that these
benefits will not be realized.
NET LOSS. The net loss for 2003 was $9.7 million, or $0.21 per share, compared
to a net loss of $121.7 million, or $2.70 per share, for 2002. In 2003, income
from discontinued operations was $1.3 million. The net loss of $121.7 million in
2002 included a loss from discontinued operations of $65.2 million. The net loss
from continuing operations in 2003 was $10.9 million, which was $45.6 million
lower than 2002. In total, our research and development, selling and marketing,
and general and administrative expenses declined $24.6 million to $28.6 million
in 2003 compared to $53.2 million in 2002. The reduction in these expenses
reflects the effect of our 2001 and 2002 restructuring programs, as well as our
continuing focus on reducing costs. In addition, depreciation and amortization
decreased $11.8 million and interest expense declined $7.6 million in 2003
compared to 2002.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
NET REVENUE. Our net revenue increased by approximately $54.7 million to $164.9
million for 2002 from $110.2 million for 2001. The increase in revenue from 2001
was the result of an increase in traffic carried over our network to 2.6 billion
minutes for 2002 from 1.4 billion minutes for 2001, offset by the decline in the
average rate per minute. The average revenue per minute was 6.4 cents per minute
in 2002 compared to 8.2 cents per minute in 2001. The lower average revenue per
minute reflects the continuing decline in prices in the long distance
telecommunications industry. In addition, our average revenue per minute can
fluctuate from period to period as a result of shifts in traffic over our
network to higher priced, or lower priced, destinations.
46
<Page>
DATA COMMUNICATIONS AND TELECOMMUNICATIONS EXPENSES. Data communications and
telecommunications expenses increased by $40.5 million, or 39.6%, to $142.8
million for 2002 from $102.3 million for 2001. The increase in data
communications and telecommunications expense was primarily driven by the
increase in traffic described above, offset by the decline in the average rate
per minute. The largest component of the expense, termination costs, increased
by $44.5 million, or 51.0%, to $131.8 million for 2002 from $87.3 million for
2001. Circuit and other costs decreased by $4.0 million, or 36.4%, to $11.0
million for 2002 from $15.0 million for 2001. The decrease in these circuit
costs was due to our efforts to further improve our network operations and make
it more cost efficient. We achieved cost savings by renegotiating prices with
vendors and service provider partners, entering into more variable rather than
fixed cost arrangements, reducing the number of service providers, conducting
extensive studies of our circuit needs and eliminating under-utilized circuits
by re-engineering more cost-effective solutions. As a percentage of net revenue,
data communications and telecommunications expenses decreased to 86.6% for 2002
from 92.9% for 2001.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses decreased
by $6.1 million, or 25.7%, to $17.8 million for 2002 from $23.9 million for
2001. The decrease in expenses is due the consolidation of our Internet central
offices and workforce reductions of 71 employees from our 2001 restructuring
program and 19 employees from our 2002 restructuring program. As a result,
personnel-related costs declined $3.1 million and third-party network
maintenance costs declined by $1.7 million. As a percentage of net revenue,
research and development expenses decreased to 10.8% for 2002 from 21.7% for
2001.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses decreased by
$9.0 million, or 44.5%, to $11.3 million for 2002 from $20.3 million for 2001.
The decrease in expenses reflects the effect of workforce reductions of 39
employees from our 2001 restructuring program and 10 employees from our 2002
restructuring program. As a result, personnel-related costs, including
commissions, declined $4.6 million, travel costs decreased $2.3 million and
promotional expenditures were reduced by $1.5 million. As a percentage of net
revenue, selling and marketing expenses decreased to 6.8% for 2002 from 18.4%
for 2001.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
decreased by $1.4 million, or 5.4%, to $24.2 million for 2002 from $25.6 million
for 2001. During 2002, our cost reduction measures for general and
administrative expenses included workforce reductions in the first and second
quarter of 2002. These 2002 cost reductions were partially offset by a $0.9
million increase in bad debt expense in 2002 compared to 2001. As a percentage
of net revenue, general and administrative expenses decreased to 14.6% for 2002
from 23.3% for 2001.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization expenses
decreased by $0.5 million, or 1.5%, to $31.9 million for 2002 from $32.4 million
for 2001. This decrease was due to the reduction in historical cost value of our
network equipment due to our agreement to settle the majority of our capital
lease obligations with our primary equipment vendor as well as the write-off of
property and equipment as a part of our restructuring plans. As a percentage of
net revenue, depreciation and amortization expenses decreased to 19.3% for 2002
from 29.4% for 2001.
NON-CASH STOCK-BASED COMPENSATION. Non-cash stock-based compensation represents
compensation expense incurred in connection with the grant of stock options to
our employees with exercise prices less than the fair value of the common stock
at the respective dates of grant. Such grants were either made prior to our
initial public stock offering or were assumed in connection with our acquisition
of PriceInteractive, Inc., and are being expensed over the vesting periods of
the options granted. For 2002 and 2001, we recorded $1.0 million and $1.4
million, respectively, in non-cash stock-based compensation expense.
LOSS ON SALE OF MESSAGING BUSINESS. In March 2002, we sold our messaging line
of business to Call Sciences, an enhanced communications service provider. The
sale included all of our messaging business, including, among other items, our
Santa Clara, California data center, our customers, revenue streams, and
customer prospects in exchange for $168,000 and a future royalty stream. During
2002, we recognized a loss on the sale of $2.1 million, net of the royalty
stream.
47
<Page>
RESTRUCTURING COSTS. During 2002, we restructured to better align the
organization and resources with our corporate strategy and recorded a net charge
of totaling approximately $5.5 million. Included in the charges are the
write-off of property and equipment, the termination of contractual obligations
and, in Q2, employee severance.
The components of the restructuring and other non-recurring costs were
as follows:
<Table>
<Caption>
(IN THOUSANDS)
Write-off of property and equipment $ 2,427
Termination of contractual obligations 2,794
Employee severance costs 750
Less: Change in estimate of 2001 restructuring costs (435)
Total $ 5,536
--------
</Table>
The fixed asset write-off is primarily related to the closure and
abandonment of our Miami and Singapore Internet central offices. The costs
include the write-off of leasehold improvements as well as an estimated
provision for termination costs for the facility space and telecommunication
circuits. As we continue to focus on serving the largest international carriers,
Tier One carriers, who tend to maintain greater geographic footprints,
management approved a plan to close our Miami and Singapore Internet Central
Offices and route traffic through our other central facilities. In addition, we
wrote-off certain assets relating to our transitioning to a new switchless
architecture in its VoIP network.
The employee severance costs resulted from a reduction in the workforce
as we terminated 44 employees on June 28, 2002. Of these 44 people, 19 were
within research and development, 10 were from sales and marketing and 15 were
from general and administrative departments.
In addition our 2002 restructuring expense was reduced by a change in
estimated restructuring costs relating to our 2001 restructuring and
specifically related to a reduction in the estimated cost of terminating
contractual lease obligations.
These cost reduction measures were completed in the first quarter of
2003 and had a minimal impact on business operations during 2002.
INTEREST INCOME. Interest income is primarily composed of income earned on our
cash and cash equivalents, restricted cash and marketable securities. Interest
income decreased by $7.9 million, or 85.9%, to $1.3 million in 2002 from $9.2
million in 2001. The decrease is primarily a result of our average cash balance
during the year, including marketable securities, declining by approximately 70%
in 2002 compared to 2001. In addition, lower average interest rates in 2002,
compared to 2001, contributed to the decline in interest income.
INTEREST EXPENSE. Interest expense is primarily composed of interest paid on
the Convertible Subordinated Notes (which includes the Existing Notes and our
11 1/2% 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 decreased by $4.9 million, or 29.7%,
to $11.6 million in 2002 from $16.5 million in 2001. This decrease was
attributable to reduced interest paid on capital equipment financing, the early
extinguishment of $40.6 million of our 11 1/2% Convertible Subordinated Notes
and the early extinguishment of $50.8 million of our capital lease obligations.
GAIN ON REPURCHASE OF CONVERTIBLE SUBORDINATED NOTES. During 2002 and 2001, we
recognized a gain of $25.8 million and $14.5 million, respectively, in
connection with the early extinguishment of $40.6 million and $20.9 million,
respectively, of our Convertible Subordinated Notes (which includes the Existing
Notes and our 11 1/2% Convertible Subordinated Notes).
48
<Page>
The gains were calculated as follows:
<Table>
<Caption>
2002 2001
---- ----
(IN THOUSANDS)
Carrying value of repurchased Notes $ 40,588 $ 20,882
Less: Cost of repurchase of Notes (13,993) (5,863)
Write-off of deferred debt financing costs (805) (470)
Gain $ 25,790 $ 14,549
---------- ---------
</Table>
OTHER EXPENSES, NET. Other expenses, net were $0.4 million and $0.6 million in
2002 and 2001, respectively, and relate mostly to state excise and franchise
taxes.
LOSS FROM CONTINUING OPERATIONS. Our loss from continuing operations was $56.5
million and $140.9 million for the years ended December 31, 2002 and 2001,
respectively. The reduction in our loss from continuing operations in 2002 was
primarily a result of lower costs and operating expenses as a percentage of
revenue, lower restructuring costs and a larger gain on bond repurchases and
exchanges.
LOSS FROM DISCONTINUED OPERATIONS. On July 15, 2002 we sold our Speech
Solutions Business for $18.5 million in cash ($1.5 million of this amount is in
escrow). The operating loss and the loss on the disposal of the business totaled
$65.2 million in 2002. The loss on the disposal of the discontinued operation of
$58.9 million included the write-off of goodwill and other purchased intangibles
of $57.3 million and costs to sell the operation of $1.6 million.
INCOME TAXES. We have not recorded an income tax benefit for the losses
associated with its operating losses as it is more likely than not that those
benefits will not be realized.
NET LOSS. The net loss for 2002 was $121.7 million, or $2.70 per share,
compared to a net loss of $190.7 million, or $2.70 per share, for 2001. In 2002,
the loss from discontinued operations was $65.2 million compared to $49.8
million in 2001. The net loss from continuing operations was $56.5 million in
2002, which was $84.4 million lower than 2001. The increase in revenues,
combined with proportionately lower data communications and telecommunications
costs, in 2002, resulted in a reduction of $14.2 million in our net loss.
Restructuring costs in 2002 decreased by $46.3 million to $5.5 million compared
to $51.8 million in 2001. In total, our research and development, selling and
marketing, and general and administrative expenses declined $16.6 million to
$53.2 million in 2002 compared to $69.8 million in 2001. The reduction in these
expenses reflects the effect of our 2001 and 2002 restructuring programs.
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 public
offerings of common stock and Existing Notes. In addition, we have also
historically met our capital needs through vendor capital leases and other
equipment financings. We expect to continue to utilize equipment financing in
the future to partially fund our future capital equipment needs.
Net cash used in continuing operating activities for the six months
ended June 30, 2004 declined to $2.4 million from $3.8 million for the same
period in 2003. For the three months ended June 30, 2004, operating
activities provided $0.4 million in cash. Cash used in continuing operating
activities for both six month periods was primarily related to the cash
necessary to fund our operating losses. In addition, the reduction in cash
used in operating activities in 2004 was also a result of strong collections
of accounts receivable which reduced our days sales outstanding.
49
<Page>
Net cash used in continuing operating activities was $3.2 million (net
of the collection of a previously reserved receivable balance of $4.3 million),
$43.0 million and $68.4 million in 2003, 2002 and 2001, respectively. Cash used
in continuing operating activities in 2003 of $3.2 million related to our loss
from continuing operations of $10.9 million and the non-cash gain on our debt
exchange of $16.6 million, partially offset by non-cash charges of $17.0 million
and changes in other assets and liabilities of $7.4 million. Cash used in
continuing operating activities in 2002 of $43.0 million related to our loss
from continuing operations of $56.5 million, the non-cash gain on our debt
repurchases of $25.8 million and changes in other assets and liabilities of
$11.8 million, partially offset by non-cash charges of $51.1 million. Cash used
in continuing operations in 2001 of $68.4 million related to our loss from
continuing operations of $140.9 million, the non-cash gain on our debt
repurchases of $14.5 million and changes in other assets and liabilities of $8.7
million, partially offset by non-cash charges of $95.7 million.
Net cash used in discontinued operating activities was $1.9 million and
$13.3 million in 2002 and 2001, respectively.
Net cash provided by investing activities was $1.7 million for the
six months ended June 30, 2004 compared to cash used of $2.9 million for the
same period in 2003. The cash provided by investing activities in 2004
relates to $1.1 million in proceeds from an earn-out receivable and $1.5
million in proceeds from an escrow payment relating the sale of our Speech
Solutions Business, net of purchases of property and equipment of $1.0
million. The cash used in investing activities in 2003 relates to purchases
of equipment of $1.0 million. The cash used in investing activities in 2003
relates to purchases of equipment of $2.1 million and $0.7 million relating
to an adjustment to the proceeds from the sale of our former Speech Solutions
Business.
In June 2004, we completed a refinancing or our outstanding debt
obligations. As part of the refinancing, we completed an Exchange Offer,
pursuant to which $37.3 million of our outstanding Existing Notes,
representing approximately 98% of the total amount of Existing Notes
outstanding, were tendered for the same principal amount of New Subordinated
Notes. Approximately $0.9 million of the Existing Notes remain outstanding
after the Exchange Offer. Simultaneously with the Exchange Offer, we
prepaid all $25.2 million of our Existing Senior Notes for cash equal to the
principal amount plus accrued but unpaid interest and the issuance of
Warrants exercisable for an aggregate of 5,176,065 shares of our common stock
at $1.85 per share. We issued $29.0 million of New 8% Secured Convertible
Notes due in June 2007 of which $25.2 million was used to prepay the Existing
Senior Notes. The New Secured Notes are convertible into shares of common
stock at $1.85 per share. As a result of the refinancing, we have extended
the maturity of $62.5 million in debt from the first quarter of 2005 until
2007 and 2009. This refinancing will also reduce our future annual cash
interest payments by $0.2 million.
Net cash used in investing activities was $5.2 million in 2003, of which
$4.5 million was used for capital expenditures and $0.7 million was a payment
relating to an adjustment associated with the sale of our Speech Solutions
Business. Net cash provided by investing activities was $46.6 million in 2002.
This primarily reflected $34.0 million in the sale and maturity of marketable
securities and $17.0 million in proceeds received from the sale of the Speech
Solutions Business, partially offset by $4.6 million for capital expenditures.
Net cash used in investing activities was $15.1 million in 2001. This primarily
reflected $38.1 million in cash paid for the acquisition of the Speech Solutions
Business, and $35.1 million for capital expenditures, partially offset by $58.1
million in proceeds from the sale and maturity of marketable securities. We
expect our capital expenditures to be approximately $6 million to $8 million in
2004.
At a Special Meeting of Shareholders held on February 18, 2004,
shareholders voted to give our board of directors authority to effect a reverse
stock split of our common stock. The affirmative vote by shareholders permits
our board of directors to choose to effect a reverse stock split of our common
stock at a ratio of between one-and-a-half for one (1.5:1) and five to one
(5:1). The board of directors has not chosen to affect such a split yet, and may
choose not to affect such a split.
At a Special Meeting of Shareholders held on June 18, 2004, shareholders
voted to increase the number of authorized shares of common stock, par value
$0.001 per share, from 85,000,000 shares to 170,000,000 shares. As a result, on
June 18, 2004, we filed an Amendment to our First Amended and Restated
Certificate of Incorporation to increase the number of authorized shares of
common stock, par value $0.001 per share, from 85,000,000 shares to 170,000,000
shares.
Net cash provided by financing activities was $1.7 million for the
six months ended June 30, 2004 compared to cash used in financing activities
of $4.5 million for 2003. Cash provided by financing activities in 2004
included an additional $3.8 million in proceeds from the issuance of the New
Secured Notes net of the amount used to finance the prepayment of the
Existing Senior Notes. The additional net proceeds from the New Secured Notes
helped finance $1.8 million in transaction costs. In addition, we received
proceeds of $1.0 million from the holders of the Existing Senior Notes who
exercised previously issued warrants for 1.5 million shares during the three
months ended June 30, 2004. Principal payments on capital lease obligations
were $1.4 million in 2004.
50
<Page>
Net cash used in financing activities was $6.7 million in 2003, of which
$5.8 million was used to repay our capital lease obligations and $0.9 million
was paid for fees in connection the exchange of our outstanding bonds. Net cash
used in financing activities was $45.2 million in 2002. This primarily reflected
$14.0 million used to repurchase $40.6 million face value of the Existing Notes,
and $38.9 million in payments of our capital leases and other debt obligations,
including the early extinguishment of $28.5 million of certain capital lease
obligations. In the fourth quarter of 2002, we borrowed $2.3 million under a
revised credit agreement. This credit agreement did not require cash collateral
and, therefore, $8.9 million of previously restricted cash is reported as a cash
inflow due to the termination of this collateral requirement. Net cash used in
financing activities was $35.7 million in 2001. This primarily reflected $26.4
million in payments of capital leases and other debt obligations, $8.9 million
in restricted cash related to our previous credit agreement, and $5.9 million
used to repurchase $20.9 million face value of the Existing Notes, partially
offset by $4.0 million in bank borrowings and $1.4 million in proceeds from
employee stock purchase and option plans.
On August 5, 2002 we completed an agreement with our primary equipment
vendor to reduce our capital lease obligations and related future cash
commitments. Under the terms of the agreement, we paid our vendor $28.5 million
in exchange for the elimination of $50.8 million in existing vendor debt, $9.0
million in future interest obligations (assuming the debt was held to maturity)
and $4.0 million in tax and other obligations for a total of $63.8 million of
future obligations. The difference between the cash paid and the recorded
outstanding obligation on that date was accounted for as a reduction in the
carrying value of the underlying capital assets. This transaction reduced
interest expense by $2.5 million and depreciation and amortization by $3.3
million in the months subsequent to the transaction from the amounts that would
have otherwise been recognized in 2002.
In December 2003, we amended and extended our revolving line of credit
with our bank. The new $15.0 million revolving line of credit replaced two
secured lines of credit that totaled $15.0 million. The revolving line of credit
bears interest at the bank's prime rate plus 1%, matures on January 5, 2005 and
is collateralized by substantially all of our assets. Borrowings under the
revolving line of credit are on a formula basis and are limited to eligible
accounts receivable. The revolving line of credit requires us to comply with
various non-financial covenants and financial covenants, including minimum
profitability. We were in compliance with all of these covenants as of March 31,
2004 and December 31, 2003. As of June 30, 2004 and December 31, 2003, we had
$2.3 million and $2.3 million in borrowings and unused borrowing capacity of
$3.0 million and $2.9 million, respectively, based on our borrowing formula,
under the new revolving line of credit. As of December 31, 2002, we had $2.3
million in borrowings under our previous revolving lines of credit with our
bank. As of June 30, 2004, December 31, 2003 and 2002, we had issued and
outstanding letters of credit, under our revolving lines of credit, totaling
$1.6 million, $2.6 million and $3.3 million, respectively.
During 2003, we entered into agreements with principal holders of the
Existing Notes which resulted in the retirement of $50.4 million of such notes
in exchange for new debt instruments at 50% of the face value of the retired
notes. Under the terms of the agreement, the holders of the retired notes
received $25.2 million of Existing Senior Notes and warrants to purchase
4,915,416 shares of the common stock. Each warrant has an exercise price of
$0.65 per share and is exercisable over a five-year term. In April 2004, holders
of 1,478,132 warrant shares exercised their warrants for cash.
We anticipate that the June 30, 2004 balance of $18.2 million in
cash and cash equivalents, together with cash flow from operations, will be
sufficient to fund our operations and debt service requirements for the next
twelve months.
51
<Page>
Under accounting principles generally accepted in the U.S., certain
obligations and commitments are not required to be included in the consolidated
balance sheets and statements of operations. These obligations and commitments,
while entered into in the normal course of business, may have a material impact
on liquidity. We do not have any relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as structured finance
or special purpose entities, which would have been established for the purpose
of facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. As such, we are not exposed to any financing, liquidity,
market or credit risk that could arise if we had engaged in such relationships.
The following table summarizes our future contractural obligations as of
June 30, 2004:
<Table>
<Caption>
PAYMENT DUE DATES
-------------------------------------------------------------------------------
LESS THAN 1 1 TO 2 2 TO 3 3 TO 5 AFTER 5
TOTAL YEAR YEARS YEARS YEARS YEARS
------- ----------- ------ ------ ------ -------
(IN THOUSANDS)
6 3/4% Convertible Subordinated
Notes due 2009 $37,285 $ -- $ -- $ -- $37,285 --
5 3/4% Convertible Subordinated
Notes due 2005 895 895 -- -- -- --
8% Secured Convertible Notes
due 2007 29,000 -- -- 29,000 -- --
Capital lease obligations 828 828 -- -- -- --
Revolving line of credit 2,300 2,300 -- -- -- --
Operating leases 10,606 3,120 1,732 1,709 3,677 368
------- ------ ------ ------- ------- ----
Total $80,914 $7,143 $1,732 $30,709 $40,962 $368
======= ====== ====== ======= ======= ====
</Table>
52
<Page>
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
53
<Page>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk exposure is related to interest rates and
foreign currency exchange rates. To date, we have not engaged in trading market
risk sensitive instruments or purchasing hedging instruments, whether interest
rate, foreign currency exchange, commodity price or equity price risk. We have
not purchased options or entered into swaps or forward or futures contracts.
Our investments in commercial paper and debt instruments are subject to
interest rate risk, but due to the short-term nature of these investments, a
change in interest rates would not have a material impact on their value at
June 30, 2004. Our primary interest rate risk is the risk on borrowings
under our line of credit agreements, which are subject to interest rates
based on the bank's prime rate. A change in the applicable interest rates
would also affect the rate at which we could borrow funds or finance
equipment purchases. All other debt, including capital lease obligations, are
fixed rate debt. A 10% change in interest rates would not have a material
impact on interest expense associated with our line of credit agreement. In
addition, a 10% change in interest rates would not significantly impact the
fair value of our New Secured Notes.
We conduct our business in various regions of the world, but most of our
revenues are denominated in U.S. dollars with the remaining being generally
denominated in Euros or British pounds. Although most of our costs are U.S.
dollar denominated, some of our costs are in Euros or British pounds which
partially offsets our risk from revenues denominated in these currencies.
BUSINESS
DESCRIPTION OF BUSINESS
COMPANY OVERVIEW
We are an international telecommunications carrier that utilizes the
Internet to provide economical international telecommunications services. Our
continuing operations consist of our Voice-Over-Internet-Protocol, or VoIP,
business. We offer wholesale services through our worldwide network to carriers,
telephony resellers and others around the world by operating through various
service agreements with local service providers in the United States, Europe,
Asia, the Middle East, Latin America, Africa and Australia.
During the third quarter of 2003, we introduced our retail prepaid
calling card services and have marketed such services primarily to ethnic
communities within major domestic markets through distributors. Our entry
into the retail prepaid calling card business is based on our strategy to
leverage our existing international VoIP network with additional enhanced
services that have the potential to deliver higher margins than our wholesale
international telecommunications services. In addition, the retail prepaid
calling card business typically has a faster cash collection cycle than
wholesale international telecommunications services. Beginning in the second
quarter of 2004, we have created a new reportable business segment, retail
prepaid calling card services and other enhanced services ("Retail") in
addition to our international wholesale VoIP telecommunications services.
Since we introduced our retail prepaid calling card services, revenue from
our Retail business had been less than 10% of total revenue. In the second
quarter of 2004, revenue from our Retail business exceeded 10% of our total
net revenue.
We have a history of operating losses and, as of June 30, 2004, our
accumulated deficit was $427.5 million and our stockholders' deficit was
$52.4 million. We used $2.4 million and $3.2 million in cash from operations
in the six months ended June 30, 2004 and the year ended December 31, 2003,
respectively. These results are primarily attributable to the expenditures
necessary to build our network and develop and expand our market. In June
2004, we completed a refinancing of our outstanding debt obligations. As part
of the refinancing, we completed a public exchange offer, pursuant to which
$37.3 million of our outstanding 5 3/4% Convertible Subordinated Notes due in
March 2005, representing approximately 98% of the total amount outstanding,
were tendered for the same principal amount of new 6 3/4% Convertible
Subordinated Notes due in June 2009. Approximately $0.9 million of the 5 3/4%
Convertible Subordinated Notes due in June 2009 remain outstanding after the
exchange offer. Simultaneously with the completion of the exchange offer, we
prepaid all $25.2 million of our 11 1/2% Senior Secured Notes due in January
2005 for cash equal to the principal amount plus accrued but unpaid interest
and the issuance of warrants exercisable for an aggregate of 5,176,065 shares
of our common stock, at $1.85 per share. We issued $29.0 million of new 8%
Secured Convertible Notes due in June 2007, of which $25.2 million
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was used to prepay the 11 1/2% Senior Secured Notes due in January 2005. The new
8% Secured Convertible Notes due in June 2007 are convertible into shares of
common stock at $1.85 per share.
We were incorporated as a Delaware corporation in 1996. Our principal
executive offices are located at 20 Second Avenue, in Burlington, Massachusetts
and our telephone number is (781) 505-7500.
INDUSTRY OVERVIEW
MARKET OVERVIEW. The international voice and fax traffic market is estimated to
be worth more than US $50 billion. We believe that this market will continue to
grow as countries around the world continue to deregulate their
telecommunication markets, prices fall and underlying trends in migration and
economic integration drive fundamental demand.
Global deregulation combined with rapid technological advances has
enabled the emergence of many new communications service providers in dozens of
local markets. In their efforts to remain competitive, national carriers are
focusing their capital spending on "last-mile" services such as fixed-line,
wireless, and cable that account for the most of their revenues. Consequently,
communications service providers are looking for ways to expand their ability to
serve all of their customers' telecommunications needs, while simultaneously
reducing the cost of providing international services. Increasingly, the world's
carriers are seeking to outsource international voice traffic to efficient Voice
over Internet Protocol or VoIP networks, such as The iBasis Network, whose
inherently lower infrastructure and transport costs improve a carrier's
competitiveness and bottom line, without compromising service quality.
EMERGENCE OF INTERNET TELEPHONY. Although it has been possible to transmit VoIP
since 1995, only recently has the technology improved such that phone-to-phone
calls can be transmitted over data networks with quality nearly
indistinguishable from that of traditional voice networks. International VoIP
traffic has grown rapidly; according to industry analyst, TeleGeography, traffic
grew from 5.9 billion minutes in 2000, to 10.1 billion in 2001, to 18.1 billion
in 2002, and is forecast to reach 24 billion in 2003.
Unlike fixed-line telecommunication networks and managed IP networks,
the Internet has many potential points of congestion where information, in the
form of data packets, can be delayed or dropped. For non-real time
communications, such as email for example, a slight delay in the receipt of a
message is not significant. However, for real-time communications, such as
telephone calls, the result of a delay in transmitting the call, or losing the
call altogether, is significant. To minimize the risk of delays, or losing
calls, over the Internet, we utilize complex and proprietary performance
monitoring and call routing technology to ensure consistently high call
completion and voice quality. We have developed patent-pending quality
management technology that enables us to deliver call completion rates and
average call durations (the standard metrics for measuring quality in
telecommunications) that we believe are consistently equal to or better than
those achieved by traditional fixed-line carriers.
Internet telephony's principal benefits are:
- COST ADVANTAGE FROM INTERNET TRANSPORT. Traditional voice
networks use circuit-switching technology, which establishes
dedicated channels between an originating and terminating point
for the duration of a call. Physical facilities (typically fiber
and associated equipment) are dedicated to voice traffic between
switching nodes, regardless of changes in demand. In contrast,
Internet telephony is based on packet-switching technology. This
technology completes a call by digitizing and dividing a
speaker's voice into small packets that travel to their
destination along lines carrying packets of other Internet
traffic, in much the same way as email travels. Using a network
of service facilities connected to the public Internet for
transport is less costly than building a dedicated network as
our calls share the Internet with other traffic.
- Cost ADVANTAGE FROM IP TECHNOLOGY. Internet telephony gateway
equipment that is used to convert and route phone calls over the
Internet is less expensive and requires less physical space in
telecom facilities than traditional telecommunications
equipment.
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- COST ADVANTAGE FROM BYPASS OF INTERNATIONAL SETTLEMENT RATES.
Traditional international long distance calls are completed
through international toll switches that provide access to the
terminating network. These networks are often owned by
government bodies or telecommunications carriers who charge
settlement rates (or tariffs) well in excess of costs. Although
these fees are being reduced in many countries as industry
deregulation continues, these charges remain significant. Calls
routed over the Internet bypass these toll switches, avoiding a
significant portion of these fees, which further lowers the cost
of completing such calls.
- POSITIONING FOR NEW SERVICES. In contrast to the closed,
proprietary structure inherent in a traditional circuit-switched
VOICE network, Internet telephony embraces an open architecture
and open standards, which facilitates innovation at lower cost.
Traditional voice networks have been designed specifically to
provide one basic service, making it difficult and costly to
introduce new services over those networks and their proprietary
platforms. As data networks convert all services into data
packets, new services are delivered from industry standard
servers, integrating the Internet with the revolution in
commodity computing.
OUTSOURCING INTERNET TELEPHONY SERVICES. Given the advantages, many carriers
have begun to carry some portion of their voice traffic over IP networks.
Despite the move by some large carriers to develop their own international VoIP
infrastructures, carriers have been more interested in outsourcing international
traffic to providers such as us. The reasons for the preference to outsource
international traffic include:
- the relatively low percentage of revenue that international
service represents for many large carriers;
- the disproportionate cost and complexity of deploying and
supporting international service infrastructure as compared with
domestic investment opportunities;
- a hesitation to build new networks and cannibalize traffic from
their traditional voice networks;
- concerns over sufficient in-house VoIP expertise to ensure that
voice quality and network reliability are comparable to that of
the public-switched telephone network, especially when routing
traffic over the Internet versus private networks; and
- generally reduced capital budgets for network investment of any
kind.
RETAIL PREPAID CALLING CARD SERVICES
Leveraging on our ability to provide wholesale Internet telephony and
hosted billing services, we launched our retail prepaid calling card business in
the U.S. in the third quarter of 2003. According to industry analyst
Atlantic-ACM, the prepaid retail calling card market is forecasted to grow from
approximately $3.5 billion in 2002 to more than $6 billion in 2003. We sell our
retail prepaid calling card through established distributors to retail outlets
in major metropolitan markets across the U.S. We have established a dedicated
operation to sell and service our prepaid retail calling card services, which is
led by an experienced industry executive. Typically, retail prepaid calling
cards deliver gross margins that are substantially higher than in the wholesale
Internet telephony business.
iBASIS SERVICES
iBasis wholesale international Internet telephony enables carriers and
other communications service providers to outsource international voice and fax
traffic, substantially lowering their transport and service support costs,
without compromising quality. We provide our carrier customers access to The
iBasis Network, our international Internet telephony network, through "Internet
Central Offices" or "ICOs" and "Internet Branch Offices" or "IBOs" as described
below under the section captioned "The iBasis Network." ICOs are strategically
located in major telecommunications hubs in the U.S., Asia, and Europe. Our
services provide the following key benefits to our customers:
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HIGH QUALITY CALL COMPLETION. Our network, monitoring and management
technologies enable us to complete international voice and fax calls with
quality comparable to that of traditional circuit-switched voice networks. This
high quality is reflected in the fact that carriers choose to provide our
Internet telephony services to their retail customers undifferentiated from
their traditional services. We achieve high quality over the Internet through a
variety of controls and technologies. At our 24x7, expert-staffed global Network
Operations Centers (NOCs) in Burlington, Massachusetts, USA and Hong Kong, we
are able to monitor our carrier customers' voice traffic and add/remove routing
choices according to real time performance. Using our patent-pending Assured
Quality Routing technology, we dynamically route customers' traffic over
multiple Internet backbones, completing calls on our partners' phone networks in
destination countries.
COST EFFECTIVE SERVICES. Our call transport costs are lower because packet
switching is more efficient than traditional circuit-switching. Because we use
the Internet, rather than a private IP network, to deliver international voice
traffic, we have greater infrastructure flexibility and lower costs than service
providers that employ dedicated point-to-point connections. VoIP equipment is
less costly and has lower facilities costs (due to its smaller physical
footprint) than equivalent capacity circuit-switched equipment. We offer an
open, scalable architecture that enables carriers and communications service
providers to connect within a short period of time and without investment or
special expertise. An additional advantage derives from our ability to bypass
many of the international tariffs or settlement rates associated with some
international traffic carried over circuit-switched voice networks, which
produces additional cost savings. Our enhanced services--IP Call Card,
ConnectPoint Global Access--all build upon the underlying network to create cost
effective value-added solutions for our customers.
SIMPLE VALUE PROPOSITIONS THAT REDUCE COMPLEXITY AND SOLVE CURRENT CUSTOMER
PROBLEMS. In the current global telecom environment, carriers are spending money
only on what is necessary for their immediate business plans. The iBasis service
portfolio does not rely on expectations that customers will choose to begin and
will be successful with new services. While some customers buy our routes
individually, some customers give to us all of their international traffic which
they pick-up as a "byproduct" of their locally-focused operations. We help them
do the "small but essential' job of terminating their international
traffic--conveniently and effectively. Likewise, our customers find themselves
with rapidly growing demand for prepay and audio-conferencing services where
outsourcing to us enables them to eliminate an old-technology audio-conferencing
platform or to quickly create an option for customers to prepay while the market
window still exists, all without expenditure of capital. ConnectPoint Global
Access provides customers local access numbers in countries around the world,
delivering traffic across our network to a central point(s). The service enables
our customers' customers to easily access resources (such as an out-of-country
call center) that would otherwise require an international long distance direct
dial or an international toll free call. ConnectPoint saves our customers the
time and cost of developing their own global arrangements for local access and
transport to the central point(s).
THE iBASIS NETWORK
The iBasis Network is our growing international network, over which we
deliver large volumes of high quality international voice, fax and enhanced
services at significant cost savings to our customers. We transported
approximately 2.1 billion minutes and 3.5 billion minutes of traffic over our
network in the six months ended June 30, 2004 and the year ended December 31,
2003, respectively, a traffic volume that would position us among the ten
largest carriers of international traffic in the world, based on global traffic
statistics contained in the industry analyst publication TeleGeography 2003. As
of June 30, 2004, we had Points of Presence--generally referred to as POP--in
103 countries. POPs designate points where the iBasis Network connects to local
telephone networks for call origination or termination.
We have completed the deployment of our next generation switchless
architecture, leveraging our existing Cisco AS5000 gateways and SC 2200 SS7
technology, as well as our new patent-pending technology for quality management
and advanced routing. Our Assured Quality Routing and PathEngine technology
enable ongoing monitoring of network quality and automatic selection of best
quality routes based on near real-time performance data. The new architecture
provides us with significant savings in operational costs and capital expense by
eliminating the need for costly telecommunications switches and other equipment
and connectivity in central offices. It also has enabled us to simplify
provisioning, real-time route monitoring, and network management by decreasing
the number of network components involved in carrying a call. The result for our
customers is higher voice quality, call completion and call duration.
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The iBasis Network consists of four principal elements:
- Internet Central Offices (ICOs) and Internet Branch Offices
(IBOs) that convert circuit-switched voice traffic into data for
transmission and reception over the Internet or vice versa;
- the transmission medium, which is principally the Internet;
- Assured Quality Routing (AQR), our proprietary traffic
monitoring and routing management software; and
- our network operations centers (NOCs), from which we oversee and
coordinate the operation of the ICOs and IBOs.
INTERNET CENTRAL OFFICES AND INTERNET BRANCH OFFICES. Our customers can
interconnect with our network, at their cost, by connecting dedicated voice
circuits from their facilities to one of our ICOs, which are strategically
located in Amsterdam, Frankfurt, Hong Kong, London, Los Angeles, New York,
Paris, and Tokyo. Alternatively, our customers may elect to install an iBasis
IBO at their facilities. ICOs and IBOs receive calls directly from a local
carrier's switched network. VoIP gateways in each ICO or IBO digitize, compress
and packetize voice and fax calls and then transmit them over the Internet. At
the destination, another ICO or IBO reverses the process and the call is
switched back from the Internet to a local carrier's circuit-switched network in
the destination country. Some of our customers and termination partners have
their own VoIP gateway equipment--we generally interconnect with these customers
and partners via the Internet. As this trend progresses, our already
asset-effective business model gains further strength, as we no longer bear all
the cost of converting calls between traditional voice network and the Internet
and dedicated physical circuit-switched interconnects are eliminated altogether.
THE INTERNET. We use the Internet to transmit the substantial majority of our
voice and fax traffic because of its global coverage, low cost and flexible
connectivity. As a result, we have avoided the expense and delay of deploying
and maintaining a private, dedicated network of fiber and cable connections. In
addition, because we do not have fixed, point-to-point connections, we can adapt
to changes in international traffic flows rapidly and at minimal cost. We
effectively address the challenges of using the Internet for high quality,
real-time voice communications by:
- selecting only high quality, service-oriented Internet service
providers as our vendors;
- purchasing multiple, high-speed connections into the Internet
backbone; and
- continuously monitoring the quality of the connections between
our PoPs and the Internet.
In certain infrequent circumstances we use private leased lines or
traditional circuit-based voice networks to terminate traffic to destinations
where there is insufficient Internet bandwidth available to meet our quality
standards.
ASSURED QUALITY ROUTING. We have deployed a proprietary patent-pending system
of tools--collectively known as, Assured Quality Routing to maintain high
quality service over the Internet. AQR optimizes the quality of calls placed
over The iBasis Network by integrating quality parameters into routing
decisions. These parameters include measures of quality that are of direct
importance to carriers including call duration, call completion and post-dial
delay as well as underlying determinants of successful data transmission, namely
packet loss, jitter and latency. AQR automatically reroutes traffic in
anticipation of quality dropping below specific thresholds, sending subsequent
calls through another Internet path, to an alternative terminating IP partner or
to a circuit-switched backup vendor if necessary.
GLOBAL NETWORK OPERATIONS CENTERS. We manage our network and implement AQR
through our network operations centers (NOCs). iBasis NOCs use leading network
management tools from Hewlett-Packard and a number of other vendors, which are
integrated with our AQR systems to enable us to monitor, test and diagnose all
components of
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The iBasis Network. NOCs in Burlington, Massachusetts and Hong Kong are staffed
by network and traffic engineers to provide expert coverage 7 days a week, 24
hours a day, 365 days of the year, and are equipped with:
- tools that support the monitoring and analysis of various
components of The iBasis Network to identify and address
potential network problems before they affect our customers;
- system redundancy, including power back-up; and
- a help desk that allows us to respond quickly to our customer's
needs and concerns.
RESEARCH AND DEVELOPMENT
Our research and development activities are primarily focused on
developing, improving and expanding The iBasis Network. These activities include
the development of specific tools for our networks, such as our patent-pending
Assured Quality Routing and PathEngine technologies. In addition, our
engineering personnel contribute to the support and operation of our global
network operations centers, which oversee and coordinate the operation of our
ICO's and IBO's. Research and development expenses were $7.1 million, $7.1
million, $13.4 million, $17.8 million and $23.9 million for the six months
ended June 30, 2004 and 2003, and the years ended December 31, 2003, 2002 and
2001, respectively.
MARKETS AND CUSTOMERS
Our customer base can be segregated by size into Tier 1, Tier 2 and
Tier 3 carriers. Generally, Tier 1 carriers are large domestic and
international carriers, such as AT&T, MCI, Sprint, Qwest and Verizon, and
certain government-affiliated or privatized dominant carriers, such as
Belgacom, KPN and Deutsche Telekom. Tier 1 carriers generally have annual
revenues in excess of $2 billion. Tier 2 carriers have revenues generally in
the range of $750 million to $2 billion, but have fewer direct operating
agreements with other carriers and fewer international facilities. Tier 3
carriers are typically switch-based resellers with revenues of less than $750
million.
The majority of traffic carried over The iBasis Network is from Tier 1
carriers. In the six months ended June 30, 2004 and the year ended December
31, 2003, Tier 1 carriers, the world's largest and most demanding carriers,
accounted for 48% and 61% of our traffic, respectively. The ability to provide
quality call completion consistently acceptable to Tier 1 carriers is of vital
importance because these carriers control the vast majority of the world's
retail traffic. Tier 1 carriers will continue to be a main area of focus for our
sales force.
The proportion of our traffic originating from outside of the United
States was 43% and 43% of total revenue and 43% and 41% of total traffic in the
six months ended June 30, 2004 and the year ended December 31, 2003,
respectively. Non-U.S. origination generally produces higher margins than
US-originated traffic. As of June 30, 2004, we provided services to more than
277 carriers worldwide and one carrier accounted for more than 10% of revenue in
the six months ended June 30, 2004 and the year ended December 31, 2003. Only
one carrier accounted for more than 10 percent of our revenue for 2002. For
further discussion of our revenues related to significant customers and
customers in other countries and other geographic information, refer to Notes 2
and 9 to our Consolidated Financial Statements.
In countries where we terminate our traffic, we have established
relationships with local service providers that have strong local market
expertise and relationships. Some of our overseas partners are very large,
well-established national carriers. Others are emerging carriers or Internet
Service Providers (ISPs) who are able to provide the interconnection necessary
to terminate minutes for us in their country.
Increasingly, traffic flows are becoming reciprocal--formerly distinct
customers and suppliers are becoming "trading-partners--as deregulation and
competition erode the distinction between the business models of our customers
and suppliers. We expect continued growth in both size and profitability as this
trend progresses and we further consolidate our position as a leading carrier
that interconnects the world's local service providers.
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We have put particular emphasis on our wholesale international long
distance telephone service originating from outside the U.S. as our margins for
calls originating from outside the U.S. are generally higher than for calls
originated from the U.S. Deregulation and increased competition in the
telecommunications industry has caused prices for long distance telephone
service to steadily decline, particularly in the U.S. As a wholesale provider of
long distance telephone services, our margins in this business reflect the
effect of these lower prices. We attempt to offset the effect of these lower
prices by negotiating lower costs from our call termination partners and by
increasing the cost efficiency and utilization of our network. Our retail
prepaid calling card services offer the potential to realize higher margins than
our wholesale long distance telephone services. With our prepaid calling cards,
we are able to charge per-minute rates that can exceed our wholesale long
distance rates, as well as fees associated with the use of these prepaid calling
cards.
SALES AND MARKETING
SALES STRATEGY. Our sales efforts for Internet telephony target leading
telecommunications carriers globally. Our sales force is composed of experienced
personnel with well-established relationships in the telecommunications
industry, based in key markets worldwide and typically responsible for business
development in a small number of countries regionally. Our sales process often
involves a test by our potential customers of our services in which they route
traffic over our network to a particular country. Our experience to date has
been that once a carrier has begun to use our network for a single country and
finds our quality to be acceptable, the sales process for increasing the volume
of traffic they send to us and growing the number of destinations for which they
use our network becomes incrementally easier.
We also seek to establish and grow relationships with service providers
that can terminate the local leg of international calls. We believe that our
ability to deliver a high volume of minutes makes us an attractive potential
partner for local service providers.
As deregulation and competition push all local service providers to both
originate and terminate as much traffic as possible on their local networks, we
will increasingly enjoy "reciprocal" relationships with the providers with which
we do business, further improving sales productivity.
We have offices providing sales coverage in Europe, Africa, the Middle
East, Latin America, the Caribbean, the Asia-Pacific region, and North America.
MARKETING STRATEGY. We seek to attract termination partners as well as
customers and consequently address our marketing efforts to both. Most retail
origination is controlled by the largest (Tier 1) retail carriers. We believe
that we have largely achieved our primary marketing objectives of awareness and
acceptance among much of this customer segment, as evidenced by our penetration
of these carriers, particularly in the United States, Western Europe and China.
We will continue to reinforce our brand presence with this segment in 2004 to
help increase our share of their international traffic. Also, we will
concentrate on state-owned carriers, known as PTTs--in Asia and in developing
economies generally--whom we view as natural customers. While we increasingly
expect our customers to also be our termination partners, local circumstances in
many countries still are such that we look to partner with ISPs, new Competitive
Local Exchange Carriers (CLECs) and specialist termination providers. Unlike
marketing to the well-known Tier 1 carriers, we actively identify and attract
smaller termination partners in many countries, many of which are start-ups
formed specifically to terminate international traffic. Our marketing plan
includes public relations activity, outreach with industry analysts and the
trade press, participation in industry trade shows and conferences, targeted
mailings and a comprehensive Website. We expect our Web-based marketing efforts
to continue to increase in prominence in attracting and qualifying leads.
Our sales and marketing strategy for our retail prepaid calling card
business is to create relationships with established distributors in major urban
markets in the U.S. Although we have initially concentrated our efforts on the
U.S. market, we may introduce our retail prepaid calling card business in
international markets in the future.
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STRATEGIC TECHNOLOGY RELATIONSHIPS
Strategic technology relationships are important because they give us
early access to new technologies, a voice in vendors' development direction and
because strategic partners engage with us in support of our sales and marketing
programs.
CISCO SYSTEMS
Since its founding in 1996, we have maintained a strong, strategic
technology and business relationship with Cisco Systems. The iBasis Network is
the largest international Cisco Powered Network for Internet telephony. This
designation means that The iBasis Network is built end-to-end with Cisco
products and technologies, and meets a high standard of reliability and
performance. As a Cisco Powered Network, we have enhanced access to Cisco
technical resources and are able to more quickly deliver new capabilities and
service features. We have regularly engaged in numerous early field trials of
Cisco VoIP technologies, during which we gain experience with new features
before they are available to the marketplace. We have also conducted joint sales
and marketing activities with Cisco.
COMPETITION
We compete in two markets: wholesale international long distance
telephone services and retail prepaid calling card services. As described more
completely in the section captioned "Risk Factors," the market for international
long distance voice and fax call completion services is highly competitive. In
the international long distance telephone business, we compete with other
wholesale telecommunications carriers worldwide. Many of these carriers have
more resources, longer operating histories and more established positions in the
telecommunications marketplace, and, in some cases, have begun to develop
Internet telephony capabilities. We also compete with smaller companies,
including those that may be specialists in just one or two routes. We also
compete against our customers' ability to carry traffic themselves, whereby
either retail carriers develop their own international networks or interconnect
with one another and exchange international traffic by "meeting" in a major
telecoms hub, such as London. At present, we do not compete with cable
operators, or local exchange carriers, such as the U.S. "Baby Bells". Also, at
present, we do not compete with emerging retail VoIP carriers as most have not
developed international networks. We compete principally on quality of service
and price. In the overall international long distance market, which was
approximately 180 billion minutes of phone calls in 2003, we were among the ten
largest carriers with about 2% market share. In our specific subset of that
market--international VoIP traffic, which is estimated at about 24 billion
minutes in 2003, we have approximately 15% market share.
In the retail prepaid calling card business, we compete with major
telecommunications carriers, and many smaller telecommunications providers. As
we have just recently introduced this service, many of our competitors have a
longer operating history and a more established market presence in the retail
prepaid calling card business than us. Also, many of these competitors have
greater resources than us. The U.S. market for retail prepaid calling card
services is currently estimated at over $4 billion per year.
Although the market for wholesale international traffic and retail
prepaid calling card services is highly competitive and will almost certainly
remain so, we believe that our brand-strength, customer base, established global
distribution and patented ability to manage traffic across the (low-cost)
Internet, while maintaining required quality, collectively represent a
competitive advantage that will allow us to continue expanding both volumes and
margins.
GOVERNMENT REGULATION
As more fully described in the "Risk Factors" our business is subject to
U.S. and foreign laws, which may include those relating to telecommunications.
We are not licensed to offer traditional telecommunications services in
any U.S. state and we have not filed tariffs for any service at the Federal
Communications Commission or at any state regulatory commission. Nonetheless,
aspects of our operations may currently be, or become, subject to state or
federal regulations governing
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licensing, universal service funding, access charges, advertising, disclosure of
confidential communications or other information, excise taxes, transactions
restricted by U.S. embargo and other reporting or compliance requirements.
While the FCC to date has maintained an informal policy that information
service providers, including Internet telephony providers, are not
telecommunications carriers for regulatory purposes, various entities have
challenged this idea, before the FCC and at various state government agencies.
The FCC recently ruled against AT&T, finding that certain traffic AT&T carried
in part utilizing an Internet protocol format was nonetheless regulated
telecommunications for which terminating access charges were due. The FCC has
also held hearings and announced a Notice of Proposed Rulemaking on IP-enabled
services. Adverse rulings or rulemakings could subject us to licensing
requirements and additional fees and subsidies.
The regulatory treatment of Internet Telephony and our other services
varies widely among other countries and is subject to constant change. Until
recently, most countries did not have regulations addressing Internet Telephony
or other VoIP services such as calling cards, in some cases classifying these
services as unregulated services. As the Internet telephony market has grown and
matured, increasing numbers of regulators have begun to reconsider whether to
regulate Internet telephony and other VoIP services. Some countries currently
impose little or no regulation on Internet telephony or VoIP services.
Conversely, other countries that prohibit or limit competition for traditional
voice telephony services generally do not permit Internet telephony or VoIP
services or strictly limit the terms under which such services may be provided.
Still other countries regulate Internet telephony and VoIP services like
traditional voice telephony services, requiring Internet telephony companies to
obtain licenses, incorporate local subsidiaries, make universal service
contributions and pay other taxes.
We have advocated and supported deregulation for free and open market
competition in a variety of countries.
INTELLECTUAL PROPERTY
We regard our copyrights, service marks, trademarks, trade dress, trade
secrets, patents, patent applications and similar intellectual property as
critical to our success and we rely on trademark and copyright law, trade secret
protection and confidentiality and/or license agreements with out employees,
customers, partners, and others to protect our proprietary rights. Our policy is
to patent the technology, inventions and improvements that we consider important
to the development of our business. As of June 30, 2004, we had five pending
United States patent applications for The iBasis Network and other inventions
related to our business. We pursue the registration of our trademarks and
service marks in the United States and overseas. As of June 30, 2004, we have
been granted trademark registration for the marks iBasis, Assured Quality
Routing, and ConnectPoint in the United States, and iBasis in the European
community, and have pending registration applications for other service marks.
We also rely on trade secrets, technical know-how and continuing innovation to
develop and maintain our competitive position. We have granted licenses in the
ordinary course of business for occasional use of the company's name, logo,
trademarks and /or servicemarks to certain marketing partners pursuant to joint
marketing and/or other agreements. Likewise, we have been granted certain
licenses for use in the ordinary course of business.
EMPLOYEES
As of June 30, 2004, we employed 216 people. Our employees are not
represented by a labor union and we consider our relations with our employees to
be good.
GEOGRAPHIC AREAS AND BUSINESS SEGMENTS
For financial information about geographic areas, including
information about revenues and long-lived assets, see Note 9, "Segment and
Geographic Information" to our Consolidated Financial Statements. For
financial information about our business segments, see Note 3, "Business
Segment Information" to our Condensed Consolidated Financial Statements.
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PROPERTIES
We lease the following facilities:
<Table>
<Caption>
SQUARE EXPIRATION OF FACILITY USE
LOCATION FOOTAGE LEASE ------------
- -------- ------- -----
Burlington, MA.................... 50,504 April 2005 Office space and a global network operations
center
New York, NY...................... 11,654 Various, 2008-2010 House telecommunications equipment
Miami, FL......................... 10,500 February 2010 Vacant
Los Angeles, CA................... 3,156 April 2008 House telecommunications equipment
Hong Kong......................... 576 March 2005 House telecommunications equipment
</Table>
In addition to the facilities listed above, we have obtained collocation
space in special facilities around the world that are dedicated to housing
equipment of multiple competitive telephony carriers. We lease these smaller
spaces to house Internet routing and related equipment. We lease collocation
space in Amsterdam, Frankfurt, Hong Kong, London, Paris, and Tokyo. We also rent
smaller office space in London and Beijing. We believe that our existing
facilities are adequate for our current needs and that suitable additional or
alternative space will be available in the future on commercially reasonable
terms.
LEGAL PROCEEDINGS
In addition to litigation that we have initiated or responded to in the
ordinary course of business, we are currently party to the following potentially
material legal proceedings:
Beginning July 11, 2001, we were served with several class action
complaints that were filed in the United States District Court for the Southern
District of New York against us and several of our officers, directors, and
former officers and directors, as well as against the investment banking firms
that underwrote our November 10, 1999 initial public offering of the common
stock and our March 9, 2000 secondary offering of the common stock. The
complaints were filed on behalf of persons who purchased the common stock during
different time periods, all beginning on or after November 10, 1999 and ending
on or before December 6, 2000.
The complaints are similar to each other and to hundreds of other
complaints filed against other issuers and their underwriters, and allege
violations of the Securities Act of 1933 and the Securities Exchange Act of 1934
primarily based on the assertion that there was undisclosed compensation
received by our underwriters in connection with our public offerings and that
there were understandings with customers to make purchases in the aftermarket.
The plaintiffs have sought an undetermined amount of monetary damages in
relation to these claims. On September 4, 2001, the cases against us were
consolidated. On October 9, 2002, the individual defendants were dismissed from
the litigation by stipulation and without prejudice.
On June 11, 2004, we and the individual defendants, as well as many
other issuers named as defendants in the class action proceeding, entered into
an agreement-in-principle to settle this matter, and on June 14, 2004, this
settlement was presented to the court. A motion for preliminary approval of the
settlement was filed on June 25, 2004 and is pending. Once the court
preliminarily approves the settlement and notice has been mailed, there will be
an objection period, followed by a hearing for final approval of the settlement.
Although we believe that we and the individual defendants have meritorious
defenses to the claims made in the complaints, in deciding to pursue settlement,
we considered, among other factors, the substantial costs and the diversion of
our management's attention and resources that would be required by litigation.
Pursuant to the terms of the proposed settlement, in exchange for a
termination and release of all claims against us and the individual defendants
and certain protections against third-party claims, we will assign to the
plaintiffs certain claims we may have as an issuer against the underwriters, and
our insurance carriers, along with the insurance carriers of the other issuers,
will ensure a floor of $1 billion for any underwriter-plaintiff settlement.
Although the financial effect of the settlement on us will not be material,
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our insurance carriers' exposure in this connection will range from zero to a
few hundred thousand dollars, and will be reduced proportionately by any
amounts recovered by plaintiffs directly from the underwriters.
We cannot assure you that the settlement which has been finalized will
be accepted by the court, or that we will be fully covered by collateral or
related claims from underwriters, and that we would be successful in resulting
litigation. In addition, even though we have insurance and contractual
protections that could cover some or all of the potential damages in these
cases, or amounts that we might have to pay in settlement of these cases, an
adverse resolution of one or more of these lawsuits could have a material
adverse affect on our financial position and results of operations in the period
in which the lawsuits are resolved. We are not presently able to estimate
potential losses, if any, related to the lawsuits.
We are also party to suits for collection, related commercial disputes,
claims from carriers and foreign service partners over reconciliation of
payments for circuits, Internet bandwidth and/or access to the public switched
telephone network, and claims from estates of bankrupt companies alleging that
we received preferential payments from such companies prior to their bankruptcy
filings. We intend to prosecute vigorously claims that we have brought and
employ all available defenses in contesting claims against us. Nevertheless, in
deciding whether to pursue settlement, we will consider, among other factors,
the substantial costs and the diversion of management's attention and resources
that would be required in litigation. In light of such costs, we have settled
various and in some cases similar matters on what we believe have been favorable
terms which did not have a material impact our financial position, results of
operations, or cash flows. The results or failure of any suit may have a
material adverse affect on our business.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors are as follows:
<Table>
<Caption>
NAME AGE POSITION
- ---------------------------------- ----- -------------------------------------------------
Ofer Gneezy (1) 52 President, Chief Executive Officer and Director
Gordon J. VanderBrug 61 Executive Vice President, Assistant Secretary and
Director
Dan Powdermaker 41 Senior Vice President, Worldwide Sales
Paul H. Floyd 46 Senior Vice President, R&D, Engineering and
Operations
Richard G. Tennant 59 Vice President, Finance and Administration and
Chief Financial Officer
Charles N. Corfield(1)(2)(4) 43 Director
W. Frank King(2)(3)(4) 64 Director
David Lee(2)(3)(4) 67 Director
Charles Skibo(1)(3) 65 Director
Peter D. Aquino 43 Director
</Table>
- ----------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
(3) Member of the Shareholder Litigation Committee
(4) The Board of Directors has determined these directors to be independent
in accordance with Nasdaq National Market listing rules.
EXECUTIVE OFFICERS
MR. GNEEZY has served as our President, Chief Executive Officer and as
one of our directors since our formation in August 1996. From 1994 to 1996, Mr.
Gneezy served as President of Acuity Imaging, Inc., a multinational company
focused on the industrial automation industry. From 1980 to 1994, Mr. Gneezy was
an executive of Automatix, Inc. (a predecessor to Acuity Imaging), an industrial
automation company, most recently serving as its President and Chief Executive
Officer. Since July 2000, Mr. Gneezy has served as a director of NMS
Communications, which provides communication solutions for wireless and wireline
networks.
DR. VANDERBRUG has served as our Executive Vice President and as one of
our directors since October 1996. From 1991 to 1996, Dr. VanderBrug was the
Director of Marketing, Electronic Imaging Systems of Polaroid Corporation. In
1980, Dr. VanderBrug co-founded Automatix, Inc. Dr. VanderBrug received his B.A.
in mathematics from Calvin College, a M.A. in mathematics from Wayne State
University, and his Ph.D. in computer science from the University of Maryland.
MR. POWDERMAKER has served as our Senior Vice President of Worldwide
Sales since July 2002. An early member of our management team, Mr. Powdermaker
has spent the past five years developing relationships with
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carriers and service providers around the world and establishing the sales force
to support these customers and partners. He worked to bring our initial US
customers onto The iBasis Network(TM), has served as Vice President of Sales for
Asia and most recently as Vice President, Europe, the Middle East and Africa.
Prior to joining us, Mr. Powdermaker worked in sales management for AT&T Global
Markets, a networking services division of AT&T focused on the world's 2,000
largest telecommunications users.
MR. FLOYD has served as our Senior Vice President, R&D, Engineering and
Operations since September 2001. Beginning April 2001, Mr. Floyd was our Vice
President of Research and Development. Prior to joining us, Mr. Floyd was a
Senior Vice President of DSL Business at Paradyne Networks, Inc., a manufacturer
of high-speed broadband access products and technology that support and manage
high-bandwidth applications and network traffic. From 1996 to 2000, Mr. Floyd
served as Vice President of Research and Development and Engineering at
Paradyne.
MR. TENNANT has served as our Vice President, Finance and Administration
and Chief Financial Officer since October 2001. From 2000 to 2001, Mr. Tennant
was the Vice President, Chief Financial Officer and Treasurer of ScoreBoard,
Inc., a software company providing optimization solutions for wireless carriers.
Before joining ScoreBoard and from 1999 to 2000, Mr. Tennant served as Senior
Vice President and Chief Financial Officer of Orbcomm Global, L.P., the world's
first commercial provider of global low-earth satellite data and messaging
services. From 1997 to 1999, Mr. Tennant also served as Senior Vice President
and Chief Financial Officer to Information Resource Engineering, now known as
SafeNet, Inc., a developer and manufacturer of security and encryption products
for computer data networks.
DIRECTORS
MR. CORFIELD has been a director since September 1997. Since 1999, Mr.
Corfield has been a director of BeVocal and since 2000, the Chief Executive
Officer of SandCherry Networks. Mr. Corfield serves on the board of directors of
Liberate Technologies, a web-based, enhanced television company. Mr. Corfield
co-founded Frame Technology, a software company, in 1986 and was a member of its
board of directors and its Chief Technology Officer until Adobe Systems acquired
it in 1995.
DR. KING has been a private investor since November 1998 and a director
since June 2001. From 1992 to 1998, he was Chief Executive Officer and director
of PSW Technologies, Inc. (formerly a division of Pencom, Inc.), a provider of
software services. From 1988 to 1992, Dr. King was Senior Vice President of
Development of Lotus Development Corporation, and for the previous 19 years he
served in various positions with IBM Corporation, including his last position as
Vice President of Development for the entry system division. He is also director
of NMS Communications, Inc., eOn Communications Corporation, Aleri, Inc.,
Concero, Inc., and Perficient, Inc.
MR. LEE has been a director since May 2002. Mr. Lee has founded, served
as chairman, and held senior executive positions at several communications
technology companies, including ITT Corporation. Mr. Lee joined ITT after that
company acquired Qume Corporation, a company he had co-founded in 1973. At ITT
Qume, Mr. Lee held the positions of Executive Vice President from 1978 to 1981,
and President, from 1981 through 1983. Mr. Lee later became President and
Chairman of Data Technology Corporation. Mr. Lee is currently Chairman of the
Board of eOn Communications Corporation, Cortelco, Cidco Communications, ESS
Technology Inc. and Linear Technology Corporation. Mr. Lee also serves as a
Regent for the University of California. Through his service on the Advisory
Committee on Trade Policy and Negotiation for Presidents Bush (senior) and
Clinton, and his current role on President George W. Bush's Council on the 21st
Century Workforce, Mr. Lee is one of the world's foremost experts on US-China
commerce and the Chinese telecommunications industry.
MR. SKIBO has been a director since September 1999. He served as
President of iBasis Speech Solutions, Inc. from November 2001 to July 2002. From
January 1999 to September 2001, Mr. Skibo served as the Chief Executive Officer
and Chairman of Colo.com, a company that provided facilities and co-location
services to communication and information technology industries. Colo.com filed
for bankruptcy in June 2001. Since 1994, Mr. Skibo has served as Chairman and
Chief Executive Officer of Strategic Enterprises and Communications, Inc., a
venture capital firm. Mr. Skibo also serves as Chairman and Chief Executive
Officer of Allied Telecommunications, a communications company. From 1985 to
1987, Mr. Skibo was President and CEO of US Sprint and its predecessor company,
U.S. Telecom.
MR. AQUINO was elected to the Board of Directors on August 5, 2004.
Mr. Aquino has been Senior Managing Director of Capital & Technology Advisors
LLC, a telecommunications advisory firm, since 2001. From 1995 to 2001, Mr.
Aquino was a partner with Wave International, Inc., a telecommunications
venture capital firm. Prior to 1995, Mr. Aquino spent twelve years with Bell
Atlantic (now Verizon) in various senior management positions. Mr. Aquino is
director of Neon Communications and Motient Corporation.
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ELECTION OF DIRECTORS
Our board of directors is divided into the following three classes, with
the members of the respective classes serving for staggered three-year terms.
- - Class 1 directors, whose terms expire at the annual meeting of stockholders
to be held in 2006;
- - Class 2 directors, whose terms expire at the annual meeting of stockholders
to be held in 2007; and
- - Class 3 directors, whose terms expire at the annual meeting of stockholders
to be held in 2005.
Messrs. VanderBrug and Lee are our Class 1 directors, Messrs. King and
Skibo are our Class 2 directors, and Messrs. Gneezy, Corfield and Aquino are
our Class 3 directors. At each annual meeting of stockholders, our
stockholders will elect the successors to directors whose terms have expired
to serve from the time of election and qualification until the third annual
meeting following election. The classification of the board of directors may
delay or prevent a change in control in our management. See "Description of
Capital Stock--Delaware Law and Certain Certificate of Incorporation and
By-Law Provisions."
COMPENSATION OF DIRECTORS
In 2003, each of our non-employee directors earned $15,000 in cash
compensation for their services as directors. Neither Mr. Gneezy nor Dr.
VanderBrug received additional compensation for serving as directors. The
directors who do not live in the Boston Metropolitan area were also reimbursed
for travel expenses. We maintain directors' and officers' liability insurance
and our by-laws provide for mandatory indemnification of directors and officers
to the fullest extent permitted by Delaware law. In addition, our certificate of
incorporation limits the liability of our directors to either us or our
shareholders for breaches of the directors' fiduciary duties to the fullest
extent permitted by Delaware law.
In 2003, Messrs. Gneezy and VanderBrug each received options to purchase
120,000 shares of our common stock. Each option becomes exercisable on a
quarterly basis, in a series of 16 installments, vesting 6.25% of the optioned
shares, provided, that individually, each remains an employee of ours on each
vesting date. The exercise price for each option is $0.88, the closing price of
a share of our common stock on the OTCCB on the date of the grant, August 11,
2003. Each option expires on August 11, 2013. All options were granted under our
stock incentive plan and the first installment became exercisable on
November 11, 2003.
In 2003, Messrs. Corfield, King and Skibo each received options to
purchase 80,000 shares of common stock. Each option becomes exercisable
cumulatively, in a series of four installments of 25% of the option shares, with
the first installment exercisable on May 24, 2004 and with each additional
installment to become exercisable at each of the next three annual meeting of
shareholders in years 2005, 2006 and 2007, respectively, provided, that
individually, each still serves as a director of iBasis on each applicable date.
All options were granted under our stock incentive plan.
In 2003, Mr. Lee received options to purchase 40,000 shares of common
stock with 50% of the shares to become exercisable at the 2006 Annual Meeting of
Shareholders and the remaining 50% to become exercisable at the 2007 Annual
Meeting of Shareholders, provided, that Mr. Lee continues to be one of our
directors on each applicable date. All options were granted under our stock
incentive plan.
BOARD COMMITTEES
Our directors hold regular meetings, attend special meetings, as
required, and spend such time on our affairs as their duties require. During the
fiscal year ended December 31, 2003, the Board of Directors held six meetings.
During the year, each of the directors attended at least 75% of the meetings of
the Board of Directors and, in accordance with their membership on each, the
audit and compensation committees of the Board.
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The Board of Directors has the following four committees:
COMPENSATION COMMITTEE. Our Compensation Committee determines the
compensation of our senior management and administers the stock option plans.
Its members are Messrs. Gneezy, Corfield, and Skibo. The committee convened four
times last year.
AUDIT COMMITTEE. Our Audit Committee (i) recommends engagement of and
monitors the independence of our independent auditors, (ii) considers and
pre-approves the range of audit and non-audit services performed by independent
auditors and fees for such services, (iii) reviews and votes on all transactions
between us and any our officers, directors or other affiliates; (iv) consults
with the our auditors concerning the scope of the audit and reviews the results
of their examination, (v) reviews and approves any material accounting policy
changes affecting our operating results, and (vi) reviews our policies and
procedures on maintaining our accounting records and adequacy of our internal
controls. Its members are Messrs. Corfield, King, and Lee, each of whom is
independent, as defined by Rule 4200(a)(15) of the Nasdaq National Market
listing standards, including Dr. King as the committee's expert as defined in
Regulation S-K of the Securities Act. The Board of Directors has determined that
Dr. King is a financial expert. The committee convened seven times last year and
held six executive sessions with Deloitte & Touche LLP in conjunction with the
regularly scheduled meetings.
STRATEGIC COMMITTEE. Our Strategic Committee has in the past evaluated
and recommended our strategic course. The Strategic Committee has remained
dormant since November 8, 2001, subsequent to which time, our entire Board of
Directors has participated in such discussions. The Strategic Committee was
dissolved in March 2004.
SHAREHOLDER LITIGATION COMMITTEE. Our Shareholder Litigation Committee
was formed to evaluate and accept and/or reject settlement proposals in
connection with the several class action lawsuits filed against us and certain
of our current and past officers and directors, as well as, against the
investment banking firms that underwrote our public offerings. The committee
convened two times last year. Its members are Messrs. King, Lee, and Skibo.
Messrs. Gneezy and VanderBrug attended our 2003 Annual Meeting of
Shareholders. We do not require that non-employee members of our Board of
Directors attend our annual meeting.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
With the exception of Mr. Gneezy, no member of the Compensation
Committee is one of our officers or employees. Mr. Skibo served as the President
of iBasis Speech Solutions, our wholly-owned subsidiary, from November 2001
until its sale in July 2002. Mr. Skibo was not a member of the Compensation
Committee during that period. None of our executive officers serves as a member
of the board of directors or compensation committee of any other entity that has
one or more executive officers serving as a member of our Board of Directors or
the Compensation Committee.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the annual and
long-term compensation in each of the last three fiscal years for our Chief
Executive Officer and the next four most highly compensated executive officers.
<Table>
<Caption>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION (1) AWARDS
------------------------------------------ ------------------------------------
OTHER ANNUAL SECURITIES ALL OTHER
YEAR SALARY BONUS COMPENSATION UNDERLYING OPTIONS COMPENSATION
---- ---------- ------- --------------- -------------------- ------------
Ofer Gneezy 2003 $ 200,000 $ 0 $ 0 120,000 $ 0
President and Chief 2002 200,000 0 0 0 0
</Table>
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<Table>
Executive Officer 2001 200,000 0 0 50,000 0
Gordon J. VanderBrug 2003 180,000 0 0 120,000 0
Executive Vice President 2002 180,000 0 0 0 0
and Assistant Secretary 2001 180,000 0 0 50,000 0
Paul H. Floyd (2) 2003 180,000 0 0 275,000(3) 0
Senior Vice President of 2002 180,000 0 0 0 0
Operations 2001 126,923 0 62,400(4) 235,000 0
Richard G. Tennant (5) 2003 175,000 0 0 100,000 0
Chief Financial Officer, 2002 175,000 0 0 0 0
Vice President, Finance 2001 35,897 0 48,000(6) 150,000 0
and Administration
Dan Powdermaker (7), 2003 150,000 0 241,472(8) 220,000(9) 0
Senior Vice President, 2002 150,000 0 260,347(10) 0 0
Worldwide Sales
</Table>
- ----------
(1) Excludes certain perquisites and other benefits, the amount of which did
not exceed 10% of the employee's total salary and bonus.
(2) Mr. Floyd became our Senior Vice President of R&D, Engineering, and
Operations in September 2001.
(3) Mr. Floyd voluntarily surrendered 175,000 stock options on December 23,
2002, pursuant to our Tender Offer Statement and Offer to Exchange
Outstanding Stock Options on Schedule TO, filed with the Securities and
Exchange Commission on November 25, 2002 (the "Option Exchange Offer").
In accordance with the terms of the Option Exchange Offer, 175,000 new
options were granted to Mr. Floyd on June 24, 2003. Pursuant to the
Option Exchange Offer, for each option to purchase one share of common
stock that Mr. Floyd surrendered, he received a new option to purchase
one share of common stock. Mr. Floyd was also granted 100,000 stock
options on August 11, 2003.
(4) Mr. Floyd received approximately $62,400 in moving and relocation
expenses in 2001.
(5) Mr. Tennant became Vice President, Finance and Administration and Chief
Financial Officer in October 2001.
(6) Mr. Tennant received approximately $48,000 for moving and relocation
expenses in 2001.
(7) Mr. Powdermaker became Senior Vice President, Worldwide Sales in July,
2002.
(8) Mr. Powdermaker received $103,240 in sales commissions and $138,232 in
reimbursement of living expenses while working at our London office.
(9) Mr. Powdermaker voluntarily surrendered 120,000 stock options on
December 23, 2002, pursuant to the Option Exchange Offer. In accordance
with the terms of the Option Exchange Offer, 120,000 new stock options
were granted to Mr. Powdermaker on June 24, 2003. Pursuant to the Option
Exchange Offer, for each option to purchase one share of common stock
that Mr. Powdermaker surrendered, he received a new option to purchase
one share of common stock. Mr. Powdermaker was also granted 100,000
stock options on August 11, 2003.
(10) Mr. Powdermaker received $142,471 in sales commissions and $117,876 in
reimbursement of living expenses while working at our London office.
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The following table contains information concerning options to purchase
common stock that we granted during the year ended December 31, 2003 to each of
the officers named in the summary compensation table.
<Table>
<Caption>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE VALUE AT
------------------------------------------------------ ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM (2)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ----------------------
GRANTED (1) 2003 SHARE ON DATE 5% 10%
------------ ------------- ------------ ----------- ---------- -----------
Ofer Gneezy 120,000 2.54% $ 0.88 8/11/13 $ 66,422 $ 485,126
Gordon J. VanderBrug 120,000 2.54 0.88 8/11/13 66,422 485,126
Paul H. Floyd 175,000 3.72 1.24 6/24/13 136,493 996,898
Paul H. Floyd 100,000 2.12 0.88 8/11/13 55,352 404,272
Richard G. Tennant 100,000 2.12 0.88 8/11/13 55,352 404,272
Dan Powdermaker 120,000 2.54 1.24 6/24/13 93,595 683,587
Dan Powdermaker 100,000 2.12 0.88 8/11/13 55,352 404,272
</Table>
- ----------
(1) Shares underlying the retention options vest over a four-year period,
with 6.25% of the shares vesting on each of the first sixteen
three-month anniversaries after the grant date.
(2) The 5% and 10% assumed annual rates of compounded stock price
appreciation are mandated by the Securities and Exchange Commission
rules and do not represent an estimate or projection of our future stock
prices. Actual gains, if any, on stock option exercises and common stock
holdings are dependent on future performance of our common stock and
overall stock market conditions. There can be no assurance that the
amounts reflected in the table will be achieved.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table contains information concerning option holdings for
the year ended December 31, 2003, and such date with respect to each of the
officers named in the summary compensation table.
<Table>
<Caption>
NUMBER OF SHARES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY
ACQUIRED OPTIONS AT YEAR END OPTIONS AT YEAR END (1)
ON VALUE ------------------------- ---------------------------
EXERCISE REALIZED EXERCISABL UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------ ---------- ------------- ----------- --------------
Ofer Gneezy 0 $ 0 172,500 117,500 $ 88,025 $ 79,875
Gordon J. VanderBrug 0 0 143,750 116,250 $ 78,225 $ 79,875
Paul H. Floyd 0 0 107,915 227,085 $ 71,220 $ 113,230
Richard G. Tennant 0 0 81,250 168,750 $ 69,668 $ 131,813
Dan Powdermaker 0 0 64,818 185,182 $ 40,536 $ 98,564
</Table>
- ----------
(1) Value is determined by subtracting the exercise price from $1.59, the
closing price of our common stock on the OTCBB on December 31, 2003,
multiplied by the number of shares underlying the options.
EMPLOYMENT AGREEMENTS
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We currently have employment agreements in effect with Mr. Gneezy, our
President and Chief Executive Officer, Dr. VanderBrug, our Executive Vice
President and Assistant Secretary, Mr. Powdermaker, our Senior Vice President,
Worldwide Sales, Mr. Floyd, our Senior Vice President, R&D, Engineering and
Operations, and Mr. Tennant, our Vice President of Finance and Administration
and Chief Financial Officer.
iBasis and Mr. Gneezy are parties to an employment agreement, dated as
of August 11, 1997, governing his employment as President and Chief Executive
Officer. Under the terms of the employment agreement, Mr. Gneezy is paid a base
salary of $125,000, and is eligible to receive an annual bonus at the discretion
of the Board of Directors. iBasis and Dr. VanderBrug are parties to an
employment agreement, dated as of August 11, 1997, governing his employment as
Executive Vice President and Assistant Secretary. Under the terms of the
employment agreement, Dr. VanderBrug is paid a base salary of $115,000, and is
eligible to receive an annual bonus at the discretion of the Board of Directors.
In 2003, Mr. Gneezy and Dr. VanderBrug earned $200,000 and $180,000 in base
salary, respectively. iBasis also has employment agreements with Messrs.
Powdermaker, Floyd, and Tennant, for serving in their respective capacities.
Under the terms of their employment agreements, Mr. Powdermaker is paid a base
salary of $150,000, Mr. Floyd is paid a base salary of $180,000, and Mr. Tennant
is paid a base salary of $175,000. Each officer is eligible for a bonus,
although we have suspended the bonus programs since 2001, in an effort to reduce
operation expenses.
We may terminate the employment agreements with Messrs. Gneezy and
VanderBrug "for cause" or at any time upon at least thirty days prior written
notice, and Messrs. Gneezy and Mr. VanderBrug may terminate their employment
agreements "for good reason" or at any time upon at least thirty days prior
written notice. We may terminate the employment agreement with Messrs.
Powdermaker, Floyd, and Tennant at any time and each may terminate his
employment agreement at any time. If we terminate either of Messrs. Gneezy and
VanderBrug without cause or if either resigns for good reason, we must continue
to pay his base salary and continue to provide health benefits for one year. If,
within six months following an acquisition or change of control, we terminate
Messrs. Powdermaker, Floyd, or Tennant, without cause, or if any resigns for
good reason, we must continue to pay each officer's base salary and health
benefits for nine months.
The employment agreements with executive officers entitle them to life
insurance, health insurance and other employee fringe benefits to the extent
that we make benefits of this type available to our other employees. All
intellectual property that the officers may invent, discover, originate or make
during their term of their employment is our exclusive property. The officers
may not, during or after the term of his employment, disclose or communicate any
confidential information without our prior written consent. The agreements with
Messrs. Gneezy and VanderBrug also provide that in the event of an acquisition
or change in control, each of their options and restricted shares, if any, shall
automatically become fully vested immediately prior to such event, and each such
option shall remain exercisable until the expiration of such option or until it
sooner terminates in accordance with its terms. The agreements with Messrs.
Powdermaker, Floyd, and Tennant provide that in the event that we terminate the
employment of the officer without cause, or the officer terminates his
employment with "good reason," in either case within six months after the
occurrence of an acquisition or change in control, then such officers options
shall immediately vest and become exercisable.
In general, "good reason" as used in the employment agreements of our
executive officers means any material change in the compensation, position, and
location of employment or responsibilities of the employee. "For cause"
generally means gross negligence or willful misconduct of the employee, a breach
of the employment agreement or the commission of a crime.
Our employment agreements with Messrs. Floyd, Tennant and Powdermaker
also contain provisions relating to each officer's relocation expenses.
1997 STOCK INCENTIVE PLAN
In August 1997, our board of directors approved our 1997 Stock Incentive
Plan, which was amended in December 1998 and in September 1999. The initial
adoption of the plan and each of its amendments were subsequently approved by
our stockholders. Our stock incentive plan provides for the grant of incentive
stock options, nonqualified stock options and restricted stock awards. Employees
(including officers and employee
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directors), directors, consultants and advisors are eligible for all awards
except incentive stock options. Only employees are eligible for incentive stock
options.
A maximum of 9,000,000 shares of common stock have been authorized for
issuance under our stock incentive plan. Under our stock incentive plan, as of
June 30, 2004:
- options for the purchase of 6,170,850 shares of common stock had
been granted and were outstanding under the plan;
- 1,828,390 shares had been issued upon exercise of options
granted under the plan;
- options for the purchase of 8,368,634 shares that were granted
under the plan had been cancelled.
1,464,214 shares of common stock remained available for the grant of
awards under the plan as of June 30, 2004. No participant in our stock incentive
plan may, in any year, be granted options or restricted stock awards with
respect to more than 100,000 shares of common stock.
The compensation committee administers our stock incentive plan and has
the authority to make all determinations required under our stock incentive
plan, including the eligible persons to whom, and the time or times at which,
options or restricted stock awards may be granted, the exercise price or
purchase price, if any, of each option or restricted stock award, whether each
option is intended to qualify as an incentive stock option or a nonqualified
stock option, and the number of shares subject to each option or restricted
stock award. The compensation committee also has authority to:
- interpret our stock incentive plan;
- determine the terms and provisions of the option or restricted
stock award instruments; and
- make all other determinations necessary or advisable for
administration of our stock incentive plan.
The committee has authority to prescribe, amend, and rescind rules and
regulations relating to our stock incentive plan. The exercise price of options
granted under our stock incentive plan shall not be less than 100% of the fair
market value of the common stock on the date of grant, or 110% in the case of
incentive stock options issued to an employee who at the time of grant owns more
than 10% of the total combined voting power of all classes of our stock. The
options become exercisable at such time or times, during such periods, and for
such numbers of shares as shall be determined by the compensation committee and
expire after a specified period that may not exceed ten years from the date of
grant.
The compensation committee may, in its discretion, provide for the
acceleration of one or more outstanding options and the vesting of unvested
shares held as restricted stock awards upon occurrence of a change of control.
In the event of a merger, consolidation, or sale, transfer, or other disposition
of all or substantially all of our assets, the compensation committee may, in
its discretion, provide for the automatic acceleration of one or more
outstanding options that are assumed or replaced and do not otherwise accelerate
by reason of the transaction. In addition, the compensation committee may
similarly provide for the termination of any of our repurchase rights that may
be assigned in connection with the merger, consolidation, or sale, transfer, or
other disposition of all or substantially all of our assets, in the event that a
holder of restricted stock's employment, directorship or consulting or advising
relationship should subsequently terminate following the transaction. The board
of directors may amend, modify, suspend or terminate our stock incentive plan at
any time, subject to applicable law and the rights of holders of outstanding
options and restricted rights awards. Our stock incentive plan will terminate on
August 11, 2007, unless the board of directors terminates it prior to that time.
1999 EMPLOYEE STOCK PURCHASE PLAN
In September 1999, our board of directors and stockholders approved the
1999 iBasis, Inc. Employee Stock Purchase Plan ("ESPP"), which enables eligible
employees to acquire shares of our common stock through payroll deductions. In
December 1999, the employee stock purchase plan was amended. Our employee stock
purchase plan
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is intended to qualify as an employee stock purchase plan under Section 423 of
the Internal Revenue Code. Offering periods under the employee stock purchase
plan start on January 1 and July 1 of each year and end on June 30 and December
31 of each year. During each offering period, an eligible employee may select a
rate of payroll deduction of from 1% to 10% of compensation, up to an aggregate
of $12,500 in any offering period. The purchase price for our common stock
purchased under our employee stock purchase plan is 85% of the lesser of the
fair market value of the shares on the first or last day of the offering period.
Issuance of shares of our common stock was discontinued under the ESPP in 2002
and all shares authorized for issuance under the ESPP have been issued as of
December 31, 2003.
LITIGATION INVOLVING OUR OFFICERS AND DIRECTORS
In October 2002, our officers and directors that had been named as
defendants in consolidated class actions suits alleging violations of securities
laws related to our public offerings of common stock were dismissed from the
suits for the time being. On June 11, 2004, we and the individual defendants, as
well as many other issuers named as defendants in the class action proceeding,
entered into an agreement-in-principle to settle this matter, and on June 14,
2004, this settlement was presented to the court. A motion for preliminary
approval of the settlement was filed on June 25, 2004 and is pending. Once the
court preliminarily approves the settlement and notice has been mailed, there
will be an objection period, followed by a hearing for final approval of the
settlement.
Pursuant to the terms of the proposed settlement, in exchange for a
termination and release of all claims against us and the individual defendants
and certain protections against third-party claims, we will assign to the
plaintiffs certain claims we may have as an issuer against the underwriters, and
our insurance carriers, along with the insurance carriers of the other issuers,
will ensure a floor of $1 billion for any underwriter-plaintiff settlement.
Although the financial effect of the settlement on us will not be material, our
insurance carriers' exposure in this connection will range from zero to a few
hundred thousand dollars, and will be reduced proportionately by any amounts
recovered by plaintiffs directly from the underwriters.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As previously announced, on August 5, 2002, we completed an agreement
with our primary equipment vendor to reduce our capital lease obligations and
related future cash commitments. Under the terms of the agreement, we paid our
vendor $28.5 million in exchange for the elimination of $50.8 million in
existing vendor debt, $9.0 million in future interest obligations (assuming the
debt was held to maturity) and $4.0 million in tax and other obligations for a
total of $63.8 million of future obligations. The difference between the cash
paid and the recorded outstanding obligation on that date was accounted for as a
reduction in the carrying value of the underlying capital assets. This
transaction reduced interest expense by $2.5 million and depreciation and
amortization by $3.3 million in the months subsequent to the transaction from
the amounts that would have otherwise been recognized in 2002. Mr. Carl
Redfield, a former director who served on our Board of Directors from September
1999 until July 2002, is an officer of the equipment vendor.
During 2002, we paid Mr. Skibo, a current director, approximately
$168,325 for serving as President of iBasis Speech Solutions, Inc., one of our
wholly-owned subsidiaries.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of our common stock as of July 1, 2004 by:
- each person we know owns beneficially more than five percent
(5%) of our common stock;
- each of our directors;
- each of our executive officers; and
- all directors and executive officers as a group.
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Beneficial ownership is determined in accordance with the rules and
regulations of the Securities and Exchange Commission. In computing the number
of shares beneficially owned by a person and the percentage of ownership of that
person, shares of common stock subject to options held by that person that are
currently exercisable or exercisable within 60 days of July 1, 2004 are deemed
outstanding. These shares, however, are not deemed outstanding for the purposes
of computing the percentage ownership of any other person. Except as indicated
in the footnotes to this table and pursuant to applicable community property
laws, each shareholder named in the table has sole voting and investment power
with respect to the shares set forth opposite such shareholder's name. Unless
otherwise indicated, the address for each of the following shareholders is c/o
iBasis, Inc., 20 Second Avenue, Burlington, Massachusetts 01803.
<Table>
<Caption>
SHARES BENEFICIALLY OWNED
-------------------------
DIRECTORS, EXECUTIVE OFFICERS AND 5% SHAREHOLDERS NUMBER PERCENT
------------------------------------------------- ----------- -----------
JMG Triton Offshore Fund, Ltd. (1) 4,209,203 9.02%
JMG Capital Partners, LP (2) 2,702,703 5.79
Entities Affiliated with Symphony Asset Management (3) 4,975,795 10.66
Loeb Partners Corporation (4) 4,872,176 10.44
LC Capital Master Fund (5) 4,775,626 10.23
Singer Children's Management Trust (6) 4,604,605 9.86
Ofer Gneezy (7) 4,220,932 9.05
Windward Capital, LP (8) 3,956,883 8.48
Menlo Ventures VII, L.P. and affiliated entities (9) 3,430,351 7.35
Gordon J. VanderBrug (10) 1,757,752 3.77
Charles N. Corfield (11) 1,444,416 3.10
Paul H. Floyd (12) 194,860 *
Charles Skibo (13) 190,000 *
W. Frank King (14) 150,750 *
Dan Powdermaker (15) 123,176 *
Richard G. Tennant (16) 112,500 *
David Lee (17) 75,000 *
ALL EXECUTIVE OFFICERS AND DIRECTORS AS A GROUP (9 PERSONS) (12) 8,269,386
</Table>
- ----------
* Represents less than 1% of the outstanding shares of common stock.
(1) Includes 3,519,976 shares of common stock which JMG Triton
Offshore Fund, Ltd. (the "Fund") has the right to acquire within 60
days of July 1, 2004, including 2,702,703 shares of common stock
upon the conversion of New Secured Notes and 817,273 shares of
common stock upon exercise of Warrants. The Fund is an
international business company organized under the laws of the
British Virgin Islands. The Fund's investment manager is Pacific
Assets Management LLC, a Delaware limited liability company
("Pacific Assets"). Pacific Assets is an investment adviser
registered with the Securities and Exchange Commission and has
voting and dispositive power over the Fund's investments. The
equity interests of Pacific Assets are owned by Pacific Capital
Management, Inc., a Delaware corporation ("Pacific") and Asset
Alliance Holding Corp., a Delaware corporation. The equity
interests of Pacific are owned by Messrs. Roger Richter, Jonathan
M. Glaser and Daniel A. David. Messrs. Glaser and Richter have
sole investment discretion over the Fund's portfolio holdings.
(2) Includes 2,702,703 shares of common stock which JMG Capital Partners, LP
("JMG Partners") has the right to acquire within 60 days of July 1, 2004,
upon the conversion of New Secured Notes. JMG Partners is a
California limited partnership. Its general partner is JMG Capital
Management, LLC (the "Manager"), a Delaware limited liability
company and an investment adviser registered with the Securities
and Exchange Commission. The Manager has voting and dispositive
power over JMG Partners' investments. The equity interests of the
Manager are owned by JMG Capital Management, Inc., ("JMG Capital")
a Delaware corporation, and Asset Alliance Holding Corp., a
Delaware corporation. Jonathan M. Glaser is the Executive Officer
and Director of JMG Capital and has sole investment discretion over
JMG Partners' portfolio holdings.
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(3) Includes 3,104,611 shares of common stock which entities affiliated with
Symphony Asset Management have the right to acquire within 60 days of
July 1, 2004 upon the exercise of Warrants. Includes the ownership by
the following funds managed by Symphony Asset Management: 50,098 shares
held by Adagio Fund, 283,894 shares held by Andante Fund, LP, 2,011,453
shares held by Arpeggio Fund, 183,729 shares held by CSV Limited,
185,497 shares held by International Monetary Fund, 2,085,477 shares
held by Rhapsody Fund, LP and 175,647 shares held by Vivace Fund, LP.
Symphony Asset Management is a wholly owned subsidiary of Nuveen
Investments, Inc. and Symphony Asset Management exercises sole voting
and investment power with respect to all shares held by Adagio Fund,
Andante Fund, Arpeggio Fund, CSV International Monetary Fund, Rhapsody
Fund and Vivace Fund. Symphony Asset Management may be deemed to
beneficially own all 4,975,795 shares.
(4) Includes 4,575,676 shares of common stock which Loeb Partners
Corporation has the right to acquire within 60 days of July 1, 2004 upon
the conversion of New Secured Notes and New Subordinated Notes.
(5) Includes 3,275,676 shares of common stock which LC Capital Master Fund,
Ltd. has the right to acquire within 60 days of July 1, 2004 upon the
conversion of New Secured Notes and New Subordinated Notes.
(6) Includes 4,085,019 shares of common stock which Singer Children's
Management Trust has the right to acquire within 60 days of July 1, 2004
upon the conversion of New Secured Notes, New Subordinated Notes and
upon the exercise of warrants to purchase shares of common stock. Karen
Singer is the trustee of Singer Children's Management Trust and
exercises sole voting and investment power with respect to all 4,604,605
shares. Ms. Singer, as trustee, may be deemed to beneficially own all
4,604,605 shares.
(7) Includes 192,500 shares of common stock issuable upon exercise of
options within 60 days of July 1, 2004. Also includes 50,000 shares held
by The Ofer Gneezy 1999 Family Trust for the benefit of Mr. Gneezy's
children. Mr. Gneezy disclaims beneficial ownership of the shares held
by the Ofer Gneezy 1999 Family Trust. Mr. Gneezy is our President, Chief
Executive Officer and one of our directors.
(8) Includes 3,956,883 shares of common stock which Windward Capital, L.P.
has the right to acquire within 60 days of July 1, 2004, including
2,702,702 shares of common stock it has the right to acquire upon the
conversion of New Secured Notes and 1,254,181 shares of common stock
which it has the right to acquire upon exercise of Warrants.
(9) Includes 3,292,083 shares held by Menlo Ventures VII, L.P. and 138,268
held by Menlo Entrepreneurs Fund VII, L.P. The address for Menlo
Ventures is 3000 Sand Hill Road, Building 4, Suite 100, Menlo Park,
California 94025.
(10) Includes 162,500 shares of common stock issuable upon exercise of
options within 60 days of July 1, 2004, 2004. Also includes 1,177,345
shares held by the G.J. & C.E. VanderBrug Family Limited Partnership.
Dr. VanderBrug disclaims beneficial ownership of the shares held by the
G.J. & C.E. VanderBrug Family Limited Partnership, except to the extent
of his pecuniary interest therein. Does not include 29,230 shares of
common stock held by Dr. VanderBrug's spouse. Dr. VanderBrug disclaims
beneficial ownership of the shares held by his spouse. Dr. VanderBrug is
our Executive Vice President and Assistant Secretary and one of our
directors.
(11) Includes 100,000 shares of common stock issuable upon exercise of
options within 60 days of July 1, 2004. Also includes of 1,344,416
shares held by the Charles N. Corfield Trust u/a/d 12/19/91, a revocable
trust of which Mr. Corfield is the sole trustee. Mr. Corfield is one of
our directors.
(12) Includes 164,860 shares of common stock issuable upon exercise of
options within 60 days of July 1, 2004. Mr. Floyd is our Senior Vice
President, R&D, Engineering and Operations.
(13) Includes 190,000 shares of common stock issuable upon exercise of
options within 60 days of July 1, 2004. Mr. Skibo is one of our
directors.
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(14) Includes 150,000 shares of common stock issuable upon exercise of
options within 60 days of July 1, 2004. Dr. King is one of our
directors.
(15) Includes 107,795 shares of common stock issuable upon exercise of
options within 60 days of July 1, 2004. Mr. Powdermaker is our Senior
Vice President of Worldwide Sales.
(16) Includes 112,500 shares of common stock issuable upon exercise of
options within 60 days of July 1, 2004. Mr. Tennant is our Vice
President of Finance and Administration and our Chief Financial Officer.
(17) Includes 60,000 shares of common stock issuable upon exercise of options
within 60 days of July 1, 2004. Mr. Lee is one of our directors.
Includes 1,240,155 shares of common stock issuable upon the exercise of
options within 60 days of May 1, 2004 and certain shares held by
affiliates of such directors and executive officers.
DESCRIPTION OF SECURITIES TO BE REGISTERED
DESCRIPTION OF NEW SECURED NOTES
GENERAL
The New Secured Notes are secured by second priority liens on
substantially all of our assets. iBasis Global, Inc., iBasis Holdings, Inc.,
iBasis Securities Corporation and any future restricted subsidiaries of ours
will, jointly and severally, fully and unconditionally guarantee our
obligations under the New Secured Notes and the New Secured Note Indenture.
The New Secured Notes are subordinated to the prior payment in full of all of
our existing and future senior indebtedness as described below under
"Subordination"
The New Secured Notes are convertible into shares of common stock as
described below under "Conversion".
The New Secured Notes have been issued in aggregate principal amount of
$29,000,000 in fully registered form and denominated in integral multiples of
$1,000. The New Secured Notes have been issued as a global note. The New Secured
Notes mature on June 18, 2007, unless earlier converted, redeemed or
repurchased. See "Form, Denomination and Registration" below.
The New Secured Notes will mature on June 18, 2007. Interest will be
payable at a rate of 8% per year on June 15 and December 15 of each year,
commencing December 15, 2004. The record dates for payment of interest will be
June 1 and December 1. Interest will be computed on the basis of a 360-day year
consisting of twelve 30-day months.
We will maintain an office in the Borough of Manhattan in New York, New
York where New Secured Notes may be presented for registration, transfer,
exchange or conversion. Initially, this will be the office of the Trustee
located at 101 Barclay Street, New York, New York 10286. We may, at our option,
pay interest on the New Secured Notes by check mailed to the registered holders
of New Secured Notes. However, holders of more than $2,000,000 in principal
amount of New Secured Notes may elect in writing to be paid by wire transfer;
provided that any payment to The Depository Trust Company (referred to as DTC)
or its nominee will be made by wire transfer of immediately available funds to
the account of DTC or its nominee.
No service charge will be made for any registration, exchange or
transfer of the New Secured Notes, but we may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection therewith.
We are subject to certain financial and other covenants under the New
Secured Note Indenture, described more fully below under "Covenants." You are
not protected, however, in the event of a highly leveraged transaction or a
change in control, except as described below under "Repurchase at Option of
Holders Upon a Change of Control."
CONVERSION
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The New Secured Notes may be converted at the option of the holder, in
whole or in part, at any time prior to maturity, into common stock at a
conversion rate equal to $1.85 per share (the "Conversion Price"). The New
Secured Notes are convertible in denominations of $1,000 and any integral
multiples thereof. If the New Secured Notes are called for redemption, your
conversion rights on the New Secured Notes called for redemption will expire at
the close of business of the last business day before the redemption date,
unless we default in payment of the redemption price. If you have submitted your
New Secured Notes for repurchase after a change of control, you may only convert
your New Secured Notes if you deliver a withdrawal notice before the close of
business on the last business day before the repurchase date.
Except as described below, we will not make any adjustment for accrued
interest or dividends on common stock upon conversion of the New Secured Notes.
If you convert your New Secured Notes after a record date and prior to the next
interest payment, you will have to pay us interest, unless the New Secured Notes
have been called for redemption or are eligible for repurchase under the New
Secured Note Indenture. We will pay a cash adjustment for any fractional shares
based on the market price of the common stock on the last business day before
the conversion date.
The Conversion Price will be adjusted if:
1. we dividend or distribute on the common stock shares of common
stock;
2. we issue rights or warrants to all holders of the common stock
to purchase common stock at less than the current market price;
3. we subdivide or combine our common stock;
4. we dividend or distribute to all holders of common stock,
capital stock or evidences of indebtedness, cash or assets, but
excluding:
- dividends, distribution and rights or warrants referred
to in (1) and (2) above, or
- dividends and distribution paid exclusively in cash;
5. we make a dividend or distribution consisting exclusively of
cash to all holders of common stock if the aggregate amount of
these distributions combined together with (A) all other
all-cash distributions made within the preceding 12 months in
respect of which we made no adjustment plus (B) any cash and the
fair market value of other consideration payable in any tender
offers by us or any of our subsidiaries for common stock
concluded within the preceding 12 months in respect for which we
made no adjustment, exceeds 10% of our market capitalization,
being the product of the then current market price of the common
stock multiplied by the number of shares of common stock then
outstanding;
6. the purchase of common stock pursuant to a tender offer made by
us or any of our subsidiaries involves an aggregate
consideration that, together with (A) any cash and the fair
market value of any other consideration payable in any other
tender offer by us or any of our subsidiaries for common stock
expiring within the 12 months preceding such tender offer plus
(B) the aggregate amount of any such all-cash distributions
referred to in (5) above to all holders of common stock within
the 12 months preceding the expiration of the tender offer for
which we have made no adjustment, exceeds 10% of our market
capitalization on the expiration of such tender offer;
7. payment on tender offers or exchange offers by a third party
other than us or our subsidiaries if, as of the closing date of
the offer, our board of directors does not recommend rejection
of the offer. We will only make this adjustment if a tender
offer increases the person's ownership to more than 25% of our
outstanding common stock and the payment per share is greater
than the current market price of a share of common stock. We
will not make this adjustment if the tender offer is a merger or
transaction described below under "Consolidation, Merger or
Assumption";
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8. a registration statement has not been filed with the SEC within
30 days from the date a demand request is received by us
pursuant to the registration rights agreement between us and the
holders of the New Secured Notes; or
9. a registration statement that has been filed with the SEC has
not been declared effective by the SEC within 120 days from the
filing date.
If we implement a stockholders' rights plan, we will be required under
the New Secured Note Indenture to provide that the holders of New Secured Notes
will receive the rights upon conversion of the New Secured Notes, whether or not
these rights were separated from the common stock prior to conversion.
If we reclassify our common stock, consolidate, merge or combine with
another person or sell or convey our property and assets as an entirety or
substantially as an entirety, each New Secured Note then outstanding will,
without the consent of the holder of any New Secured Note, become convertible
only into the kind and amount of securities, cash and other property receivable
upon such reclassification, consolidation, merger, combination, sale or
conveyance by a holder of the number of shares of common stock into which the
New Secured Note was convertible immediately prior to the reclassification,
consolidation, merger, combination, sale or conveyance. This calculation will be
made based on the assumption that the holder of common stock failed to exercise
any rights of election that the holder may have to select a particular type of
consideration. The adjustment will not be made for a consolidation, merger or
combination that does not result in any reclassification, conversion, exchange
or cancellation of our common stock.
You may, in some circumstances, be deemed to have received a
distribution or dividend subject to United States federal income tax as a result
of an adjustment (or the nonoccurrence of an adjustment) to the Conversion
Price.
We are permitted to reduce the Conversion Price of the New Secured Notes
for limited periods of time, if our board of directors deems it advisable. Any
such reduction shall be effective for not less than 20 days. We are required to
give at least 15 days prior notice of any such reduction. We may also reduce the
Conversion Price to avoid or diminish income tax to holders of our common stock
in connection with a dividend or distribution of stock or similar event.
No adjustment in the Conversion Price will be required unless it would
result in a change in the Conversion Price of at least one percent. Any
adjustment not made will be taken into account in subsequent adjustments.
PROVISIONAL REDEMPTION
The New Secured Notes are not redeemable prior until June 18, 2005.
Thereafter, we will have the right to redeem some or all of the New Secured
Notes at a redemption price equal to $1,000 per New Secured Note plus accrued
and unpaid interest to the redemption date if the closing price of a share of
common stock exceeds 150% of the conversion price for at least 20 trading days
in any consecutive 30-trading day period ending on the trading day prior to the
mailing of the notice of redemption.
OPTIONAL REDEMPTION
At any time on or after June 18, 2006, we may redeem the New Secured
Notes, in whole or in part, at our option, at the redemption prices specified
below. The redemption price, expressed as a percentage of the principal amount,
is as follows for the 12-month periods beginning on June 18 of the year
indicated:
<Table>
<Caption>
REDEMPTION
YEAR PRICE
---- ----------
2006........................................................ 102%
</Table>
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and 100% of the principal amount on and after June 18, 2007. In each case we
will also pay accrued and unpaid interest to, but excluding, the redemption
date. If the redemption date is an interest payment date, we will pay interest
to the record holders as of the relevant record date. We are required to give
notice of redemption not more than 60 and not less than 20 days before the
redemption date under the New Secured Note Indenture.
No "sinking fund" is provided for the New Secured Notes, which means
that the New Secured Note Indenture does not require us to redeem or retire the
New Secured Notes periodically. We may not redeem the New Secured Notes if there
is a default under the New Secured Note Indenture or our other senior
indebtedness documents.
REPURCHASE AT THE OPTION OF THE HOLDERS UPON A REPURCHASE EVENT
If a repurchase event occurs, holders of the New Secured Notes would
have the right, subject to conditions and restrictions, to require us to
repurchase some or all of the New Secured Notes at a price equal to 105% of the
principal amount, plus accrued and unpaid interest to, but excluding, the
repurchase date. If a repurchase date is an interest payment date, we will pay
interest to the record holder on the record date.
We will be required to mail you a notice within 15 days after the
occurrence of a repurchase event. The notice must describe the repurchase event,
your right to elect repurchase of the New Secured Notes and the repurchase date.
We must deliver a copy of the notice to the Trustee and cause a copy, or a
summary of the notice, to be published in a newspaper of general circulation in
New York, New York. You may exercise your repurchase rights by delivering
written notice to us and the Trustee. The notice must be accompanied by New
Secured Notes duly endorsed for transfer to us. You must deliver the exercise
notice on or before the close of business on the thirty-fifth calendar day after
the mailing date of the change of control notice.
A repurchase event will be considered to have occurred if:
1. a termination of listing of our common stock on a U.S. national
securities exchange or trading on an established
over-the-counter trading market in the U.S. occurs; or
2. one of the following "change of control" events occurs:
- any person or group is or becomes a beneficial owner of
more than 50% of the voting power of our outstanding
securities entitled to generally vote for directors;
- our stockholders approve any plan or proposal for our
liquidation, dissolution or winding up;
- we consolidate with or merge into any other corporation
or any other corporation merges into us and, as a
result, our outstanding common stock is changed or
exchanged for other assets or securities, unless our
stockholders immediately before the transaction own,
directly or indirectly, immediately following the
transaction at least 51% of the combined voting power of
the corporation resulting from the transaction in
substantially the same proportion as their ownership of
our voting stock immediately before the transaction;
- we convey, transfer or lease all or substantially all of
our assets to any person; or
- the "continuing directors" do not constitute a majority
of our board of directors at any time.
However, we will not be deemed to have undergone a change in control if
either:
a) (1) the closing sale price of a share of our common
stock, or, if no sale has taken place that day, the
average of the closing bid and asked prices, for any 5
trading days during the 10 trading days immediately
before the change in control is equal to at least 120%
of the conversion price of $1.85 per share (or at the
current adjusted conversion price if an adjustment has
been made as provided in the New Secured Note
Indenture), (2) our common
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stock is traded on a United States national securities
exchange or quoted on Nasdaq National Market and (3)
shares of our common stock issuable upon conversion of
the New Secured Notes are freely transferable without
requiring registration under the Securities Act, or
b) in the case of a merger or consolidation otherwise
constituting a change of control, (1) all of the
consideration (excluding cash payments for fractional
shares) in the transaction constituting the change in
control consists of common stock traded on a United
States national securities exchange or quoted on the
Nasdaq National Market (or which will be so traded or
quoted when issued and exchanged in connection with such
change of control), (2) as a result of the transaction
the New Secured Notes become convertible solely into
such common stock, and (3) we or the entity formed by or
surviving any change of control shall have a fixed
charge coverage ratio for our most recently ended four
full fiscal quarters for which internal financial
statements are available immediately preceding the date
of such change of control equal to or greater than 2 to
1, as if such change of control had occurred on the
first day of such four-quarter period.
The term "continuing director" means at any date a member of our board
of directors:
- who was a member of our board of directors on December
31, 2003; or
- who was nominated or elected by at least a majority of
the directors who were continuing directors at the time
of the nomination or election or whose election to our
board of directors was recommended by at least a
majority of the directors who were continuing directors
at the time of the nomination or election or by the
nominating committee comprised of our independent
directors.
Under the above definition of continuing directors, if the current board
of directors approve a new director or directors and then resigned, no change in
control would occur, even though the current director or directors would then
cease to be a director or directors. The interpretation of the phrase "all or
substantially all" used in the definition of change in control would likely
depend on the facts and circumstances existing at such time. As a result, there
may be uncertainty as to whether or not a sale or transfer of "all or
substantially all" of our assets has occurred.
You may require us to repurchase all or any portion of your New Secured
Notes upon a repurchase event. However, covenants under our senior indebtedness
documents, including our bank revolving line of credit, may prevent us from
paying the purchase price. If we are prohibited from repurchasing the New
Secured Notes, we could seek consent from our lenders to repurchase the New
Secured Notes. If we are unable to obtain their consent, we could attempt to
refinance the New Secured Notes. If we were unable to obtain a consent or
refinance, we would be prohibited from repurchasing the New Secured Notes. If we
were unable to repurchase the New Secured Notes upon a repurchase event, it
would result in an event of default under the New Secured Note Indenture, which
could in turn result in an event of default under our other then-existing debt.
In addition, the occurrence of the repurchase event may be an event of default
under our other debt. As a result, we would be prohibited from paying amounts
due on the New Secured Notes under the subordination provisions of the New
Secured Note Indenture.
The change in control feature may not necessarily afford you protection
in the event of a highly leveraged transaction, a change in control of us or
similar transactions involving us. We could, in the future, enter into
transactions including recapitalizations, that would not constitute a change in
control but that would increase the amount of our senior indebtedness or other
debt, to the extent permitted by the New Secured Note Indenture. If we incur
significant amounts of additional debt, this could have an adverse effect on our
ability to make payments on the New Secured Notes.
Our board of directors does not have the right under the New Secured
Note Indenture to limit or waive the repurchase right in the event of these
types of leveraged transactions. Our requirement to repurchase New Secured Notes
upon a change of control could delay, defer or prevent such change of control.
As a result, the repurchase right may discourage:
- a merger, consolidation or tender offer;
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- the assumption of control by a holder of a large block of our
shares; and
- the removal of incumbent management.
The repurchase feature of the New Secured Notes is not the result of any
specific effort to accumulate shares of common stock or to obtain control of us
by means of a merger, tender offer or solicitation, or part of a plan by us to
adopt a series of anti-takeover provisions. We have no present intention to
engage in a transaction involving a change of control, although it is possible
that we would decide to do so in the future.
The Exchange Act and SEC rules thereunder require the distribution of
specified types of information to security holders in the event of issuer tender
offers and may apply in the event of a repurchase. We will comply with these
rules to the extent applicable.
SUBORDINATION
The New Secured Notes are subordinated in right of payment to our
existing and future senior indebtedness, including the right of payment of our
bank.
EVENTS OF DEFAULT AND REMEDIES
The following events will constitute "events of default" under the New
Secured Note Indenture:
- failure to pay the principal or premium, if any, on any of the
New Secured Notes when due;
- failure to pay interest on the New Secured Notes when due if
such failure continues for 30 days;
- failure to deliver shares of the common stock, including cash
for fractional shares, 5 days after conversion of a New Secured
Note;
- failure to perform any covenant in the New Secured Note
indenture if such failure continues for 45 days after notice is
given;
- failure to repurchase any New Secured Note upon repurchase
event, specifically a change of control or upon a termination of
listing of the common stock on a U.S. national securities
exchange or trading on an established over-the-counter trading
market in the U.S. or to provide written notice to the holders
of the New Secured Notes of such an event;
- our failure or the failure of any of our significant
subsidiaries to make payment at maturity of indebtedness in an
aggregate principal amount in excess of $5 million, if such
failure continues for a period of 30 days after notice of such
default;
- our default or the default of any of our significant
subsidiaries that results in the acceleration of indebtedness in
an aggregate principal amount in excess of $5 million if such
indebtedness shall not have been discharged or such acceleration
shall not have been rescinded or annulled within 30 days after
notice of such default;
- we or any of our significant subsidiaries commences a voluntary
proceeding seeking liquidation, reorganization or other relief,
or consents to any such relief or the appointment a trustee,
receiver, liquidator, custodian or similar official in an
involuntary case against us or any such subsidiary, or makes a
general assignment for the benefit of creditors or otherwise
fails to pay debts when they become due;
- an involuntary case or other proceeding is commenced against us
or any of our significant subsidiaries seeking liquidation,
reorganization or other relief with respect to us or our debts
or seeking the
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appointment of a trustee, receiver, liquidator, custodian or
similar official, and such case remains undismissed and unstayed
for a period of 60 days;
- a default occurs under any of the security documents, the liens
created by the security documents do not constitute valid and
perfected liens, or any of the security documents ceases to be
in full force and effect (other than expiration in accordance
with their terms or modification, waiver, termination or release
in accordance with the terms of the New Secured Note Indenture),
and such default continues for a period of 15 days following
written notice of such default;
- our failure to make, when due, any transfer, delivery, pledge,
assignment or grant of collateral required to be made by us, and
such failure continues for 10 business days after notice of such
failure; or
- Any guarantee given by one of our subsidiaries pursuant to the
New Secured Note Indenture is held to be unenforceable or
invalid in any material respect or ceases to be in full force
and effect, or any subsidiary denies its guarantee obligations.
If an event of default occurs and continues to occur, the principal and
premium on the New Secured Notes may be declared to be immediately due and
payable. After acceleration, but before a judgment or decree based on
acceleration, the holders of a majority in aggregate principal amount of
outstanding New Secured Notes under circumstances set forth in the New Secured
Note Indenture, will be able to rescind the acceleration of all events of
default, other than the payment of principal of the New Secured Notes that
become due solely because of the acceleration and events of defaults that are
cured or waived as provided in the New Secured Note Indenture.
COVENANTS
FINANCIAL COVENANTS
Under the New Secured Note Indenture, until the earlier of June 18,
2007, or any conversion, redemption or repurchase of all the New Secured Notes,
we are prohibited from incurring any additional indebtedness other than:
- indebtedness under the New Secured Notes and the subsidiary
guarantees;
- an aggregate principal amount not to exceed $38.18 million of
the Existing Notes and New Subordinated Notes;
- additional indebtedness that is PARI PASSU with or subordinate
to the New Secured Notes, not to exceed $20,000,000.00 in
principal amount outstanding at any time ("PARI PASSU
indebtedness");
- indebtedness not otherwise covered by any other clause which was
outstanding on June 18, 2004, the date of execution of the New
Secured Note Indenture;
- our indebtedness to any of our designated subsidiaries and
indebtedness of any designated subsidiary to us or another
subsidiary;
- indebtedness secured by our assets that is incurred by us or a
designated subsidiary from any bank, commercial finance company,
other commercial lender or financial institution in an amount
not to exceed in the aggregate the greater of (x) $15,000,000,
or (y) an amount equal to the sum of (i) eighty-five percent
(85%) of the face amount of our accounts receivable aged less
than ninety (90) days, and (ii) forty percent (40%) of our
property, plant and equipment;
- indebtedness of ours or any of our subsidiaries incurred or
issued in exchange for, or the net proceeds of which are used to
extend, refinance, renew, replace, defease or refund other
indebtedness of ours or any of our subsidiaries (other than
intercompany indebtedness); PROVIDED that (1) the principal
amount (or accreted value, if applicable) of such indebtedness
does not exceed the principal amount (or accreted value, if
applicable) of the indebtedness extended, refinanced, renewed,
replaced, defeased
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(whether legally or as to covenants only) or refunded (plus all
accrued interest on such indebtedness and the amount of all
fees, expenses and premiums incurred in connection therewith);
(2) such indebtedness has a final maturity date on or later than
the final maturity date of, and has a weighted average life to
maturity equal to or greater than the weighted average life to
maturity of, the indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded; (3) if the indebtedness
being extended, refinanced, renewed, replaced, defeased or
refunded is subordinated in right of payment to the New Secured
Notes, such indebtedness is subordinated in right of payment to
the New Secured Notes on terms at least as favorable to the
holders of New Secured Notes as those contained in the
documentation governing the indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and (4)
such indebtedness is incurred either by us or our subsidiary
that is the obligor on the indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded;
- indebtedness of a person existing at the time such person
becomes one of our subsidiaries or assumed in connection with
the acquisition by us of assets from such person, in an amount
not to exceed $25,000,000 in the aggregate;
- indebtedness that is subordinate to the New Secured Notes, not
to exceed $114,500,000 in the aggregate, provided that that the
express subordination provisions contained therein or otherwise
pertaining thereto provide that (a) the obligor thereunder shall
not be permitted to make any payments of principal in cash, or
otherwise retire, redeem or repurchase such subordinate
indebtedness for cash so long as any indebtedness under the New
Secured Notes remains outstanding, provided so long as no event
of default has occurred and is continuing hereunder such obligor
shall be permitted to make regularly scheduled payment of
interest on such subordinate indebtedness in cash as and when
the same shall become payable, and (b) the holders of such
subordinate indebtedness agree that during the occurrence and
continuation of an event of default under the New Secured Note
Indenture, such holders will not take any action to enforce
their rights and remedies under such subordinate indebtedness
(other than such actions which may be necessary to toll any
statute of limitations or any filing of a proof of claim in any
bankruptcy or insolvency proceeding);
- indebtedness arising from bid, performance, appeal or surety
bonds or similar bonds or instruments securing any obligations
of us or any of our designated subsidiaries incurred in the
ordinary course of business, which subsidiaries' guarantees,
letters of credit, bonds or similar instruments do not secure
other indebtedness;
- disqualified stock issued in accordance with the requirements
set forth below;
- indebtedness (including capitalized lease obligations) incurred
by us or any of our subsidiaries to finance the purchase, lease
or improvement of property (real or personal) (whether through
the direct purchase, lease or improvement of assets or purchase
of the equity interests of any person owning such assets);
provided that the aggregate principal amount of indebtedness
outstanding under this clause does not exceed the lesser of (x)
10% of our consolidated total assets at the time of any
incurrence thereof (including any indebtedness incurred in
connection with a refinancing by us or our subsidiaries with
respect thereto) or (y) $10,000,000;
- indebtedness under obligations incurred pursuant to any foreign
currency exchange agreement, option or futures contract or
similar agreement or arrangement entered into for bona fide
hedging purposes and not for speculative purposes, provided that
that such obligations do not increase the indebtedness of us or
any of our designated subsidiaries outstanding at any time other
than as a result of fluctuations in foreign currency exchange
rates or interest rates, as applicable, or by reason of fees,
indemnities and compensation payable thereunder;
- indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument
inadvertently (except in the case of daylight overdrafts) drawn
against insufficient funds in the ordinary course of business,
provided that such indebtedness is extinguished within four (4)
business days of incurrence; and
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- indebtedness of us or any of our designated subsidiaries
consisting of guarantees, indemnities or obligations in respect
of purchase price adjustments in connection with the acquisition
or disposition of assets.
Under the New Secured Note Indenture, we may not, and we may not permit
any of our subsidiaries to:
- issue, assume or guarantee any indebtedness secured by any lien
on any property, or any improvements, additions and accessions
thereto and all proceeds thereof, owned as of the date of the
New Secured Note Indenture or thereafter acquired by us or any
designated subsidiary, other than (i) liens existing on the date
the New Secured Notes are issued or provided for pursuant to
agreements (and terms thereof) existing on the date the New
Secured Notes are issued securing indebtedness (A) existing on
the date the New Secured Notes are issued or (B) to be incurred
under agreements existing on the date the New Secured Notes are
issued; (ii) liens on the property of any person existing at the
time such person becomes a designated subsidiary and not
incurred as a result of (or in connection with or in
anticipation of) such person becoming a designated subsidiary,
PROVIDED that such liens do not extend to or cover any property
of ours or any of our designated subsidiaries other than the
property encumbered at the time such person becomes a designated
subsidiary, all improvements, additions and accessions thereto
and all proceeds thereof; (iii) liens affecting property
existing at the time it becomes property of ours or any of our
designated subsidiaries, and all improvements, additions and
accessions thereto and all proceeds thereof; (iv) any lien
extending, renewing or replacing (or successive extensions,
renewals or replacements of) any lien of any type permitted
under clauses (i) through (iii) above, including any lien
securing any refinancing indebtedness relating to the
indebtedness referenced in clauses (i) through (iii) above,
PROVIDED that lien extends to or covers only the property that
is subject to the lien being extended, renewed or replaced and
that the principal amount of indebtedness secured thereby shall
not exceed the sum of (A) the principal amount of indebtedness
so secured at the time of such extension, renewal or
replacement, (B) any expenses of ours and any of our designated
subsidiaries (including any premium) incurred in connection with
any such extension, renewal or replacement; (v) liens securing
indebtedness of ours or any of our designated subsidiaries
classified as "Permitted Indebtedness, (vi) liens securing PARI
PASSU indebtedness, (vi) other liens (exclusive of any lien of
any type otherwise permitted under clauses (i) through (vi)
above) securing indebtedness of ours or any of our designated
subsidiaries in an aggregate principal amount that does not at
the time such indebtedness is incurred exceed 20% of
consolidated net tangible assets (as shown on our most recent
audited consolidated balance sheet), and (vii) any interest or
title of a lessor under any capitalized lease obligation
otherwise permitted under the New Secured Note Indenture;
- directly or indirectly: (i) declare or pay any dividend or make
any distribution on account of our or any of our subsidiaries'
equity interests (other than dividends or distributions payable
in equity interests (other than disqualified stock)), dividends
or distributions payable us or any of our designated
subsidiaries , or dividends or distributions payable with
respect to any shares of disqualified stock issued in compliance
with the New Secured Note Indenture; (ii) purchase, redeem or
otherwise acquire or retire for value any equity interests of
ours or any direct or indirect parent of ours or other affiliate
or subsidiary of ours (other than any such equity interests
owned by us or any of our designated subsidiaries), any
permitted employee repurchase or any qualified repurchase plan;
or (iii) make any principal payment on, or purchase, redeem,
defease or otherwise acquire or retire for value any
indebtedness that is contractually subordinated to the New
Secured Notes, except at final maturity, other than through the
purchase or acquisition by us of indebtedness through the
issuance in exchange therefor of equity interests other than
disqualified stock (all such payments and other actions set
forth in clauses (i) through (iii) above being collectively
referred to as "restricted payments"), unless, at the time of
and after giving effect to such restricted payment: (a) no
default or event of default shall have occurred and be
continuing or would occur as a consequence thereof; (b) we
would, at the time of such restricted payment and after giving
pro forma effect thereto as if such restricted payment had been
made at the beginning of the applicable four-quarter period,
have been permitted to incur at least $1.00 of additional
indebtedness pursuant to a fixed charge coverage ratio test set
forth in the New Secured Note Indenture; and (c) such restricted
payment, together with the aggregate of all other restricted
payments made by us and our subsidiaries after the date of issue
of the New Secured Notes (excluding
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restricted payments permitted by clauses (II) and (III) below),
is less than the sum, without duplication, of (I) $5,000,000
plus (II) 50% of our consolidated net income for the period
(taken as one accounting period) from June 1, 2004 to the end of
our most recently ended fiscal quarter for which internal
financial statements are available at the time of such
restricted payment (or, if such consolidated net income for such
period is a deficit, less 100% of such deficit), plus (III) to
the extent not included in the amount described in clause (II)
above, 100% of the aggregate net cash proceeds received by us
after the date of issue of the New Secured Notes from the issue
or sale of, or from additional capital contributions in respect
of, our equity interests or debt securities or any subsidiary
that have been converted into, or cancelled in exchange for, our
equity interests (other than equity interests (or convertible
debt securities) sold to one of our subsidiaries or an
affiliates and other than disqualified stock or debt securities
that have been converted into disqualified stock);
- issue any disqualified stock or permit any of our subsidiaries
to issue any shares of preferred stock; provided, however, that
we may issue shares of disqualified stock if: (i) the fixed
charge coverage ratio for our most recently ended four full
fiscal quarters for which internal financial statements are
available immediately preceding the date on which such
disqualified stock is issued would have been at least 1.5 to 1,
determined on a pro forma basis (including a pro forma
application of the net proceeds therefrom), as if the
disqualified stock had been issued at the beginning of such
four-quarter period; (ii) no default or event of default shall
have occurred and be continuing or would occur as a consequence
thereof, and (iii) the terms of such disqualified stock
expressly provide that we shall not be required to redeem such
disqualified stock at any time prior to the date on which all
amounts due under the New Secured Note Indenture, including
without limitation all principal and interest due under the New
Secured Notes, have been indefeasibly paid in full;
- directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on the
ability of any of our designated subsidiaries to (i)(A) pay
dividends or make any other distributions to us or any of our
subsidiaries (1) on its capital stock or (2) with respect to any
other interest or participation in, or measured by, its profits,
or (B) pay any indebtedness owed to us or any of our
subsidiaries, (ii) make loans or advances to us or any of our
subsidiaries or (iii) transfer any of its properties or assets
to us or any of our subsidiaries, except for such encumbrances
or restrictions existing under or by reason of (a) existing
indebtedness as in effect on the issue date of the New Secured
Notes, and any amendments, modifications, restatements,
renewals, supplements, refundings, replacements or refinancings
thereof, provided that such amendments, modifications,
restatements, renewals, supplements, refundings, replacement or
refinancings are no more restrictive with respect to such
dividend and other payment restrictions than those contained in
the existing indebtedness as in effect on the issue date of the
New Secured Notes, (b) the New Secured Note Indenture and the
New Secured Notes, (c) applicable law, (d) any instrument
governing acquired indebtedness or capital stock of a person
acquired by us or any of our subsidiaries as in effect at the
time of such acquisition, which encumbrance or restriction is
not applicable to any person, or the properties or assets of any
person, other than the person, or the property or assets of the
person, so acquired, (e) by reason of customary non-assignment
provisions in leases and licenses entered into in the ordinary
course of business and consistent with past practices, (f)
purchase money obligations for property acquired in the ordinary
course of business that impose restrictions of the nature
described in clause (iii) above on the property so acquired, (g)
agreements relating to the financing of the acquisition of real
or tangible personal property acquired after the issue date of
the New Secured Notes, provided, that such encumbrance or
restriction relates only to the property which is acquired and
in the case of any encumbrance or restriction that constitutes a
lien, such lien constitutes a purchase money lien, (h) any
restriction or encumbrance in the nature of clause (iii) above
contained in contracts for sale of assets permitted by this
indenture in respect of the assets being sold pursuant to such
contract, (i) contractual encumbrances or restrictions in effect
on the date of issuance of the New Secured Notes, (j) customary
provisions contained in leases, licenses or other agreements
entered into in the ordinary course of business or in permitted
indebtedness, in each case which do not limit the ability of any
designated subsidiary to take any of the actions described in
clauses (i) through (iii) of this clause with respect to a
material amount of dividends, distributions, indebtedness,
loans, advances or sales, leases or transfers of properties or
assets, as applicable, (k) restrictions on cash or other
deposits or net worth or similar type restrictions imposed by
customers under contracts entered into in the ordinary course of
business
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or (l) refinancing indebtedness, provided that the restrictions
contained in the agreements governing such refinancing
indebtedness are no more restrictive than those contained in the
agreements governing the indebtedness being refinanced;
- sell, lease, transfer or otherwise dispose of any of our
properties or assets to, or purchase any property or assets
from, or enter into or make any contract, agreement,
understanding, loan, advance or guarantee with, or for the
benefit of, any affiliate (each of the foregoing referred to
hereinafter as, an "affiliate transaction"), unless (i) such
affiliate transaction is on terms that are no less favorable to
us or our designated subsidiary than those that would have been
obtained in a comparable transaction by us or such designated
subsidiary with an unrelated person and (ii) we deliver to the
Trustee (a) with respect to any affiliate transaction entered
into after the date of the New Secured Note Indenture involving
aggregate consideration in excess of $1,000,000, an officers'
certificate certifying that such affiliate transaction complies
with clause (i) above and that such affiliate transaction has
been approved by a majority of the disinterested members of the
Board of Directors and (b) with respect to any affiliate
transaction involving aggregate consideration in excess of
$5,000,000, an opinion as to the fairness to us or our
designated subsidiary of such affiliate transaction from a
financial point of view issued by an investment banking firm of
national standing; provided that the following shall not be
deemed to be affiliate transactions: (x) any employment
agreement entered into by us or any of our subsidiaries in the
ordinary course of business and consistent with the past
practice of us or such designated subsidiary, (y) transactions
between or among us and/or any of our designated subsidiaries,
and (z) restricted payments permitted by the New Secured Note
Indenture;
- make any investments other than (a) investments in us or one of
our designated subsidiaries; (b) any investments in cash
equivalents; (c) investments by us or any of our subsidiaries in
a person if as a result of such investment (i) such person
becomes one of our designated subsidiaries and that is engaged
in the development, manufacture, marketing, provision or sale of
communications and communications-related services and products
or any other business conducted by us on the issue date of the
New Secured Notes, or (ii) such person is merged, consolidated
or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, us or
any of our designated subsidiaries that is engaged in the
development, manufacture, marketing, provision or sale of
communications and communications-related services and products
or any other business conducted by us on the issue date of the
New Secured Notes; (d) investments outstanding as of the issue
date of the New Secured Notes; and (e)(i) other investments that
do not exceed $3,000,000 in the aggregate at any time
outstanding, and (ii) if the amount specified in clause (e)(i)
above has been fully utilized, other investments (in addition to
those permitted by clause (e)(i) above) that (A) are each
individually approved by the Board of Directors as evidenced by
a resolution of the Board of Directors delivered to the Trustee
contemporaneously with such investment and (B) in the aggregate
do not exceed $3,000,000 at any time outstanding;
- directly or indirectly, consummate any asset sale unless: (i) we
or one of our designated subsidiaries, as the case may be,
receives consideration at the time of any such asset sale at
least equal to the fair market value of the asset sold or
otherwise disposed of, (ii) at least 75% of the net proceeds
from such asset sale are received in cash or cash equivalents
(unless such asset sale is a lease) and (iii) with respect to
any asset sale involving the equity interests of any of our
designated subsidiaries, we shall sell all of the equity
interests of such designated subsidiary that we own; PROVIDED,
that the amount of (x) any liabilities (as shown on our or our
restricted subsidiary's most recent balance sheet) of ours or
any of our designated subsidiaries (other than contingent
liabilities and liabilities that are by their terms subordinated
to the New Secured Notes or a guarantee given by one of our
subsidiaries) that are assumed by the transferee of any such
assets pursuant to a customary novation agreement that releases
us or such designated subsidiary from further liability and (y)
in the case of any asset sale constituting the transfer (by
merger or otherwise) of all of the capital stock of a designated
subsidiary, any liabilities (as shown on such designated
subsidiary's most recent balance sheet) of such designated
subsidiary (other than contingent liabilities and liabilities
that are by their terms subordinated to the New Secured Notes or
a guarantee given by one of our subsidiaries) that will remain
outstanding after such transfer and will not be a liability of
ours or any of our designated subsidiaries following such
transfer and (z) any securities, notes or other obligations
received by us or any such designated
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subsidiary from such transferee that are contemporaneously
(subject to ordinary settlement periods) converted by us or such
designated subsidiary into cash (to the extent of the cash
received), shall be deemed to be cash for purposes of this
provision.
Within 365 days after the receipt of proceeds in respect of any
asset sale, we must use all such proceeds either to invest in
properties and assets used in the development, manufacture,
marketing, provision or sale of communications and
communications-related services and products or any other
business conducted by us on the issue date of the New Secured
Notes (including, without limitation, a capital investment in
any person which becomes a designated subsidiary) and/or to
reduce indebtedness under the Credit Agreement, the New Secured
Notes, any PARI PASSU indebtedness or indebtedness of a
designated subsidiary; PROVIDED, that when any non-cash proceeds
are liquidated, such proceeds (to the extent they are asset sale
proceeds) will be deemed to be asset sale proceeds at that time.
When the aggregate amount of asset sale proceeds that are not
invested or used to reduce indebtedness under the Credit
Agreement, the New Secured Notes, any PARI PASSU indebtedness or
indebtedness of a designated subsidiary ("excess proceeds")
exceeds $10,000,000, we shall make an offer (an "excess proceeds
offer") to apply the excess proceeds to repurchase the New
Secured Notes at a purchase price equal to 100% of the principal
amount of such New Secured Notes, plus accrued and unpaid
interest to the date of purchase. If we are required to do so by
the terms of any senior indebtedness or PARI PASSU indebtedness,
the excess proceeds offer may be made ratably to purchase the
New Secured Notes and such other senior indebtedness or PARI
PASSU indebtedness on the terms contemplated by such other
indebtedness at a purchase price not to exceed 100% of the
principal amount of such other indebtedness plus accrued and
unpaid interest to the date of purchase. To the extent that the
aggregate principal amount of the New Secured Notes (plus
accrued interest thereon) (and, if applicable, such other
indebtedness) tendered pursuant to the excess proceeds offer is
less than the excess proceeds, we may use such deficiency, or a
portion thereof, for general corporate purposes or for other
purposes permitted under the New Secured Note Indenture. If the
aggregate principal amount of the New Secured Notes surrendered
by holders thereof (and, if applicable, such other indebtedness
surrendered by holders thereof) exceeds the amount of excess
proceeds allocated to the New Secured Notes, we shall select the
New Secured Notes to be purchased in accordance with the
procedures (including prorating in the event of
oversubscription) described below.
Within 10 days following the occurrence of an event which
mandates an excess proceeds offer, we shall mail a notice to the
Trustee and to each holder of the New Secured Notes stating: (i)
that the excess proceeds offer is being made pursuant to the
terms of the New Secured Note Indenture and that all New Secured
Notes tendered and not subsequently withdrawn will be accepted
for payment and paid for by us; (ii) the offer amount and
purchase price and the purchase date (which shall not be less
than 30 days nor more than 60 days after the date such notice is
mailed); (iii) that any New Secured Note not tendered shall
continue to accrue interest and be convertible and shall
continue to be governed by the terms of the New Secured Note
Indenture in all respects; (iv) that, unless we default in the
payment thereof, all New Secured Notes accepted for payment
pursuant to the excess proceeds offer shall cease to accrue
interest on and after the payment date and cease to be
convertible; (v) that holders electing to have any New Secured
Notes purchased pursuant to an excess proceeds offer will be
required to surrender the New Secured Notes to be purchased to
the paying agent at the address specified in the notice prior to
the close of business on the business day next preceding the
respective payment date; (vi) that holders of the New Secured
Notes will be entitled to withdraw their election on the terms
and conditions set forth in such notice; (vii) that holders
whose New Secured Notes are being purchased only in part will be
issued new notes equal in principal amount to the unpurchased
portion of the New Secured Notes surrendered, PROVIDED, that
each New Secured Note purchased and each such new note issued
shall be in a principal amount of $1,000 or integral multiples
thereof; (viii) briefly, the conversion rights of holders of the
New Secured Notes; (ix) the conversion price and any adjustments
thereto, the date on which the right to convert the New Secured
Notes will terminate and the places where such New Secured Notes
may be surrendered for conversion; and (x) that holders who want
to convert their New Secured Notes must satisfy the requirements
set forth in the New Secured Notes.
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Holders electing to have a New Secured Note purchased shall be
required to surrender the New Secured Note, with an appropriate
form duly completed, to the paying agent at the address
specified in the notice prior to the close of business on the
business day next preceding the payment date. Holders shall be
entitled to withdraw their election if the Trustee or we
receives not later than one business day prior to the purchase
date a telegram, telex, facsimile transmission or letter setting
forth the name of the holder, the principal amount of the New
Secured Note which was delivered for purchase by the holder and
a statement that such holder is withdrawing his election to have
such New Secured Note purchased. If on the payment date the
aggregate principal amount of New Secured Notes exceeds the
offer amount, we shall select the New Secured Notes to be
purchased on a pro rata basis (with such adjustments as may be
deemed appropriate by us so that only New Secured Notes in
denominations of $1,000, or integral multiples thereof, shall be
purchased).
On the payment date, we shall (i) accept for payment all New
Secured Notes or portions thereof tendered and not theretofore
withdrawn and which are selected for repurchase pursuant to the
offer, (ii) deposit with the paying agent immediately available
funds sufficient to pay the purchase price of all New Secured
Notes or portions thereof accepted for payment, and (iii)
deliver or cause to be delivered to the Trustee all New Secured
Notes so tendered, together with an officers' certificate
specifying the New Secured Notes or portions thereof tendered to
us or the paying agent and an authentication order, if new notes
are to be issued. The paying agent shall promptly mail or
deliver to each holder of New Secured Notes so tendered payment
in an amount equal to the purchase price for such New Secured
Notes, and the Trustee shall promptly authenticate and mail or
deliver to such holder one or more certificates evidencing New
Secured Notes equal in aggregate principal amount to any
unpurchased portion of the New Secured Notes surrendered;
PROVIDED, that each such New Secured Note shall be in a
principal amount of $1,000 or integral multiples thereof.
- directly or indirectly permit any designated subsidiary to
guarantee any indebtedness of ours other than indebtedness under
the Credit Agreement, the New Secured Notes, the PARI PASSU
indebtedness, other permitted indebtedness and, to the extent
permitted by the New Secured Note Indenture, currency hedge
obligations.
- acquire or create, directly or indirectly, another domestic
subsidiary (other than a subsidiary that is also a subsidiary of
a designated subsidiary that is not a subsidiary guarantor)
after the date of the New Secured Note Indenture, unless such
newly acquired or created domestic subsidiary shall become a
subsidiary guarantor and execute a supplemental indenture and
deliver an opinion of counsel, in accordance with the terms of
the New Secured Note Indenture; PROVIDED, that subsidiaries that
have been properly designated as unrestricted subsidiaries by
our board of directors in accordance with the New Secured Note
Indenture shall not be subject to these requirements and shall
be released from all obligations under any a guarantee given by
one of our subsidiaries, in each case for so long as they
continue to constitute unrestricted subsidiaries; and
- sell, directly or indirectly, any shares of capital stock of a
designated subsidiary (including options, warrants, or other
rights to purchase shares of such capital stock) except: (i) to
us or one of our wholly-owned subsidiaries; (ii) issuances of
director's qualifying shares or sales to foreign nationals of
shares of capital stock of designated subsidiaries which are
foreign subsidiaries, to the extent required by applicable law;
or (iii) issuances or sales of common stock of a designated
subsidiary so long as immediately giving effect to the issuance
or sale, the designated subsidiary would no longer constitute a
designated subsidiary, PROVIDED, that (x) the proceeds therefrom
shall be treated as proceeds from an asset sale and (y) any
investment in any person remaining after giving effect to the
issuance or sale that would have been a permitted investment if
made on the date of the issuance or sale.
Under the New Secured Note Indenture, we are required to:
- preserve the liens granted under the security agreements between
the collateral agent and us and each the designated
subsidiaries, and undertake all actions which are required by
applicable law to maintain the liens of the collateral agent in
the collateral in full force and effect at all times (including
the relevant priority thereof), and (b) preserve and protect the
collateral and protect and enforce our rights
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and title and the rights of the collateral agent to the
collateral, including, without limitation, the making or
delivery of all filings and recordations, the payment of fees
and other charges and the issuance of supplemental documentation
for such purposes.
NON-FINANCIAL COVENANTS
Under the New Secured Note Indenture, we are required to:
- duly and punctually pay the principal of and premium, if any,
and interest on each of the New Secured Notes;
- maintain an office or agency in the Borough of Manhattan, The
City of New York, where the New Secured Notes may be surrendered
for registration of transfer or exchange or for presentation for
payment or for conversion, redemption or repurchase and where
notice and demands to or upon us in respect of the New Secured
Notes and New Secured Note Indenture may be served;
- appoint a Trustee whenever necessary to avoid or fill a vacancy
in the office of Trustee, so that at all times there will be a
Trustee under the New Secured Note Indenture;
- cause any paying agent that we appoint other than the Trustee to
execute and deliver to the Trustee an instrument in which it
agrees to (i) hold all sums in trust for the benefit of the
holders of the New Secured Notes, (ii) give the Trustee notice
of any failure by us to make any payment of the principal of and
premium, if any, or interest on the New Secured Notes when the
same is due and payable, and (iii) pay to the Trustee all sums
held in trust upon an event of default under the New Secured
Note Indenture. If we act as our own paying agent, we must, on
or before each due date of the principal of, premium, if any, or
interest on the New Secured Notes, set aside and hold in trust
for the benefit of the holders of the New Secured Notes a sum
sufficient to pay such principal, premium, if any, or interest
becoming due, and we must notify the Trustee of our failure to
take any such action or any failure to make any payment when
due;
- do all things necessary to preserve and keep in full force and
effect our corporate existence and the corporate, partnership or
other existence of the designated subsidiaries and our rights,
licenses and franchises and the rights, licenses and franchises
of the designated subsidiaries;
- agree not to claim or take advantage of any stay, extension or
usury law or other law, whenever enacted, that would prohibit or
forgive us from paying all or any portion of the principal of or
interest on the New Secured Notes;
- deliver to the Trustee within 120 days after the end of each
fiscal year an officer's certificate, signed by our principal
executive, principal financial or principal accounting officer,
stating whether, to the best of their knowledge, the signer
knows of any default under the New Secured Note Indenture that
occurred during such period, and describing the nature of such
default;
- execute and deliver any further instruments and do any further
acts, as may be requested by the Trustee, that are reasonably
necessary to carry out the purposes of the New Secured Note
Indenture;
- pay or discharge any material tax, assessment, charge, or claim;
- maintain with financially sound and reputable insurance
companies insurance in at least such amounts and against at
least such risks (but including in any event public liability,
product liability and business interruption) as are usually
insured against in the same general area by companies engaged in
the same or a similar business; and
- while any New Secured Note is outstanding, timely file with the
SEC and provide a copy to the Trustee and to each holder of New
Secured Notes, and, upon request, any beneficial owner of New
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Secured Notes without cost, all such reports and other
information as may be required by Section 13 or 15(d) of the
Exchange Act, including, without limitation, Forms 10-K, 10-Q
and 8-K. Upon request without cost, we shall also provide
holders and beneficial owners of New Secured Notes copies of all
officers' certificates delivered to the Trustee. At such time as
we are not subject to the reporting requirements of the Exchange
Act, promptly after the same would be required to be filed with
the SEC if we then were subject to Section 13 or 15(d) of the
Exchange Act, we shall file with the Trustee and supply to each
holder and, upon request, to any beneficial owner of New Secured
Notes and any prospective purchaser of New Secured Notes,
without cost, copies of its financial statements and certain
other reports or information comparable to that which we would
have been required to report pursuant to Sections 13 and 15(d)
of the Exchange Act, including, without limitation, the
information that would be required by Forms 10-K, 10-Q and 8-K.
Delivery of such reports, information and documents to the
Trustee is for informational purposes only and the Trustee's
receipt of such shall not constitute constructive notice of any
information contained therein or determinable from information
contained therein, including our compliance with any of its
covenants hereunder (as to which the Trustee is entitled to rely
exclusively on officers' certificates).
MODIFICATIONS OF THE NEW SECURED NOTES INDENTURE
The consent of the holders of a majority in principal amount of the
outstanding New Secured Note affected is required to make a modification or
amendment to the New Secured Note Indenture. However, a modification or
amendment requires the consent of the holder of each outstanding New Secured
Note affected if it would:
- extend the fixed maturity of any New Secured Note;
- reduce the interest rate or change the time of payment of
interest on any New Secured Note;
- reduce the principal amount or any premium of any New Secured
Note;
- reduce any amount payable upon redemption or repurchase of any
New Secured Note;
- adversely change our obligation to repurchase any New Secured
Note upon the happening of an event requiring such repurchase;
- adversely change the holder's right to institute suit for the
payment of any New Secured Note;
- change the place where, or currency in which, any New Secured
Note is payable;
- adversely modify the right to convert the New Secured Notes;
- adversely modify the subordination provisions of the New Secured
Notes;
- change the percentage required to consent to modifications and
amendments;
- reduce the percentage in aggregate principal amount of
outstanding New Secured Notes required for the adoption of a
resolution or the quorum required at any meeting of holders of
New Secured Notes at which a resolution is adopted; or
- reduce the percentage of outstanding New Secured Notes necessary
for waiver of compliance with certain provisions of the New
Secured Notes Indenture or for the waiver of certain defaults;
or
SATISFACTION AND DISCHARGE
We may discharge our obligations under the New Secured Note Indenture
while New Secured Notes remain outstanding if:
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- all New Secured Notes will become due in one year or are
scheduled for redemption in one year; and
- we deposit sufficient funds to pay all outstanding New Secured
Notes on their scheduled maturity or redemption date.
NOTICES
Notice to holders of the New Secured Notes will be given by mail to the
addresses of such holders as they appear in the security register. Such notices
will be deemed to have been given on the date of mailing of the notice.
REPLACEMENT OF NOTES
We will replace New Secured Notes that become mutilated, destroyed,
stolen or lost at the expense of the holder upon delivery to the Trustee of the
mutilated New Secured Notes or evidence of the loss, theft or destruction
thereof satisfactory to us and the Trustee. In the case of a lost, stolen or
destroyed New Secured Note, indemnity satisfactory to the Trustee and to us may
be required at the expense of the holder of such New Secured Note before a
replacement New Secured Note will be issued.
GOVERNING LAW
The New Secured Notes and the New Secured Note Indenture are governed by
the laws of the State of New York, without regard to conflicts of laws
principles.
CONCERNING THE TRUSTEE
We have appointed the Trustee as the initial paying agent, conversion
agent, registrar and custodian for the New Secured Notes. We may maintain
deposit accounts and conduct other banking transactions with the Trustee or its
affiliates in the ordinary course of business. In addition, the Trustee and its
affiliates may in the future provide banking and other services to us in the
ordinary course of their business.
If the Trustee becomes one of our creditors, the New Secured Note
Indenture and the Trust Indenture Act of 1939 may limit the right of the Trustee
to obtain payment on or realize on security for its claims. If the Trustee
develops any conflicting interest with the holders of New Secured Notes or us,
it must eliminate the conflict or resign.
CONVERSION, REGISTRATION, TRANSFER AND EXCHANGE OF THE NEW SECURED NOTES
You can convert your New Secured Notes by delivering the New Secured
Notes to an office or agency of the Trustee in the Borough of Manhattan, the
City of New York, along with a duly signed and completed notice of conversion, a
form of which may be obtained from the Trustee. In the case of a global
security, DTC will effect the conversion upon notice from the holder of a
beneficial interest in the global security in accordance with DTC's rules and
procedures. The conversion date will be the date on which the New Secured Note
and the duly signed and completed notice of conversion are delivered. As
promptly as practicable on or after the conversion date, but no later than three
business days after the conversion date, we will issue and deliver to the
conversion agent certificates for the number of full shares of common stock
issuable upon conversion, together with any cash payment for fractional shares.
If you have previously elected to have us repurchase your New Secured Notes, you
will have to withdraw such election prior to conversion.
Holders will not be required to pay a service charge for the conversion,
registration, exchange or transfer of their New Secured Notes. We may, however,
require holders to pay any tax or other governmental charge in connection with
the transfer or exchange of the New Secured Notes other than stamp or other
duties imposed with respect to the issuance of the New Secured Notes. We are not
required to exchange or register the transfer of:
- any New Secured Note for a period of 15 days before selection
for redemption;
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- any New Secured Note or portion selected for redemption;
- any New Secured Note or portion surrendered for conversion; or
- any New Secured Note or portion surrendered for repurchase but
not withdrawn in connection with a change of control.
FORM, DENOMINATION AND REGISTRATION
The New Secured Notes are evidenced by a global security initially
deposited with DTC, and registered in the name of Cede & Co. as DTC's nominee.
The global security has been deposited with the Trustee as custodian for DTC, in
New York, New York, and registered in the name of DTC or its nominee, in each
case for credit to an account of a direct or indirect participant in DTC, as
described below.
Transfers of beneficial interests in the global security are subject to
the applicable rules and procedures of DTC and its direct and indirect
participants, which may change from time to time.
Except as set forth below, the global security may be transferred, in
whole and not in part, only to another nominee of DTC or to a successor of DTC
or its nominee.
THE DESCRIPTIONS OF THE OPERATIONS AND PROCEDURES OF DTC THAT FOLLOW ARE
PROVIDED SOLELY AS A MATTER OF CONVENIENCE. THESE OPERATIONS AND PROCEDURES ARE
SOLELY WITHIN THE CONTROL OF DTC AND ARE SUBJECT TO CHANGES BY THEM FROM TIME TO
TIME. WE TAKE NO RESPONSIBILITY FOR THESE OPERATIONS AND PROCEDURES AND URGES
INVESTORS TO CONTACT DTC OR ITS PARTICIPANTS DIRECTLY TO DISCUSS THESE MATTERS.
Institutions that have accounts with DTC or its nominees (called
"participants") may own a beneficial interest in a global New Secured Note.
Persons that are not participants may beneficially own interests in the global
security held by DTC only through participants or banks, brokers, dealers, trust
companies and other parties that clear through or maintain a custodial
relationship with a participant, either directly or indirectly ("indirect
participants"). So long as Cede, as the nominee of DTC, is the registered owner
of the global security, Cede will be considered the sole holder of the global
security for all purposes. Except as provided below, owners of beneficial
interests in the global security will not:
- be entitled to have certain certificates registered in their
names;
- be entitled to receive physical delivery of certificates in
definitive form; or
- be considered the registered holders thereof.
A beneficial interest in the global security may not be exchanged for a
New Secured Note in certificated form unless (i) DTC (x) notifies us that it is
unwilling or unable to continue as depositary for the global security or (y) has
ceased to be a clearing agency registered under the Exchange Act and in either
case we fail to appoint a successor depositary, (ii) we, at our option, notify
the Trustee in writing that we elect to cause the issuance of the New Secured
Notes in certificated form or (iii) an event of default or any event which after
notice or lapse of time or both would be an event of default occurs, and is
continuing, with respect to the New Secured Notes. In all cases, certificated
New Secured Notes delivered in exchange for any global security or beneficial
interest therein will be registered in the names, and issued in any approved
denominations, requested by or on behalf of the depositary (in accordance with
its customary procedures).
Transfers between participants will be affected in the ordinary way in
accordance with DTC rules and will be settled in clearinghouse funds. The laws
of some states require that some persons take physical delivery of securities in
definitive form. As a result, holders may be unable to transfer beneficial
interests in the global security to those persons.
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We will make cash payments of interest on and principal and redemption
or repurchase price of the global security to Cede, the nominee for DTC as the
registered holder of the global security. We will make these payments by wire
transfer of immediately available funds. Neither we, the Trustee nor any paying
agent will have any responsibility or liability for:
- any aspect of the records relating to, or payments made on
account of, beneficial ownership interests in the global
security; or
- maintaining, supervising or reviewing any records relating to
those beneficial ownership interests.
We have been informed that DTC's practice is to credit participants'
accounts on the payment date with payments in amounts proportionate to their
respective beneficial interests in the New Secured Notes represented by the
global security as shown on DTC's records, unless DTC has reason to believe that
it will not receive payment on the payment date. Payments by participants to
owners of beneficial interests in New Secured Notes represented by the global
security held through participants will be the responsibility of those
participants, as is now the case with securities held for the accounts of
customers registered in "street name."
We will send any redemption notices to Cede. We will understand that if
less than all of the New Secured Notes are being redeemed, DTC's practice is to
determine by lot the amount of the holdings of each participant to be redeemed.
We also understand that neither DTC nor Cede will consent or vote with
respect to the New Secured Notes. We have been advised that under its usual
procedures, DTC will mail an "omnibus proxy" to us as soon as possible after the
record date. The omnibus proxy assigns Cede's consenting or voting rights to
those participants to whose accounts the New Secured Notes are credited on the
record date identified in a listing attached to the omnibus proxy.
A person having a beneficial interest in New Secured Notes represented
by the global security may be unable to pledge that interest to persons or
entities that do not participate in the DTC system, or to take other actions in
respect of that interest, because that beneficial interest is not represented by
a physical certificate.
We and the Trustee have no responsibility for the performance by DTC,
its participants and its indirect participants of their respective obligations
under the rules and procedures governing their operations. DTC has advised us
that it will take any action permitted to be taken by a holder of New Secured
Notes, including the presentation of New Secured Notes for conversion as
described below, only at the direction of one or more participants whose DTC
accounts are credited with interests in the global security and only in respect
of the principal amount of the New Secured Notes represented by the global
security as to which those participants have given such a direction.
DTC has advised us as follows:
- DTC is a limited purpose trust company organized under the laws
of the State of New York;
- DTC is a member of the Federal Reserve System;
- DTC is a "clearing corporation" within the meaning of the
Uniform Commercial Code; and
- DTC is a "clearing agency" registered pursuant to the provisions
of Section 17A of the Exchange Act.
DTC was created to hold securities for its participants and to
facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes to accounts of its
participants. Participants include securities brokers and dealers, banks, trust
companies and clearing corporations and may include other types of
organizations. Some of the participants, together with other entities, own DTC.
Indirect access to the DTC system is available to others such as banks, brokers,
dealers and trust companies that clear through, or maintain a custodial
relationship with a participant, either directly or indirectly.
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DTC is under no obligation to perform or continue to perform the above
procedures, and these procedures may be discounted at any time. If DTC is at any
time unwilling or unable to continue as depositary and a successor depositary is
not appointed by us within 90 days, we will cause New Secured Notes to be issued
in definitive form in exchange for the global security.
The laws of some states require that certain persons take physical
delivery in definitive form of securities that they own. Consequently, the
ability to transfer beneficial interests in a global New Secured Note to such
persons may be limited to that extent. Because DTC can act only on behalf of its
participants, which in turn act on behalf of indirect participants and certain
banks, the ability of a person having beneficial interests in a global New
Secured Note to pledge such interest to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
interests, may be affected by the lack of a physical certificate evidencing such
interests.
DESCRIPTION OF EQUITY SECURITIES
THE FOLLOWING DESCRIPTION SETS FORTH THE GENERAL TERMS OF OUR COMMON
STOCK AND WARRANTS, INCLUDING THOSE ISSUED IN CONNECTION WITH OUR REFINANCING OF
THE EXISTING SENIOR NOTES. THIS DESCRIPTION DOES NOT PURPORT TO BE COMPLETE AND
IS SUBJECT TO AND QUALIFIED IN ITS ENTIRETY BY REFERENCE TO OUR CERTIFICATE OF
INCORPORATION AND BY-LAWS AND PROVISIONS OF DELAWARE LAW. WE HAVE FILED OUR
CERTIFICATE OF INCORPORATION AND BY-LAWS AS EXHIBITS TO OUR OTHER FILINGS WITH
THE SEC. SEE "WHERE YOU CAN FIND MORE INFORMATION" FOR INFORMATION ABOUT HOW YOU
CAN OBTAIN COPIES OF THESE DOCUMENTS.
CAPITAL STOCK
Our authorized capital stock consists of 170,000,000 shares of common
stock and 15,000,000 shares of undesignated preferred stock, $0.001 par value
per share. We are authorized to issue up to 170,000,000 shares of common stock.
Holders of our common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do no have cumulative voting
rights. Holders of our common stock are entitled to receive ratably such
dividends, if any, as may be declared by the board of directors out of funds
legally available therefor and subject to any preferential dividend rights of
any then outstanding preferred stock. Upon the liquidation, dissolution or
winding up of our company, the holders of common stock are entitled to receive
ratably all of our assets available for distribution and subject to any
liquidation preference of any then outstanding preferred stock. Holders of our
common stock have no preemptive, subscription, redemption or conversion rights.
As of June 30, 2004, there were 46,655,867 shares of common stock
outstanding held by 229 stockholders of record. There are currently no
designated classes of preferred stock and no outstanding shares of preferred
stock.
WARRANTS
In connection with our contemporaneous refinancing of the Existing
Senior Notes, on June 18, 2004 we issued to the holders of the Existing Senior
Notes the Warrants to purchase in the aggregate 5,176,065 shares of our common
stock, which Warrants shall have an exercise price of $1.85 per share (subject
to antidilution protection in certain circumstances) and are exercisable until
June 18, 2007. We are registering the shares of common stock underlying these
Warrants for resale by their holders pursuant to this Prospectus.
In 2003, in connection with an exchange of Existing Notes for Existing
Senior Notes, we issued to holders of Existing Notes warrants to purchase
4,915,416 shares of our common stock, which warrants have an exercise price of
$0.65 per share and are exercisable for a period of five years from the date of
issuance. In April 2004, holders of warrants to purchase 1,478,132 shares of
common stock exercised such warrants for cash.
In December 2002, in conjunction with the initiation of our bank credit
lines, we issued to Silicon Valley Bank a warrant to purchase 337,500 shares of
our common stock, which warrant had an exercise price of $0.337 per share. In
January 2004, the bank exercised its warrant in full, on a net issue basis, and
received 272,876 shares of our common stock.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
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We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. Subject to certain exceptions, Section 203 prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a certain period of time. That period is three
years from the date of the transaction in which the person became an interested
stockholder, unless the interested stockholder attained such status with the
approval of the board of directors or unless the business combination is
approved in a prescribed manner. A "business combination" includes certain
mergers, asset sales and other transactions resulting in a financial benefit to
the interested stockholder. Subject to certain exceptions, an "interested
stockholder" is a person who, together with his or her affiliates and
associates, owns, or owned within three years prior, 15% or more of the
corporation's voting stock.
Our certificate of incorporation and by-laws provide for the division of
the board of directors into three classes, as nearly equal in size as possible,
with each class beginning its three-year term in different years. A director may
be removed only for cause by the vote of a majority of the shares entitled to
vote for the election of directors.
Our by-laws provide that for nominations for the board of directors or
for other business to be properly brought by a stockholder before a meeting of
stockholders, the stockholder must first have given timely notice of the matter
in writing to our secretary. To be timely, a notice of nominations or other
business to be brought before an annual meeting must be delivered between 120
days and 150 days prior to date one year after the date of the preceding year's
proxy statement. If the date of the current year's annual meeting is more than
30 days before or 60 days after such anniversary, or if no proxy statement was
delivered to stockholders in connection with the preceding year's annual
meeting, a stockholder's notice will be timely if it is delivered not earlier
than 90 days prior to the current year's annual meeting and not later than 60
days prior to the annual meeting or 10 days following the date on which public
announcement of the date of the annual meeting is first made by us, whichever is
later. With respect to special meetings, notice must generally be delivered not
more than 90 days prior to such meeting and not later than 60 days prior to such
meeting or 10 days following the day on which public announcement of the date of
the annual meeting is first made by us, whichever is later. The notice must
contain, among other things, certain information about the stockholder
delivering the notice and, as applicable, background information about each
nominee or a description of the proposed business to be brought before the
meeting.
Our certificate of incorporation empowers the board of directors, when
considering a tender offer or merger or acquisition proposal, to take into
account factors in addition to potential economic benefits to stockholders.
These factors may include:
- comparison of the proposed consideration to be received by
stockholders in relation to the market price of our capital
stock, the estimated current value of our company in a freely
negotiated transaction and the estimated future value of our
company as an independent entity;
- the impact of such a transaction on our employees, suppliers and
customers and its effect on the communities in which we operate;
and
- the impact of such a transaction on our unique corporate culture
and atmosphere.
The provisions described above could make it more difficult for a third
party to acquire, or discourage a third party from acquiring control of our
company.
Our certificate of incorporation also provides that any action required
or permitted to be taken by our stockholders may be taken only at duly called
annual or special meetings of the stockholders, and that special meetings may be
called only by the chairman of the board of directors, a majority of the board
of directors or our president. These provisions could have the effect of
delaying until the next annual stockholders meeting stockholder actions that are
favored by the holders of a majority of the common stock. These provisions may
also discourage another person or entity from making a tender offer to our
stockholders for the common stock. This is because the person or entity making
the offer, even if it acquired a majority of our outstanding voting securities,
would be unable call a special meeting of the stockholders or to take action by
written consent. As a result, any desired actions they
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would like to take, such as electing new directors or approving a merger, would
have to wait until the next duly called stockholders meeting.
The Delaware General Corporation Law provides that the affirmative vote
of a majority of the shares entitled to vote on any matter is required to amend
a corporation's certificate of incorporation or by-laws, unless the
corporation's certificate of incorporation or by-laws, as the case may be,
requires a greater percentage. Our certificate of incorporation requires the
affirmative vote of the holders of at least 67% of our outstanding voting stock
to amend or repeal any of the provisions our certificate of incorporation
described above, or to reduce the number of authorized shares of common stock
and preferred stock. The 67% vote is also required to amend or repeal any of the
provisions of our by-laws that are described above. Our by-laws may also be
amended or repealed by a majority vote of the board of directors. The 67%
stockholder vote would be in addition to any separate class vote that might in
the future be required pursuant to the terms of any preferred stock that might
be outstanding at the time any amendments are submitted to stockholders.
COMMON STOCK LISTING
The common stock is listed on the Over-the-Counter Bulletin Board and
trades on such market under the symbol "IBAS."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our common stock is EquiServe Trust
Company, N.A.
PLAN OF DISTRIBUTION
We are registering the New Secured Notes, the shares of common stock
underlying the New Secured Notes and the Warrants, and the shares held by our
investment banker, Imperial Capital, LLC, on behalf of the selling
securityholders. Sales of securities may be made by "selling securityholders,"
which such term includes their respective donees, transferees, pledgees or other
successors-in-interest, from time to time in the over-the-counter market, any
other exchange upon which our shares may trade in the future, or otherwise, at
market prices prevailing at the time of sale, at prices related to market
prices, or at negotiated or fixed prices. The securities may be sold at
market prices prevailing at the time of sale, or at negotiated prices by one or
more of, or a combination of, the following:
- a block trade in which the broker-dealer so engaged will attempt
to sell the securities as agent but may position and resell a
portion of the block as principal to facilitate the transaction;
- purchases by a broker-dealer as principal and resale by such
broker-dealer for its account pursuant to this prospectus;
- ordinary brokerage transactions and transactions in which the
broker solicits purchases;
- through options, swaps or derivatives;
- in privately negotiated transactions;
- through the settlement of short sales entered into after the
date of this prospectus;
- put or call option transactions relating to the securities; or
- any other method permitted by applicable law.
The offering of the common stock and the New Secured Notes offered by
the selling securityholders pursuant to this prospectus is limited to, and
such securities may be sold in California only to, suitable investors who
have (A) a minimum net worth of at least $75,000 and a minimum gross income
of $50,000, or (B) in the alternative, a minimum net worth of $150,000,
PROVIDED, that in either case, the investment may not exceed 10% of the
investor's total net worth. Also, a "small investor" who, including the
offering pursuant to this prospectus, has not purchased more than $2,500
worth of our securities in the past twelve months, may also purchase common
stock or New Secured Notes offered pursuant to this prospectus in an amount
not to exceed $2,500 in the aggregate. Each California investor will be
required to confirm in writing to the applicable selling securityholder its
compliance with the foregoing suitability standards.
The selling securityholders may effect these transactions by selling
securities directly to purchasers or to or through broker-dealers, which may act
as agents or principals. These broker-dealers may receive compensation in the
form of discounts, concessions or commissions from the selling securityholders
and/or the purchasers of securities for whom such broker-dealers may act as
agents or to whom they sell as principals, or both (which compensation as to a
particular broker-dealer might be in excess of customary commissions). To the
extent
96
<Page>
permitted by applicable law, the selling securityholders may also sell
securities short and deliver securities covered by this prospectus to close out
short positions, provided that the short sale is made after the registration
statement is declared effective and a copy of this prospectus is delivered in
connection with the short sale. The selling securityholders have not advised us
that they have entered into any agreements, understandings or arrangements with
any underwriters or broker-dealers regarding the sale of their securities.
To the extent permitted by applicable law, the selling securityholders
may enter into hedging transactions with broker-dealers or other financial
institutions. In connection with those transactions, the broker-dealers or other
financial institutions may, to the extent permitted by applicable law, engage in
short sales of the securities in the course of hedging positions they assume
with the selling securityholders. To the extent permitted by applicable law, the
selling securityholders may also enter into options or other transactions with
broker-dealers or other financial institutions which require the delivery of
securities offered by this prospectus to those broker-dealers or other financial
institutions. The broker-dealer or other financial institution may then resell
the securities pursuant to this prospectus (as amended or supplemented, if
required by applicable law, to reflect those transactions).
The selling securityholders and any broker-dealers that act in
connection with the sale of securities may be deemed to be "underwriters" within
the meaning of Section 2(11) of the Securities Act and any commissions received
by broker-dealers or any profit on the resale of the securities sold by them
while acting as principals may be deemed to be underwriting discounts or
commissions under the Securities Act. The selling securityholders may agree to
indemnify any agent, dealer or broker-dealer that participates in transactions
involving sales of the securities against liabilities, including liabilities
arising under the Securities Act.
Because selling securityholders may be "underwriters" within the
meaning of Section 2(11) of the Securities Act, the selling securityholders
may be subject to the prospectus delivery requirements of the Securities Act.
The selling securityholders and any other person participating in the
distribution of the securities will be subject to the applicable provisions
of the Exchange Act and the rules and regulations thereunder, including,
without limitation, Regulation M of the Exchange Act, which may limit the
timing of purchases and sales of any of the securities by the selling
securityholders and any other participating person. Regulation M may also
restrict the ability of any person engaged in the distribution of the
securities to engage in market-making activities with respect to the
securities.
The selling securityholders also may resell all or a portion of the
securities in open market transactions in reliance upon Rules 144 and, in some
circumstances, Rule 144A under the Securities Act, provided they meet the
criteria and conform to the requirements of such Rules 144 and 144A, rather than
under this prospectus.
Upon being notified by a selling securityholder that a material
arrangement has been entered into with a broker-dealer for the sale of
securities through a block trade, special offering, exchange distribution or
secondary distribution or a purchase by a broker or dealer, we will file a
supplement to this prospectus, if required pursuant to Rule 424(b) under the
Securities Act, or a post-effective amendment to the registration statement, of
which this prospectus is a part, if required under the Securities Act,
disclosing:
- the name of the selling securityholder and of the participating
broker-dealer(s);
- the number of securities involved;
- the initial price at which the securities were sold;
- the commissions paid or discounts or concessions allowed to the
broker-dealer(s), where applicable;
- that such broker-dealer(s) did not conduct any investigation to
verify the information set out or incorporated by reference in
this prospectus; and
- other facts material to the transactions.
This prospectus may also be may be amended or supplemented from time to
time, if required, to describe a specific plan of distribution.
97
<Page>
We are paying all expenses and fees in connection with the registration
of the securities. The selling security-holders will bear all brokerage
discounts or commissions paid to broker-dealers in connection with the sale of
the securities. We have agreed to indemnify the selling securityholders against
certain losses, claims, damages and liabilities in connection with the sale of
securities under this prospectus, including liabilities under the Securities
Act.
In addition, upon our company being notified by a selling
securityholder that a donee, pledgee, transferee or other successor in
interest intends to sell more than 500 shares, a supplement to this
prospectus will be filed.
LEGAL MATTERS
The validity of the securities has been passed upon for us by Bingham
McCutchen LLP, Boston, Massachusetts.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, Washington,
D.C. 20549, under the Securities Act of 1933, a registration statement on Form
S-1 relating to the New Secured Notes and shares of common stock offered hereby.
This prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedules thereto. For further
information with respect to our company and the shares we are offering by this
prospectus you should refer to the registration statement, including the
exhibits and schedules thereto. You may inspect a copy of the registration
statement without charge at the Public Reference Section of the Securities and
Exchange Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549. The public may obtain information on the operation of the Public
Reference Room by calling the Securities and Exchange Commission. The Securities
and Exchange Commission also maintains an Internet site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Securities and Exchange Commission. The
Securities and Exchange Commission's World Wide Web address is
http://www.sec.gov.
We file periodic reports, proxy statements and other information with
the Securities and Exchange Commission in accordance with requirements of the
Exchange Act. These periodic reports, proxy statements and other information are
available for inspection and copying at the regional offices, public reference
facilities and Internet site of the Securities and Exchange Commission referred
to above. In addition, you may request a copy of any of our periodic reports
filed with the Securities and Exchange Commission at no cost, by writing or
telephoning us at the following address:
Investor Relations
iBasis, Inc.
20 Second Avenue
Burlington, MA 01803
(781) 505-7500
Information contained on our website is not a prospectus and does not
constitute a part of this prospectus.
You should rely only on the information contained in or incorporated by
reference or provided in this prospectus. We have not authorized anyone else to
provide you with different information. We are not making an offer of these
securities in any state where the offer is not permitted. You should not assume
the information in this prospectus is accurate as of any date other than the
date on the front of this prospectus.
98
<Page>
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
----
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets at June 30, 2004 and December 31, 2003 (unaudited)................ F-2
Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2004 and 2003
(unaudited)............................................................................................ F-3
Condensed Consolidated Statements of Operations for the Six Months Ended June 30, 2004 and 2003
(unaudited).................................................................... ....................... F-4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003
(unaudited)............................................................................................ F-5
Condensed Notes to Consolidated Financial Statements (unaudited)......................................... F-6
</Table>
F-1
<Page>
IBASIS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2004 2003
----------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
Cash and cash equivalents ........................................................... $ 18,217 $ 17,270
Accounts receivable, net of allowance for doubtful accounts of $3,132 and
$3,128, respectively ............................................................. 25,692 21,767
Prepaid expenses and other current assets ........................................... 2,875 5,295
----------------- -----------------
Total current assets ............................................................. 46,784 44,332
Property and equipment, at cost:
Network equipment ................................................................ 67,990 67,441
Equipment under capital lease .................................................... 9,558 9,558
Computer software ................................................................ 8,763 8,387
Leasehold improvements ........................................................... 6,437 6,414
Furniture and fixtures ........................................................... 1,065 1,062
----------------- -----------------
93,813 92,862
Less: Accumulated depreciation and amortization .................................. (81,996) (75,687)
----------------- -----------------
Property and equipment, net ......................................................... 11,817 17,175
Deferred debt financing costs, net .................................................. 191 326
Long term investment in non-marketable security ..................................... -- 5,000
Other assets ........................................................................ 358 705
----------------- -----------------
Total assets ................................................................... $ 59,150 $ 67,538
================= =================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable .................................................................... $ 24,510 $ 19,902
Accrued expenses .................................................................... 13,875 18,652
Deferred revenue .................................................................... 3,421 417
Current portion of long-term debt ................................................... 4,023 2,097
----------------- -----------------
Total current liabilities ........................................................ 45,829 41,068
Long term debt, net of current portion .............................................. 66,285 65,829
Other long term liabilities ......................................................... 1,200 2,749
Stockholders' deficit:
Common stock, $0.001 par value, authorized - 170,000 and 85,000 shares,
respectively; issued - 46,656 and 45,913 shares, respectively; ................. 48 46
Treasury stock; 1,135 shares at cost ............................................. (341) (341)
Additional paid-in capital ....................................................... 373,590 370,393
Accumulated deficit .............................................................. (427,461) (412,206)
----------------- -----------------
Total stockholders' deficit .................................................... (54,164) (42,108)
================= =================
Total liabilities and stockholders' deficit .................................... $ 59,150 $ 67,538
================= =================
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-2
<Page>
IBASIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30,
-----------------------------------
2004 2003
---------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenue ............................................................... $ 61,175 $ 39,119
Costs and operating expenses:
Data communications and telecommunications (excluding
depreciation and amortization) ........................................... 52,066 33,370
Research and development .................................................. 3,542 3,442
Selling and marketing ..................................................... 2,131 1,903
General and administrative ................................................ 3,266 2,820
Depreciation and amortization ............................................. 2,787 5,749
Non-cash stock-based compensation ......................................... -- 28
----------------- -----------------
Total cost and operating expenses ...................................... 63,792 47,312
================= =================
Loss from operations ...................................................... (2,617) (8,193)
Interest income ........................................................... 14 41
Interest expense .......................................................... (809) (971)
Gain on bond exchanges .................................................... -- 3,716
Other expenses, net ....................................................... (66) (98)
Refinancing transaction costs ............................................. (1,954) --
Refinancing related interest expense ...................................... (481) --
----------------- -----------------
Net loss .................................................................. $ (5,913) $ (5,505)
================= =================
Basic and diluted net loss per share:
Basic .................................................................. $ (0.13) $ (0.12)
Diluted ................................................................ $ (0.13) $ (0.12)
Weighted average common shares outstanding:
Basic .................................................................. 46,287 44,652
Diluted ................................................................ 46,287 44,652
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<Page>
IBASIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30,
-----------------------------------
2004 2003
----------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenue ............................................................ $ 118,183 $ 80,960
Costs and operating expenses:
Data communications and telecommunications (excluding
depreciation and amortization) ........................................ 100,656 68,297
Research and development ............................................... 7,080 7,125
Selling and marketing .................................................. 4,132 3,896
General and administrative ............................................. 6,219 5,329
Depreciation and amortization .......................................... 6,311 11,862
Non-cash stock-based compensation ...................................... -- 57
----------------- -----------------
Total cost and operating expenses ................................... 124,398 96,566
================= =================
Loss from operations ................................................... (6,215) (15,606)
Interest income ........................................................ 28 111
Interest expense ....................................................... (1,548) (2,398)
Gain on bond exchanges ................................................. -- 16,615
Other expenses, net .................................................... (85) (195)
Loss on long-term non-marketable security .............................. (5,000) --
Refinancing transaction costs .......................................... (1,954) --
Refinancing related interest expense ................................... (481) --
----------------- -----------------
Net loss ............................................................... $ (15,255) $ (1,473)
================= =================
Basic and diluted net loss per share:
Basic ............................................................... $ (0.33) $ (0.03)
Diluted ............................................................. $ (0.33) $ (0.03)
Weighted average common shares outstanding:
Basic ............................................................... 45,674 44,651
Diluted ............................................................. 45,674 44,651
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<Page>
IBASIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30,
-----------------------------------
2004 2003
----------------- -----------------
(IN THOUSANDS)
Cash flows from operating activities:
Loss from continuing operations .................................................. $ (15,255) $ (1,473)
Adjustments to reconcile net loss to net cash used in operating activities:
Gain on bond exchanges ......................................................... -- (16,615)
Depreciation and amortization .................................................. 6,311 11,862
Amortization of deferred debt financing costs .................................. 135 198
Amortization of deferred compensation .......................................... -- 57
Bad debt expense ............................................................... -- 300
Impairment of investment in long-term non-marketable security .................. 5,000 --
Fair value of warrant issued ................................................... 2,140
Changes in assets and liabilities
Accounts receivable ......................................................... (3,925) 4,075
Prepaid expenses and other current assets ................................... (188) 661
Other assets ................................................................ 347 53
Accounts payable ............................................................ 4,608 (309)
Accrued expenses ............................................................ (2,998) (2,183)
Deferred revenue ............................................................ 3,004 --
Other long term liabilities ................................................. (1,549) (391)
----------------- -----------------
Net cash used in continuing operating activities .......................... (2,370) (3,765)
----------------- -----------------
Cash flows from investing activities:
Purchases of property and equipment .............................................. (953) (2,146)
Adjustments to proceeds from sale of Speech Solutions Business ................... -- (736)
Proceeds from earn-out receivable related to sale of Speech Solutions Business ... 1,108 --
Proceeds from receipt of escrow receivable related to sale of Speech Solutions
Business ....................................................................... 1,500 --
----------------- -----------------
Net cash provided by (used in) investing activities ....................... 1,655 (2,882)
================= =================
Cash flows from financing activities:
Bank borrowings .................................................................. 4,600 4,600
Payments of bank borrowings ...................................................... (4,600) (4,600)
Proceeds from issuance of 8% Secured Convertible Notes ........................... 29,000 --
Prepayment of 11 1/2% Senior Secured Notes ....................................... (25,175) --
Payments of principal on capital lease obligations ............................... (1,443) (3,599)
Refinancing transaction costs .................................................... (1,779) (861)
Proceeds from exercise of warrants ............................................... 961 --
Proceeds from exercises of common stock options .................................. 98 5
----------------- -----------------
Net cash provided by (used in) financing activities ....................... 1,662 (4,455)
================= =================
Net increase (decrease) in cash and cash equivalents ................................ 947 (11,102)
Cash and cash equivalents, beginning of period ...................................... 17,270 32,316
----------------- -----------------
Cash and cash equivalents, end of period ............................................ $ 18,217 $ 21,214
================= =================
Supplemental disclosure of cash flow information:
Cash paid during the year for interest .............................................. $ 6,341 $ 3,098
Supplemental disclosure of non-cash investing and financing activities:
Refinancing of 5 3/4% Convertible Subordinated Notes and
11 1/2% Senior Secured Notes:
Fair value of warrant issued ................................................... $ 2,140 $ --
Reduction of accrued interest on 11 1/2% Senior Secured Notes .................. $ (1,659) $ --
Investment banking services paid in shares of common stock ..................... $ 175 $ --
Exchange of 5 3/4% Convertible Subordinated Notes for
11 1/2% Senior Secured Notes:
Face value of 5 3/4% Convertible Subordinated Notes surrendered ................ $ -- $ 50,350
Face value of 11 1/2% Senior Secured Notes issued .............................. $ -- $ 25,175
Future interest payments on 11 1/2% Senior Secured Notes ....................... $ -- $ 5,527
Fair value of warrants issued .................................................. $ -- $ 1,375
Reduction in deferred financing costs .......................................... $ -- $ 723
</Table>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<Page>
IBASIS, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BUSINESS, MANAGEMENT PLANS AND PRESENTATION
BUSINESS
We are an international telecommunications carrier that utilizes the Internet to
provide economical international telecommunications services. Our continuing
operations consist primarily of our Voice-Over-Internet-Protocol, or ("VoIP"),
business. We offer wholesale services through our worldwide network to carriers,
telephony resellers and others around the world by operating through various
service agreements with local service providers in the United States, Europe,
Asia, the Middle East, Latin America, Africa and Australia. During the third
quarter of 2003, we introduced our retail prepaid calling card services and have
marketed such services primarily to ethnic communities within major domestic
markets through distributors.
Beginning in the second quarter of 2004, our recently created operating segment,
retail prepaid calling card services and other enhanced services ("Retail")
became a reportable business segment, in addition to our international wholesale
VoIP telecommunications services. Since we introduced our retail prepaid calling
card services, revenue from our Retail business had been less than 10% of total
revenue. In the second quarter of 2004, revenue from our Retail business
exceeded 10% of total net revenue.
We have a history of operating losses and, as of June 30, 2004, our accumulated
deficit was $427.5 million and our stockholders' deficit was $54.2 million. We
used $2.4 million and $3.2 million in cash from operations in the six months
ended June 30, 2004 and the year ended December 31, 2003, respectively. These
results are primarily attributable to the expenditures necessary to build our
network and develop and expand our market.
In June 2004, we completed a refinancing of our outstanding debt obligations. As
part of the refinancing, we completed an exchange offer (the "Exchange Offer"),
pursuant to which $37.3 million of our outstanding 5 3/4% Convertible
Subordinated Notes due in March 2005 ("Existing Notes"), representing
approximately 98% of the total amount of Existing Notes outstanding, were
tendered for the same principal amount of new 6 3/4% Convertible Subordinated
Notes due in June 2009 ("New Subordinated Notes"). Approximately $0.9 million of
the Existing Notes remain outstanding after the Exchange Offer. Simultaneously
with the Exchange Offer, we prepaid all $25.2 million of our 11 1/2% Senior
Secured Notes due in January 2005 ("Existing Senior Notes") for cash equal to
the principal amount plus accrued but unpaid interest and the issuance of
warrants exercisable for an aggregate of 5,176,065 shares of our common stock,
at $1.85 per share (the "Warrants"). We issued $29.0 million of new 8% Secured
Convertible Notes due in June 2007 of which $25.2 million was used to prepay the
Existing Senior Notes. The new Secured Notes are convertible into shares of
common stock at $1.85 per share.
MANAGEMENT PLANS
We continue to expand our market share in VoIP telecommunications services by
expanding our customer base and by introducing cost-effective solutions for our
customers to interconnect with our network. During the first quarter of 2004, we
introduced our DirectVoIP service which eliminates the need for certain switches
for our customers to interconnect to our network, thus reducing capital
equipment costs for both us and our customers. Our strategy is to continue the
deployment of our retail prepaid calling card services which leverage our
international VoIP network with our real time back office systems, and have the
potential to deliver higher margins and improve cash flow. In addition, we
continue to increase the traffic we terminate to mobile phones, which generally
delivers higher average revenue per minute and margins than typical fixed-line
traffic. We also continue to control operating expenses and capital
expenditures, as well as to monitor and manage accounts payable and accounts
receivable, and restructure existing debt to enhance cash flow.
Our plans include:
o expanding our market share for our retail prepaid calling card
services;
o increasing revenues generated through mobile phone terminations;
o increasing our customer base by introducing cost-effective solutions
to interconnect with our network;
o use of our switchless architecture, which eliminates the need for
costly telecommunication switches and other equipment; and
o aggressive management of credit risk.
From 2001 to date, we took a series of actions to reduce operating expenses,
restructure operations, reduce outstanding debt
F-6
<Page>
and provide additional liquidity. Such actions primarily included:
o reductions in workforce and consolidation of Internet Central Offices.
As a result of our restructuring programs and our continued focus on
controlling expenses, our research and development, selling and
marketing and general and administrative expenses, in total, declined
to $28.6 million in 2003 from $53.2 million in 2002;
o sale of our previous messaging business and the assets associated with
our previous Speech Solutions Business;
o settlement of certain capital lease obligations;
o repurchase of a portion of our 5 3/4% Convertible Subordinated Notes
for cash;
o exhange of a portion of our 5 3/4% Convertible Subordinated Notes for
11 1/2% Senior Secured Notes and warrants to purchase common stock;
o establishment of a new credit facility with a bank; and
o completing our refinancing plan, pursuant to which $37.3 million (98%
of the total outstanding) of our 5 3/4% Convertible Subordinated Notes
due in March 2005 were tendered for the same principal amount of our
new 6 3/4% Convertible Subordinated Notes due in June 2009 and we
issued $29.0 million of 8% Secured Convertible Notes due in June 2007
to finance the prepayment of all $25.2 million of our 11 1/2% Senior
Secured Notes due in January 2005.
We anticipate that the June 30, 2004 balance of $18.2 million in cash and cash
equivalents, together with cash flow from operations, will be sufficient to fund
our operations and debt service requirements for the next twelve months.
F-7
<Page>
PRESENTATION
The unaudited condensed consolidated financial statements presented herein have
been prepared by us 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 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 we
believe 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 in our Annual Report on Form 10-K for the year ended December 31,
2003.
(2) STOCK BASED COMPENSATION
We account for stock-based compensation in accordance with Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," using
the intrinsic-value method as permitted by Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." SFAS No.
123 encourages, but does not require, the recognition of compensation expense
for the fair value of stock options and other equity instruments issued to
employees and non-employee directors.
At June 30, 2004, we had one stock-based employee compensation plan. The
following table illustrates the effect on net income or net loss, and net income
or net loss per share, if we had applied the fair value recognition provisions
of SFAS No. 123.
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- ---------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2004 2003 2004 2003
- ------------------------------------------------------ ---------------- ---------------- ---------------- ---------------
Net loss:
As reported ....................................... $ (5,913) $ (5,505) $ (15,255) $ (1,473)
Deduct: Stock-based employee compensation expense
included in reported net loss ..................... -- 28 -- 57
Add: Total stock-based employee expense included in
reported net under fair value based method for
all awards ........................................ (852) (139) (1,640) (282)
---------------- ---------------- ---------------- ---------------
Pro forma ............................................ $ (6,765) $ (5,616) $ (16,895) $ (1,698)
================ ================ ================ ===============
Basic and diluted net loss per share:
As reported ....................................... $ (0.13) $ (0.12) $ (0.33) $ (0.03)
================ ================ ================ ===============
Pro forma ......................................... $ (0.15) $ (0.13) $ (0.37) $ (0.04)
================ ================ ================ ===============
</Table>
F-8
<Page>
We estimate the fair value of our stock-based awards to employees using the
Black-Scholes option pricing model. The Black-Scholes model was developed for
use in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, the Black-Scholes model
required the input of highly subjective assumptions including the expected stock
price volatility. Because stock-based awards to employees have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
our opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of stock-based awards to employees. The fair value of
stock-based awards to employees was estimated assuming no expected dividends and
the following weighted average assumptions.
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- ---------------------------------
2004 2003 2004 2003
--------------- ---------------- ---------------- ---------------
Risk free interest rate ................. 3.50% 3.00% 3.25% 3.00%
Dividend yield .......................... 0.00% 0.00% 0.00% 0.00%
Expected life ........................... 5 years 5 years 5 years 5 years
Volatility .............................. 137% 128% 138% 128%
Fair value of options granted ........... $ 1.14 $ 1.21 $ 1.32 $ 1.19
</Table>
(3) BUSINESS SEGMENT INFORMATION
Beginning in the second quarter of 2004, our recently created operating segment,
retail prepaid calling card services and other enhanced services ("Retail")
became a reportable business segment, in addition to our international wholesale
VoIP telecommunications services ("Wholesale"). Since we introduced our retail
prepaid calling card services, revenue from our Retail business had been less
than 10% of total revenue. In the second quarter of 2004, revenue from our
Retail business exceeded 10% of total net revenue.
Our Wholesale business consists of international telecommunications services we
provide using VoIP. We offer wholesale services through our worldwide network to
carriers, telephony resellers and others around the world by operating through
various service agreements with local service providers in United States,
Europe, Asia, the Middle East, Latin America, Africa and Australia.
Our Retail business consists of our retail prepaid calling card services and
other enhanced services. To date, we have marketed our retail prepaid calling
card services primarily to ethnic communities within major domestic markets
through distributors. Revenue from our retail prepaid calling card services were
83% and 74% of our total Retail revenue in the three and six months ended June
30, 2004, respectively. We expect that revenue from our retail prepaid calling
card services will continue to be an increasingly large percentage of our total
Retail revenue in the future. Our other enhanced services primarily consist of
revenue derived from the outsourcing of our retail prepaid calling card
platform.
Our executive management team uses net revenue and gross margin, which is net
revenue less data communications and telecommunications costs, as the basis for
measuring profit or loss and making decisions on our Wholesale and Retail
businesses. We do not allocate our research and development expenses, selling
and marketing expenses, general and administrative expenses and depreciation and
amortization between Wholesale and Retail.
Operating results, excluding interest income and expense, other income and
expense, and refinancing related charges, for our two business segments are as
follows:
<Table>
<Caption>
Three Months Ended June 30, 2004
---------------------------------------------------
(In thousands)
Wholesale Retail Total
---------------- ---------------- ----------------
Net revenue ........................................................... $ 53,522 $ 7,653 $ 61,175
Data communications and telecommunication (excluding
depreciation and amortization) ..................................... 45,771 6,295 52,066
---------------- ---------------- ----------------
Gross margin .......................................................... $ 7,751 $ 1,358 9,109
================ ================
Research and development expenses ........................................................................ 3,542
Selling and marketing expenses ........................................................................... 2,131
General and administrative expenses ...................................................................... 3,266
Depreciation and amortization ............................................................................ 2,787
----------------
Loss from operations ..................................................................................... $ (2,617)
================
</Table>
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30, 2004
---------------------------------------------------
(IN THOUSANDS)
WHOLESALE RETAIL TOTAL
---------------- ---------------- ----------------
Net revenue ........................................................... $ 106,694 $ 11,489 $ 118,183
Data communications and telecommunication (excluding depreciation and
amortization) ...................................................... 91,450 9,206 100,656
---------------- ---------------- ----------------
Gross margin .......................................................... $ 15,244 $ 2,283 17,527
================ ================
Research and development expenses ........................................................................ 7,080
Selling and marketing expenses ........................................................................... 4,132
General and administrative expenses ...................................................................... 6,219
Depreciation and amortization ............................................................................ 6,311
----------------
Loss from operations ..................................................................................... $ (6,215)
----------------
</Table>
<Table>
<Caption>
AS OF JUNE 30, 2004
---------------------------------------------------
(IN THOUSANDS)
WHOLESALE RETAIL TOTAL
---------------- ---------------- ----------------
Segment assets ........................................................ $ 22,514 $ 3,178 $ 25,692
---------------- ----------------
Non-segment assets ....................................................................................... 33,188
Total assets ............................................................................................. 59,150
================
</Table>
(4) DISCONTINUED OPERATIONS
Loss from discontinued operations. On July 15, 2002 we completed the sale of
substantially all the assets of our Speech Solutions Business for $18.5 million
in cash ($1.5 million of this amount was held in escrow until March 2004). The
loss from discontinued operations has been recorded under the provisions of SFAS
No. 144, "Accounting for the Impairment or Disposal of Long Lived Assets." In
the fourth quarter of 2003, we recognized additional consideration of $1.3
million for an earn-out payment based on the achievement of certain 2003
revenue-based milestones associated with this business. The cash payment
associated with the earn-out was $1.1 million and was received in February 2004.
In addition, in March 2004, we received the balance that had been held in escrow
from the sale of this business since July 2002. We received $1.5 million in cash
associated with this escrow balance. There are no further payments to be made to
us relating to the sale of our former Speech Solutions Business.
(5) LONG-TERM INVESTMENT IN NON-MARKETABLE SECURITY
Our long-term investment in a non-marketable security represents an equity
investment in a privately-held company that was made in 2000 in connection with
a round of financing with other third-party investors. As our investment does
not permit us to exert significant influence or control over the entity in which
we have invested, the recorded amount represents our cost of the investment less
any adjustments we make when we determine that an investment's carrying value is
other than temporarily impaired.
The process of assessing whether the equity investment's net realizable value is
less than its carrying cost requires a significant amount of judgment due to the
lack of a mature and stable public market for investments of this type. In
making this judgment, we carefully considered the investee's most recent
financial results, cash position, recent cash flow data, projected cash flows
(both short and long-term), financing needs, recent financing rounds, most
recent valuation data, the current investing
F-9
<Page>
environment, management or ownership changes, and competition. This valuation
process is based primarily on information that we request, receive and discuss
with the investees' management on a quarterly basis. Such evaluation is
performed on a quarterly basis.
Based on our evaluation for the quarter ended March 31, 2004, we determined that
our investment in this privately-held company has been other than temporarily
impaired and, as a result, we recorded a $5.0 million non-cash charge to
continuing operations for the first quarter of 2004. Our decision was based on
our evaluation of the company's current cash position and recent operating
results, as well as the perceived inability of the company to obtain additional
financing at a level, and in a timely manner, to support its continued
operations.
(6) ACCRUED RESTRUCTURING COSTS
During 2001 and 2002, the Company announced a restructuring plan to better align
the organization with its corporate strategy and recorded a charge to its
Statements of Operations in those periods in accordance with the criteria set
forth in EITF 94-3 and SEC Staff Accounting Bulletin 100. The restructuring
included the write-off of property and equipment, the termination of certain
contractual obligations, exiting certain leased facilities and the reduction in
the Company's workforce resulting in employee benefit costs.
As of June 30, 2004, the accrued restructuring costs consisted of costs accrued
for certain leased facilities obligations. A summary of the accrued
restructuring costs for the three months ended June 30, 2004 is as follows:
<Table>
<Caption>
(IN THOUSANDS)
LEASED FACILITY
2001 RESTRUCTURING CHARGE: OBLIGATIONS
- ------------------------------------------------------------- --------------------
(In thousands)
Accrual as of December 31, 2003 ............................. $ 181
Payment of termination of contractual obligations ........... 113
---------------
Accrual as of June 30, 2004 ................................. $ 68
===============
</Table>
<Table>
<Caption>
2002 RESTRUCTURING CHARGE:
EMPLOYEE
LEASED FACILITY SEVERANCE
OBLIGATIONS COSTS TOTAL
- ------------------------------------------------------------- -------------------- -------------------- -------------------
(IN THOUSANDS)
Accrual as of December 31, 2003 ............................. $ 2,051 $ 25 $ 2,076
Payment of termination of contractual obligations ........... 294 25 319
Accrual as of June 30, 2004 ................................. $ 1,757 $ -- $ 1,757
</Table>
F-10
<Page>
(7) LONG-TERM DEBT
Long-term debt consists of the following:
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2004 2003
--------------- ---------------
(IN THOUSANDS)
5 3/4% Convertible Subordinated Notes, due in March, 2005 ............... $ 895 $ 38,180
6 3/4% Convertible Subordinated Notes, due in June, 2009 ................ 37,285 --
11 1/2% Senior Secured Notes, due in January, 2005 ...................... -- 25,175
8% Secured Convertible Notes due in June, 2007 .......................... 29,000 --
Capital lease obligations ............................................... 828 2,271
Revolving line of credit ................................................ 2,300 2,300
--------------- --------------
Total long term debt .................................................... 70,308 67,926
Less-current portion .................................................... 4,023 2,097
=============== ==============
Long term debt, net of current portion .................................. $ 66,285 $ 65,829
=============== ==============
</Table>
In June 2004, we completed a refinancing of our outstanding debt obligations. As
part of the refinancing, we completed an exchange offer, pursuant to which $37.3
million of our 5 3/4% Convertible Subordinated Notes due in March 2005,
representing approximately 98% of the total amount outstanding, were tendered
for the same principal amount of new 6 3/4% Convertible Subordinated Notes due
in June 2009. Approximately $0.9 million of the 5 3/4% Convertible Subordinated
Notes due in March 2005 remain outstanding after the exchange offer.
Simultaneously with the exchange offer, we prepaid all $25.2 million of our 11
1/2% Senior Secured Notes due in January 2005 for cash equal to the principal
amount plus accrued but unpaid interest and the issuance of warrants exercisable
for an aggregate of 5,176,065 shares of our common stock at $1.85 per share. We
issued $29.0 million of new 8% Secured Convertible Notes due in June 2007, of
which $25.2 million was used to prepay the 11 1/2% Senior Secured Notes due in
January 2005. The 8% Secured Convertible Notes due in June 2007 are convertible
into shares of common stock at $1.85 per share. The 8% Secured Convertible
Notes due in June 2007 are guaranteed by iBasis Global, Inc. iBasis
Holdings, Inc., and iBasis Securities Corporation, each of which is a
wholly-owned subsidiary of ours.
In December 2003, we amended and extended our revolving line of credit with our
bank. The new $15.0 million revolving line of credit replaced two secured lines
of credit that totaled $15.0 million. The revolving line of credit bears
interest at the bank's prime rate plus 1%, matures on January 5, 2005 and is
collateralized by substantially all of our assets. Borrowings under the
revolving line of credit are on a formula basis and are limited to eligible
accounts receivable. The revolving line of credit requires us to comply with
various non-financial covenants and financial covenants, including minimum
profitability. As of June 30, 2004, we had $2.3 million in borrowings and unused
borrowing capacity of $3.0 million, based on our borrowing formula, under the
revolving line of credit.
At June 30, 2004, we had outstanding letters of credit totaling $1.6 million.
(8) GAIN ON EXCHANGES OF 5 3/4% CONVERTIBLE SUBORDINATED NOTES
During the year ended December 31, 2003, we entered into agreements with
principal holders of our 5 3/4% Convertible Subordinated Notes which resulted in
the retirement of $50.4 million of such notes in exchange for new debt
instruments at 50% of the face value of the retired notes. Under the terms of
the agreement, the holders of the retired notes received $25.2 million of 11
1/2% Senior Secured Notes and warrants to purchase 4,915,416 shares of our
common stock. Each warrant has an initial exercise price of $0.65 per share and
is exercisable over a five-year term. The 11 1/2% Senior Secured Notes mature on
January 15, 2005 and share in a
F-11
<Page>
second priority lien on our assets and are subordinated to our revolving line of
credit with our bank.
In accordance with SFAS No. 15, "Accounting by Debtors and Creditors Regarding
Troubled Debt Restructuring," we recorded a gain on the exchange of
approximately $3.7 million and $16.6 million during the three months and six
months ended June 30, 2003, respectively. SFAS No. 15 requires that the gain on
the exchange be recorded net of the accrual for future interest payments on the
11 1/2% Senior Secured Notes, the fair value of the warrants issued, the
reduction of the net book value of the deferred financing costs originally
capitalized with the issuance of our 5 3/4% Convertible Subordinated Notes and
any other fees or costs.
The gain recognized for the debt exchanges that occurred in the three and six
months ended June 30, 2003 was calculated as follows:
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS
JUNE 30, ENDED JUNE 30,
2003 2003
------------------ --------------
(IN THOUSANDS)
Face value of surrendered 5 3/4% Convertible Subordinated Notes ..... $ 12,200 $ 50,350
Less: Face value of issued 11 1/2% Senior Secured Notes ............. (6,100) (25,175)
Future interest payments on 11 1/2% Senior Secured Notes ...... (1,140) (5,527)
Fair value of warrants issued ................................. (833) (1,375)
Reduction of deferred debt financing costs .................... (154) (723)
Professional fees ............................................. (257) (935)
----------- ----------
Gain .......................................................... $ 3,716 $ 16,615
=========== ==========
</Table>
(9) NET (LOSS) INCOME PER SHARE
Basic and diluted net loss per common share is determined by dividing net loss
by the weighted average common shares outstanding during the period. Basic net
loss per share and diluted net loss per share are the same, as outstanding stock
options, shares issuable upon conversion of the 6 3/4% Convertible Subordinated
Notes, shares issuable upon conversion of the remaining 5 3/4% Convertible
Subordinated Notes, shares issuable upon conversion of the 8% Secured
Convertible Notes, and warrants to purchase common shares are anti-dilutive.
Basic net income per common share is determined by dividing net income by the
weighted average common shares outstanding during the period. Diluted net income
per common share is determined by dividing the net income by the weighted
average common shares, which includes weighted average common shares outstanding
and weighted average outstanding stock options, shares issuable upon conversion
of the 6 3/4% Convertible Subordinated Notes, shares issuable upon conversion of
the remaining 5 3/4% Convertible Subordinated Notes, shares issuable upon
conversion of the 8% Secured Convertible Notes and warrants to purchase common
shares.
The following common shares have been excluded from the computation of basic net
income or loss for the periods presented:
F-12
<Page>
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30,
----------------------------
2004 2003
----------- ------------
(IN THOUSANDS)
Outstanding stock options ................................................................. 6,171 4,060
Shares to be issued upon conversion of 5 3/4% Convertible Subordinated Notes .............. 10 443
Shares to be issued upon conversion of 6 3/4% Convertible Subordinated Notes .............. 20,154 --
Shares to be issued upon conversion of 8% Secured Convertible Notes ....................... 15,676 --
Warrants to purchase shares, issued in connection with the 11 1/2% Senior Secured Notes . 3,437 4,915
Warrants to purchase common shares, issued in connection with prepayment of 11 1/2%
Senior Secured Notes ................................................................... 5,176 --
Shares to be issued as partial compensation for investment banking services ............... 110 --
----------- ------------
Total shares excluded ..................................................................... 50,734 9,418
=========== ============
</Table>
(10) CONTINGENCIES
In addition to litigation that we have initiated or responded to in the ordinary
course of business, we are currently party to the following potentially material
legal proceedings:
Beginning July 11, 2001, we were served with several class action complaints
that were filed in the United States District Court for the Southern District of
New York against us and several of our officers, directors, and former officers
and directors, as well as against the investment banking firms that underwrote
our November 10, 1999 initial public offering of the common stock and our March
9, 2000 secondary offering of the common stock. The complaints were filed on
behalf of persons who purchased the common stock during different time periods,
all beginning on or after November 10, 1999 and ending on or before December 6,
2000.
The complaints are similar to each other and to hundreds of other complaints
filed against other issuers and their underwriters, and allege violations of the
Securities Act of 1933 and the Securities Exchange Act of 1934 primarily based
on the assertion that there was undisclosed compensation received by our
underwriters in connection with our public offerings and that there were
understandings with customers to make purchases in the aftermarket. The
plaintiffs have sought an undetermined amount of monetary damages in relation to
these claims. On September 4, 2001, the cases against us were consolidated. On
October 9, 2002, the individual defendants were dismissed from the litigation by
stipulation and without prejudice.
On June 11, 2004, we and the individual defendants, as well as many other
issuers named as defendants in the class action proceeding, entered into an
agreement-in-principle to settle this matter, and on June 14, 2004, this
settlement was presented to the court. A motion for preliminary approval of the
settlement was filed on June 25, 2004 and is pending. Once the court
preliminarily approves the settlement and notice has been mailed, there will be
an objection period, followed by a hearing for final approval of the settlement.
Although we believe
F-13
<Page>
that we and the individual defendants have meritorious defenses to the claims
made in the complaints, in deciding to pursue settlement, we considered, among
other factors, the substantial costs and the diversion of our management's
attention and resources that would be required by litigation.
Pursuant to the terms of the proposed settlement, in exchange for a termination
and release of all claims against us and the individual defendants and certain
protections against third-party claims, we will assign to the plaintiffs certain
claims we may have as an issuer against the underwriters, and our insurance
carriers, along with the insurance carriers of the other issuers, will ensure a
floor of $1 billion for any underwriter-plaintiff settlement. Although the
financial effect of the settlement on us will not be material, our insurance
carriers' exposure in this connection will range from zero to a few hundred
thousand dollars, and will be reduced proportionately by any amounts recovered
by plaintiffs directly from the underwriters.
We cannot assure you that the settlement which has been finalized will be
accepted by the court, or that we will be fully covered by collateral or related
claims from underwriters, and that we would be successful in resulting
litigation. In addition, even though we have insurance and contractual
protections that could cover some or all of the potential damages in these
cases, or amounts that we might have to pay in settlement of these cases, an
adverse resolution of one or more of these lawsuits could have a material
adverse affect on our financial position and results of operations in the period
in which the lawsuits are resolved. We are not presently able to estimate
potential losses, if any, related to the lawsuits.
We are also party to suits for collection, related commercial disputes, claims
from carriers and foreign service partners over reconciliation of payments for
circuits, Internet bandwidth and/or access to the public switched telephone
network, and claims from estates of bankrupt companies alleging that we received
preferential payments from such companies prior to their bankruptcy filings. We
intend to prosecute vigorously claims that we have brought and employ all
available defenses in contesting claims against us. Nevertheless, in deciding
whether to pursue settlement, we will consider, among other factors, the
substantial costs and the diversion of management's attention and resources that
would be required in litigation. In light of such costs, we have settled various
and in some cases similar matters on what we believe have been favorable terms
which did not have a material impact our financial position, results of
operations, or cash flows. The results or failure of any suit may have a
material adverse affect on our business.
F-14
<Page>
(11) Subsidiary Guarantors
In June 2004, we completed a refinancing of our outstanding debt obligations. As
part of the refinancing, we prepaid all $25.2 million of our 11 1/2% Senior
Secured Notes due in January 2005 ("Existing Senior Notes") plus accrued but
unpaid interest and issued warrants exercisable for an aggregate of 5,176,065
shares of our common stock at $1.85 per share (the "Warrants"). In conjunction
with the refinancing we issued $29.0 million of new 8% Secured Convertible Notes
("New Secured Notes") due in June 2007, proceeds of $25.2 million were used to
prepay the Existing Senior Notes. The New Secured Notes are convertible into
shares of common stock at $1.85 per share. Our New Secured Notes due in June
2007 are fully and unconditionally guaranteed,, jointly and severally, by our
wholly-owned subsidiaries, iBasis Global, Inc., iBasis Holdings, Inc. and iBasis
Securities Corporation.
The following tables contain condensed consolidating financial information for
iBasis, Inc ("Parent Company") and iBasis Global, Inc., iBasis Holdings, Inc.,
and iBasis Securities Corporation ("Subsidiary Guarantors"), on a combined
basis, for the periods presented. Separate financial statements of the
Subsidiary Guarantors are not presented as we believe they would be immaterial
to investors.
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 2004
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<Table>
<Caption>
PARENT SUBSIDIARY
ASSETS COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
---------------- ---------------- ---------------- ----------------
Cash and cash equivalents .............. $ 17,373 $ 844 $ -- $ 18,217
Accounts receivable, net ............... 24,961 731 25,692
Prepaid expenses and other current
assets ................................. 1,954 921 2,875
Due from Parent ........................ 15,436 (15,436) --
---------------- ---------------- ---------------- ----------------
Total current assets ................... 44,288 17,932 (15,436) 46,784
Property and equipment, net ............ 11,649 168 11,817
Deferred debt financing costs, net ..... 191 191
Other assets ........................... 273 85 358
Investment in guarantor subsidiaries ... 51 (51) --
---------------- ---------------- ---------------- ----------------
Total assets ........................... $ 56,452 $ 18,185 $ (15,487) $ 59,150
================ ================ ================ ================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable ....................... $ 18,925 $ 5,585 $ -- $ 24,510
Accrued expenses ....................... 9,342 4,533 13,875
Deferred revenue ....................... 3,421 3,421
Current portion of long-term debt ...... 4,023 4,023
Due to Guarantor Subsidiaries .......... 5,306 (5,306) --
---------------- ---------------- ---------------- ----------------
Total current liabilities .............. 41,017 10,118 (5,306) 45,829
Long-term debt, net of current portion . 66,285 66,285
Other long-term liabilities ............ 1,200 1,200
Stockholders' equity (deficit):
Common stock, $0.001 par value,
authorized 170,000 shares; issued and
outstanding 46,656 shares .............. 48 48
Treasury stock; 1,135 shares at cost ... (341) (341)
Additional paid-in capital ............. 373,590 10,130 (10,130) 373,590
Capital stock of Guarantor subsidiaries 100 (100) --
Accumulated deficit .................... (425,347) (2,163) 49 (427,461)
---------------- ---------------- ---------------- ----------------
Total stockholders' equity (deficit) ... (52,050) 8,067 (10,181) (54,164)
---------------- ---------------- ---------------- ----------------
Total liabilities and stockholders'
equity (deficit) ....................... $ 56,452 $ 18,185 $ (15,487) $ 59,150
================ ================ ================ ================
</Table>
F-15
<Page>
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2003
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<Table>
<Caption>
PARENT SUBSIDIARY
ASSETS COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
---------------- ---------------- ---------------- ----------------
Cash and cash equivalents .............. $ 15,520 $ 1,750 $ -- $ 17,270
Accounts receivable, net ............... 21,247 520 21,767
Prepaid expenses and other current
assets ................................. 4,568 727 5,295
Due from parent ........................ 13,121 (13,121) --
---------------- ---------------- ---------------- ----------------
Total current assets ................... 41,335 16,118 (13,121) 44,332
Property and equipment, net ............ 16,931 244 17,175
Deferred debt financing costs, net ..... 326 326
Long-term investment in non-
marketable security .................. 5,000 5,000
Other assets ........................... 620 85 705
Investment in guarantor subsidiaries ... 51 (51) --
---------------- ---------------- ---------------- ----------------
Total assets ........................... $ 64,263 $ 16,447 $ (13,172) $ 67,538
================ ================ ================ ================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable ....................... $ 17,678 $ 2,224 $ -- $ 19,902
Accrued expenses ....................... 14,399 4,253 18,652
Deferred revenue ....................... 417 417
Current portion of long-term debt ...... 2,097 2,097
Due to guarantor subsidiaries .......... 2,991 (2,991) --
---------------- ---------------- ---------------- ----------------
Total current liabilities .............. 37,582 6,477 (2,991) 41,068
Long-term debt, net of current portion . 65,829 65,829
Other long-term liabilities ............ 2,749 2,749
Stockholders' equity (deficit):
Common stock, $0.001 par value,
authorized 85,000 shares; issued and
outstanding 45,193 shares .............. 46 46
Treasury stock; 1,135 shares at cost ... (341) (341)
Additional paid-in capital ............. 370,393 10,130 (10,130) 370,393
Capital stock of Guarantor subsidiaries 100 (100) --
Accumulated deficit .................... (411,995) (260) 49 (412,206)
---------------- ---------------- ---------------- ----------------
Total stockholders' equity (deficit) ... (41,897) 9,970 (10,181) (42,108)
---------------- ---------------- ---------------- ----------------
Total liabilities and stockholders'
equity (deficit) ....................... $ 64,263 $ 16,447 $ (13,172) $ 67,538
================ ================ ================ ================
</Table>
F-16
<Page>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2004
(IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
---------------- ---------------- ---------------- ----------------
Net revenue ............................. $ 61,025 $ 1,932 $ (1,782) $ 61,175
Costs and expenses:
Data communications and
telecommunications ...................... 52,100 1,596 (1,630) 52,066
Research and development ................ 3,087 455 3,542
Selling and marketing ................... 1,565 566 2,131
General and administrative .............. 3,032 386 (152) 3,266
Depreciation and amortization ........... 2,747 40 2,787
---------------- ---------------- ---------------- ----------------
Total costs and expenses ................ 62,531 3,043 (1,782) 63,792
Loss from operations .................... (1,506) (1,111) -- (2,617)
Interest income ......................... 13 1 14
Interest expense ........................ (809) (809)
Other expenses, net ..................... (66) (66)
Refinancing transaction costs ........... (1,954) (1,954)
Refinancing related interest expense .... (481) (481)
---------------- ---------------- ---------------- ----------------
Net loss ................................ $ (4,803) $ (1,110) $ -- $ (5,913)
================ ================ ================ ================
</Table>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2003
(IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
PARENT SUBSIDIARY CONSOLIDATED
COMPANY GUARANTORS ELIMINATIONS TOTAL
---------------- ---------------- ---------------- ----------------
Net revenue ......................... $ 39,032 $ 4,703 $ (4,616) $ 39,119
Costs and expenses:
Data communications and
telecommunications .................. 31,281 4,159 (2,070) 33,370
Research and development ............ 3,025 417 3,442
Selling and marketing ............... 1,372 531 1,903
General and administrative .......... 5,021 345 (2,546) 2,820
Depreciation and amortization ....... 5,656 93 5,749
Non-cash stock-based compensation ... 28 28
---------------- ---------------- ---------------- ----------------
Total costs and expenses ............ 46,383 5,545 (4,616) 47,312
Loss from operations ................ (7,351) (842) -- (8,193)
Interest income ..................... 41 41
Interest expense .................... (971) (971)
Gain on bond exchanges .............. 3,716 3,716
Other expenses, net ................. (98) (98)
---------------- ---------------- ---------------- ----------------
Net loss ............................ $ (4,663) $ (842) $ -- $ (5,505)
================ ================ ================ ================
</Table>
F-17
<Page>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2004
(IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
---------------- ---------------- ---------------- ----------------
Net revenue ............................. $ 117,920 $ 4,080 $ (3,817) $ 118,183
Costs and expenses:
Data communications and
telecommunications ...................... 100,806 3,407 (3,557) 100,656
Research and development ................ 6,182 898 7,080
Selling and marketing ................... 3,018 1,114 4,132
General and administrative .............. 6,013 466 (260) 6,219
Depreciation and amortization ........... 6,232 79 6,311
---------------- ---------------- ---------------- ----------------
Total costs and expenses ................ 122,251 5,964 (3,817) 124,398
Loss from operations .................... (4,331) (1,884) (6,215)
Interest income ......................... 28 28
Interest expense ........................ (1,547) (1) (1,548)
Loss on investment in long-term
non-marketable security ................. (5,000) (5,000)
Other expenses, net ..................... (67) (18) (85)
Refinancing transaction costs ........... (1,954) (1,954)
Refinancing related interest expense .... (481) (481)
---------------- ---------------- ---------------- ----------------
Net loss ................................ $ (13,352) $ (1,903) $ -- $ (15,255)
================ ================ ================ ================
</Table>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2003
(IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
PARENT SUBSIDIARY CONSOLIDATED
COMPANY GUARANTORS ELIMINATIONS TOTAL
---------------- ---------------- ---------------- ----------------
Net revenue .......................... $ 80,783 $ 9,354 $ (9,177) $ 80,960
Costs and expenses:
Data communications and
telecommunications ................... 64,262 7,382 (3,347) 68,297
Research and development ............. 6,229 896 7,125
Selling and marketing ................ 2,816 1,080 3,896
General and administrative ........... 10,644 515 (5,830) 5,329
Depreciation and amortization ........ 11,635 227 11,862
Non-cash stock-based compensation .... 57 57
---------------- ---------------- ---------------- ----------------
Total costs and expenses ............. 95,643 10,100 (9,177) 96,566
Loss from operations ................. (14,860) (746) -- (15,606)
Interest income ...................... 111 111
Interest expense ..................... (2,398) (2,398)
Gain on bond exchanges ............... 16,615 16,615
Other expenses, net .................. (195) (195)
---------------- ---------------- ---------------- ----------------
Net loss ............................. $ (727) $ (746) $ -- $ (1,473)
================ ================ ================ ================
</Table>
F-18
<Page>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2004
(IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
---------------- ---------------- ---------------- ----------------
Cash flows from operating activities:
Loss from continuing operations ............. $ (13,352) $ (1,903) $ -- $ (15,255)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization ............. 6,232 79 6,311
Amortization of deferred debt
Financing costs ......................... 135 135
Impairment of investment in long-
term non-marketable security ............ 5,000 5,000
Fair value of warrant issued .............. 2,140 2,140
Change in assets and liabilities
Accounts receivable ..................... (3,714) (211) (3,925)
Prepaid expenses and other
current assets ........................ 6 (194) (188)
Other assets ............................ 347 347
Accounts payable ........................ 1,247 3,361 4,608
Accrued expenses ........................ (3,278) 280 (2,998)
Deferred revenue ........................ 3,004 3,004
Other long-term liabilities ............. (1,549) (1,549)
Due from parent ......................... (2,315) (2,315)
Due to guarantor subsidiaries ........... 2,315 2,315
---------------- ---------------- ---------------- ----------------
Net cash provided by (used in)
continuing operating activities ............. (1,467) (903) (2,370)
---------------- ---------------- ---------------- ----------------
Cash flows from investing activities:
Purchases of property and equipment ......... (950) (3) (953)
Proceeds from earn-out receivable
Related to sale of Speech Solutions
Business .................................. 1,108 1,108
Proceeds from receipt of escrow
Receivable related to sale of Speech
Solutions Business ........................ 1,500 1,500
---------------- ---------------- ---------------- ----------------
Net cash provided by (used in) investing
activities .................................. 1,658 (3) 1,655
---------------- ---------------- ---------------- ----------------
Cash flows from financing activities:
Bank borrowings ............................. 4,600 4,600
Payments of bank borrowings ................. (4,600) (4,600)
Proceeds from issuance of 8% Secured
Convertible Notes ......................... 29,000 29,000
Prepayment of 11 1/2% Senior Secured
Notes ..................................... (25,175) (25,175)
Payments of principal on capital lease
obligations ............................... (1,443) (1,443)
Refinancing transaction costs ............... (1,779) (1,779)
Proceeds from exercise of warrants .......... 961 961
Proceeds from exercises of common
stock options ............................. 98 98
---------------- ---------------- ---------------- ----------------
Net cash provided by financing
activities ................................ 1,662 1,662
---------------- ---------------- ---------------- ----------------
Net increase (decrease) in cash and cash
equivalents ................................. 1,853 (906) 947
---------------- ---------------- ---------------- ----------------
Cash and cash equivalents, beginning
of period ................................. 15,520 1,750 17,270
---------------- ---------------- ---------------- ----------------
Cash and cash equivalents, end of
period .................................... $ 17,373 $ 844 $ -- $ 18,217
================ ================ ================ ================
</Table>
F-19
<Page>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2003
(IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
PARENT SUBSIDIARY CONSOLIDATED
COMPANY GUARANTORS ELIMINATIONS TOTAL
---------------- ---------------- ---------------- ----------------
Cash flows from operating activities:
Loss from continuing operations ............. $ (727) $ (746) $ -- $ (1,473)
Adjustments to reconcile net loss to
net cash used in operating activities
Gain on bond exchanges .................... (16,615) (16,615)
Depreciation and amortization ............. 11,635 227 11,862
Amortization of deferred debt
Financing costs ......................... 198 198
Amortization of deferred
compensation ............................ 57 57
Bad debt expense .......................... 300 300
Change in assets and liabilities
Accounts receivable ..................... 3,555 520 4,075
Prepaid expenses and other
current assets ........................ 1,028 (367) 661
Other assets ............................ 66 (13) 53
Accounts payable ........................ (255) (54) (309)
Accrued expenses ........................ (2,138) (45) (2,183)
Other long-term liabilities ............. (391) (391)
Due from parent (241) (241)
Due to guarantor subsidiaries ........... 241 241
---------------- ---------------- ---------------- ----------------
Net cash provided by (used in)
continuing operating activities ............. (3,046) (719) (3,765)
---------------- ---------------- ---------------- ----------------
Cash flows from investing activities:
Purchases of property and equipment ......... (2,135) (11) (2,146)
Adjustments to proceeds from sale of
Speech Solutions Business ................. (736) (736)
---------------- ---------------- ---------------- ----------------
Net cash provided by (used in) investing
activities .................................. (2,871) (11) (2,882)
---------------- ---------------- ---------------- ----------------
Cash flows from financing activities:
Bank borrowings ............................. 4,600 4,600
Payments of bank borrowings ................. (4,600) (4,600)
Payments of principal on capital lease
obligations ............................... (3,599) (3,599)
Bond exchange transaction costs ............. (861) (861)
Proceeds from exercises of common
stock options ............................. 5 5
Dividends paid .............................. 10,130 (10,130) --
---------------- ---------------- ---------------- ----------------
Net cash used in financing activities ....... 5,675 (10,130) (4,455)
---------------- ---------------- ---------------- ----------------
Net increase (decrease) in cash and cash
equivalents ................................. (242) (10,860) (11,102)
---------------- ---------------- ---------------- ----------------
Cash and cash equivalents, beginning
of period ................................. 20,359 11,957 32,316
---------------- ---------------- ---------------- ----------------
Cash and cash equivalents, end of
period .................................... $ 20,117 $ 1,097 $ -- $ 21,214
================ ================ ================ ================
</Table>
F-20
<Page>
CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Registered Public Accounting Firm................................................. F-22
Consolidated Balance Sheets as of December 31, 2003 and 2002............................................ F-23
Consolidated Statements of Operations for the Years Ended December 31, 2003, 2002 and 2001.............. F-24
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 2003, 2002
and 2001............................................................................................. F-25
Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001.............. F-27
Notes to Consolidated Financial Statements................................................................. F-29
</Table>
F-21
<Page>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
iBasis, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of iBasis,
Inc. and subsidiaries as of December 31, 2003 and 2002, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the three years in the period ended December 31, 2003. These
financial statements are the responsibility of iBasis's management. Our
responsibility is to express an opinion on the financial statements based on our
audits.
We conducted our audits in accordance with auditing standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of iBasis, Inc. and
subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2003 in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 2 to the consolidated financial statements, in 2002
iBasis changed its method of accounting for goodwill and other intangible assets
to conform to Statement of Financial Accounting Standards No. 142.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 27, 2004
F-22
<Page>
iBASIS, INC. CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31,
----------------------------
2003 2002
------------ ------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents .................................................................. $ 17,270 $ 32,317
Accounts receivable, net of allowance for doubtful accounts of $3,128 and $7,833,
respectively ............................................................................ 21,767 20,854
Prepaid expenses and other current assets .................................................. 5,295 5,374
Total current assets .......................................................................... 44,332 58,545
Property and equipment, at cost:
Network equipment .......................................................................... 67,441 56,372
Equipment under capital lease .............................................................. 9,558 19,481
Computer software .......................................................................... 8,387 6,724
Leasehold improvements ..................................................................... 6,414 6,285
Furniture and fixtures ..................................................................... 1,062 1,047
92,862 89,909
Less--Accumulated depreciation and amortization ............................................ (75,687) (57,552)
17,175 32,357
Deferred debt financing costs, net ............................................................ 326 1,382
Long-term investment in non-marketable security ............................................... 5,000 5,000
Other assets .................................................................................. 705 1,240
$ 67,538 $ 98,524
------------ ------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable ........................................................................... $ 19,902 $ 13,142
Accrued expenses ........................................................................... 18,652 18,148
Deferred revenue ........................................................................... 417 --
Current portion of long-term debt .......................................................... 2,097 5,349
Total current liabilities .................................................................. 41,068 36,639
Long-term debt, net of current portion ........................................................ 65,829 93,590
Other long-term liabilities ................................................................... 2,749 2,268
Commitments and contingencies
Stockholders' deficit:
Common stock, $0.001 par value, authorized--85,000 shares; issued--45,913 and 45,785 shares,
respectively; ........................................................................... 46 46
Preferred stock, $.001 par value, authorized 15,000 shares; issued and outstanding; none ... -- --
Treasury stock, 1,135 shares at cost ....................................................... (341) (341)
Additional paid-in capital ................................................................. 370,393 368,927
Deferred compensation ...................................................................... -- (86)
Accumulated deficit ........................................................................ (412,206) (402,519)
Total stockholders' deficit ................................................................ (42,108) (33,973)
$ 67,538 $ 98,524
------------ ------------
</Table>
The accompanying notes are an integral part of these consolidated
financial statements.
F-23
<Page>
iBASIS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
Net revenue .................................................................... $ 178,159 $ 164,942 $ 110,180
Cost and operating expenses:
Data communications and telecommunications (excluding depreciation and
amortization) ............................................................... 152,853 142,847 102,320
Research and development ....................................................... 13,387 17,781 23,939
Selling and marketing .......................................................... 7,513 11,279 20,323
General and administrative ..................................................... 7,665 24,186 25,563
Depreciation and amortization .................................................. 20,065 31,871 32,364
Non-cash stock-based compensation .............................................. 86 967 1,368
Loss on sale of messaging business ............................................. -- 2,066 --
Restructuring costs ............................................................ -- 5,536 51,834
Total cost and operating expenses ........................................... 201,569 236,533 257,711
Operating loss ................................................................. (23,410) (71,591) (147,531)
Interest income ................................................................ 161 1,290 9,169
Interest expense ............................................................... (3,967) (11,608) (16,518)
Gain on bond repurchases and exchanges ......................................... 16,615 25,790 14,549
Other expenses, net ............................................................ (337) (382) (587)
Loss from continuing operations ................................................ (10,938) (56,501) (140,918)
Income (loss) from discontinued operations ..................................... 1,251 (65,222) (49,771)
Net loss ....................................................................... $ (9,687) $ (121,723) $ (190,689)
------------ ------------ ------------
Basic and diluted net loss per share:
Loss from continuing operations ................................................ $ (0.24) $ (1.25) $ (3.30)
Income (loss) from discontinued operations ..................................... 0.03 (1.45) (1.17)
Net loss ....................................................................... $ (0.21) $ (2.70) $ (4.47)
------------ ------------ ------------
Basic and diluted weighted average common shares outstanding ................... 44,696 45,164 42,645
------------ ------------ ------------
</Table>
The accompanying notes are an integral part of these consolidated
financial statements.
F-24
<Page>
iBASIS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<Table>
<Caption>
COMMON STOCK TREASURY STOCK
------------------ ------------------- TOTAL
$0.001 ADDITIONAL STOCKHOLDERS'
NUMBER PAR NUMBER PAID IN DEFERRED ACCUMULATED EQUITY
OF SHARES VALUE OF SHARES AMOUNT CAPITAL COMPENSATION DEFICIT (DEFICIT)
--------- ------- --------- ------- ---------- ------------ ----------- -------------
(IN THOUSANDS)
Balance, January 1, 2001... 34,203 $ 34 -- -- $ 298,574 $ (1,605) $ (90,107) $ 206,896
Issuance of common stock
related to the
purchase of
PriceInteractive,
Inc., net of filing
fees of $7............ 9,282 9 -- -- 58,362 -- -- 58,371
Issuance of restricted
common stock related
to the purchase of
PriceInteractive,
Inc., net of
forfeited shares...... 948 1 -- -- 5,966 -- -- 5,967
Issuance of options to
buy common stock
related to the
purchase of
PriceInteractive...... -- -- -- -- 5,202 (1,834) -- 3,368
Exercise of common stock
options and warrants.. 706 1 -- -- 955 -- -- 956
Sale of common stock
related to employee
stock purchase plan... 132 -- -- -- 480 -- -- 480
Amortization of deferred
compensation.......... -- -- -- -- -- 1,214 -- 1,214
Compensation expense
related to
acceleration of
option vesting........ -- -- -- -- 154 -- -- 154
Net loss................... -- -- -- -- -- -- (190,689) (190,689)
Balance, December 31, 2001. 45,271 45 -- -- 369,693 (2,225) (280,796) 86,717
Acquisition of treasury
shares from escrow
settlement with
PriceInteractive, Inc. -- -- (1,135) (341) -- -- -- (341)
Exercise of common stock
options............... 149 -- -- -- 122 -- -- 122
Sale of common stock
related to employee
stock purchase plan... 365 1 -- -- 284 -- -- 285
Reduction in deferred
compensation.......... -- -- -- -- (1,172) 1,172 -- --
</Table>
F-25
<Page>
<Table>
Amortization of deferred
compensation.......... -- -- -- -- -- 967 -- 967
Net loss................. -- -- -- -- -- -- (121,723) (121,723)
Balance, December 31, 2002. 45,785 46 (1,135) (341) 368,927 (86) (402,519) (33,973)
Exercise of common stock
options............... 128 -- -- -- 91 -- -- 91
Fair value of warrants
issued on bond
Exchange.............. 1,375 1,375
Amortization of deferred
compensation.......... 86 86
Net loss................. (9,687) (9,687)
Balance, December 31, 2003. 45,913 $ 46 (1,135) $ (341) $ 370,393 $ -- $ (412,206) $ (42,108)
------ ------- ------ ------- ---------- ------------ ----------- -------------
</Table>
The accompanying notes are an integral part of these consolidated
financial statements.
F-26
<Page>
iBASIS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
--------------------------------------------
2003 2002 2001
------------ ------------ ------------
(IN THOUSANDS)
Cash flows from operating activities:
Loss from continuing operations ................................................ $ (10,938) $ (56,501) $ (140,918)
Adjustments to reconcile loss from continuing operations to net cash used in
operating activities:
Gain on bond repurchases and exchanges ......................................... (16,615) (25,790) (14,549)
Restructuring costs ............................................................ -- 5,536 51,834
Depreciation and amortization of leased equipment .............................. 20,065 31,871 32,364
Loss on sale of messaging business ............................................. -- 2,066 --
Amortization of deferred debt financing costs .................................. 333 672 1,026
Amortization of deferred compensation .......................................... 86 967 1,214
Non cash compensation expense related to stock options ......................... -- -- 154
Bad debt expense ............................................................... 800 10,026 9,161
Recovery of previously reserved receivable balance ............................. (4,269) -- --
Changes in current assets and liabilities:
Accounts receivable, net ....................................................... 2,556 (6,430) (16,267)
Prepaid expenses and other current assets ...................................... 1,330 3,607 (1,409)
Other assets ................................................................... 535 670 3,036
Accounts payable ............................................................... 6,760 2,483 1,579
Deferred revenue ............................................................... 417 -- --
Accrued expenses ............................................................... (4,718) (14,412) 4,416
Other long-term liabilities .................................................... 481 2,268 --
Net cash used in continuing operating activities ............................... (3,177) (42,967) (68,359)
Net cash used in operating activities of discontinued operations ............... -- (1,874) (13,252)
Net cash used in operating activities .......................................... (3,177) (44,841) (81,611)
Cash flows from investing activities:
Purchase of PriceInteractive, Inc., net of cash acquired ....................... -- -- (38,118)
Purchases of property and equipment ............................................ (4,452) (4,632) (35,067)
Decrease in marketable securities .............................................. -- 25,614 58,122
Decrease in long-term marketable securities .................................... -- 8,411 --
Proceeds from sale of messaging business ....................................... -- 168 --
Proceeds from sale of Speech Solutions business ................................ -- 17,000 --
Payment associated with the sale of Speech Solutions businesses ................ (736) -- --
Net cash (used in) provided by investing activities ............................ (5,188) 46,561 (15,063)
Cash flows from financing activities:
Decrease (increase) in restricted cash ......................................... -- 8,867 (8,867)
Bank borrowings ................................................................ 9,200 2,300 4,000
Payments of principal of long-term debt ........................................ (9,200) (3,866) (2,655)
Payments of principal on capital lease obligations ............................. (5,838) (38,918) (23,760)
Repurchase of Convertible Subordinated Notes ................................... -- (13,992) (5,862)
Professional fees paid for exchange of bonds ................................... (935) -- --
Proceeds from issuance of shares related to employee stock purchase plan ....... -- 285 480
Proceeds from exercise of warrants and common stock options .................... 91 122 956
Net cash used in financing activities .......................................... (6,682) (45,202) (35,708)
Net decrease in cash and cash equivalents ......................................... (15,047) (43,482) (132,382)
Cash and cash equivalents, beginning of year ...................................... 32,317 75,799 208,181
Cash and cash equivalents, end of year ............................................ $ 17,270 $ 32,317 $ 75,799
------------ ------------ ------------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest ......................................... $ 5,996 $ 10,738 $ 15,144
Acquisition of PriceInteractive, Inc.:
Fair value of common stock issued .............................................. $ -- $ -- $ 64,346
Fair value of options issued ................................................... $ -- $ -- 3,367
</Table>
F-27
<Page>
<Table>
Liabilities assumed ............................................................ $ -- $ -- $ 21,785
Treasury stock-settlement of escrow ............................................ $ -- $ 341 $ --
Supplemental disclosure of non-cash investing and financing activities:
Exchange of Existing Notes for Existing Senior Notes:
Face value of Existing Notes surrendered ....................................... $ 50,350 $ -- $ --
Face value of Existing Senior Notes issued ..................................... $ 25,175 $ -- $ --
Future interest payments on Existing Senior Notes .............................. $ 5,527 $ -- $ --
Fair value of warrants issued .................................................. $ 1,375 $ -- $ --
Reduction in deferred financing costs .......................................... $ 723 $ -- $ --
Equipment acquired under capital lease obligations ................................ $ -- $ 3,247 $ 23,964
Reduction in carrying value of certain property and equipment as a result of the
settlement of capital lease obligations ........................................ $ -- $ 23,906 $ --
Escrow and earn-out receivable related to sale of Speech Solutions Business ....... $ 1,251 $ 1,500 $ --
Conversion of accrued interest to capital lease obligations ....................... $ -- $ 2,096 $ --
</Table>
The accompanying notes are an integral part of these consolidated
financial statements.
F-28
<Page>
iBASIS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BUSINESS AND MANAGEMENT PLANS
BUSINESS We are an international telecommunications carrier that utilizes the
Internet to provide economical international telecommunications services. Our
continuing operations consist of our Voice-Over-Internet-Protocol ("VoIP")
business. We offer wholesale services through our worldwide network to carriers,
telephony resellers and others around the world by operating through various
service agreements with local service providers in the United States, Europe,
Asia, the Middle East, Latin America, Africa and Australia. During the third
quarter of 2003, we introduced our retail prepaid calling card services. We have
marketed these prepaid calling cards primarily to ethnic communities within
major domestic markets through distributors.
We have a history of operating losses and, as of December 31, 2003, our
accumulated deficit was $412.2 million and our stockholders' deficit was $42.1
million. Although we have consistently generated negative operating cash flows,
our negative cash flow from operations for 2003 declined to $3.2 million from
$44.8 million in 2002 and $81.6 million in 2001. We have $67.9 million of debt
obligations due within the next two years, including $25.2 million of Existing
Senior Notes due in January 2005 and $38.2 million of Existing Notes due in
March 2005.
MANAGEMENT PLANS Beginning in 2001, we have taken a series of actions to reduce
operating expenses, restructure operations, reduce outstanding debt and provide
additional liquidity. Such actions primarily included:
- reductions in workforce,
- consolidation of Internet central offices,
- sale of our previous messaging business,
- sale of the assets associated with our previous Speech Solutions
business,
- settlement of certain lease agreements,
- repurchase of a portion of the Existing Notes for cash,
- exchange of a portion of the Existing Notes for new Existing
Senior Notes, and warrants to purchase common stock, and
- establishment of a new credit facility with a bank.
We continue to implement plans to control operating expenses and capital
expenditures, as well as to monitor and manage accounts payable and accounts
receivable and restructure existing debt to enhance cash flow.
Our plans have included and do include:
- aggressive management of credit risk,
- monitoring and reduction of capital expenditures,
- monitoring and reduction of selling, general and administrative
expenses,
- offsetting of accounts receivable and accounts payable balances
with carriers,
- reduction in circuit costs reflecting efforts to further improve
network operations and make it more cost efficient,
F-29
<Page>
- use of our new switchless architecture which eliminates the need
for costly telecommunications switches and other equipment, and
- explore refinancing alternatives in connection with our Existing
Senior Notes due in January 2005 as well as the Existing Notes
due in March 2005.
As a result of our restructuring programs and our continued focus on
controlling expenses, our research and development, selling and marketing and
general and administrative expenses, in total, declined to $28.6 million for
2003 from $53.2 million for 2002. In addition, our data communications and
telecommunications costs have declined to 85.8% of net revenue for 2003 from
86.6% of net revenue for 2002.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements
include the accounts of iBasis, Inc. and its subsidiaries. All intercompany
balances and transactions have been eliminated in consolidation.
BASIS OF PRESENTATION During July 2002, we sold our Speech Solutions Business.
Accordingly, the Consolidated Statements of Operations have been reclassified to
present the results of the Speech Solutions Business separately from continuing
operations as discontinued operations.
USE OF ESTIMATES The preparation of financial statements in conformity with
accounting principles generally accepted in the United States 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 and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
REVENUE RECOGNITION For our wholesale business, our revenue transactions are
derived from the resale of international minutes of calling time. We recognize
revenue in the period the service is provided, net of revenue reserves for
potential billing credits. Such disputes can result from disagreements with
customers regarding the duration, destination or rates charged for each call.
For our retail prepaid calling card business, revenue is deferred upon
activation of the cards and is recognized as the prepaid calling card balances
are reduced based upon minute usage and service charges. Revenue from both the
resale of minutes as well as the usage of the prepaid calling cards is
recognized when all of the following criteria are met: persuasive evidence of an
arrangement exists, delivery has occurred or services have been rendered, the
seller's price to the buyer is fixed or determinable and collectibility is
reasonably assured.
NET LOSS PER SHARE Basic and diluted net loss per common share are determined
by dividing net loss by the weighted average common shares outstanding during
the period. Basic net loss per share and diluted net loss per share are the
same, as the outstanding common stock options, common shares to be issued upon
conversion of the Convertible Subordinated Notes and warrants to purchase common
shares are anti-dilutive since we have recorded a net loss for all periods
presented.
The following have been excluded from the computation of diluted
weighted average common shares for the periods presented:
F-30
<Page>
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------------------
2003 2002 2001
------------ ------------ ------------
(IN THOUSANDS)
Options to purchase common shares .............................................. 6,332 2,256 7,768
Common shares to be issued upon conversion of the Existing Notes ............... 443 1,028 1,499
Warrants to purchase common shares, issued in connection with the 2002 Credit
Lines and Existing Senior Notes ............................................. 5,253 -- --
Total common shares excluded ................................................... 12,028 3,284 9,267
------------ ------------ ------------
</Table>
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:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------------------
2003 2002 2001
------------ ------------ ------------
(IN THOUSANDS)
Weighted average common shares outstanding ..................................... 44,696 45,388 43,410
Less: Weighted average unvested common shares outstanding ...................... -- -- (4)
Weighted average unvested restricted common shares outstanding ................. -- (224) (761)
Basic and diluted weighted average common shares outstanding ................... 44,696 45,164 42,645
------------ ------------ ------------
</Table>
CASH, CASH EQUIVALENTS AND RESTRICTED CASH We consider highly liquid
investments purchased with an original maturity of 90 days or less at the time
of purchase to be cash equivalents. Cash equivalents include money market
accounts and commercial paper that are readily convertible into cash.
PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Assets under
capital leases are recorded at the present value of minimum lease payments.
These assets are depreciated over the lesser of the lease term or the estimated
useful lives of the assets using the straight-line method. Significant
improvements and betterments are capitalized if they extend the useful life of
the asset. Routine repairs and maintenance are expensed when incurred.
Construction in process represents those assets that were acquired by
us, but were not placed in service as of the balance sheet date. For assets that
have been placed in service, we provide for depreciation and amortization using
the straight-line method over the useful life of the asset, as follows:
<Table>
<Caption>
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE
-------------------- ---------------------
Network equipment........................................................... 3 years
Equipment under capital lease............................................... Life of lease
Computer software........................................................... 3 years
Leasehold improvements...................................................... Life of lease
Furniture and fixtures...................................................... 5 years
</Table>
We review long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment recognized is measured by the amount by which
F-31
<Page>
the carrying amount of the assets exceeds the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair value
less costs to sell. Total depreciation and amortization expense included in the
consolidated statements of operations was approximately $20.1 million, $31.9
million, and $32.4 million for the years ended December 31, 2003, 2002 and 2001,
respectively.
DEFERRED DEBT FINANCING COSTS Underwriter discounts and other costs incurred in
connection with the issuance of debt are being amortized to interest expense
using the straight-line method which is not materially different than the
effective interest rate method over the term of the related debt.
INVESTMENT IN LONG-TERM NON-MARKETABLE SECURITY Our long term investment in a
non-marketable security represents an equity investment in a privately-held
company that was made in connection with a round of financing with other
third-party investors. As our investment does not permit us to exert significant
influence or control over the entity in which we have invested, the recorded
amount represents our cost of the investment less any adjustments we make when
we determine that an investment's carrying value is other-than-temporarily
impaired.
The process of assessing whether the equity investment's net realizable
value is less than its carrying cost requires a significant amount of judgment
due to the lack of a mature and stable public market for investments of this
type. In making this judgment, we carefully considered the investee's most
recent financial results, cash position, recent cash flow data, projected cash
flows (both short and long-term), financing needs, recent financing rounds, most
recent valuation data, the current investing environment, management or
ownership changes, and competition. This valuation process is based primarily on
information that we request, receive and discuss with the investees' management
on a quarterly basis.
In addition, we consider our equity investment to be other than
temporarily impaired if, as of the end of any quarter, we believe that the
carrying value of the investment is greater than the estimated fair value. Such
evaluation is performed on a quarterly basis. Based on our evaluation as of
December 31, 2003, we have not been made aware of any additional facts or
circumstances from our last evaluation that would lead us to believe that an
other than temporary impairment of our investment has occurred. However, if the
privately-held company, in which we have an investment, fails to achieve its
future operating plan, or fails to obtain financing as required, our investment
may become, in a future period, other than temporarily impaired.
OTHER ASSETS Other assets at December 31, 2003 and 2002 consist primarily of
deposits for call termination services and leased facilities.
GOODWILL AND OTHER INTANGIBLE ASSETS Effective January 1, 2002, we adopted the
provisions of Statement on Financial Accounting Standards No.142, "Goodwill and
Other Intangible Assets" ("SFAS 142"). Under the provisions of SFAS 142, if an
intangible asset is determined to have an indefinite useful life, it shall not
be amortized until its useful life is determined to be no longer indefinite. An
intangible asset that is not subject to amortization shall be tested for
impairment annually, or more frequently if events or changes in circumstances
indicate that the asset might be impaired. Goodwill is not amortized but is
tested for impairment, for each reporting unit, on an annual basis and between
annual tests in certain circumstances. Upon adoption of SFAS 142, we performed
an impairment review and concluded that there were no necessary adjustments.
RESEARCH AND DEVELOPMENT EXPENSES We charge research and development expenses
to operations as incurred.
CONCENTRATION OF CREDIT RISK/SIGNIFICANT CUSTOMERS Financial instruments that
potentially subject us to significant concentrations of credit risk consist
principally of cash investments and accounts receivable. We place our cash
investments with a high quality financial institution and limits the amount of
credit exposure. We have established certain credit requirements that our
customers must meet before sales credit is extended. We monitor the financial
condition of our customers to help ensure collections and to minimize losses.
We did not have a customer that accounted for 10% or more of accounts
receivable at December 31, 2003. We had one customer account for 17% of accounts
receivable at December 31, 2002.
We had one customer, each year, account for 11%, 12%, and 14% of net
revenue for the years ended December 31, 2003, 2002, and 2001, respectively.
F-32
<Page>
FAIR VALUE OF FINANCIAL INSTRUMENTS Financial instruments consist principally
of cash and cash equivalents, accounts receivable, long-term investments in
marketable securities, long-term debt and accounts payable. The estimated fair
value of these instruments, except for the Existing Notes, approximates their
carrying value. The fair value of the Convertible Subordinated Notes (which
includes the Existing Notes and our 11 1/2% Convertible Subordinated Notes) at
December 31, 2003 is approximately $30.6 million.
STOCK-BASED COMPENSATION
We account for stock-based compensation in accordance with Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," using the intrinsic-value method as permitted by Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 encourages, but does not require, the recognition of
compensation expense for the fair value of stock options and other equity
instruments issued to employees and non-employee directors.
At December 31, 2003, we had two stock-based employee compensation
plans, which are described more fully in Note 7. The following table illustrates
the effect on net loss and net loss per share if we had applied the fair value
recognition provisions of SFAS No. 123.
<Table>
<Caption>
DECEMBER 31,
------------
2003 2002 2001
------------ ------------ ------------
(IN THOUSANDS)
Net loss:
As reported ....................................................... $ (9,687) $ (121,723) $ (190,689)
Deduct: Stock-based employee compensation expense
included in reported net loss .................................. 86 967 1,368
Add: Total stock-based employee compensation expense
determined under fair value based method for all awards ........ (2,200) (7,554) (8,054)
Pro forma ......................................................... $ (11,801) $ (128,310) $ (197,375)
Basic and diluted net loss per share:
As reported ....................................................... $ (0.21) $ (2.70) $ (4.47)
Pro forma ......................................................... $ (0.26) $ (2.84) $ (4.63)
</Table>
We estimate the fair value of its stock-based awards to employees using
the Black-Scholes option pricing model. The Black-Scholes model was developed
for use in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, the Black-Scholes model
requires the input of highly subjective assumptions including the expected stock
price volatility. Because stock-based awards to employees have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
our opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of stock-based awards to employees. The fair value of
stock-based awards to employees was estimated assuming no expected dividends and
the following weighted-average assumptions:
<Table>
<Caption>
DECEMBER 31,
------------
2003 2002 2001
------------ ------------ ------------
Risk-free interest rate .............................................. 3.250% 3.000% 4.669%
Dividend yield ....................................................... 0.0% 0.0% 0.0%
Expected life ........................................................ 5 years 5 years 5 years
Expected volatility .................................................. 143% 146% 155%
Weighted average remaining contractual life .......................... 8.84 years 8.00 years 9.56 years
Weighted average fair value of options granted ....................... $ 0.88 $ 0.61 $ 1.04
</Table>
F-33
<Page>
INCOME TAXES We account for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." This statement requires an asset and liability
approach to accounting for income taxes based upon the future expected values of
the related assets and liabilities. Deferred income taxes are provided for tax
and financial reporting basis differences between assets and liabilities at tax
rates expected to be in effect when the basis differences reverse. Valuation
allowances are provided in situations where recoverability of deferred tax
assets is not considered more likely than not.
FUTURE ACCOUNTING PRONOUNCEMENTS
In January and December 2003, the FASB issued FASB Interpretation No. 46
(FIN 46) and No. 46, revised (FIN 46R), "Consolidation of Variable Interest
Entities." These statements, which address accounting for entities commonly
known as special-purpose or off-balance sheet, require consolidation of certain
interests or arrangements by virtue of holding a controlling financial interest
in such entities. Certain provisions of FIN 46R related to interests in special
purpose entities were applicable for the period ended December 31, 2003. We must
apply FIN 46R to our interests in all entities subject to the interpretation as
of the first interim or annual period ending after March 15, 2004. Adoption of
this new method of accounting for variable interest entities is not expected to
have a material impact on our consolidated results of operations and financial
position.
(3) ACQUISITION OF PRICEINTERACTIVE, INC. AND DISCONTINUED OPERATIONS
ACQUISITION
On February 27, 2001, we completed the acquisition of all of the
outstanding capital stock and options to purchase common stock of
PriceInteractive Inc., a leading provider of speech application services
("PriceInteractive"). The acquisition was accounted for using the purchase
method of accounting in accordance with APB Opinion No. 16, "Business
Combinations," and, accordingly, the results of operations for PriceInteractive
have been included in our consolidated results since the acquisition date. The
aggregate purchase price, which was comprised of cash of $45.3 million,
approximately 9.3 million shares of common stock (including 2.1 million shares
placed in escrow), approximately 1.0 million shares of restricted common stock
and options to purchase approximately 1.0 million shares of common stock, was
allocated to the tangible and intangible assets of PriceInteractive based upon
the fair value of such assets acquired. Fair value of intangible assets was
determined by an independent appraisal. The restricted common stock, issued in
the acquisition, vested 50% on December 31, 2001 while the remaining 50% vested
on January 1, 2003. In addition, we also recorded $1.8 million of deferred
stock-based compensation relating to the options issued in connection with the
acquisition, which was amortized over two to four years, the vesting periods of
the options granted. Subsequent to the acquisition, we changed the name of the
acquired entity to iBasis Speech Solutions, Inc.
A summary of the total consideration and the allocation of the aggregate
purchase price was as follows:
<Table>
<Caption>
(IN THOUSANDS)
--------------
Purchase Price:
Cash paid ................................................................... $ 45,251
Professional fees and other acquisition costs ............................... 6,259
Fair value of common stock issued ........................................... 64,338
Fair value of common stock options issued ................................... 3,367
Total purchase price ........................................................ $ 119,215
Allocation of Purchase Price:
Cash and cash equivalents ................................................... $ 13,385
Other current assets ........................................................ 6,940
Property and equipment ...................................................... 9,203
Developed technology and know-how ........................................... 15,448
</Table>
F-34
<Page>
<Table>
Installed customer base ..................................................... 7,560
Assembled workforce ......................................................... 1,424
Goodwill .................................................................... 62,571
Other assets ................................................................ 38
Current liabilities ......................................................... (8,801)
Long term debt .............................................................. (12,984)
In-process research and development ......................................... 24,431
Total allocation of purchase price .......................................... $ 119,215
</Table>
The $24.4 million allocated to purchased in-process research and
development ("in-process R&D") represented the appraised fair value of a project
that did not have future alternative uses. This allocation represented the
estimated fair value based on risk-adjusted cash flows related to the in-process
research and development project. The development of the project had not yet
reached technological feasibility and the research and development in process
had no alternative uses. Accordingly, these costs were expensed as of the
acquisition date.
In-process research and development value was comprised of one primary
research and development project. This project included the introduction of
certain new technologies. At the acquisition date, this project was
approximately 70% to 80% complete based on cost data and technological progress.
The research and development investment in this project made by us from the date
of acquisition through December 31, 2001 was $6.0 million.
The value assigned to purchased in-process technology was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from the
project and discounting the net cash flows to their present value. The revenue
projection used to value the in-process research and development is based on the
expected timing of new products, our estimate of the product life cycle and
expected revenue contribution. The rates utilized to discount the net cash flows
to their present value are based on our weighted average cost of capital. This
discount rate was commensurate with our corporate maturity and the uncertainties
in the economic estimates described above.
As described in Note 2, as a result of the adoption of SFAS No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142") we discontinued amortizing
all existing goodwill and indefinite lived intangible assets and did not record
any related amortization expense after January 1, 2002. Had the previous
provisions of SFAS 142 been applied, our net loss and loss per share would have
been as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------------------------
2003 2002 2001
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net loss:
As reported ....................................................... $ (9,687) $ (121,723) $ (190,689)
Add: Goodwill amortization ........................................ -- -- 23,908
Adjusted net loss ................................................. $ (9,687) $ (121,723) $ (166,781)
Basic and fully-diluted net loss per share
As reported ....................................................... $ (0.21) $ (2.70) $ (4.47)
Effect of SFAS No. 142 ............................................ -- -- 0.56
Adjusted net loss per share ....................................... $ (0.21) $ (2.70) $ (3.91)
</Table>
F-35
<Page>
DISCONTINUED OPERATIONS
On July 15, 2002 we completed the sale of substantially all of the
assets of our Speech Solutions Business for $18.5 million in cash of which $1.5
million of this amount was placed in escrow until December 31, 2003, and up to
$8 million in earn-out payments that could be earned upon the achievement of
certain revenue milestones of the Speech Solutions Business. We received no
earn-out payments related to 2002. In the fourth quarter of 2003, we recognized
additional consideration of $1.3 million for an earn-out payment based on the
achievement of certain 2003 revenue-based milestones associated with our former
Speech Solutions Business. The cash payment associated with the earn-out, net of
a $0.3 million payment associated with the sale of our Speech Solutions
Business, was $1.0 million and was received in February 2004. In the first
quarter of 2003, we made a $0.7 million payment associated with the sale of our
Speech Solutions Business. There will be no further earn-out payments due to us
in the future.
We have reported our Speech Solutions Business as a discontinued
operation under the provisions of SFAS No. 144 "Accounting for the Impairment or
Disposal of Long Lived Assets." The Consolidated Financial Statements have been
reclassified to segregate the net assets and operating results of this
discontinued operation for all periods presented.
The loss on the disposal of the discontinued operation of $58.9 million
included the write-off of goodwill and other purchased intangibles of $57.3
million and the costs to sell the operation of $1.7 million. The amount of the
loss has been adjusted for the additional revenue-based earn-out recognized in
the fourth quarter of 2003 and will be further adjusted in the future to reflect
the settlement of the $1.5 million held in escrow. iBasis, Inc. Notes to
Consolidated Financial Statements
(3) ACQUISITION OF PRICEINTERACTIVE, INC. AND DISCONTINUED OPERATIONS
Summary operating results of the discontinued operation for 2003, 2002
and 2001 were as follows:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
---------------------------------------------
2003 2002 2001
------------ ------------ ------------
(IN THOUSANDS)
Revenue .............................................................. $ -- $ 12,306 $ 23,590
Operating loss ....................................................... -- (5,906) (49,263)
Pre-tax loss from discontinued operations ............................ 1,251 (65,222) (49,771)
</Table>
The operating losses for 2002 and 2001 include depreciation of $2.6
million and $3.6 million and amortization of intangibles of $3.3 million and
$23.9 million, respectively. Also included in 2001 is a write-off of in-process
research and development costs of $24.4 million in connection with the
acquisition of PriceInteractive.
(4) ACCRUED EXPENSES
Accrued expenses at December 31, consist of the following:
<Table>
<Caption>
2003 2002
------------ ------------
(IN THOUSANDS)
Termination fees and circuit costs ................................... $ 10,155 $ 8,604
Restructuring and other non-recurring costs .......................... 786 926
Interest ............................................................. 3,680 1,485
Acquisition related costs ............................................ 2,103 2,884
Professional services ................................................ 376 794
Payroll and related costs ............................................ 112 787
Equipment purchases .................................................. 564 323
</Table>
F-36
<Page>
<Table>
Customer deposits .................................................... 259 349
Accrued other ........................................................ 617 1,996
$ 18,652 $ 18,148
------------ ------------
</Table>
(5) INCOME TAXES
No provision for federal or state income taxes has been recorded, as we
have incurred net operating losses for all periods presented and it is more
likely than not that the tax benefit of such losses will not be realized. As of
December 31, 2003, we had net operating loss carryforwards of approximately
$298.3 million available to reduce future federal and state income taxes, if
any. If not utilized, these carryforwards expire at various dates through 2022.
If substantial changes in our ownership should occur, as defined by Section 382
of the Internal Revenue Code (the "Code"), there could be annual limitations on
the amount of carryforwards which can be realized in future periods. The Company
has completed several financings since its inception and believes that it may
have incurred an ownership change as defined under the Code.
The approximate income tax effects of temporary differences and
carryforwards are as follows:
<Table>
<Caption>
DECEMBER 31,
---------------------------
2003 2002
------------ ------------
(IN THOUSANDS)
Net operating loss carryforwards ..................................... $ 91,868 $ 103,535
Accruals ............................................................. 1,308 20,817
Depreciation ......................................................... 8,054 8,225
Accounts receivable .................................................. 1,240 4,509
Other ................................................................ 1,704 (356)
Valuation allowance .................................................. (104,174) (136,730)
$ -- $ --
------------ ------------
</Table>
We have recorded a 100% valuation allowance against the net deferred tax
asset as of December 31, 2003 and 2002, as we have determined that it is more
likely than not that such assets will not be realized. The increase in the
valuation allowance during the year primarily relates to the tax benefit
associated with the increase in the net operating loss carryforward.
The major components of our income tax expense (benefit) for the years
ended December 31 are:
<Table>
<Caption>
2003 2002 2001
------------ ------------ ------------
(IN THOUSANDS)
Net operating loss carryforwards ..................................... $ (11,667) $ 27,056 $ 46,945
Deferred tax items ................................................... (20,888) (6,199) 37,879
Valuation Allowance .................................................. 32,555 (20,857) (84,824)
$ -- $ -- $ --
------------ ------------ ------------
</Table>
(6) LONG-TERM DEBT
Long-term debt consists of the following as of December 31:
F-37
<Page>
<Table>
<Caption>
2003 2002
------------ ------------
(IN THOUSANDS)
Existing Notes ....................................................... $ 38,180 $ 88,530
Existing Senior Notes ................................................ 25,175 --
Revolving line of credit ............................................. 2,300 2,300
Capital lease obligations ............................................ 2,271 8,109
67,926 98,939
Less: Current portion ................................................ 2,097 5,349
$ 65,829 $ 93,590
------------ ------------
</Table>
EXISTING NOTES In March 2000, we issued $150.0 million aggregate principal
amount of Notes, resulting in net proceeds to iBasis of approximately $144.8
million. The Notes bear interest at the annual rate of 5 3/4% with interest
payable on each March 15th and September 15th. The Notes have no required
principal payments prior to maturity on March 15, 2005 ("Maturity"). The Notes
are unsecured and subordinated to our capital lease obligations. Prior to
Maturity, the Notes are convertible into common stock at a conversion price of
$86.14 per share, subject to adjustment upon certain events as defined in the
Note agreement. The Company may redeem some or all of the Notes at the following
redemption prices for the three 12-month periods beginning March 20, 2003,
expressed as a percentage of principal amount: 102.3%, 101.15% and 100%,
respectively. In each case, iBasis will also pay accrued but unpaid interest up
to, but excluding the redemption date. We do not have any current plans to
redeem a portion, or all, of these Notes.
Upon a repurchase event, as defined in the Existing Note Indenture, the
holder can require iBasis to repurchase the Existing Notes in cash, or at
iBasis's option upon satisfaction of certain conditions as defined in the
Existing Note Indenture, in common stock, at 105% of the principal amount of the
Notes, plus accrued and unpaid interest.
A repurchase event is defined as being either:
i) iBasis's common stock or other common stock into which the
Existing Notes are convertible is neither listed for trading on
a United States national securities exchange nor approved for
trading on an established over-the-counter trading market in the
United States, or
ii) a change in control event, as defined in the Existing Note
Indenture.
As of December 31, 2003, we believe that a repurchase event has not
occurred.
GAINS ON EXCHANGES AND REPURCHASES OF EXISTING NOTES During 2003, we entered
into agreements with principal holders of our Existing Notes which resulted in
the retirement of $50.4 million of such notes in exchange for new debt
instruments at 50% of the face value of the retired Notes. Under the terms of
the agreement, the holders of the retired Notes received $25.2 million of
Existing Senior Notes and warrants to purchase 4,915,416 shares of our common
stock. Each warrant has an initial exercise price of $0.65 per share and is
exercisable over a five-year term. The Existing Senior Notes mature on January
15, 2005 and share in a second priority lien on our assets and are subordinated
to our revolving line of credit with our bank.
In accordance with SFAS No. 15, "Accounting by Debtors and Creditors
Regarding Troubled Debt Restructuring," we recorded a gain on the exchange of
debt of approximately $16.6 million during the year ended December 31, 2003.
SFAS No. 15 requires that the gain on the exchange be recorded net of the
accrual for future interest payments on the new Existing Senior Notes, the fair
value of the warrants issued, the reduction of the net book value of the
deferred financing costs originally capitalized with the issuance of our
Existing Notes and any other fees or costs. The fair value of $1,375,000 of the
detachable warrants was estimated utilizing a valuation method similar to the
Black-Scholes model. Assumptions utilized within the pricing model included a) a
useful life
F-38
<Page>
of 5 years; b) volatility of 46%; c) no dividends; and d) a discount rate of 3%.
While our future cash flows relating to interest payments will not be affected
by the exchange, our future Statement of Operations will show, as required, a
reduction of interest expense due to the accrual of the future interest payments
on the Existing Senior Notes within the gain.
The gain recognized in 2003 was calculated as follows:
<Table>
<Caption>
2003(IN THOUSANDS)
Face value of surrendered Existing Notes ....................................... $ 50,350
Less: Face value of issued Existing Senior Notes ............................... (25,175)
Future interest payments on Existing Senior Notes ........................... (5,527)
Fair value of warrants issued ............................................... (1,375)
Reduction of deferred debt financing costs .................................. (723)
Professional fees ........................................................... (935)
Gain ........................................................................... $ 16,615
--------------
</Table>
During 2002 and 2001, we repurchased (as opposed to "redeemed") a
portion of our outstanding Existing Notes and recorded gains. The gains were
calculated as follows:
<Table>
<Caption>
2002 2001
------------ ------------
(IN THOUSANDS)
Carrying value of repurchased Notes .................................. $ 40,588 $ 20,882
Less: Cost of repurchase of Notes .................................... (13,993) (5,863)
Write-off of deferred debt financing costs ........................... (805) (470)
Gain ................................................................. $ 25,790 $ 14,549
------------ ------------
</Table>
CAPITAL LEASE SETTLEMENT In August 2002, we completed an agreement with our
primary equipment vendor to reduce our capital lease obligations and related
future cash commitments. Under the terms of the agreement, we paid our vendor
$28.5 million to purchase the leased assets. In exchange the vendor eliminated
$63.8 million in existing debt, future interest obligations and other fees
($50.8 million in principal, $9.0 million in interest assuming the vendor debt
was held to maturity, and $4.0 million in tax obligations). The difference
between the cash paid and the recorded outstanding obligation on that date was
accounted for as a reduction in the carrying value of the underlying capital
assets.
REVOLVING LINE OF CREDIT AND TERM LOAN In December 2003, we amended and
extended our revolving line of credit with our bank. The new $15.0 million
revolving line of credit replaced two secured lines of credit that totaled $15.0
million. The revolving line of credit bears interest at the bank's prime rate
plus 1%, matures on January 5, 2005 and is collateralized by substantially all
of our assets. Borrowings under the revolving line of credit are on a formula
basis and are limited to eligible accounts receivable. The revolving line of
credit requires us to comply with various non-financial covenants and financial
covenants, including minimum profitability. We were in compliance with all of
these covenants as of December 31, 2003. As of December 31, 2003, we had $2.3
million in borrowings and unused borrowing capacity of $2.9 million, based on
our borrowing formula, under the new revolving line of credit.
In December 2002, we entered into two secured lines of credit agreements
with a bank totaling $15.0 million. In conjunction with the initiation of these
credit lines, we issued a warrant to the bank for the purchase of 337,500 shares
of our common stock at an exercise price of $0.337 per share. At December 31,
2002,
F-39
<Page>
we had $2.3 million in borrowings under these credit lines. In January 2004, the
bank exercised its warrant in full, on a net issue basis, and received 272,876
shares of our common stock. As a result of the bank exercising its warrant on a
net basis no cash was received by us.
In October 2001, we entered into a $4.0 million term loan which was to
mature in April 2003. The term loan was bearing interest at the bank's prime
rate plus 1/2% and required equal monthly repayments of principal of $133,000
plus accrued interest until maturity. As collateral, we deposited cash with the
bank of approximately $8.9 million. In December 2002, the term loan was paid-off
and the related cash collateral was released.
At December 31, 2003, we had outstanding letters of credit totaling $2.6
million.
REPAYMENTS OF DEBT Scheduled maturities of long-term debt as of December 31,
2003 are as follows:
<Table>
<Caption>
EXISTING REVOLVING
CAPITAL EXISTING SENIOR CREDIT
YEAR LEASES NOTES NOTES LINES TOTAL
- ---- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
2004 ............................................. $ 2,131 $ -- $ -- $ -- $ 2,131
2005 ............................................. 221 38,180 25,175 2,300 65,876
2006 ............................................. -- -- -- -- --
2007 ............................................. -- -- -- -- --
2008 ............................................. -- -- -- -- --
Thereafter ....................................... -- -- -- -- --
Total future minimum payments .................... 2,352 38,180 25,175 2,300 68,007
Less: Amounts representing interest .............. 81 -- -- -- 81
Present value of minimum repayments .............. 2,271 38,180 25,175 2,300 67,926
Less: Current portion of long-term debt .......... 2,097 -- -- -- 2,097
Long-term debt, net of current portion ........... $ 174 $ 38,180 $ 25,175 $ 2,300 $ 65,829
</Table>
(7) STOCKHOLDERS' EQUITY
(a) AUTHORIZED CAPITAL STOCK We have authorized for issuance 85,000,000 shares
of common stock, $0.001 par value per share ("common stock") and 15,000,000
shares of preferred stock, $0.001 par value per share ("Preferred Stock").
(b) REVERSE STOCK SPLIT At a Special Meeting of Shareholders held on February
18, 2004, shareholders voted to give the iBasis board of directors authority to
effect a reverse split of our common stock. The affirmative vote by shareholders
permits our board of directors to choose to effect a reverse stock split of our
common stock at a ratio of between one-and-a-half for one (1.5:1) and five for
one (5:1). Alternatively, the board may choose not to affect such a split.
(c) TREASURY STOCK During 2002, we negotiated a settlement of the 2,070,225
shares of our common stock that we placed into escrow in connection with the
acquisition of PriceInteractive, Inc. in 2001. As a part of this settlement,
1,135,113 shares were returned to us and have been accounted for on the
accompanying balance sheet as treasury stock, stated at the fair value of the
shares on the date of the settlement.
(d) STOCK INCENTIVE PLAN Our 1997 Stock Incentive Plan (the "Plan") provides
for the granting of restricted stock awards and incentive stock options ("ISOs")
and nonqualified options to purchase shares of common stock to key employees,
directors and consultants. Under the terms of the Plan, the exercise price of
options granted shall be determined by the Board of Directors and for ISOs shall
not be less than fair market value of our common stock on the date of grant.
Options vest quarterly in equal installments over two to four years, provided
that no options shall
F-40
<Page>
vest during the employees' first year of employment. The expiration date of each
stock option shall be determined by the Board of Directors, but shall not exceed
10 years from the date of grant.
As a result of a special meeting of our stockholders, held in February
2001, the maximum number of shares of common stock that could be purchased under
the Plan increased from 5.7 million to 9.0 million. In addition, as a result of
that meeting, we assumed the PriceInteractive Stock Option Plan and all of the
outstanding options to purchase the common stock of PriceInteractive, Inc. and
converted such assumed options into options to purchase 1,021,434 shares of our
common stock.
The following table summarizes the option activity for the years ended
December 31, 2003, 2002 and 2001:
<Table>
<Caption>
WEIGHTED
NUMBER EXERCISE AVERAGE
OF PRICE EXERCISE
SHARES PER SHARE PRICE
--------- -------------- --------
(IN THOUSANDS)
Outstanding, January 1, 2001.................................................. 4,239 $0.03-$74.63 $ 8.76
Granted.................................................................... 4,523 0.43-3.71 2.16
Options assumed in connection with the acquisition of PriceInteractive,
Inc..................................................................... 1,021 0.85-5.89 2.52
Exercised.................................................................. (706) 0.41-7.00 3.52
Forfeited.................................................................. (1,309) 0.03-74.63 7.26
Outstanding, December 31, 2001................................................ 7,768 0.43-74.63 5.04
Granted.................................................................... 312 0.25-0.97 0.61
Exercised.................................................................. (149) 0.50-2.13 0.82
Forfeited.................................................................. (5,674) 0.37-74.63 6.06
Outstanding, December 31, 2002................................................ 2,257 0.25-28.75 2.02
Granted.................................................................... 4,710 0.38-1.54 1.02
Exercised.................................................................. (128) 0.86-1.57 1.39
Forfeited.................................................................. (507) 0.25-14.81 1.86
Outstanding, December 31, 2003................................................ 6,332 $0.25-$28.75 $ 1.35
---------
Exercisable, December 31, 2003................................................ 2,216 $0.25-$28.75 $ 1.90
---------
Exercisable, December 31, 2002................................................ 1,160 $0.43-$28.75 $ 2.29
---------
Exercisable, December 31, 2001................................................ 1,694 $0.43-$74.63 $ 7.69
---------
</Table>
The following table summarizes information relating to currently
outstanding and exercisable stock options as of December 31, 2003:
F-41
<Page>
<Table>
<Caption>
OUTSTANDING
-----------
WEIGHTED EXERCISABLE
AVERAGE -----------
REMAINING WEIGHTED WEIGHTED
CONTRACTUAL AVERAGE AVERAGE
OUTSTANDING LIFE EXERCISE OPTIONS EXERCISE
RANGE OF EXERCISE PRICES OPTIONS (IN YEARS) PRICE OUTSTANDING PRICE
- ------------------------ -------------- ----------- ---------- -------------- --------
(IN THOUSANDS) (IN THOUSANDS)
$0.25-$0.69...................... 335 8.30 $ 0.50 128 $ 0.54
$0.72............................ 997 7.86 $ 0.72 916 $ 0.72
$0.88-$1.10...................... 2,882 9.27 $ 0.91 371 $ 1.00
$1.24-$3.10...................... 1,729 9.34 $ 1.35 462 $ 1.53
$3.71-$5.00...................... 283 6.29 $ 4.46 247 $ 4.55
$11.00-$13.50.................... 94 6.39 $ 13.45 82 $ 13.44
$14.81-$28.75.................... 12 6.64 $ 16.63 10 $ 16.92
6,332 8.84 $ 1.35 2,216 $ 1.90
-------------- ----------- ---------- -------------- --------
</Table>
At December 31, 2003, options to purchase 1,082,357 shares of common
stock were available for future grants under the Plan.
We apply the accounting provisions prescribed in APB No. 25 and related
Interpretations. In 1999 we issued stock options with an exercise price less
than the fair market value of the common stock as determined for accounting
purposes. Deferred compensation related to these stock options of approximately
$2.4 million was recorded and was amortized over four years, the vesting period
of those options. In connection with the 2001 acquisition of PriceInteractive,
Inc., we assumed vested options with exercise prices that were less than the
fair market value of our common stock as determined for accounting purposes. As
such, we recorded approximately $1.8 million of deferred compensation which was
amortized over the remaining life of those options of up to four years. Deferred
compensation was reduced in 2002 due to the settlement with the former
shareholders of PriceInteractive and due to the forfeit of options by Company
employees. As of December 31, 2003, all deferred compensation had been
amortized.
During 2001, we accelerated vesting on 92,500 to purchase common stock
in relation to severance agreements with employees. Accordingly, the Company
recorded non-cash compensation expense of approximately $0.2 million which is
included in general and administrative expenses in the accompanying consolidated
statement of operations for 2001.
Total compensation cost recognized in the statements of operations as a
result of stock-based employee compensation awards was $0.1 million, $1.0
million and $1.4 million for the years ended December 31, 2003, 2002, and 2001,
respectively.
(e) STOCK OPTION EXCHANGE PROGRAM In December 2002 we announced an offer to
exchange outstanding employee stock options in return for new stock options to
be granted by us. In exchange for existing options, each option holder received
a commitment to receive new options to be issued exercisable for the same number
of shares of common stock tendered by the option holder and accepted for
exchange. A total of 1,786,950 options were accepted for exchange under the
exchange offers and, accordingly, were canceled in 2002. The new option grants
were granted in the second quarter of 2003 at $1.24 per share, more than six
months and one day from the date on which each exchange offer terminated. The
new options granted to our employees vest quarterly over a two-year period.
F-42
<Page>
iBASIS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(7) STOCKHOLDERS' EQUITY
(f) EMPLOYEE STOCK PURCHASE PLAN In 1999, our Board of Directors and
stockholders approved the 1999 iBasis, Inc. Employee Stock Purchase Plan (the
"ESPP"), which enables eligible employees to acquire shares of our common stock
through payroll deductions. The ESPP is intended to qualify as an employee stock
purchase plan under Section 423 of the Internal Revenue Code. The offering
periods under the ESPP start on January 1 and July 1 of each year and end on
June 30 and December 31 of each year, unless otherwise determined by the Board
of Directors. During each offering period, an eligible employee may select a
rate of payroll deduction from 1% to 10% of compensation, up to an aggregate of
$12,500 in any offering period. The purchase price for common stock purchased
under the ESPP is 85% of the lesser of the fair market value of the shares on
the first or last day of the offering period. We issued 364,531 and 131,607
shares under the ESPP during 2002 and 2001, respectively. No shares were issued
under the ESPP in 2003 and, at December 31, 2003, all shares authorized under
the ESPP had been issued.
(g) WARRANTS As described in Note 6 in 2003, we issued 4,915,416 warrant shares
in connection with the exchange of our Existing Notes for Existing Senior Notes.
Each warrant share is exercisable into our common stock on a one-to-one basis at
an exercise price of $0.65 per warrant share and are exercisable over a
five-year term. In December 2002, in conjunction with the initiation of our bank
credit lines, we issued a warrant to the bank for the purchase of 337,500 shares
of our common stock at an exercise price of $0.337 per share. In January 2004,
the bank exercised its warrant in full, on a net issue basis, and received
272,876 shares of our common stock. As a result of the bank exercising its
warrant on a net issue basis no cash was received by us.
(h) SHARES ISSUABLE UPON CONVERSION OF THE EXISTING NOTES At December 31, 2003,
the outstanding balance of $38.2 million in Existing Notes, issued in 2000, were
convertible into 443,232 shares of our common stock at a conversion price of
$86.14 per share.
(i) RESERVED SHARES At December 31, 2003, we had 7,438,036 shares reserved for
issuance under our Stock Incentive Plan and 5,252,916 shares reserved for
exercise of stock warrants, which included 4,915,416 warrants relating to the
Existing Senior Notes and 337,500 warrants we had issued to our bank as well as
443,232 shares reserved for issuance upon conversion of the Existing Notes. In
January 2004, the bank exercised its warrant in full, on a net issue basis, and
received 272,876 shares of our common stock.
(8) COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
We lease our administrative and operating facilities and certain
equipment under non-cancelable operating leases, which expire at various dates
through 2009. The future approximate minimum lease payments under such operating
leases consist of the following:
<Table>
<Caption>
YEAR (IN THOUSANDS)
---- --------------
2004 ........................................................................... $ 3,394
2005 ........................................................................... 2,233
2006 ........................................................................... 1,709
2007 ........................................................................... 1,709
2008 ........................................................................... 1,454
Thereafter ..................................................................... 1,846
Total future minimum lease payments ............................................ $ 12,345
</Table>
F-43
<Page>
Total rent expense included in the consolidated statements of operations
was approximately $3,669,000, $3,918,000, and $4,384,000 for the years ended
December 31, 2003, 2002, and 2001, respectively.
LITIGATION
In addition to litigation that we have initiated or responded to in the
ordinary course of business, we are currently party to the following potentially
material legal proceedings:
Beginning August 1, 2001, we were served with several class action
complaints that were filed in the United States District Court for the Southern
District of New York against us and several of our officers, directors, and
former officers and directors, as well as against the investment banking firms
that underwrote our November 11, 1999 initial public offering of common stock
and our March 9, 2000 secondary offering of common stock. The complaints were
filed on behalf of persons who purchased our common stock during different time
periods, all beginning on or after November 10, 1999 and ending on or before
December 6, 2000.
The complaints are similar to each other and to hundreds of other
complaints filed against other issuers and their underwriters, and allege
violations of the Securities Act of 1933 and the Securities Exchange Act of 1934
primarily based on the assertion that there was undisclosed compensation
received by our underwriters in connection with our public offerings. The
plaintiffs have sought an as-yet undetermined amount of monetary damages in
relation to these claims. On September 4, 2001, the cases against iBasis were
consolidated. On October 9, 2002, the individual defendants were dismissed from
the litigation by stipulation and without prejudice. We believe that iBasis and
the individual defendants have meritorious defenses to the claims made in the
complaints and should it ever become necessary we intend to contest the lawsuits
vigorously. Nevertheless, in deciding to pursue settlement, we considered, among
other factors, the substantial costs and the diversion of our management's
attention and resources that would be required by litigation. We cannot assure
you that the settlement which has been finalized will be accepted by the court,
or that we will be fully covered by collateral or related claims from
underwriters, and that we would be successful in resulting litigation. In
addition, even though we have insurance and contractual protections that could
cover some or all of the potential damages in these cases, or amounts that we
might have to pay in settlement of these cases, an adverse resolution of one or
more of these lawsuits could have a material adverse affect on our financial
position and results of operations in the period in which the lawsuits are
resolved. We are not presently able to estimate potential losses, if any,
related to the lawsuits.
We are also party to suits for collection, related commercial disputes,
claims from carriers and foreign service partners over reconciliation of
payments for circuits, Internet bandwidth and/or access to the public switched
telephone network, and claims from estates of bankrupt companies alleging that
we received preferential payments from such companies prior to their bankruptcy
filings. We intend to prosecute vigorously claims that we have brought and
employ all available defenses in contesting claims against us. Nevertheless, in
deciding whether to pursue settlement, we will consider, among other factors,
the substantial costs and the diversion of management's attention and resources
that would be required in litigation. In light of such costs, we have settled
various and in some cases similar matters on what we believe have been favorable
terms which did not have a material impact our financial position, results of
operations, or cash flows. The results or failure of any suit may have a
material adverse affect on our business.
(9) SEGMENT AND GEOGRAPHIC INFORMATION
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for reporting information about operating
segments in annual financial statements and requires selected information about
operating segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services, and
geographic areas. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision-making group, in
deciding how to allocate resources and in assessing performance. Our chief
operating decision-making group is composed of the chief executive officer,
members of senior management and the Board of Directors. We have viewed our
operations and we manage our business principally as one operating segment.
The following table represents percentage revenue derived from
individual countries:
F-44
<Page>
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
--------------------------------
2003 2002 2001
-------- -------- --------
United States ............................... 57% 55% 58%
United Kingdom .............................. 16 11 13
China ....................................... 3 10 13
Other ....................................... 24 21 14
100% 100% 100%
-------- -------- --------
</Table>
We did not have a customer that accounted for 10% or more of accounts
receivable at December 31, 2003. We had one customer account for 17% of accounts
receivable at December 31, 2002.
We had one customer, each year, account for 11%, 12%, and 14% of net
revenue for the years ended December 31, 2003, 2002, and 2001, respectively.
The net book value of long-lived tangible assets by geographic area was
as follows:
<Table>
<Caption>
GEOGRAPHIC LOCATION 2003 2002
------------------- -------- --------
(IN THOUSANDS)
North America........................................... $ 16,930 $ 31,855
Europe.................................................. 141 209
Asia.................................................... 104 293
$ 17,175 $ 32,357
-------- --------
</Table>
(10) VALUATION AND QUALIFYING ACCOUNTS
The allowance for doubtful accounts reflects our best estimate of
probable losses inherent in the account receivable balance. We determine the
allowance based on known troubled accounts, historical experience, and other
currently available evidence. Activity in the allowance for doubtful accounts is
as follows:
<Table>
<Caption>
RECOVERY
BALANCE AT OF PREVIOUSLY
BEGINNING OF CHARGED TO COSTS WRITE-OFFS RESERVED BALANCE AT
YEAR ENDED DECEMBER 31, YEAR AND EXPENSES AND OTHER BALANCE END OF YEAR
----------------------- ------------ --------------- ------------ ------------- ------------
2001 ........................................ $ 2,179 9,161 (5,473) -- $ 5,867
2002 ........................................ $ 5,867 10,026 (8,060) -- $ 7,833
2003 ........................................ $ 7,833 800 (1,236) (4,269) $ 3,128
</Table>
(11) RESTRUCTURING COSTS
2001 RESTRUCTURING
During 2001, we announced a restructuring plan to better align our
organization with our corporate strategy and recorded a charge of approximately
$51.8 million in accordance with the criteria set forth in EITF 94-3 and SEC
F-45
<Page>
Staff Accounting Bulletin 100. The restructuring included the write-off of
property and equipment, the termination of certain contractual obligations and
the reduction in our workforce resulting in employee benefit costs.
The write-off of property and equipment related primarily to the
abandonment and related costs of certain equipment in a limited number of our
network data centers and internet central offices. As a result of adopting the
Openwave platform for our former unified messaging business, certain equipment,
which was previously deployed in our New York City and Cambridge, Massachusetts
data centers, were no longer required. In addition, the write-down of equipment
at internet central offices was related to our increasing focus within ours
wholesale VoIP business on serving the largest international carriers (Tier
One). Large Tier One carriers tend to maintain greater geographic footprints and
the ability to cost efficiently connect their networks to our network. As a
result, the equipment located in some of our internet central offices was no
longer required and has therefore been written down to its estimated net
realizable value.
The termination of contractual obligations represented the anticipated
cost of negotiated settlements with providers of facility space and
telecommunications circuits related to the network data centers and internet
central offices which are no longer in operation.
The employee severance costs related to a reduction in our workforce of
136 full time employees on a worldwide basis, 71 of which were in research and
development, 39 of which were in sales and marketing and the remaining 26 in
general and administrative functions. These cost reduction measures were
completed by the end of the second quarter of 2002.
The components of the 2001 Restructuring charge were as follows:
<Table>
<Caption>
(IN THOUSANDS)
--------------
Write-off of property and equipment ............................................ $ 42,629
Termination of contractual obligations ......................................... 7,442
Employee severance costs ....................................................... 1,763
Total .......................................................................... $ 51,834
--------------
</Table>
2002 RESTRUCTURING
During 2002, we announced cost reduction measures and recorded a charge
of approximately $5.5 million in the accompanying consolidated statement of
operations:
The write-off of fixed assets relates primarily to the closure and
abandonment of our Miami and Singapore internet central offices. The costs
include the write-off of leasehold improvements as well as a provision for
termination costs for the facility space and telecommunication circuits. As we
continued to focus on serving the largest international, Tier-One carriers who
tend to maintain greater geographic footprints, we approved a plan to close the
Miami and Singapore internet central offices and route traffic through our other
central facilities. In addition, we wrote off certain assets which were
considered to be impaired due to our plan to move to a new switchless
architecture in our VoIP network.
The employee severance costs relate to a reduction in our workforce as
we terminated 44 employees on June 28, 2002. Of these 44 people, 19 were within
research and development, 10 were from sales and marketing and 15 were from
general and administrative departments. These cost reduction measures were
completed in the first quarter of 2003.
In addition, the 2002 restructuring expense was reduced by a change in
estimated restructuring costs related to the 2001 restructuring and specifically
related to a reduction in the estimated cost of terminating contractual lease
obligations.
F-46
<Page>
The components of the 2002 Restructuring charge were as follows:
<Table>
<Caption>
(IN THOUSANDS)
--------------
Write off of fixed assets and facilities costs ................................. $ 2,427
Termination of contractual lease obligations ................................... 2,794
Employee severance costs ....................................................... 750
Less: Change in estimate of 2001 restructuring costs ........................... (435)
Total restructuring and other non-recurring costs .............................. $ 5,536
--------------
</Table>
At December 31, 2003, accrued restructuring costs of approximately $2.2
million consisted of costs accrued for the termination of certain contractual
obligations. At December 31, 2003 and 2002, the current portion of accrued
restructuring costs were $0.8 million and $0.9 million and the long-term portion
of accrued restructuring costs were $1.4 million and $2.3 million, respectively.
A summary of accrued restructuring costs for the 2001 and 2002 Restructuring
charges are as follows:
<Table>
<Caption>
TERMINATION
PROPERTY OF EMPLOYEE
AND CONTRACTUAL SEVERANCE
2001 RESTRUCTURING CHARGE: EQUIPMENT OBLIGATIONS COSTS TOTAL
- -------------------------- ------------ ------------ ------------ ------------
Original charge ............................. $ 42,629 $ 7,442 $ 1,763 $ 51,834
Less: write-off of property and equipment ... 42,258 -- -- 42,258
Less: cash payments ......................... 4,232 1,460 5,692
Balance, December 31, 2001 .................. 371 3,210 303 3,884
Less: cash payments ......................... -- 2,640 303 2,943
Less: adjustments ........................... 371 64 -- 435
Balance, December 31, 2002 .................. -- 506 -- 506
Less: cash payments ......................... -- 325 -- 325
Balance, December 31, 2003 .................. $ -- $ 181 $ -- $ 181
------------ ------------ ------------ ------------
</Table>
<Table>
<Caption>
TERMINATION OF EMPLOYEE
PROPERTY AND CONTRACTUAL SEVERANCE
2002 RESTRUCTURING CHARGE: EQUIPMENT OBLIGATIONS COSTS TOTAL
- -------------------------- --------------- --------------- --------------- ---------------
Original charge ............................. $ 2,427 $ 2,794 $ 750 $ 5,971
Less: write-off of property and equipment ... 2,427 -- -- 2,427
Less: cash payments ......................... 131 725 856
Balance, December 31, 2002 .................. -- 2,663 25 2,688
Less: cash payments ......................... -- 612 -- 612
Balance, December 31, 2003 .................. $ -- $ 2,051 $ 25 $ 2,076
--------------- --------------- --------------- ---------------
</Table>
(12) OTHER LONG-TERM LIABILITIES
F-47
<Page>
Other long-term liabilities at December 31, consist of the following:
<Table>
<Caption>
2003 2002
------------ ------------
(IN THOUSANDS)
Accrued interest on Existing Senior Notes ............................ $ 1,303 $ --
Restructuring charges ................................................ 1,446 2,268
Total ................................................................ $ 2,749 $ 2,268
------------ ------------
</Table>
iBasis, Inc. Notes to Consolidated Financial Statements
F-48
<Page>
(13) Subsidiary Guarantors
In June 2004, we completed a refinancing of our outstanding debt obligations. As
part of the refinancing, we completed an exchange offer (the "Exchange Offer"),
pursuant to which $37.3 million of our outstanding 5 3/4% Convertible
Subordinated Notes due in March 2005 ("Existing Notes"), representing
approximately 98% of the total amount of Existing Notes outstanding, were
tendered for the same principal amount of new 6 3/4% Convertible Subordinated
Notes due in June 2009 ("New Subordinated Notes"). Approximately $0.9 million of
the Existing Notes remain outstanding after the Exchange Offer. Simultaneously
with the Exchange Offer, we prepaid all $25.2 million of our 11 1/2% Senior
Secured Notes due in January 2005 ("Existing Senior Notes") plus accrued but
unpaid interest and issued of warrants exercisable for an aggregate of 5,176,065
shares of our common stock at $1.85 per share (the "Warrants"). In conjunction
with the refinancing, we issued $29.0 million of new 8% Secured Convertible
Notes ("New Secured Notes") due in June 2007, proceeds of which $25.2 million
were used to prepay the Existing Senior Notes. The New Secured Notes are
convertible into shares of common stock at $1.85 per share. Our New Secured
Notes due in June 2007 are fully and unconditionally guaranteed, jointly and
severally, by our wholly-owned subsidiaries, iBasis Global, Inc., iBasis
Holdings, Inc. and iBasis Securities Corporation.
The following tables contain condensed consolidating financial information for
iBasis, Inc ("Parent Company") and iBasis Global, Inc., iBasis Holdings, Inc.,
and iBasis Securities Corporation ("Subsidiary Guarantors"), on a combined
basis, for the periods presented. Separate financial statements of the
Subsidiary Guarantors are not presented as we believe they would be immaterial
to investors.
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2003
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
PARENT SUBSIDIARY
ASSETS COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
---------------- ---------------- ---------------- ----------------
Cash and cash equivalents .................. $ 15,520 $ 1,750 $ -- $ 17,270
Accounts receivable, net ................... 21,247 520 21,767
Prepaid expenses and other current
assets ..................................... 4,568 727 5,295
Due from parent ............................ 13,121 (13,121) --
---------------- ---------------- ---------------- ----------------
Total current assets ....................... 41,335 16,118 (13,121) 44,332
Property and equipment, net ................ 16,931 244 17,175
Deferred debt financing costs, net ......... 326 326
Long-term investment in non-
marketable security ...................... 5,000 5,000
Other assets ............................... 620 85 705
Investment in guarantor subsidiaries ....... 51 (51) --
---------------- ---------------- ---------------- ----------------
Total assets ............................... $ 64,263 $ 16,447 $ (13,172) $ 67,538
================ ================ ================ ================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable ........................... $ 17,678 $ 2,224 $ -- $ 19,902
Accrued expenses ........................... 14,399 4,253 18,652
Deferred revenue ........................... 417 417
Current portion of long-term debt .......... 2,097 2,097
Due to guarantor subsidiaries .............. 2,991 (2,991) --
---------------- ---------------- ---------------- ----------------
Total current liabilities .................. 37,582 6,477 (2,991) 41,068
Long-term debt, net of current portion ..... 65,829 65,829
Other long-term liabilities ................ 2,749 2,749
Stockholders' equity (deficit):
Common stock, $0.001 par value,
authorized 85,000 shares; issued and
outstanding 45,913 shares .................. 46 46
Treasury stock; 1,135 shares at cost ....... (341) (341)
Additional paid-in capital ................. 370,393 10,130 (10,130) 370,393
Capital stock of Guarantor subsidiaries .... 100 (100) --
Accumulated deficit ........................ (411,995) (260) 49 (412,206)
---------------- ---------------- ---------------- ----------------
Total stockholders' equity (deficit) ....... (41,897) 9,970 (10,181) (42,108)
---------------- ---------------- ---------------- ----------------
Total liabilities and stockholders'
equity (deficit) ........................... $ 64,263 $ 16,447 $ (13,172) $ 67,538
================ ================ ================ ================
</Table>
F-49
<Page>
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2002
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<Table>
<Caption>
PARENT SUBSIDIARY
ASSETS COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
---------------- ---------------- ---------------- ----------------
Cash and cash equivalents .................. $ 20,359 $ 11,958 $ -- $ 32,317
Accounts receivable, net ................... 19,977 877 20,854
Prepaid expenses and other current
assets ..................................... 4,212 1,162 5,374
Due from guarantor subsidiaries ............ 1,671 (1,671) --
---------------- ---------------- ---------------- ----------------
Total current assets ....................... 46,219 13,997 (1,671) 58,545
Property and equipment, net ................ 31,855 502 32,357
Deferred debt financing costs, net ......... 1,382 1,382
Long-term investment in non-
marketable security ...................... 5,000 5,000
Other assets ............................... 1,124 116 1,240
Investment in guarantor subsidiaries ....... 10,181 (10,181) --
---------------- ---------------- ---------------- ----------------
Total assets ............................... $ 95,761 $ 14,615 $ (11,852) $ 98,524
================ ================ ================ ================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable ........................... $ 12,023 $ 1,119 $ -- $ 13,142
Accrued expenses ........................... 15,828 2,320 18,148
Current portion of long-term debt .......... 5,349 5,349
Due to parent .............................. 1,671 (1,671) --
---------------- ---------------- ---------------- ----------------
Total current liabilities .................. 33,200 5,110 (1,671) 36,639
Long-term debt, net of current portion ..... 93,590 93,590
Other long-term liabilities ................ 2,268 2,268
Stockholders' equity (deficit):
Common stock, $0.001 par value,
authorized 85,000 shares; issued and
outstanding 45,785 shares .................. 46 46
Treasury stock; 1,135 shares at cost ....... (341) (341)
Additional paid-in capital ................. 368,927 10,130 (10,130) 368,927
Capital stock of Guarantor subsidiaries .... 100 (100) --
Deferred compensation ...................... (86) (86)
Accumulated deficit ........................ (401,843) (725) 49 (402,519)
---------------- ---------------- ---------------- ----------------
Total stockholders' equity (deficit) ....... (33,297) 9,505 (10,181) (33,973)
---------------- ---------------- ---------------- ----------------
Total liabilities and stockholders'
equity (deficit) ........................... $ 95,761 $ 14,615 $ (11,852) $ 98,524
================ ================ ================ ================
</Table>
F-50
<Page>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003
(IN THOUSANDS)
<Table>
<Caption>
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
---------------- ---------------- ---------------- ----------------
Net revenue ............................ $ 177,810 $ 28,645 $ (28,296) $ 178,159
Costs and expenses:
Data communications and
telecommunications ..................... 139,046 22,380 (8,573) 152,853
Research and development ............... 11,654 1,733 13,387
Selling and marketing .................. 5,248 2,265 7,513
General and administrative ............. 26,107 1,281 (19,723) 7,665
Depreciation and amortization .......... 19,701 364 20,065
Non-cash stock-based compensation ...... 86 86
---------------- ---------------- ---------------- ----------------
Total costs and expenses ............... 201,842 28,023 (28,296) 201,569
(Loss) income from operations .......... (24,032) 622 -- (23,410)
Interest income ........................ 159 2 161
Interest expense ....................... (3,965) (2) (3,967)
Gain on bond exchanges ................. 16,615 16,615
Other expenses, net .................... (181) (156) (337)
---------------- ---------------- ---------------- ----------------
(Loss) income from continuing
operations ............................. (11,404) 466 -- (10,938)
Income from discontinued operations .... 1,251 1,251
---------------- ---------------- ---------------- ----------------
Net (loss) income ...................... $ (10,153) $ 466 $ -- $ (9,687)
================ ================ ================ ================
</Table>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002
(IN THOUSANDS)
<Table>
<Caption>
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
---------------- ---------------- ---------------- ----------------
Net revenue ........................... $ 164,231 $ 17,453 $ (16,742) $ 164,942
Costs and expenses:
Data communications and
telecommunications .................... 137,470 11,289 (5,912) 142,847
Research and development .............. 16,376 1,405 17,781
Selling and marketing ................. 9,404 1,875 11,279
General and administrative ............ 33,338 1,678 (10,830) 24,186
Depreciation and amortization ......... 31,036 835 31,871
Non-cash stock-based compensation ..... 967 967
Loss on sale of messaging business .... 2,066 2,066
Restructuring costs ................... 5,536 5,536
---------------- ---------------- ---------------- ----------------
Total costs and expenses .............. 236,193 17,082 (16,742) 236,533
(Loss) income from operations ......... (71,962) 371 -- (71,591)
Interest income ....................... 1,405 562 (677) 1,290
Interest expense ...................... (11,708) (577) 677 (11,608)
Gain on bond repurchases .............. 25,790 25,790
Other expenses, net ................... (330) (52) (382)
---------------- ---------------- ---------------- ----------------
(Loss) income from continuing
operations ............................ (56,805) 304 -- (56,501)
Loss from discontinued operations ..... (65,222) $ (65,222)
---------------- ---------------- ---------------- ----------------
Net (loss) income ..................... $ (122,027) $ 304 $ -- $ (121,723)
================ ================ ================ ================
</Table>
F-51
<Page>
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001
(IN THOUSANDS)
<Table>
<Caption>
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
---------------- ---------------- ---------------- ----------------
Net revenue .......................... $ 109,893 $ 9,804 $ (9,517) $ 110,180
Costs and expenses:
Data communications and
telecommunications ................... 99,937 5,056 (2,673) 102,320
Research and development ............. 23,278 661 23,939
Selling and marketing ................ 18,443 1,880 20,323
General and administrative ........... 31,056 1,351 (6,844) 25,563
Depreciation and amortization ........ 31,702 662 32,364
Non-cash stock-based compensation .... 1,368 1,368
Restructuring costs .................. 51,834 51,834
---------------- ---------------- ---------------- ----------------
Total costs and expenses ............. 257,618 9,610 (9,517) 257,711
(Loss) income from operations ........ (147,725) 194 -- (147,531)
Interest income ...................... 9,135 8,165 (8,131) 9,169
Interest expense ..................... (16,518) (8,131) 8,131 (16,518)
Gain on bond repurchases ............. 14,549 14,549
Other expenses, net .................. (565) (22) (587)
---------------- ---------------- ---------------- ----------------
(Loss) income from continuing
operations ........................... (141,124) 206 -- (140,918)
Loss from discontinued operations .... (49,771) (49,771)
---------------- ---------------- ---------------- ----------------
Net (loss) income .................... $ (190,895) $ 206 $ -- $ (190,689)
================ ================ ================ ================
</Table>
F-52
<Page>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2003
(IN THOUSANDS)
<Table>
<Caption>
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
---------------- ---------------- ---------------- ----------------
Cash flows from operating activities:
(Loss) income from continuing operations .... $ (11,404) $ 466 $ -- $ (10,938)
Adjustments to reconcile net loss to
net cash used in operating activities
Gain on bond exchanges .................... (16,615) (16,615)
Depreciation and amortization ............. 19,701 364 20,065
Amortization of deferred debt
financing costs ......................... 333 333
Amortization of deferred
compensation ............................ 86 86
Bad debt expense .......................... 800 800
Recovery of previously reserved
receivable balance ...................... (4,269) (4,269)
Change in assets and liabilities
Accounts receivable ..................... 2,199 357 2,556
Prepaid expenses and other
current assets ........................ 895 435 1,330
Other assets ............................ 504 31 535
Accounts payable ........................ 5,655 1,105 6,760
Accrued expenses ........................ (6,650) 1,932 (4,718)
Deferred revenue ........................ 417 417
Other long-term liabilities ............. 481 481
Due from parent (14,792) (14,792)
Due to guarantor subsidiaries ........... 14,792 14,792
---------------- ---------------- ---------------- ----------------
Net cash provided by (used in)
continuing operating activities ............. 6,925 (10,102) (3,177)
---------------- ---------------- ---------------- ----------------
Cash flows from investing activities:
Purchases of property and equipment ......... (4,346) (106) (4,452)
Payment associated with the sale of
Speech Solutions Business ................... (736) (736)
---------------- ---------------- ---------------- ----------------
Net cash used in investing activities ....... (5,082) (106) (5,188)
---------------- ---------------- ---------------- ----------------
Cash flows from financing activities:
Bank borrowings ............................. 9,200 9,200
Payments of bank borrowings ................. (9,200) (9,200)
Payments of principal on capital lease
obligations ............................... (5,838) (5,838)
Professional fees paid for exchange
of bonds .................................. (935) (935)
Proceeds from exercises of common
stock options ............................. 91 91
---------------- ---------------- ---------------- ----------------
Net cash provided by financing
activities ................................ (6,682) (6,682)
---------------- ---------------- ---------------- ----------------
Net increase (decrease) in cash and cash
equivalents ................................. (4,839) (10,208) (15,047)
---------------- ---------------- ---------------- ----------------
Cash and cash equivalents, beginning
of period ................................. 20,359 11,958 32,317
---------------- ---------------- ---------------- ----------------
Cash and cash equivalents, end of
period .................................... $ 15,520 $ 1,750 $ -- $ 17,270
================ ================ ================ ================
</Table>
F-53
<Page>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2002
(IN THOUSANDS)
<Table>
<Caption>
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
---------------- ---------------- ---------------- ----------------
Cash flows from operating activities:
(Loss) income from continuing operations ..... $ (56,805) $ 304 $ -- $ (56,501)
Adjustments to reconcile net loss to
net cash used in operating activities
Gain on bond repurchases ................... (25,790) (25,790)
Restructuring costs ........................ 5,536 5,536
Depreciation and amortization .............. 31,036 835 31,871
Loss on sale of messaging business ......... 2,066 2,066
Amortization of deferred debt
Financing costs .......................... 672 672
Amortization of deferred
compensation ............................. 967 967
Bad debt expense ........................... 9,674 352 10,026
Change in assets and liabilities
Accounts receivable ...................... (6,175) (255) (6,430)
Prepaid expenses and other
current assets ......................... 4,070 (463) 3,607
Other assets ............................. 670 670
Accounts payable ......................... 2,006 477 2,483
Accrued expenses ......................... (15,904) 1,492 (14,412)
Other long-term liabilities .............. 2,268 2,268
Due to parent (78,735) (78,735)
Due from guarantor subsidiaries .......... 78,735 78,735
---------------- ---------------- ---------------- ----------------
Net cash provided by (used in)
continuing operating activities .............. 33,026 (75,993) (42,967)
Net cash used in discontinued operations
............................................. (1,874) (1,874)
---------------- ---------------- ---------------- ----------------
Net cash provided by (used in) operating
activities ................................... 31,152 (75,993) (44,841)
---------------- ---------------- ---------------- ----------------
Cash flows from investing activities:
Purchases of property and equipment .......... (3,692) (940) (4,632)
Decrease in marketable securities ............ 25,614 25,614
Decrease in long-term marketable
securities ................................. 8,411 8,411
Proceeds from sale of messaging business ..... 168 168
Proceeds from sale of Speech Solutions
Business ..................................... 17,000 17,000
---------------- ---------------- ---------------- ----------------
Net cash provided by investing activities .... 13,476 33,085 46,561
---------------- ---------------- ---------------- ----------------
Cash flows from financing activities:
Decrease in restricted cash .................. 8,867 8,867
Bank borrowings .............................. 2,300 2,300
Payments of principal on long-term debt ...... (3,866) (3,866)
Payments of principal on capital lease
obligations ................................ (38,918) (38,918)
Repurchase of bonds .......................... (13,992) (13,992)
Proceeds from exercises of warrants and
common stock options ......................... 122 122
Proceeds from employee stock purchase
plan ......................................... 285 285
---------------- ---------------- ---------------- ----------------
Net cash used in financing activities ........ (45,202) (45,202)
---------------- ---------------- ---------------- ----------------
Net decrease in cash and cash equivalents .... (574) (42,908) (43,482)
---------------- ---------------- ---------------- ----------------
Cash and cash equivalents, beginning
of period .................................. 20,933 54,866 75,799
---------------- ---------------- ---------------- ----------------
Cash and cash equivalents, end of
period ..................................... $ 20,359 $ 11,958 $ -- $ 32,317
================ ================ ================ ================
</Table>
F-54
<Page>
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2001
(IN THOUSANDS)
<Table>
<Caption>
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
---------------- ---------------- ---------------- ----------------
Cash flows from operating activities:
(Loss) income from continuing operations .... $ (141,124) $ 206 $ -- $ (140,918)
Adjustments to reconcile net loss to
net cash used in operating activities
Gain on bond repurchases .................. (14,549) (14,549)
Restructuring costs ....................... 51,834 51,834
Depreciation and amortization ............. 31,702 662 32,364
Amortization of deferred debt
Financing costs ......................... 1,026 1,026
Amortization of deferred
compensation ............................ 1,214 1,214
Non-cash compensation expense
related to stock options ................ 154 154
Bad debt expense .......................... 9,161 9,161
Change in assets and liabilities
Accounts receivable ..................... (15,277) (990) (16,267)
Prepaid expenses and other
current assets ........................ (714) (695) (1,409)
Other assets ............................ 3,036 3,036
Accounts payable ........................ 1,081 498 1,579
Accrued expenses ........................ 3,682 734 4,416
Due to parent (210,398) (210,398)
Due from guarantor subsidiaries ......... 210,398 210,398
---------------- ---------------- ---------------- ----------------
Net cash provided by (used in)
continuing operating activities ............. 141,624 (209,983) (68,359)
Net cash used in discontinued operations .... (13,252) (13,252)
---------------- ---------------- ---------------- ----------------
Net cash provided by (used in) operating
activities .................................. 128,372 (209,983) (81,611)
---------------- ---------------- ---------------- ----------------
Cash flows from investing activities:
Purchase of PriceInteractive, Inc. net
of cash acquired ............................ (38,118) (38,118)
Purchases of property and equipment ......... (33,974) (1,093) (35,067)
Decrease in marketable securities ........... 58,122 58,122
---------------- ---------------- ---------------- ----------------
Net cash (used in) provided by investing
activities .................................. (72,092) 57,029 (15,063)
---------------- ---------------- ---------------- ----------------
Cash flows from financing activities:
Increase in restricted cash ................. (8,867) (8,867)
Bank borrowings ............................. 4,000 4,000
Payments of principal on long-term debt ..... (2,655) (2,655)
Payments of principal on capital lease
obligations ............................... (23,760) (23,760)
Repurchase of bonds ......................... (5,862) (5,862)
Proceeds from exercises of warrants and
common and stock options .................... 956 956
Proceeds from employee stock purchase
plan ........................................ 480 480
---------------- ---------------- ---------------- ----------------
Net cash used in financing activities ....... (35,708) (35,708)
---------------- ---------------- ---------------- ----------------
Net increase (decrease) in cash and cash
equivalents ................................. 20,572 (152,954) (132,382)
---------------- ---------------- ---------------- ----------------
Cash and cash equivalents, beginning
of period ................................. 361 207,820 208,181
---------------- ---------------- ---------------- ----------------
Cash and cash equivalents, end of
period .................................... $ 20,933 $ 54,866 $ -- $ 75,799
================ ================ ================ ================
</Table>
(14) SUMMARY OF QUARTERLY INFORMATION (UNAUDITED)
Quarterly financial information for 2003 and 2002 is as follows:
<Table>
<Caption>
FIRST SECOND THIRD FOURTH TOTAL
2003 QUARTER QUARTER QUARTER QUARTER YEAR
---- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net revenue ................................. $ 41,841 $ 39,119 $ 44,032 $ 53,167 $ 178,159
Total cost and operating expenses ........... 49,254 47,312 48,796 56,207 201,569
Income (loss) from continuing operations .... 4,032 (5,505) (5,633) (3,832) (10,938)
Income from discontinued operations ......... -- -- -- 1,251 1,251
Net loss .................................... $ 4,032 $ (5,505) $ (5,633) $ (2,581) $ (9,687)
---------- ---------- ---------- ---------- ----------
Basic and diluted net loss per share:
Income (loss) from continuing operations . $ 0.09 $ (0.12) $ (0.13) $ (0.09) $ (0.24)
Income from discontinued operations ...... -- -- -- 0.03 0.03
Net loss ................................. $ 0.09 $ (0.12) $ (0.13) $ (0.06) $ (0.21)
---------- ---------- ---------- ---------- ----------
</Table>
<Table>
<Caption>
FIRST SECOND THIRD FOURTH TOTAL
2002 QUARTER(1) QUARTER(1) QUARTER(1) QUARTER(1)(2) YEAR(1)
- ---- ---------- ---------- ---------- ------------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net revenue ......................................... $ 41,726 $ 41,923 $ 38,359 $ 42,934 $ 164,942
Total cost and operating expenses ................... 62,609 71,151 50,262 52,511 236,533
Loss from continuing operations ..................... (14,124) (19,655) (11,194) (11,528) (56,501)
Loss (income) from discontinued operations .......... (3,839) (61,531) (531) 679 (65,222)
Net loss ............................................ $ (17,963) $ (81,186) $ (11,725) $ (10,849) $ (121,723)
---------- ---------- ---------- ------------- ----------
Basic and diluted net loss per share:
Loss from continuing operations .................. $ (0.30) $ (0.44) $ (0.25) $ (0.26) $ (1.25)
Loss (income) from discontinued operations ....... (0.10) (1.36) (0.01) 0.02 (1.45)
Net loss ......................................... $ (0.40) $ (1.80) $ (0.26) $ (0.24) $ (2.70)
---------- ---------- ---------- ------------- ----------
</Table>
F-55
<Page>
- -----------
(1) Amounts vary from those originally filed on Form 10-Q due to the
reclassification of the operating results of the Company's Speech
Solutions Business as a discontinued operation beginning in the second
quarter 2002.
(2) The results for the fourth quarter 2002 include a restructuring charge
of approximately $1.6 million.
F-56
<Page>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Expenses of the Registrant in connection with the issuance and
distribution of the securities being registered, other than the underwriting
discount, are estimated as follows:
<Table>
SEC Registration Fee $ 4,826
Printing and Engraving Expenses $10,000
Legal Fees and Expenses $40,000
Accountants' Fees and Expenses $30,000
Miscellaneous Costs $ 1,000
Total $85,826
</Table>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation law empowers a Delaware
corporation to indemnify its officers and directors and certain other persons to
the extent and under the circumstances set forth therein.
The First Amended and Restated Certificate of Incorporation of the
Registrant (as amended from time to time, the "Amended and Restated Certificate
of Incorporation"), and the Amended and Restated By-laws of the Registrant,
copies of which are filed as Exhibits 3.1 and 3.2, provide for indemnification
of officers and directors of the Registrant and certain other persons against
liabilities and expenses incurred by any of them in certain stated proceedings
and under certain stated conditions.
The above discussion of the Registrant's Amended and Restated
Certificate of Incorporation, Amended and Restated By-Laws and Section 145 of
the Delaware General Corporation Law is not intended to be exhaustive and is
qualified in its entirety by such Amended and Restated Certificate of
Incorporation, Amended and Restated By-Laws and statute.
ITEM 15: RECENT SALES OF UNREGISTERED SECURITIES
In January 2003, the Registrant exchanged an aggregate principal amount
of $30,200,000 of the Registrant's 5 3/4% Convertible Subordinated Notes due
2005 for an aggregate principal amount of $15,100,000 of the Registrant's
11 1/2% Senior Secured Notes due 2005 and warrants to purchase 3,071,184 shares
of common stock pursuant to that certain Securities Exchange Agreement, dated as
of January 30, 2003, among iBasis, Inc., iBasis Global, Inc., the guarantors
named therein, the Symphony Funds named therein and U.S. Bank National Agent
("BNA"), as collateral agent.
In February 2003, the Registrant exchanged an aggregate principal amount
of $7,950,000 of the Registrant's 5 3/4% Convertible Senior Secured Notes due
2005 for an aggregate principal amount of $3,975,000 of the Registrant's 11 1/2%
Senior Secured Notes due 2005 and warrants to purchase 727,627 shares of common
stock pursuant to that certain Securities Exchange Agreement, dated as of
February 21, 2003, by and between iBasis, iBasis Global, Inc., the guarantors
named therein, JMG Triton Offshore Fund Limited CITCO and the other Exchanging
Holders named therein, and BNA, as collateral agent.
In May 2003, the Registrant exchanged an aggregate principal amount of
$12,200,000 of the Registrant's 5 3/4% Convertible Senior Notes due 2005 for an
aggregate principal amount of $6,100,000 of the Registrant's 11 1/2% Senior
Secured Notes due 2005 and warrants to purchase 1,116,605 shares of common
stock, pursuant to a joinder agreement to the February 21, 2003 Securities
Exchange Agreement, dated as of May 29, 2003, between iBasis, Inc., iBasis
Global, Inc., Commonwealth Advisors, Inc., and BNA as collateral agent.
II-1
<Page>
In June 2004, the Registrant repurchased $25.2 million aggregate
principal amount of its 11 1/2% Senior Secured Notes due 2005 for cash equal to
the principal amount plus accrued but unpaid interest and the issuance of
warrants exercisable for an aggregate of 5,176,065 shares of common stock at
$1.85 per share. The Registrant issued $29 million aggregate principal amount of
its 8% Secured Convertible Notes due 2007, of which $25.2 million was used to
finance the prepayment of the 11 1/2% Senior Secured Notes. The 8% Secured
Convertible Notes are convertible into shares of common stock at $1.85 per
share, and mature on June 18, 2007.
In July 2004, the Registrant issued 110,231 shares of common stock to
its investment banker, Imperial Capital, LLC, as partial compensation for
services provided to the Registrant in connection with the refinancing of its
debt obligations.
All of the above-described issuances were exempt from registration
pursuant to Section 4(2) of the Securities Act or Rule 506 of Regulation D
promulgated thereunder, as transactions not involving a public offering. No
underwriters were involved in the foregoing issuances.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBITS
The following is a list of exhibits filed as a part of this registration
statement:
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -------------
3.1 First Amended and Restated Certificate of Incorporation of the
Registrant (incorporated by reference from Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1 (file no. 333-96535)),
as amended by that certain Certificate of Amendment to First Amended
and Restated Certificate of Incorporation of the Registrant
(incorporated by reference from Appendix A to the Registrant's
Definitive Proxy Statement on Schedule 14A (file no. 000-27127)).
3.2 Amended and Restated By-Laws of the Registrant (incorporated by
reference from Exhibit 3.2 to the Registrant's Registration Statement
on Form S-1 (file no. 333-96535)).
4.1 Specimen Certificate for share of the common stock (incorporated by
reference from Exhibit 4.1 to the Registrant's Registration Statement
on Form S-1 (file no. 333-85545)).
4.2 Indenture for the Existing Notes, dated as of March 15, 2000, between
the Registrant and The Bank of New York, as Trustee (incorporated by
reference from Exhibit 4.2 to the Registrant's Registration Statement
on Form S-1 (file no. 333-96533)).
4.3 Form of Existing Note (incorporated by reference from Exhibit 4.3 to
the Registrant's Registration Statement on Form S-1 (file no.
333-96533)).
4.4 Indenture for the New Notes, dated as of June 18, 2004, between the
Registrant and The Bank of New York, as Trustee (incorporated by
reference from Exhibit 99.1 to the Registrant's Current Report on Form
8-K dated June 29, 2004 (file no. 000-27127)).
4.5 Global Note, issued June 18, 2004, representing $37,285,000 aggregate
principal amount of New Notes (incorporated by reference from Exhibit
99.2 to the Registrant's Current Report on Form 8-K dated June 29, 2004
(file no. 000-27127)).
4.6 Indenture for the New Secured Notes, dated as of June 18, 2004, between
the Registrant and the Bank of New York, as trustee (incorporated by
reference from Exhibit 99.7 to the Registrant's Current Report on Form
8-K dated June 29, 2004 (file no. 000-27127)).
4.7 Global Note, issued June 18, 2004, representing $29,000,000 aggregate
principal amount of New Secured Notes (incorporated by reference from
Exhibit 99.8 to the Registrant's Current Report on Form 8-K dated June
29, 2004 (file no. 000-27127)).
5 Opinion of Bingham McCutchen LLP.*
10.1 Lease, dated January 8, 1999, as amended, between the Registrant and
Rodger P. Nordblum and Peter C. Nordblum as Trustees of Northwest
Associates under Declaration of Trust dated December 9, 1971 with
respect to property located at 20 Second Avenue, Burlington,
Massachusetts (incorporated by reference from Exhibit 10.1 to the
Registrant's Registration Statement on Form S-1 (file no. 333-85545)).
</Table>
II-2
<Page>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -------------
10.2 Lease, dated as of August 7, 1998, between the Registrant and 111
Eighth Avenue LLC, relating to property located at 111 Eighth Avenue,
New York, New York (incorporated by reference from Exhibit 10.3 to the
Registrant's Registration Statement on Form S-1 (file no. 333-85545)).
10.3 Lease, dated December 11, 1998 between the Registrant and Downtown
Properties L.L.C., with respect to property located at 611 Wilshire
Boulevard, Los Angeles, California (incorporated by reference from
Exhibit 10.4 to the Registrant's Registration Statement on Form S-1
(file no. 333-85545)).
10.4 Warrant, dated as of September 10, 1997, for the purchase of shares of
preferred stock of the Company issued to TLP Leasing Programs, Inc.
(incorporated by reference from Exhibit 10.5 to the Registrant's
Registration Statement on Form S-1 (file no. 333-85545)).
10.5 Warrant, dated as of June 8, 1998, for the purchase of shares of
preferred stock of the Company issued to TLP Leasing Programs, Inc.
(incorporated by reference from Exhibit 10.6 to the Registrant's
Registration Statement on Form S-1 (file no. 333-85545)).
10.6 Master Agreement of Terms and Conditions for Lease between the
Registrant and Cisco Systems Capital Corporation, dated as of November
3, 1998, as amended (incorporated by reference from Exhibit 10.7 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
2001 (file no. 000-27127)).
10.7 1997 Stock Incentive Plan of the Registrant (incorporated by reference
from Exhibit 10.8 to the Registrant's Registration Statement on Form
S-1 (file no. 333-85545)).
10.8 Employment Agreement between the Registrant and Ofer Gneezy, dated as
of August 11, 1997 (incorporated by reference from Exhibit 10.9 to the
Registrant's Registration Statement on Form S-1 (file no. 333-85545)).
10.9 Employment Agreement between the Registrant and Gordon J. VanderBrug,
dated as of August 11, 1997. (incorporated by reference from Exhibit
10.10 to the Registrant's Registration Statement on Form S-1 (file no.
333-85545)).
10.10 Series B Convertible Preferred Stock Purchase Agreement, dated as of
August 26, 1998, between the Registrant and the "Purchaser" parties
thereto (incorporated by reference from Exhibit 10.14 to the
Registrant's Registration Statement on Form S-1 (file no. 333-85545)).
10.11 Series C Convertible Purchase Agreement, dated as of July 12, 1999,
between the Registrant and the "Purchaser" parties thereto
(incorporated by reference from Exhibit 10.15 to the Registrant's
Registration Statement on Form S-1 (file no. 333-85545)).
10.12 Second Amended and Restated Shareholders' Agreement, dated as of July
12, 1999, among the Registrant and the holders of the capital stock of
the Registrant who become parties thereto (incorporated by reference
from Exhibit 10.16 to the Registrant's Registration Statement on Form
S-1 (file no. 333-85545).
10.13 First Amended and Restated Registration Rights Agreement, dated as of
July 12, 1999, among the Registrant and the holders of the capital
stock of the Registrant who become parties thereto (incorporated by
reference from Exhibit 10.17 to the Registrant's Registration Statement
on Form S-1 (file no. 333-85545)).
10.14 Shareholders Agreement, dated as of March 28, 1998, relating to VIP
Calling (Hong Kong) Limited (incorporated by reference from Exhibit
10.18 to the Registrant's Registration Statement on Form S-1 (file no.
333-85545)).
10.15 Amendment No. 1 to the Shareholders Agreement, dated as of March 28,
1998, relating to VIP Calling (Hong Kong) Limited (incorporated by
reference from Exhibit 10.19 to the Registrant's Registration Statement
on Form S-1 (file no. 333-85545)).
10.16 Amendment No. 2 to the Shareholders Agreement, dated as of March 28,
1998, relating to VIP Calling (Hong Kong) Limited (incorporated by
reference from Exhibit 10.20 to the Registrant's Registration Statement
on Form S-1 (file no. 333-85545)).
10.17 Stock Restriction Agreement, dated as of August 26, 1998, between the
Registrant and Ofer Gneezy and Gordon VanderBrug (incorporated by
reference from Exhibit 10.22 to the Registrant's Registration Statement
on Form S-1 (file no. 333-85545)).
10.18 Alliance Agreement, dated January 4, 1999, between the Registrant and
Cisco Systems, Inc. (incorporated by reference from Exhibit 10.23 to
the Registrant's Registration Statement on Form S-1 (file no.
33-85545)).
10.19 1999 Employee Stock Purchase Plan of the Registrant, as amended
(incorporated by reference from Exhibit 10.26 to the Registrant's
Registration Statement on Form S-1 (file no. 333-96535)).
</Table>
II-3
<Page>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -------------
10.20 Lease, dated October 22, 1999, between the Registrant and Roger P.
Nordblom and Peter C. Nordblom, as Trustees of N.W. Building 1
Associates under Declaration of Trust dated November 11, 1984 and filed
with the Middlesex South Registry District of the Land Court as
Document Number 674807 with respect to property located at 10 Second
Avenue, Burlington, Massachusetts (incorporated by reference from
Exhibit 10.28 to the Registrant's Registration Statement on Form S-1
(file no. 333-96535)).
10.21 Supply Contract, dated as of December 30, 1999, between the Registrant
and Belle Systems A/S (incorporated by reference from Exhibit 10.30 to
the Registrant's Registration Statement on Form S-1 (file no.
333-96535)).
10.22 Offer Letter between the Registrant and Richard Tennant, dated as of
September 17, 2001 and Employment Agreement, dated as of September 20,
2001 (incorporated by reference from Exhibit 10.30 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2001 (file
no. 000-27127)).
10.23 Offer Letter between the Registrant and Paul Floyd, dated as of April
2, 2001 and Proprietary Information and Inventions Agreement dated
April 12, 2001 (incorporated by reference from Exhibit 10.31 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
2001 (file no. 000-27127)).
10.24 Loan and Security Agreement between the Registrant and Silicon Valley
Bank, dated as of October 9, 2001 (incorporated by reference from
Exhibit 10.32 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 2001 (file no. 000-27127)).
10.25 Securities Exchange Agreement, dated January 30, 2003, by and among
iBasis, Inc., iBasis Global, Inc., iBasis Securities Corporation, the
Symphony Funds signatories thereto and U.S. Bank National Association,
as Collateral Agent (incorporated by reference from Exhibit 4.1 to the
Registrant's Current Report on Form 8-K dated January 30, 2003 (file
no. 000-27127)).
10.26 Global Note dated January 30, 2003 (incorporated by reference from
Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated
January 30, 2003 (file no. 000-27127)).
10.27 Warrant and Registration Rights Agreement, dated January 29, 2003, by
and among iBasis, Inc. and U.S. Bank National Association, as
Collateral Agent (incorporated by reference from Exhibit 4.3 to the
Registrant's Current Report on Form 8-K dated January 30, 2003 (file
no. 000-27127)).
10.28 Global Warrant Certificate dated January 30, 2003 (incorporated by
reference from Exhibit 4.4 to the Registrant's Current Report on Form
8-K dated January 30, 2003 (file no. 000-27127)).
10.29 Security Exchange Agreement, dated January 30, 2003, by and among
iBasis, Inc., iBasis Global, Inc., iBasis Securities Corporation, and
U.S. Bank National Association, as Collateral Agent (incorporated by
reference from Exhibit 4.5 to the Registrant's Current Report on Form
8-K dated January 30, 2003 (file no. 000-27127)).
10.30 Subordination Agreement, dated January 30, 2003, by and among iBasis,
Inc., iBasis Global, Inc., iBasis Securities Corporation, Silicon
Valley Bank, the Creditors party thereto, U.S. Bank National
Association, as Collateral Agent and Fiscal Agent (incorporated by
reference from Exhibit 4.6 to the Registrant's Current Report on Form
8-K dated January 30, 2003 (file no. 000-27127)).
10.31 Fiscal Agency Agreement, dated January 30, 2003, by and among iBasis,
Inc., iBasis Global, Inc., iBasis Securities Corporation, and U.S. Bank
National Association, as Fiscal Agent (incorporated by reference from
Exhibit 4.7 to the Registrant's Current Report on Form 8-K dated
January 30, 2003 (file no. 000-27127)).
10.32 Guarantee, dated January 30, 2003, by and between iBasis Securities
Corporation and U.S. Bank National Association, as Collateral Agent
(incorporated by reference from Exhibit 4.7 to the Registrant's Current
Report on Form 8-K dated January 30, 2003 (file no. 000-27127)).
10.33 Security Exchange Agreement, dated February 21, 2003, by and among
iBasis, Inc., iBasis Global, Inc., iBasis Securities Corporation, and
U.S. Bank National Association, as Collateral Agent. (incorporated by
reference from Exhibit 10.39 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 2002 (file no. 000-27127)).
10.34 Global Note, dated February 21, 2003 (incorporated by reference from
Exhibit 10.40 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 2002 (file no. 000-27127)).
10.35 Global Warrant Certificate, dated February 21, 2003 (incorporated by
reference from Exhibit 10.41 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 2002 (file no. 000-27127)).
10.36 Amendment 1 to Securities Exchange Agreement, dated February 21, 2003,
by and among iBasis, Inc., iBasis Global, Inc., iBasis Securities
Corporation, JMG Triton Offshore Fund Limited CITCO signatories
</Table>
II-4
<Page>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -------------
thereto and U.S. Bank National Association, as Collateral Agent
(incorporated by reference from Exhibit 10.42 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2002 (file
no. 000-27127)).
10.37 Amendment No. 1 to Fiscal Agency Agreement, dated February 21, 2003, by
and among iBasis, Inc., iBasis Global, Inc., iBasis Securities
Corporation, and U.S. Bank National Association, as Fiscal Agent
(incorporated by reference from Exhibit 10.43 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2002 (file
no. 000-27127)).
10.38 Amended and Restated Warrant and Registration Rights Agreement dated
February 21, 2003, by and among iBasis, Inc. and U.S. Bank National
Association, as Warrant Agent (incorporated by reference from Exhibit
10.44 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2002 (file no. 000-27127)).
10.39 Collateral Agency and Intercreditor Agreement as of February 21, 2003,
by and among U.S. Bank National Association, as Collateral Agent, the
Exchanging Holders (as defined therein), iBasis Inc., iBasis Global,
Inc. and iBasis Securities Corporation (incorporated by reference from
Exhibit 10.45 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 2002 (file no. 000-27127)).
10.40 Guarantee, dated February 21, 2003, by and between iBasis Securities
Corporation and U.S. Bank National Association, as Collateral Agent
(incorporated by reference from Exhibit 10.46 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2002 (file
no. 000-27127)).
10.41 Security Agreement dated as of February 21, 2003, by and among iBasis,
Inc., iBasis Global, Inc., iBasis Securities Corporation and U.S. Bank
National Association, as Collateral Agent (incorporated by reference
from Exhibit 10.47 to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 2002 (file no. 000-27127)).
10.42 Master Agreement to Lease Equipment (incorporated by reference from
Exhibit 99.3 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002 (file no. 000-27127)).
10.43 Settlement Agreement made as of August 2, 2002 among Cisco Systems
Capital Corporation, Cisco Systems, Inc and iBasis, Inc.(incorporated
by reference from Exhibit 99.4 to the Registrant's Annual Report on
Form 10-Q for the quarter ended September 30, 2002 (file no.
000-27127)).
10.44 Bill of Sale pursuant to the Settlement Agreement made as of August 2,
2002 among Cisco Systems Capital Corporation, Cisco Systems, Inc and
iBasis, Inc. (incorporated by reference from Exhibit 99.5 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002 (file no. 000-27127)).
10.45 Silicon Valley Bank Loan and Security Agreement, dated December 30,
2002, by and among Silicon Valley Bank, the Registrant and iBasis
Global, Inc. (incorporated by reference from Exhibit 99.2 to the
Registrant's Current Report on Form 8-K dated December 31, 2002 (file
no. 000-27127)).
10.46 Export-Import Bank Loan and Security Agreement, dated December 30,
2002, by and among Silicon Valley Bank, the Registrant and iBasis
Global, Inc. (incorporated by reference from Exhibit 99.3 to the
Registrant's Current Report on Form 8-K dated December 31, 2002 (file
no. 000-27127)).
10.47 Side Letter, dated February 5, 2003, by and among iBasis, Inc. and the
Symphony Funds signatories thereto (incorporated by reference from
Exhibit 99.2 to the Registrant's Current Report on Form 8-K dated
December 31, 2002 (file no. 000-27127)).
10.48 Global Note of the Registrant dated May 29, 2003 (incorporated by
reference from Exhibit 4.2 of the Registrant's Quarterly Report on Form
10-Q for period ended June 30, 2003 (file no. 000-27127)).
10.49 Global Warrant Certificate of the Registrant dated May 29, 2003
(incorporated by reference from Exhibit 4.2 of the Registrant's
Quarterly Report on Form 10-Q for period ended June 30, 2003 (file no.
000-27127)).
10.50 Third modification to the loan agreement, dated December 30, 2002,
evidenced by, among other documents, a certain Loan and Security
Agreement dated as of December 30, 2002 between iBasis, iBasis Global,
Inc. and Silicon Valley Bank, as amended by a certain First Loan
Modification Agreement dated as of January 30, 2003 (as amended, the
"Loan Agreement." ((incorporated by reference from Exhibit 10.1 of the
Registrant's Quarterly Report on Form 10-Q for period ended June 30,
2003 (file no. 000-27127)).
10.51 Joinder Agreement, dated May 29, 2003, by and among iBasis, Inc.,
iBasis Global, Inc., U.S. Bank National Association, as Collateral
Agent, and the Acceding Holders (incorporated by reference from Exhibit
10.57 of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2003
</Table>
II-5
<Page>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -------------
(file no. 000-27127)).
10.52 Registration Rights Agreement, dated May 29, 2003, by and among iBasis,
Inc. and the Holders (incorporated by reference from Exhibit 10.58 of
the Registrant's Annual Report on Form 10-K for the year ended December
31, 2003 (file no. 000-27127)).
10.53 Amendment No. 2 to Fiscal Agency Agreement, dated May 29, 2003, by and
among iBasis, Inc., iBasis Global, Inc., and U.S. Bank National
Association as fiscal agent (incorporated by reference from Exhibit
10.4 of the Registrant's Quarterly Report on Form 10-Q for period ended
June 30, 2003 (file no. 000-27127)).
10.54 Fourth modification to the loan agreement dated December 30, 2002,
evidenced by, among other documents, a certain Loan and Security
Agreement dated as of December 30, 2002 between iBasis, Inc., iBasis
Global, Inc. and Silicon Valley Bank (incorporated by reference from
Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q for
period ended September 30, 2003 (file no. 000-27127)).
10.55 Amended and Restated Loan and Security Agreement dated December 29,
2003, evidenced by, among other documents, a certain Amended and
Restated Loan and Security Agreement dated as of December 29, 2003
between iBasis, Inc. and Silicon Valley Bank (incorporated by reference
from Exhibit 10.61 of the Registrant's Annual Report on Form 10-K for
the year ended December 31, 2003 (file no. 000-27127)).
10.56 Note Repurchase, Exchange and Amendment Agreement, dated as of April
27, 2004, by and among the Registrant and the noteholder signatories
thereto (incorporated by reference from Exhibit 10.1 of the
Registrant's Quarterly Report on Form 10-Q for the period ended March
31, 2004).
10.57 2004 Warrant and Registration Rights Agreement, dated as of June 18,
2004, by and between the Registrant and U.S. Bank as Warrant Agent
(incorporated by reference from Exhibit 99.4 to the Registrant's
Current Report on Form 8-K dated June 29, 2004 (file no. 000-27127)).
10.58 Global Warrant Certificate, issued June 18, 2004, representing
5,176,065 shares of common stock (incorporated by reference from
Exhibit 99.5 to the Registrant's Current Report on Form 8-K dated June
29, 2004 (file no. 000-27127)).
10.59 Note Purchase Agreement, dated as of June 18, 2004, by and among the
Registrant and the Purchasers (as such term is defined therein)
(incorporated by reference from Exhibit 99.6 to the Registrant's
Current Report on Form 8-K dated June 29, 2004 (file no. 000-27127)).
10.60 Registration Rights Agreement, dated as of June 18, 2004, by and among
the Company and the Initial Holders (as such term is defined therein)
(incorporated by reference from Exhibit 99.9 to the Registrant's
Current Report on Form 8-K dated June 29, 2004 (file no. 000-27127)).
10.61 Security Agreement, dated as of June 18, 2004, by and between the
Registrant and The Bank of New York, as Collateral Agent for the
holders of the New Secured Notes (incorporated by reference to the
Registrant's Registration Statement on Form S-1 (file no. 333-117346),
filed with the SEC on July 13, 2004).
10.62 Security Agreement, dated as of June 18, 2004, by and between iBasis
Global, Inc. and The Bank of New York, as Collateral Agent for the
holders of the New Secured Notes (incorporated by reference to the
Registrant's Registration Statement on Form S-1 (file no. 333-117346),
filed with the SEC on July 13, 2004).
10.63 Security Agreement, dated as of June 18, 2004, by and between iBasis
Holdings, Inc. and The Bank of New York, as Collateral Agent for the
holders of the New Secured Notes (incorporated by reference to the
Registrant's Registration Statement on Form S-1 (file no. 333-117346),
filed with the SEC on July 13, 2004).
10.64 Security Agreement, dated as of June 18, 2004, by and between iBasis
Securities Corporation and The Bank of New York, as Collateral Agent
for the holders of the New Secured Notes (incorporated by reference to
the Registrant's Registration Statement on Form S-1 (file no.
333-117346), filed with the SEC on July 13, 2004).
10.65 Intellectual Property Security Agreement, dated as of June 18, 2004, by
and between the Registrant and The Bank of New York, as Collateral
Agent for the holders of the New Secured Notes (incorporated by
reference to the Registrant's Registration Statement on Form S-1
(file no. 333-117346), filed with the SEC on July 13, 2004).
10.66 Intercreditor Agreement, dated as of June 18, 2004, by and among the
Creditors (as such term is defined therein), Silicon Valley Bank, the
Obligors (as such term is defined therein), and The Bank of New York as
Collateral Agent and Trustee (incorporated by reference to the
Registrant's Registration Statement on Form S-1 (file no. 333-117346),
filed with the SEC on July 13, 2004).
10.67 Collateral Agency Agreement, dated as of June 18, 2004, by and among
The Bank of New York as Collateral Agent, the Noteholders (as such term
is defined therein), the Registrant and the Subsidiary Guarantors (as
such term is defined therein) (incorporated by reference to the
Registrant's Registration Statement on Form S-1 (file no. 333-117346),
filed with the SEC on July 13, 2004).
12 Statement Regarding Computation of Ratios.*
21.1 Subsidiaries of the Registrant (incorporated by reference from the
Amendment Number 1 to the Registrant's Registration Statement on Form
S-4 (file no. 333-114929), filed with the SEC on April 28, 2004).
23.1 Consent of Bingham McCutchen LLP (included in Exhibit 5).*
23.2 Consent of Deloitte & Touche LLP.*
</Table>
II-6
<Page>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -------------
24 Power of Attorney (included on signature page).*
25.1 Statement of Eligibility on Form T-1 of The Bank of New York, as
Trustee for the New Notes (incorporated by reference from the
Registrant's Registration Statement on Form S-4 (file no. 333-114929),
filed with the SEC on April 28, 2004).
25.2 Statement of Eligibility on Form T-1 of The Bank of New York, as
Trustee for the New Secured Notes (incorporated by reference to the
Registrant's Registration Statement on Form S-1 (file no. 333-117346),
filed with the SEC on July 13, 2004).
99.1 Form of Letter of Transmittal (incorporated by reference from Exhibit
99.1 to Amendment No. 1 to the Registrant's Registration Statement on
Form S-4 (file no. 333-114929), filed with the SEC on May 14, 2004).
99.2 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies
and Other Nominees (incorporated by reference from Exhibit 99.2 to
Amendment No. 1 to the Registrant's Registration Statement on Form S-4
(file no. 333-114929), filed with the SEC on May 14, 2004).
99.3 Form of Letter to Clients for Use by Brokers, Dealers, Commercial
Banks, Trust Companies and Other Nominees (incorporated by reference
from Exhibit 99.3 to Amendment No. 1 to the Registrant's Registration
Statement on Form S-4 (file no. 333-114929), filed with the SEC on May
14, 2004).
99.4 Form of Notice of Guaranteed Delivery (incorporated by reference from
Exhibit 99.4 to Amendment No. 1 to the Registrant's Registration
Statement on Form S-4 (file no. 333-114929), filed with the SEC on May
14, 2004).
</Table>
- -----------
* Filed herewith.
II-7
<Page>
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made pursuant to this Registration Statement, a post-effective
amendment to this Registration Statement:
(a) to include any prospectus required by
Section 10(a)(3) of the Securities Act of 1933.
(b) to reflect in the prospectus any facts or
events arising after the effective date of the registration
statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in the
effective registration.
(c) to include any material information with
respect to the plan of distribution not previously disclosed in
this Registration Statement or any material change to such
information in this Registration Statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions described in Item 15 above,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-8
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the Town
of Burlington, Commonwealth of Massachusetts, on this 16th day of August, 2004.
iBASIS, INC.
/s/ Ofer Gneezy
-----------------------
Name: Ofer Gneezy
Title: PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement on Form S-1 has been signed below by the
following person in the capacities and on the dates indicated:
<Table>
<Caption>
NAME TITLE DATE
---- ----- ----
/s/ Ofer Gneezy President, Chief Executive Officer and Director August 16, 2004
---------------- (Principal Executive Officer)
Ofer Gneezy
/s/ Gordon J. VanderBrug Executive Vice President and Director August 16, 2004
------------------------
Gordon J. VanderBrug
/s/ Richard Tennant Vice President, Finance and Chief Financial Officer August 16, 2004
------------------- (Principal Financial and Accounting Officer)
Richard Tennant
* Director August 16, 2004
-----------------------
Charles N. Corfield
* Director August 16, 2004
-----------------
W. Frank King
* Director August 16, 2004
-------------
David Lee
* Director August 16, 2004
-----------------
Charles Skibo
*By /s/ Richard Tennant
-------------------------
Richard Tennant
ATTORNEY-IN-FACT
</Table>
II-9
<Page>
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
Town of Burlington, Commonwealth of Massachusetts, on this 16th day of
August, 2004
iBASIS GLOBAL, INC.
/s/ Ofer Gneezy
-----------------------
Name: Ofer Gneezy
Title: PRESIDENT AND CHIEF EXECUTIVE OFFICER
Each person whose signature appears below hereby appoints Ofer Gneezy,
Gordon J. VanderBrug and Richard Tennant, and each of them severally, acting
alone and without the other, his/her true and lawful attorney-in-fact with
full power of substitution or resubstitution, for such person and in such
person's name, place and stead, in any and all capacities, to sign on such
person's behalf, individually and in each capacity stated below, any and all
amendments and post-effective amendments to this Registration Statement, and
to sign any and all additional registration statements relating to the same
offering of securities of the Registration Statement that are filed pursuant
to Rule 462(b) of the Securities Act of 1933, as amended, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact, full power and authority to do and perform each and every
act and thing requisite or necessary to be done in and about the premises, as
fully to all intents and purposes as such person might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact, or their
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securites Act of 1933, as amended,
this Registration Statement on Form S-1 has been signed below by the
following persons in the capacities and on the dates indicated:
<Table>
<Caption>
NAME TITLE DATE
---- ----- ----
/s/ Ofer Gneezy President, Chief Executive Officer and Director August 16, 2004
---------------- (Principal Executive Officer)
Ofer Gneezy
/s/ Richard Tennant Vice President, Finance, Chief Financial Officer August 16, 2004
------------------- and Director (Principal Financial and Accounting
Richard Tennant Officer)
/s/ Gordon J. VanderBrug Executive Vice President and Director August 16, 2004
------------------------
Gordon J. VanderBrug
</Table>
II-10
<Page>
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
Town of Burlington, Commonwealth of Massachusetts, on this 16th day of
August, 2004
iBASIS HOLDINGS, INC.
/s/ Ofer Gneezy
-----------------------
Name: Ofer Gneezy
Title: PRESIDENT AND CHIEF EXECUTIVE OFFICER
Each person whose signature appears below hereby appoints Ofer Gneezy,
Gordon J. VanderBrug and Richard Tennant, and each of them severally, acting
alone and without the other, his/her true and lawful attorney-in-fact with
full power of substitution or resubstitution, for such person and in such
person's name, place and stead, in any and all capacities, to sign on such
person's behalf, individually and in each capacity stated below, any and all
amendments and post-effective amendments to this Registration Statement, and
to sign any and all additional registration statements relating to the same
offering of securities of the Registration Statement that are filed pursuant
to Rule 462(b) of the Securities Act of 1933, as amended, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact, full power and authority to do and perform each and every
act and thing requisite or necessary to be done in and about the premises, as
fully to all intents and purposes as such person might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact, or their
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securites Act of 1933, as amended,
this Registration Statement on Form S-1 has been signed below by the
following persons in the capacities and on the dates indicated:
<Table>
<Caption>
NAME TITLE DATE
---- ----- ----
/s/ Ofer Gneezy President, Chief Executive Officer and Director August 16, 2004
---------------- (Principal Executive Officer)
Ofer Gneezy
/s/ Richard Tennant Chief Financial Officer August 16, 2004
------------------- (Principal Financial and Accounting
Richard Tennant Officer)
/s/ Gordon J. VanderBrug Executive Vice President and Director August 16, 2004
------------------------
Gordon J. VanderBrug
</Table>
II-11
<Page>
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this Registration Statement on Form S-1 to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
Town of Burlington, Commonwealth of Massachusetts, on this 16th day of
August, 2004
iBASIS SECURITIES CORPORATION
/s/ Ofer Gneezy
-----------------------
Name: Ofer Gneezy
Title: PRESIDENT AND CHIEF EXECUTIVE OFFICER
Each person whose signature appears below hereby appoints Ofer Gneezy,
Gordon J. VanderBrug and Richard Tennant, and each of them severally, acting
alone and without the other, his/her true and lawful attorney-in-fact with
full power of substitution or resubstitution, for such person and in such
person's name, place and stead, in any and all capacities, to sign on such
person's behalf, individually and in each capacity stated below, any and all
amendments and post-effective amendments to this Registration Statement, and
to sign any and all additional registration statements relating to the same
offering of securities of the Registration Statement that are filed pursuant
to Rule 462(b) of the Securities Act of 1933, as amended, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact, full power and authority to do and perform each and every
act and thing requisite or necessary to be done in and about the premises, as
fully to all intents and purposes as such person might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact, or their
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securites Act of 1933, as amended,
this Registration Statement on Form S-1 has been signed below by the
following persons in the capacities and on the dates indicated:
<Table>
<Caption>
NAME TITLE DATE
---- ----- ----
/s/ Ofer Gneezy President, Chief Executive Officer and Director August 16, 2004
---------------- (Principal Executive Officer)
Ofer Gneezy
/s/ Richard Tennant Chief Financial Officer August 16, 2004
------------------- (Principal Financial and Accounting
Richard Tennant Officer)
/s/ Gordon J. VanderBrug Executive Vice President and Director August 16, 2004
------------------------
Gordon J. VanderBrug
</Table>
II-12
<Page>
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -------------
3.1 First Amended and Restated Certificate of Incorporation of the
Registrant (incorporated by reference from Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1 (file no. 333-96535)),
as amended by that certain Certificate of Amendment to First Amended
and Restated Certificate of Incorporation of the Registrant
(incorporated by reference from Appendix A to the Registrant's
Definitive Proxy Statement on Schedule 14A (file no. 000-27127)).
3.2 Amended and Restated By-Laws of the Registrant (incorporated by
reference from Exhibit 3.2 to the Registrant's Registration Statement
on Form S-1 (file no. 333-96535)).
4.1 Specimen Certificate for share of the common stock (incorporated by
reference from Exhibit 4.1 to the Registrant's Registration Statement
on Form S-1 (file no. 333-85545)).
4.2 Indenture for the Existing Notes, dated as of March 15, 2000, between
the Registrant and The Bank of New York, as Trustee (incorporated by
reference from Exhibit 4.2 to the Registrant's Registration Statement
on Form S-1 (file no. 333-96533)).
4.3 Form of Existing Note (incorporated by reference from Exhibit 4.3 to
the Registrant's Registration Statement on Form S-1 (file no.
333-96533)).
4.4 Indenture for the New Notes, dated as of June 18, 2004, between the
Registrant and The Bank of New York, as Trustee (incorporated by
reference from Exhibit 99.1 to the Registrant's Current Report on Form
8-K dated June 29, 2004 (file no. 000-27127)).
4.5 Global Note, issued June 18, 2004, representing $37,285,000 aggregate
principal amount of New Notes (incorporated by reference from Exhibit
99.2 to the Registrant's Current Report on Form 8-K dated June 29, 2004
(file no. 000-27127)).
4.6 Indenture for the New Secured Notes, dated as of June 18, 2004, between
the Registrant and the Bank of New York, as trustee (incorporated by
reference from Exhibit 99.7 to the Registrant's Current Report on Form
8-K dated June 29, 2004 (file no. 000-27127)).
4.7 Global Note, issued June 18, 2004, representing $29,000,000 aggregate
principal amount of New Secured Notes (incorporated by reference from
Exhibit 99.8 to the Registrant's Current Report on Form 8-K dated June
29, 2004 (file no. 000-27127)).
5 Opinion of Bingham McCutchen LLP.*
10.1 Lease, dated January 8, 1999, as amended, between the Registrant and
Rodger P. Nordblum and Peter C. Nordblum as Trustees of Northwest
Associates under Declaration of Trust dated December 9, 1971 with
respect to property located at 20 Second Avenue, Burlington,
Massachusetts (incorporated by reference from Exhibit 10.1 to the
Registrant's Registration Statement on Form S-1 (file no. 333-85545)).
10.2 Lease, dated as of August 7, 1998, between the Registrant and 111
Eighth Avenue LLC, relating to property located at 111 Eighth Avenue,
New York, New York (incorporated by reference from Exhibit 10.3 to the
Registrant's Registration Statement on Form S-1 (file no. 333-85545)).
10.3 Lease, dated December 11, 1998 between the Registrant and Downtown
Properties L.L.C., with respect to property located at 611 Wilshire
Boulevard, Los Angeles, California (incorporated by reference from
Exhibit 10.4 to the Registrant's Registration Statement on Form S-1
(file no. 333-85545)).
10.4 Warrant, dated as of September 10, 1997, for the purchase of shares of
preferred stock of the Company issued to TLP Leasing Programs, Inc.
(incorporated by reference from Exhibit 10.5 to the Registrant's
Registration Statement on Form S-1 (file no. 333-85545)).
10.5 Warrant, dated as of June 8, 1998, for the purchase of shares of
preferred stock of the Company issued to TLP Leasing Programs, Inc.
(incorporated by reference from Exhibit 10.6 to the Registrant's
Registration Statement on Form S-1 (file no. 333-85545)).
10.6 Master Agreement of Terms and Conditions for Lease between the
Registrant and Cisco Systems Capital Corporation, dated as of November
3, 1998, as amended (incorporated by reference from Exhibit 10.7 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
2001 (file no. 000-27127)).
10.7 1997 Stock Incentive Plan of the Registrant (incorporated by reference
from Exhibit 10.8 to the Registrant's Registration Statement on Form
S-1 (file no. 333-85545)).
10.8 Employment Agreement between the Registrant and Ofer Gneezy, dated as
of August 11, 1997 (incorporated by reference from Exhibit 10.9 to the
Registrant's Registration Statement on Form S-1 (file
</Table>
II-13
<Page>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -------------
no. 333-85545)).
10.9 Employment Agreement between the Registrant and Gordon J. VanderBrug,
dated as of August 11, 1997. (incorporated by reference from Exhibit
10.10 to the Registrant's Registration Statement on Form S-1 (file no.
333-85545)).
10.10 Series B Convertible Preferred Stock Purchase Agreement, dated as of
August 26, 1998, between the Registrant and the "Purchaser" parties
thereto (incorporated by reference from Exhibit 10.14 to the
Registrant's Registration Statement on Form S-1 (file no. 333-85545)).
10.11 Series C Convertible Purchase Agreement, dated as of July 12, 1999,
between the Registrant and the "Purchaser" parties thereto
(incorporated by reference from Exhibit 10.15 to the Registrant's
Registration Statement on Form S-1 (file no. 333-85545)).
10.12 Second Amended and Restated Shareholders' Agreement, dated as of July
12, 1999, among the Registrant and the holders of the capital stock of
the Registrant who become parties thereto (incorporated by reference
from Exhibit 10.16 to the Registrant's Registration Statement on Form
S-1 (file no. 333-85545).
10.13 First Amended and Restated Registration Rights Agreement, dated as of
July 12, 1999, among the Registrant and the holders of the capital
stock of the Registrant who become parties thereto (incorporated by
reference from Exhibit 10.17 to the Registrant's Registration Statement
on Form S-1 (file no. 333-85545)).
10.14 Shareholders Agreement, dated as of March 28, 1998, relating to VIP
Calling (Hong Kong) Limited (incorporated by reference from Exhibit
10.18 to the Registrant's Registration Statement on Form S-1 (file no.
333-85545)).
10.15 Amendment No. 1 to the Shareholders Agreement, dated as of March 28,
1998, relating to VIP Calling (Hong Kong) Limited (incorporated by
reference from Exhibit 10.19 to the Registrant's Registration Statement
on Form S-1 (file no. 333-85545)).
10.16 Amendment No. 2 to the Shareholders Agreement, dated as of March 28,
1998, relating to VIP Calling (Hong Kong) Limited (incorporated by
reference from Exhibit 10.20 to the Registrant's Registration Statement
on Form S-1 (file no. 333-85545)).
10.17 Stock Restriction Agreement, dated as of August 26, 1998, between the
Registrant and Ofer Gneezy and Gordon VanderBrug (incorporated by
reference from Exhibit 10.22 to the Registrant's Registration Statement
on Form S-1 (file no. 333-85545)).
10.18 Alliance Agreement, dated January 4, 1999, between the Registrant and
Cisco Systems, Inc. (incorporated by reference from Exhibit 10.23 to
the Registrant's Registration Statement on Form S-1 (file no.
33-85545)).
10.19 1999 Employee Stock Purchase Plan of the Registrant, as amended
(incorporated by reference from Exhibit 10.26 to the Registrant's
Registration Statement on Form S-1 (file no. 333-96535)).
10.20 Lease, dated October 22, 1999, between the Registrant and Roger P.
Nordblom and Peter C. Nordblom, as Trustees of N.W. Building 1
Associates under Declaration of Trust dated November 11, 1984 and filed
with the Middlesex South Registry District of the Land Court as
Document Number 674807 with respect to property located at 10 Second
Avenue, Burlington, Massachusetts (incorporated by reference from
Exhibit 10.28 to the Registrant's Registration Statement on Form S-1
(file no. 333-96535)).
10.21 Supply Contract, dated as of December 30, 1999, between the Registrant
and Belle Systems A/S (incorporated by reference from Exhibit 10.30 to
the Registrant's Registration Statement on Form S-1 (file no.
333-96535)).
10.22 Offer Letter between the Registrant and Richard Tennant, dated as of
September 17, 2001 and Employment Agreement, dated as of September 20,
2001 (incorporated by reference from Exhibit 10.30 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2001 (file
no. 000-27127)).
10.23 Offer Letter between the Registrant and Paul Floyd, dated as of April
2, 2001 and Proprietary Information and Inventions Agreement dated
April 12, 2001 (incorporated by reference from Exhibit 10.31 to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
2001 (file no. 000-27127)).
10.24 Loan and Security Agreement between the Registrant and Silicon Valley
Bank, dated as of October 9, 2001 (incorporated by reference from
Exhibit 10.32 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 2001 (file no. 000-27127)).
10.25 Securities Exchange Agreement, dated January 30, 2003, by and among
iBasis, Inc., iBasis Global, Inc., iBasis Securities Corporation, the
Symphony Funds signatories thereto and U.S. Bank National
</Table>
II-14
<Page>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -------------
Association, as Collateral Agent (incorporated by reference from
Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated
January 30, 2003 (file no. 000-27127)).
10.26 Global Note dated January 30, 2003 (incorporated by reference from
Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated
January 30, 2003 (file no. 000-27127)).
10.27 Warrant and Registration Rights Agreement, dated January 29, 2003, by
and among iBasis, Inc. and U.S. Bank National Association, as
Collateral Agent (incorporated by reference from Exhibit 4.3 to the
Registrant's Current Report on Form 8-K dated January 30, 2003 (file
no. 000-27127)).
10.28 Global Warrant Certificate dated January 30, 2003 (incorporated by
reference from Exhibit 4.4 to the Registrant's Current Report on Form
8-K dated January 30, 2003 (file no. 000-27127)).
10.29 Security Exchange Agreement, dated January 30, 2003, by and among
iBasis, Inc., iBasis Global, Inc., iBasis Securities Corporation, and
U.S. Bank National Association, as Collateral Agent (incorporated by
reference from Exhibit 4.5 to the Registrant's Current Report on Form
8-K dated January 30, 2003 (file no. 000-27127)).
10.30 Subordination Agreement, dated January 30, 2003, by and among iBasis,
Inc., iBasis Global, Inc., iBasis Securities Corporation, Silicon
Valley Bank, the Creditors party thereto, U.S. Bank National
Association, as Collateral Agent and Fiscal Agent (incorporated by
reference from Exhibit 4.6 to the Registrant's Current Report on Form
8-K dated January 30, 2003 (file no. 000-27127)).
10.31 Fiscal Agency Agreement, dated January 30, 2003, by and among iBasis,
Inc., iBasis Global, Inc., iBasis Securities Corporation, and U.S. Bank
National Association, as Fiscal Agent (incorporated by reference from
Exhibit 4.7 to the Registrant's Current Report on Form 8-K dated
January 30, 2003 (file no. 000-27127)).
10.32 Guarantee, dated January 30, 2003, by and between iBasis Securities
Corporation and U.S. Bank National Association, as Collateral Agent
(incorporated by reference from Exhibit 4.7 to the Registrant's Current
Report on Form 8-K dated January 30, 2003 (file no. 000-27127)).
10.33 Security Exchange Agreement, dated February 21, 2003, by and among
iBasis, Inc., iBasis Global, Inc., iBasis Securities Corporation, and
U.S. Bank National Association, as Collateral Agent. (incorporated by
reference from Exhibit 10.39 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 2002 (file no. 000-27127)).
10.34 Global Note, dated February 21, 2003 (incorporated by reference from
Exhibit 10.40 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 2002 (file no. 000-27127)).
10.35 Global Warrant Certificate, dated February 21, 2003 (incorporated by
reference from Exhibit 10.41 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 2002 (file no. 000-27127)).
10.36 Amendment 1 to Securities Exchange Agreement, dated February 21, 2003,
by and among iBasis, Inc., iBasis Global, Inc., iBasis Securities
Corporation, JMG Triton Offshore Fund Limited CITCO signatories thereto
and U.S. Bank National Association, as Collateral Agent (incorporated
by reference from Exhibit 10.42 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2002 (file no. 000-27127)).
10.37 Amendment No. 1 to Fiscal Agency Agreement, dated February 21, 2003, by
and among iBasis, Inc., iBasis Global, Inc., iBasis Securities
Corporation, and U.S. Bank National Association, as Fiscal Agent
(incorporated by reference from Exhibit 10.43 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2002 (file
no. 000-27127)).
10.38 Amended and Restated Warrant and Registration Rights Agreement dated
February 21, 2003, by and among iBasis, Inc. and U.S. Bank National
Association, as Warrant Agent (incorporated by reference from Exhibit
10.44 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2002 (file no. 000-27127)).
10.39 Collateral Agency and Intercreditor Agreement as of February 21, 2003,
by and among U.S. Bank National Association, as Collateral Agent, the
Exchanging Holders (as defined therein), iBasis Inc., iBasis Global,
Inc. and iBasis Securities Corporation (incorporated by reference from
Exhibit 10.45 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 2002 (file no. 000-27127)).
10.40 Guarantee, dated February 21, 2003, by and between iBasis Securities
Corporation and U.S. Bank National Association, as Collateral Agent
(incorporated by reference from Exhibit 10.46 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2002 (file
no. 000-27127)).
10.41 Security Agreement dated as of February 21, 2003, by and among iBasis,
Inc., iBasis Global, Inc., iBasis Securities Corporation and U.S. Bank
National Association, as Collateral Agent (incorporated by
</Table>
II-15
<Page>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -------------
reference from Exhibit 10.47 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 2002 (file no. 000-27127)).
10.42 Master Agreement to Lease Equipment (incorporated by reference from
Exhibit 99.3 to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002 (file no. 000-27127)).
10.43 Settlement Agreement made as of August 2, 2002 among Cisco Systems
Capital Corporation, Cisco Systems, Inc and iBasis, Inc.(incorporated
by reference from Exhibit 99.4 to the Registrant's Annual Report on
Form 10-Q for the quarter ended September 30, 2002 (file no.
000-27127)).
10.44 Bill of Sale pursuant to the Settlement Agreement made as of August 2,
2002 among Cisco Systems Capital Corporation, Cisco Systems, Inc and
iBasis, Inc. (incorporated by reference from Exhibit 99.5 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002 (file no. 000-27127)).
10.45 Silicon Valley Bank Loan and Security Agreement, dated December 30,
2002, by and among Silicon Valley Bank, the Registrant and iBasis
Global, Inc. (incorporated by reference from Exhibit 99.2 to the
Registrant's Current Report on Form 8-K dated December 31, 2002 (file
no. 000-27127)).
10.46 Export-Import Bank Loan and Security Agreement, dated December 30,
2002, by and among Silicon Valley Bank, the Registrant and iBasis
Global, Inc. (incorporated by reference from Exhibit 99.3 to the
Registrant's Current Report on Form 8-K dated December 31, 2002 (file
no. 000-27127)).
10.47 Side Letter, dated February 5, 2003, by and among iBasis, Inc. and the
Symphony Funds signatories thereto (incorporated by reference from
Exhibit 99.2 to the Registrant's Current Report on Form 8-K dated
December 31, 2002 (file no. 000-27127)).
10.48 Global Note of the Registrant dated May 29, 2003 (incorporated by
reference from Exhibit 4.2 of the Registrant's Quarterly Report on Form
10-Q for period ended June 30, 2003 (file no. 000-27127)).
10.49 Global Warrant Certificate of the Registrant dated May 29, 2003
(incorporated by reference from Exhibit 4.2 of the Registrant's
Quarterly Report on Form 10-Q for period ended June 30, 2003 (file no.
000-27127)).
10.50 Third modification to the loan agreement, dated December 30, 2002,
evidenced by, among other documents, a certain Loan and Security
Agreement dated as of December 30, 2002 between iBasis, iBasis Global,
Inc. and Silicon Valley Bank, as amended by a certain First Loan
Modification Agreement dated as of January 30, 2003 (as amended, the
"Loan Agreement." ((incorporated by reference from Exhibit 10.1 of the
Registrant's Quarterly Report on Form 10-Q for period ended June 30,
2003 (file no. 000-27127)).
10.51 Joinder Agreement, dated May 29, 2003, by and among iBasis, Inc.,
iBasis Global, Inc., U.S. Bank National Association, as Collateral
Agent, and the Acceding Holders (incorporated by reference from Exhibit
10.57 of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2003 (file no. 000-27127)).
10.52 Registration Rights Agreement, dated May 29, 2003, by and among iBasis,
Inc. and the Holders (incorporated by reference from Exhibit 10.58 of
the Registrant's Annual Report on Form 10-K for the year ended December
31, 2003 (file no. 000-27127)).
10.53 Amendment No. 2 to Fiscal Agency Agreement, dated May 29, 2003, by and
among iBasis, Inc., iBasis Global, Inc., and U.S. Bank National
Association as fiscal agent (incorporated by reference from Exhibit
10.4 of the Registrant's Quarterly Report on Form 10-Q for period ended
June 30, 2003 (file no. 000-27127)).
10.54 Fourth modification to the loan agreement dated December 30, 2002,
evidenced by, among other documents, a certain Loan and Security
Agreement dated as of December 30, 2002 between iBasis, Inc., iBasis
Global, Inc. and Silicon Valley Bank (incorporated by reference from
Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q for
period ended September 30, 2003 (file no. 000-27127)).
10.55 Amended and Restated Loan and Security Agreement dated December 29,
2003, evidenced by, among other documents, a certain Amended and
Restated Loan and Security Agreement dated as of December 29, 2003
between iBasis, Inc. and Silicon Valley Bank (incorporated by reference
from Exhibit 10.61 of the Registrant's Annual Report on Form 10-K for
the year ended December 31, 2003 (file no. 000-27127)).
10.56 Note Repurchase, Exchange and Amendment Agreement, dated as of April
27, 2004, by and among the Registrant and the noteholder signatories
thereto (incorporated by reference from Exhibit 10.1 of the
Registrant's Quarterly Report on Form 10-Q for the period ended March
31, 2004).
</Table>
II-16
<Page>
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -------------
10.57 2004 Warrant and Registration Rights Agreement, dated as of June 18,
2004, by and between the Registrant and U.S. Bank as Warrant Agent
(incorporated by reference from Exhibit 99.4 to the Registrant's
Current Report on Form 8-K dated June 29, 2004 (file no. 000-27127)).
10.58 Global Warrant Certificate, issued June 18, 2004, representing
5,176,065 shares of common stock (incorporated by reference from
Exhibit 99.5 to the Registrant's Current Report on Form 8-K dated June
29, 2004 (file no. 000-27127)).
10.59 Note Purchase Agreement, dated as of June 18, 2004, by and among the
Registrant and the Purchasers (as such term is defined therein)
(incorporated by reference from Exhibit 99.6 to the Registrant's
Current Report on Form 8-K dated June 29, 2004 (file no. 000-27127)).
10.60 Registration Rights Agreement, dated as of June 18, 2004, by and among
the Company and the Initial Holders (as such term is defined therein)
(incorporated by reference from Exhibit 99.9 to the Registrant's
Current Report on Form 8-K dated June 29, 2004 (file no. 000-27127)).
10.61 Security Agreement, dated as of June 18, 2004, by and between the
Registrant and The Bank of New York, as Collateral Agent for the
holders of the New Secured Notes (incorporated by reference to the
Registrant's Registration Statement on Form S-1 (file no. 333-117346),
filed with the SEC on July 13, 2004).
10.62 Security Agreement, dated as of June 18, 2004, by and between iBasis
Global, Inc. and The Bank of New York, as Collateral Agent for the
holders of the New Secured Notes (incorporated by reference to the
Registrant's Registration Statement on Form S-1 (file no. 333-117346),
filed with the SEC on July 13, 2004).
10.63 Security Agreement, dated as of June 18, 2004, by and between iBasis
Holdings, Inc. and The Bank of New York, as Collateral Agent for the
holders of the New Secured Notes (incorporated by reference to the
Registrant's Registration Statement on Form S-1 (file no. 333-117346),
filed with the SEC on July 13, 2004).
10.64 Security Agreement, dated as of June 18, 2004, by and between iBasis
Securities Corporation and The Bank of New York, as Collateral Agent
for the holders of the New Secured Notes (incorporated by reference to
the Registrant's Registration Statement on Form S-1
(file no. 333-117346), filed with the SEC on July 13, 2004).
10.65 Intellectual Property Security Agreement, dated as of June 18, 2004, by
and between the Registrant and The Bank of New York, as Collateral
Agent for the holders of the New Secured Notes (incorporated by
reference to the Registrant's Registration Statement on Form S-1
(file no. 333-117346), filed with the SEC on July 13, 2004).
10.66 Intercreditor Agreement, dated as of June 18, 2004, by and among the
Creditors (as such term is defined therein), Silicon Valley Bank, the
Obligors (as such term is defined therein), and The Bank of New York as
Collateral Agent and Trustee (incorporated by reference to the
Registrant's Registration Statement on Form S-1 (file no. 333-117346),
filed with the SEC on July 13, 2004).
10.67 Collateral Agency Agreement, dated as of June 18, 2004, by and among
The Bank of New York as Collateral Agent, the Noteholders (as such term
is defined therein), the Registrant and the Subsidiary Guarantors (as
such term is defined therein) (incorporated by reference to the
Registrant's Registration Statement on Form S-1 (file no. 333-117346),
filed with the SEC on July 13, 2004).
12 Statement Regarding Computation of Ratios.*
21.1 Subsidiaries of the Registrant (incorporated by reference from the
Amendment Number 1 to the Registrant's Registration Statement on Form
S-4 (file no. 333-114929), filed with the SEC on April 28, 2004).
23.1 Consent of Bingham McCutchen LLP (included in Exhibit 5).*
23.2 Consent of Deloitte & Touche LLP.*
24 Power of Attorney (included on signature page).*
25.1 Statement of Eligibility on Form T-1 of The Bank of New York, as
Trustee for the New Notes (incorporated by reference from the
Registrant's Registration Statement on Form S-4 (file no. 333-114929),
filed with the SEC on April 28, 2004).
25.2 Statement of Eligibility on Form T-1 of The Bank of New York, as
Trustee for the New Secured Notes (incorporated by reference to the
Registrant's Registration Statement on Form S-1 (file no. 333-117346),
filed with the SEC on July 13, 2004).
99.1 Form of Letter of Transmittal (incorporated by reference from Exhibit
99.1 to Amendment No. 1 to the Registrant's Registration Statement on
Form S-4 (file no. 333-114929), filed with the SEC on May 14, 2004).
99.2 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies
and Other Nominees (incorporated by reference from Exhibit 99.2 to
Amendment No. 1 to the Registrant's Registration Statement on Form S-4
(file no. 333-114929), filed with the SEC on May 14, 2004).
99.3 Form of Letter to Clients for Use by Brokers, Dealers, Commercial
Banks, Trust Companies and Other Nominees (incorporated by reference
from Exhibit 99.3 to Amendment No. 1 to the Registrant's Registration
Statement on Form S-4 (file no. 333-114929), filed with the SEC on May
14, 2004).
99.4 Form of Notice of Guaranteed Delivery (incorporated by reference from
Exhibit 99.4 to Amendment No. 1 to the Registrant's Registration
Statement on Form S-4 (file no. 333-114929), filed with the SEC on May
14, 2004).
</Table>
- -----------
* Filed herewith.
II-17