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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACTOF 1934
For the transition period from ______ to ______
Commission file number: 000-27127
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IBASIS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3332534
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 SECOND AVENUE, BURLINGTON, MA 01803
(Address of principal executive offices) (Zip Code)
(781)505-7500 (Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.001 PAR VALUE PER SHARE
(Title of Class)
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-X is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the registrant's common stock, $0.001 par
value per share ("Common Stock"), held by non-affiliates of the registrant as of
March 24, 2000 was approximately $1,117,310,964 based on 19,347,376 shares held
by such non-affiliates at the closing price of a share of Common Stock of $57.75
as reported on the Nasdaq National Market on such date. Affiliates of the
Company (defined as officers, directors and owners of 10 percent or more of the
outstanding share of Common Stock) owned 16,237,614 shares of Common Stock
outstanding on such date. The number of outstanding shares of Common Stock of
the Company on March 24, 2000 was 35,584,990.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement to be delivered to
stockholders in connection with the Annual Meeting of Stockholders to be held on
May 24, 2000 are incorporated by reference into Part III hereof. With the
exception of the portions of such Proxy Statement expressly incorporated into
this Annual Report on Form 10-K by reference, such Proxy Statement shall not be
deemed filed as part of this Annual Report on Form 10-K.
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IBASIS, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS PAGE
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PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 30
Item 3. Legal Proceedings........................................... 30
Item 4. Submission of Matters to a Vote of Security Holders......... 30
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters....................................... 31
Item 6. Selected Financial Data..................................... 32
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 33
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 42
Item 8. Financial Statements and Supplementary Data................. 43
PART III
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure.................................. 64
Item 10. Directors and Executive Officers of the Registrant.......... 64
Item 11. Executive Compensation...................................... 64
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 64
Item 13. Certain Relationships and Related Transactions.............. 64
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 64
Signatures ............................................................ 68
THIS ANNUAL REPORT ON FORM 10-K AND THE DOCUMENTS INCORPORATED BY REFERENCE
CONTAIN FORWARD-LOOKING STATEMENTS BASED ON CURRENT EXPECTATIONS, ESTIMATES AND
PROJECTIONS ABOUT IBASIS'S INDUSTRY AND MANAGEMENT'S BELIEFS AND ASSUMPTIONS. IN
SOME CASES YOU CAN IDENTIFY THESE STATEMENTS BY FORWARD-LOOKING WORDS SUCH AS
"ANTICIPATE," "BELIEVE," "COULD," "ESTIMATE," "EXPECT," "INTEND," "MAY,"
"SHOULD," "WILL," AND "WOULD" OR SIMILAR WORDS. YOU SHOULD READ STATEMENTS THAT
CONTAIN THESE WORDS CAREFULLY BECAUSE THEY DISCUSS FUTURE EXPECTATIONS, CONTAIN
PROJECTIONS OF FUTURE RESULTS OF OPERATIONS OR OF FINANCIAL POSITION OR STATE
OTHER "FORWARD-LOOKING" INFORMATION. THE IMPORTANT FACTORS LISTED IN THE SECTION
CAPTIONED "RISK FACTORS," AS WELL AS ANY CAUTIONARY LANGUAGE IN THIS ANNUAL
REPORT, PROVIDE EXAMPLES OF RISKS, UNCERTAINTIES AND EVENTS THAT MAY CAUSE THE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE EXPECTATIONS DESCRIBED IN THESE
FORWARD-LOOKING STATEMENTS. YOU SHOULD BE AWARE THAT THE OCCURRENCE OF THE
EVENTS DESCRIBED IN THESE RISK FACTORS AND ELSEWHERE IN THIS ANNUAL REPORT COULD
HAVE AN ADVERSE EFFECT ON THE BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL
POSITION OF IBASIS.
ANY FORWARD-LOOKING STATEMENTS IN THIS ANNUAL REPORT ARE NOT GUARANTEES OF
FUTURE PERFORMANCE, AND ACTUAL RESULTS, DEVELOPMENTS AND BUSINESS DECISIONS MAY
DIFFER FROM THOSE ENVISAGED BY THESE FORWARD-LOOKING STATEMENTS, POSSIBLY
MATERIALLY. IBASIS DISCLAIMS ANY DUTY TO UPDATE ANY FORWARD-LOOKING STATEMENTS,
EVEN IF NEW INFORMATION BECOMES AVAILABLE OR OTHER EVENTS OCCUR IN THE FUTURE.
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PART I
ITEM 1. BUSINESS
COMPANY OVERVIEW
We are a leading provider of high quality Internet telephony services that
enable telecommunications carriers and other communications service providers to
offer international voice, fax and other value-added applications over the
Internet. By outsourcing international communications services to us, our
customers are able to lower costs, generate new revenue and extend their
business into Internet-based services quickly while maintaining service quality
comparable to that of traditional voice networks.
INDUSTRY OVERVIEW
TELECOMMUNICATIONS MARKET OVERVIEW. According to the Gartner Group, a leading
market research firm, the global telecommunications market is expected to grow
to approximately $1.9 trillion by 2003. Global deregulation and rapid
technological advances have resulted in the emergence of many new communications
service providers, increased competition among traditional telecommunications
carriers, lower prices, innovative new services and accelerated customer
turnover. In their efforts to add and retain customers, communications service
providers are looking for ways to cut costs and offer new services.
INTERNATIONAL LONG DISTANCE MARKET. The international long distance market is a
large and growing segment of the telecommunications market. According to
TeleGeography, a market research firm, the total market for international long
distance services in 1997 was approximately $65.9 billion. International Data
Corporation expects international long distance traffic to grow from
94.9 billion minutes in 1998 to 187.1 billion minutes in 2002. We believe that
this growth will accelerate as countries around the world continue to deregulate
their telecommunication markets. One important result of this global trend
towards deregulation and technological change is the increasing number of
communications service providers. TeleGeography has reported that the number of
international long distance carriers grew from 367 in 1995, to 1,042 in 1998.
EMERGENCE OF INTERNET TELEPHONY. Although it has been possible to transmit
voice over data networks since 1995, only recently has the technology improved
such that phone-to-phone calls can be transmitted over data networks with
quality approaching that of traditional voice networks. International Data
Corporation projects that worldwide Internet telephony will grow from $0.5
billion in 1999, to $18.7 billion in 2004, approximately half of which would be
generated by new services, including voice-enabled ecommerce and other enhanced
services such as unified communications. Wholesale worldwide Internet telephony,
including wholesale international Internet telephony, is expected to grow to
$2.0 billion by the same date. In addition, International Data Corporation
projects that international Internet telephony will comprise $17.3 billion of
the total $18.7 billion market in 2004.
Internet telephony offers communications service providers the following
advantages over traditional voice networks, allowing them to complete calls at
comparable quality with lower costs, and offer new services:
- TECHNOLOGICAL EFFICIENCIES. Traditional voice networks use circuit
switching technology, which establishes dedicated lines between an
originating and terminating point for the duration of a call. 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. Packets from multiple calls or faxes
can be carried over the same line simultaneously with data from other
sources, which results in a higher utilization of transmission lines than
can be achieved with circuit-switched technology. Unlike circuit-switched
traffic, data packets also can be compressed, which means
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that Internet telephony uses less bandwidth per call than traditional
circuit-switched calling. As a result of these features, calls can be
completed at a lower cost using Internet telephony. We believe that
packet-switched networks, including the Internet, will allow other
traditional services to be offered more cost-effectively as well.
- ECONOMIES OF SCALE. Internet telephony calls are carried over large and
rapidly growing data networks. Businesses recently have spent billions of
dollars to upgrade their data networks to accommodate dramatic increases
in data traffic. According to TeleGeography, the total bandwidth used for
data surpassed that used for voice in the United States long distance
market in 1998. This growth is driven largely by technological innovation
and the rapid expansion of the Internet as a global medium for
communications and commerce. As data networks continue to grow,
communications service providers should benefit from greater economies of
scale and be able to offer Internet-based services, such as Internet
telephony, more cost effectively than services over traditional voice
networks.
- OPPORTUNITY TO BY-PASS INTERNATIONAL SETTLEMENT RATES. Traditional
international long distance calls are completed over international voice
networks. These networks are typically owned by government bodies or
telecommunications carriers who charge settlement rates or tariffs for
their use. International calls routed over the Internet bypass a
significant portion of these fees, and as a result can generally be
completed at lower cost.
- ADDITIONAL CHANNEL FOR CARRIERS. Carriers regularly outsource their voice
and fax traffic to take advantage of the lowest-cost provider to a
particular destination and partner with companies that can provide
additional channels. Internet telephony offers an opportunity for service
providers with access to necessary technology to develop networks that can
provide these additional channels.
- MORE SERVICES AND EASIER ROLL OUT. In contrast to the closed, proprietary
structure inherent in traditional circuit-switched voice networks,
Internet telephony embraces an open architecture and open standards, which
facilitates innovation at lower costs. Traditional voice networks are
designed specifically to provide one basic service, making it difficult to
introduce new services over those networks. In contrast, data networks
convert all services into data packets, and allow for the introduction of
an indefinite variety of packet-based services that were not possible over
the traditional network. Since rollout of new services does not
necessitate network-wide upgrades, it is easier for communications service
providers to deploy new services quickly. While voice and fax are the
dominant services provided today, additional services, such as Internet
call waiting, unified messaging and electronic commerce can be provided
over data networks.
DEMAND FOR INTERNET TELEPHONY SOLUTIONS. While there are many reasons for
telecommunications carriers and other communications service providers to take
advantage of Internet telephony, for the most part, they have been slow to
establish in-house Internet telephony capability for a number of reasons. These
reasons include:
- lack of adequate Internet telephony technology until recently;
- concerns over quality;
- prior substantial investment in circuit-switched networks and the
associated expertise; and
- a hesitation to build new networks and cannibalize traffic from their
traditional voice networks.
Developing an international Internet telephony network for a substantial portion
of a communications service provider's traffic would also be expensive and
time-consuming, requiring each service provider to negotiate agreements in each
country where it would like to be able to complete calls. Therefore, many
communications service providers are looking to outsource their Internet
telephony services.
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To date, however, few Internet telephony providers have been able to offer the
quality, reliability and back office support necessary to meet the carriers'
strict requirements. In addition, most Internet telephony providers do not have
the international presence to be able to complete calls to a sufficient number
of destinations, and do not have the capacity to carry the volume of traffic
required by carriers to any given location.
THE IBASIS SOLUTION
We provide high quality Internet-based communication services to
telecommunications carriers and other communications service providers. Our
solution enables communications service providers to outsource their
international voice, fax and other value-added services over the Internet at
substantially lower costs than over traditional networks while maintaining high
quality service. We provide our customers access to the iBasis Network, our
international, scaleable, standards-based Internet telephony network through
"Internet branch offices" strategically located in major cities in North
America, Asia, Latin America, Europe and Africa. Our services provide the
following key benefits to our customers:
HIGH QUALITY VOICE AND FAX TRANSMISSIONS. Our proprietary technology enables us
to complete international voice and fax calls over the iBasis Network with
quality comparable to that of traditional circuit-switched voice networks. This
is supported by the fact that carriers are able to provide our Internet
telephony services to their customers undifferentiated from their traditional
services. Through our global network operations center and proprietary Assured
Quality Routing software, we are able to monitor our network and route traffic
over dedicated private lines or traditional circuit-switched lines when
necessary to maintain high quality. This enables us to provide consistently high
quality services to communications service providers.
COST EFFECTIVE SOLUTIONS. Our transmission costs are lower because packet
switching is more efficient than traditional circuit switching. In addition, we
leverage the Internet to deliver traffic, which results in lower costs than
transmission alternatives that deploy dedicated connections. Our packet-based
scaleable solution also allows us to better match our investment in equipment
with capacity needs, and provide lower cost world-class operating support
systems. Also, we are currently able to circumvent many of the international
tariffs or settlement rates associated with international calls over circuit-
switched voice networks, which results in additional cost savings.
INTERNATIONAL HIGH-CAPACITY NETWORK. Our iBasis Network is a growing
international network that allows us to complete calls worldwide. During our
fourth quarter ended December 31, 1999, we transported approximately
63.8 million minutes of traffic over the more than 3,200 lines we have deployed
internationally through our relationships with communications service providers.
FLEXIBLE BACK OFFICE SOLUTION THAT FACILITATES NEW SERVICES AND EFFECTIVE
BUSINESS MANAGEMENT. We provide communications service providers with an
integrated network, making possible advanced reporting and monitoring that
customers can access from an easy to use web-based application. The flexibility
of our back office systems allows us to provide timely statistics and integrated
billing that enables a communications service provider to manage its costs more
effectively and offer new services more readily.
EASE OF DEPLOYMENT AND TIME TO MARKET. We enable carriers to route calls over
our network in a timely and cost effective manner. Carriers and other
communications service providers need no special equipment or technical
expertise in order to access our services as connections are made in the same
manner as traditional voice-based services. Our solution shortens communications
service providers' time-to-market by enabling them to complete calls to any
country on our network without experiencing the delays typically incurred in
establishing separate contracts with local service providers in each country.
5
OPEN, SCALEABLE ARCHITECTURE DESIGNED FOR NEW SERVICES. Our network
architecture is open, scaleable and standards based. This allows for fast
deployment of services to new countries, and enables us to offer other
value-added services over our network quickly and easily. We currently offer
voice, fax and billing services and will offer other new value-added services.
On February 3, 2000, we announced our intention to deploy Cisco Systems'
uOne-TM- application on the iBasis Network, thereby allowing communications
service providers to provide unified communications services to their end-user
customers over our network.
OUR STRATEGY
Our objective is to be the leading provider of high quality Internet-based
communication services to telecommunications carriers and other communications
service providers. We plan to accomplish this by pursuing the following
strategies:
FOCUS ON HIGH-VOLUME COMMUNICATIONS SERVICE PROVIDERS. We are focused on
providing Internet-based communications services to high-volume carriers. By
focusing on carriers, rather than the end-users, we are able to avoid the time
and expense associated with building a retail sales and support infrastructure.
Our focus on carriers has the added benefit that we do not compete with our
customers for end-users.
PROVIDE CARRIER-CLASS SERVICES USING THE INTERNET. Through our proprietary
technologies, we offer high quality voice and fax completion services using the
Internet. By using the Internet to deliver a majority of our services, we are
able to avoid the costs associated with developing an extensive network of
private dedicated lines. We intend to continue to use the Internet to provide
our high quality services at competitive prices. We will continue to introduce
only those services that we can offer at carrier-class quality.
FOCUS ON THE INTERNATIONAL MARKET AND EXPAND OUR GEOGRAPHIC PRESENCE THROUGH
PARTNERSHIPS AND ACQUISITIONS. The international long distance market segment is
large and growing and has historically offered higher revenue per minute than
the domestic long distance market segment. We intend to build the leading
international Internet telephony network to allow carriers to use us for their
international Internet telephony services around the world. We will continue to
focus on the international segment and partner with communications service
providers such as China Unicom and Dacom, the second largest carriers in China
and Korea respectively, that can originate and terminate calls in their
respective countries. We will also consider acquiring other complementary
businesses or technologies if attractive opportunities arise.
CONTINUE TO BE AT THE FOREFRONT OF INTERNET-BASED COMMUNICATIONS TECHNOLOGY. In
order to provide these high quality services and stay at the forefront of
Internet-based communications technology and service offerings, we will continue
to invest in improving our technology, and partner with leaders in Internet-
based communications hardware and software.
INCREASE SALES AND MARKETING EFFORTS AND BRAND AWARENESS. We will continue to
expand our sales and marketing activities, while focusing on communications
service providers domestically as well as internationally. We intend to build
iBasis into the premier brand in the Internet telephony marketplace and will
strive to make our name synonymous with high quality, value-added Internet
telephony services for communications service providers. We are in the process
of hiring additional sales, sales support and marketing professionals with
specific experience in our target markets and regions.
OFFER ADDITIONAL INTERNET-BASED COMMUNICATION SERVICES. We intend to introduce
new services that carriers can offer over our network or their own networks. We
are focused on applications that will allow carriers to expand their business,
improve service quality and cut costs. We also intend to offer new services such
as dedicated Internet and circuit-switched network access, which will help our
customers enter new markets quickly. We believe that these new services will
increase our customer
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base and allow us to cross-sell other services to communications service
providers once they are our customers. On February 3, 2000, we announced our
intention to deploy Cisco Systems' uOne-TM- application on the iBasis Network,
thereby allowing communications service providers to provide unified
communications services to their end-user customers over our network.
THE IBASIS NETWORK
The iBasis Network is our international network over which we deliver large
volumes of high quality international voice, fax and other value-added services
at significant cost savings. During our fourth quarter ended December 31, 1999,
we transported approximately 63.8 million minutes of traffic over our network.
The iBasis Network consists of four principal elements:
- "Internet central offices" and "Internet branch offices" that translate
voice to data for transmission and retrieval over a data network;
- the transmission medium, which is principally the Internet;
- Assured Quality Routing, our proprietary software; and
- our global network operations center, from which we oversee and coordinate
the operation of the gateways and the transmission network.
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Following is a diagram of the iBasis Network.
[Diagram depicting the flow of information, moving clockwise from the lower left
with arrows connecting the various points, from a telephone, cellular phone and
fax machine, through telephone lines, labeled "Circuit-Switched Network," into
an iBasis Internet Central Office/Internet Branch Office, to a cloud labeled
"The Internet," continuing out through another Internet Central Office/ Internet
Branch Office, to another picture of telephone lines, labeled "Circuit-Switched
Network," and concluding with the depiction of a telephone, cellular phone and
fax machine. In the center of the diagram, connection to the Internet Central
Offices/Internet Branch Offices and the Internet, is a box with the text "iBasis
Global Network Operations Center" and "Assured Quality Routing." Above the
Internet cloud is a small cloud labeled "Alternate Routes" connected the to
Points of Presence with dotted lines.]
INTERNET CENTRAL OFFICES AND INTERNET BRANCH OFFICES. The entrance point for
communications traffic over the iBasis Network is an Internet branch office,
four of which have enhanced functionality and capacity and are referred to as
Internet central offices. Our customers can interconnect with the iBasis Network
by connecting dedicated voice circuits from their facilities to one of four
Internet central offices, located in New York; Los Angeles; London, England; and
Hong Kong, China. Alternatively, our customers may elect to install an iBasis
Internet branch office directly at their facilities to eliminate the cost of
backhauling traffic from their facilities to one of our Internet central
offices. Internet branch offices receive calls through a local carrier's
switched network. Gateways in each Internet branch office digitize, compress and
packetize voice and fax calls and then transmit them over the Internet. At the
destination, another Internet branch office reverses the process and the call is
switched back from the Internet to a local carrier's circuit-switched network in
the destination country.
We currently operate Internet branch offices located in more than two dozen
countries worldwide, including Australia, China, Germany, Hong Kong, Japan,
Korea, the United Kingdom and the United States. Some of these Internet branch
offices are owned by us and others are owned by our partners. The Internet
branch offices are scaleable and flexible platforms designed for interconnection
with the iBasis Network and are built primarily using Cisco Systems' equipment.
The scaleability of the Internet branch offices permits us to quickly increase
capacity in discrete increments at relatively low cost, either for a region or a
customer. In addition, the Internet branch office flexible architecture is
designed to easily integrate and support the new services we intend to offer.
THE INTERNET. We use the Internet to transmit the substantial majority of our
voice and fax traffic and deliver other value-added services, because of its
global coverage, rapid growth and flexible connectivity. By using the Internet,
we avoid having to build a private, dedicated network of fiber and
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cable connections, which would delay our time-to-market in many locations and
would be more costly to deploy. We have addressed the challenges present in
using the Internet by:
- selecting only high quality, service-oriented Internet service providers
as our vendors;
- purchasing high-speed connections into the Internet backbone; and
- continuously monitoring the quality of the connections between each
Internet branch office and the Internet.
We also use data transmission over private leased lines or traditional
circuit-based voice networks where the Internet is not available or would not
permit us to meet our quality standards.
ASSURED QUALITY ROUTING. We have deployed a proprietary software application,
Assured Quality Routing, to maintain high quality voice and fax service. This
application monitors the quality of calls placed over our network by applying
defined quality parameters to each processed call. These quality parameters
include measures of voice and fax quality that are important to carriers,
including overall voice quality, call completion rates and post-dial delay. The
system alerts us whenever the transmission quality drops below specific
thresholds. We temporarily route subsequent calls to a circuit-switched network
or an alternate Internet-based network to restore high quality.
GLOBAL NETWORK OPERATIONS CENTER. We manage our network of Internet central
offices and Internet branch offices around the world and implement our
proprietary Assured Quality Routing software through our global network
operations center. It is comprised of network management tools from
Hewlett-Packard and a number of other vendors that permit us to monitor, test
and diagnose all components of the iBasis Network. The global network operations
center is staffed and running 7 days a week, 24 hours a day at our Burlington,
Massachusetts headquarters, complete with:
- real-time, end-to-end monitoring and analysis of call behavior patterns on
the iBasis Network to identify and address potential problems before they
become serious and to anticipate issues related to network growth;
- system redundancy, including power back-up and multiple network paths; and
- a help desk, which allows us to respond to our customers problems on a
timely basis.
OUR SERVICES
Our current services include international voice and fax call completion and a
retail rating or billing solution. We also provide customers with our web-based
traffic revenue reporting system called iTrac. Customers have the option to
purchase these services as a complete suite or separately.
INTERNATIONAL VOICE AND FAX SERVICES. We offer international voice and fax call
completion services, and other value-added services, that provide our customers
a high quality, low-cost alternative for international voice and fax transport
of phone-to-phone or fax-to-fax calls placed by their business and residential
customers. Our proprietary Assured Quality Routing software and web-based
extranet are important components of our services and are integrated elements of
our advanced operational support systems.
On January 19, 2000, we announced that we will be offering service level
agreements to our international customers. These service level agreements for
international termination services guarantee customers sending calls over our
network call completion rates equivalent to or better than those provided by
alternative networks, including the public-switched telephone network. The call
completion rate, known in the telecommunications industry as the answer seizure
ratio, represents the percentage of calls out of all attempts that are
successfully completed. The higher the answer seizure ratio, the more reliable
the network and the more billable calls that result for a carrier.
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RETAIL RATING SERVICE. We introduced our retail rating service to provide a
simple and easy-to-implement outsourced billing solution to customers who want
to offer prepaid or postpaid calling card origination services. Under this
program, we maintain and administer a billing support system that performs the
authentication, authorization and accounting for this service. At the same time,
our customers control the end-user calling settlement rates, and remain
responsible for card fulfillment, sales, marketing and end-user customer care.
The customer benefits of this service are:
- faster time-to-market for the introduction of calling card services;
- no up-front or ongoing investments in billing system hardware and
software; and
- reduced staffing and training expenses.
INTERACTIVE TRAFFIC REVENUE ANALYSIS CENTER. iTrac is proprietary web-based
traffic reporting analysis software that enables our customers to better manage
their operations through real-time information exchange. iTrac provides
statistics on service quality and traffic volume, helping customers to quickly
address issues that affect service and to do effective network capacity
planning. This information is delivered in a cost-efficient manner using
sophisticated and secure extranet technologies that customers access using a
standard web browser.
FUTURE SERVICES. We intend to add new services that leverage components of the
iBasis Network to generate additional sources of revenue. We believe that our
ability to deploy new Internet-based communication services makes us an
attractive partner for application developers. We also believe that the ability
to offer these new services will be beneficial to our customers, regardless of
whether or not they directly charge their end-users for these services, because
they will help our customers attract new subscribers and retain and "up-sell"
their existing subscriber base. Some of the services that we may choose to
introduce in the future include:
- UNIFIED COMMUNICATIONS. On February 3, 2000, we announced that we intend
to deploy Cisco Systems' uOne-TM- unified communications application on
the iBasis Network. This application will permit our customers to offer a
communications solution that will unify the storage and retrieval of
e-mail and voice-mail messages as well as faxes. With the proliferation of
messaging worldwide and as people send more and more e-mail, voice-mail
and faxes, unified communications services will allow subscribers to
access their messages from a single source.
- INTERNET TELEPHONY HOSTING. On December 6, 1999, we announced that we
would begin offering Internet telephony hosting services on the iBasis
Network. These services will provide customers with access to a turnkey
solution that enables them to quickly begin offering voice, fax, pre-paid
calling and other value-added Internet telephony services with a global
footprint with minimal capital investment.
- BASIC MESSAGING SERVICES. We may offer additional basic messaging
services, including outsourced voice-mail, store-and-forward fax, or
faxmail, and e-mail.
- OTHER ADVANCED MESSAGING SERVICES. We may offer other advanced messaging
services including: one-number service, which allows subscribers to
consolidate existing office, home, and mobile numbers into a single
contact or "follow-me" number; Internet call management services such as
caller ID, call waiting and call forwarding; and message delivery that
includes the recording and scheduling of a message, repeated delivery
attempts and message delivery confirmation. These services may in some
cases leverage components of our network to provide international
call-termination services and operational support services.
- INFORMATION SERVICES. We may offer Internet-based information services
that deliver detailed, metered billing information that can help customers
to understand better how their network is being used.
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- DIRECTORY SERVICES. We may offer subscriber-based directory services that
maintain important customer information. This would enable communications
service providers to customize and automate their services.
- INTERNET AND CIRCUIT-SWITCHED INFRASTRUCTURE. We may offer
circuit-switched access, dedicated Internet access, and equipment
co-location services to help our customers meet their time-to-market
objectives.
- CONFERENCING SERVICES. We may offer audio, video and data conferencing
services.
- BILLING SERVICES. We may offer additional outsourced billing services such
as on-line bill presentment and Internet telephony clearinghouse
settlement services.
MARKETS AND CUSTOMERS
Telephone companies can be segregated by size into first tier, second tier and
third tier carriers. Generally, first tier carriers are large domestic and
international carriers, such as MCI WorldCom, Cable & Wireless and certain
government-affiliated monopolies, such as the Japanese telecommunications
carrier KDD. First tier carriers generally have annual revenues in excess of
$2 billion. Second tier carriers have revenues generally in the $750 million to
$2 billion range, but have fewer direct operating agreements with other carriers
and fewer international facilities. Examples of tier two carriers are RSL,
WorldxChange Communications, World Access Telecomm Group, Star Telecomm and PGE.
Third tier carriers are typically switch-based resellers with revenues of less
than $750 million.
We provide services to members of all three tiers of United States carriers, who
transmit voice and fax traffic through our New York or Los Angeles Internet
central offices for completion overseas. As of December 31, 1999, we were
providing services to ten of the top twelve highest volume United States-based
international carriers. The ability to provide quality consistently acceptable
to these classes of carriers is of vital importance, because these carriers
often have traffic volumes that regularly overflow their capacity.
Overseas we have established relationships with in-country companies and local
service providers that have local market expertise and relationships to build
strong businesses. Some of our overseas partners/ customers are very large
well-established national carriers, such as the Korean company, Dacom, and China
Unicom. Others are emerging carriers or Internet service providers who are able
to provide the services necessary to terminate minutes for us in their country.
SALES AND MARKETING
SALES STRATEGY. Our sales efforts target leading telecommunications carriers
both in the United States and overseas. Our sales force, made up of experienced
personnel with long-time relationships in the telecommunications industry, is
frequently supplemented by senior members of management. As of December 31,
1999, we had deployed nine sales personnel to cover domestic carriers, with an
additional seven in sales support roles. In the United States, we sell directly
to carriers and have successfully developed brand awareness and beneficial
relationships through numerous channels including the web, trade shows, speaking
engagements and joint marketing programs. The ability to provide quality
acceptable to leading carriers is a strong selling point for us. These carriers
have traffic that frequently exceeds their capacity and compels them to seek
alternative channels that offer comparable quality, particularly where those
channels can offer better pricing. Our sales process often involves a test by
our potential customers of our services with traffic to a particular country.
Our experience has been that once a carrier has begun to use our network for a
single country and has found our quality to be acceptable, the sales process for
other countries becomes easier.
In overseas markets, we seek to establish relationships with local service
providers that have the local market expertise to provide the termination
services we need. We believe that the opportunity we offer
11
these companies to terminate a substantial number of minutes makes us an
attractive partner. As of December 31, 1999, we had deployed eleven sales
personnel to cover international markets, two of whom are employed by our
majority-owned joint venture in Hong Kong. We have also established an office in
Seoul, Korea that covers Korea, Japan and Taiwan; an office in Jakarta covering
the Southeast Asian countries and employ an in-country sales person in China.
Other countries are covered from the United States where we have a sales office
in Dallas and our worldwide headquarters in Burlington, Massachusetts. Prime
candidates for overseas partners are carriers, call back companies, cellular,
PCS and paging companies and Internet service providers.
In Hong Kong, we have formed a joint venture with a local equipment provider,
MicroWorld, to help us develop a stronger local market presence. We hope to use
this joint venture to accelerate our penetration throughout Asia.
MARKETING STRATEGY. Our marketing strategy includes public relations campaigns,
interaction with industry analysts, attendance at trade shows and a
comprehensive website at www.ibasis.net. We have engaged a public relations firm
to conduct a campaign to position us as the preeminent Internet telephony
provider. We aggressively pursue favorable coverage in the trade and business
press and participate in a variety of industry trade shows, including Voice on
the Net, Telecommunications Resellers Association and Telecom Business. We
believe our website will continue to be an effective marketing tool in
international markets.
STRATEGIC TECHNOLOGY RELATIONSHIPS
We have entered into strategic technology relationships with a number of leading
technology providers in the Internet telephony industry, including Cisco
Systems, Belle Systems and NetSpeak Corporation. We believe that our strategic
technology relationships are important because they give us early access to new
technologies and because many of our strategic relationship partners are an
important part of our sales and marketing programs.
CISCO SYSTEMS
As a Cisco Alliance Partner, we have access to Cisco's sales, marketing and
technical resources to aid our global expansion. We understand that Cisco has
selected fewer than 30 companies to participate in this program. The Cisco sales
and marketing resources available to us under this program include matching
funds for selected marketing activities, joint sales calls, event sponsorship
and seminar support. In addition, as a Cisco Alliance Partner, we have access to
Cisco technical resources and early opportunities to bring new products and
features to the marketplace. Currently, we are engaged in three beta programs
with Cisco for new products and features. We also conduct joint sales and
marketing programs with Cisco, participate with Cisco in industry trade shows
and periodically meet with consultants at Cisco's executive briefing center.
Under the terms of our alliance agreement with Cisco, we have committed to
appoint Cisco our preferred vendor. In addition, we are required to purchase 80%
of our total net purchases of any network equipment from Cisco, where Cisco has
a solution.
In addition, the iBasis Network has been designated by Cisco as a certified
Cisco Powered Network-TM-. This designation permits us to leverage Cisco's
significant worldwide brand equity by displaying the Cisco Powered
Network-TM-trademark in our literature and exhibits.
BELLE SYSTEMS
We also have a strategic alliance with Belle Systems A/S, a leading provider of
billing systems for Cisco-based IP Networks. Belle Systems billing solutions are
based on an architecture that provides the scaleability and flexibility that is
critical to our continued success in deploying IP-messaging services.
12
Under the agreement, we are licensing computer software from Belle Systems that
allows us to integrate their billing system into our network, in exchange for
which we pay product and license fees, which for specified products are not to
exceed the lowest price offered by Belle Systems to any of its customers for the
same or similar products. Belle Systems will provide general service and support
for the system, and use its best efforts to provide any additional assistance
for a reasonable price, also not to exceed the lowest prices charged by Belle
Systems to other customers. The agreement also contains a limited warranty for
the system, a mutual non-disclosure obligation, and a source code escrow at our
expense.
NETSPEAK CORPORATION
We have entered into a strategic partnership agreement with NetSpeak, a leading
developer of Advanced Intelligent Network technologies that enable innovative
solutions for concurrent, real-time interactive voice, video and data
communications over data networks. Under the agreement, we are licensing
computer software from NetSpeak that we and our customers can use to assist in
call routing and completion and, in exchange for which, we are obligated to pay
product and licensing fees. NetSpeak will also provide us with software
maintenance and support services for which we are obligated to pay maintenance
and support fees. Under the terms of the agreement, we have a limited obligation
to upgrade our NetSpeak software to maintain some of NetSpeak's service
obligations. We will also work with NetSpeak in the development and deployment
of new functions and features to the software that will, among other things, add
value-added service capabilities that will enhance and differentiate our
offerings to service providers. Each of NetSpeak and iBasis will also engage in
co-branding and are obligated to engage in co-marketing activities to increase
customer awareness of the services offered by each company and to represent each
other as a strategic partner.
COMPETITION
The market for international voice and fax call completion services is highly
competitive. We face competition from a variety of sources, including large
communications service providers with more resources, longer operating histories
and more established positions in the telecommunications marketplace, some of
whom have begun to develop Internet telephony capabilities. Many of our
competitors are larger companies. We also compete with small companies who have
focused primarily on Internet telephony. We believe that we compete principally
on quality of service, price and bandwidth. We also expect that the ability to
offer enhanced service capabilities, including new services, will become an
increasingly important competitive factor in the near future.
TELECOMMUNICATIONS COMPANIES AND LONG DISTANCE PROVIDERS.
Large carriers around the world carry a substantial majority of the traffic.
These carriers, such as British Telecom and Deutsche Telecom, have started or
begun to deploy packet-switched networks for voice and fax traffic. These
carriers have substantial resources and have large budgets available for
research and development. In addition, several companies, many with significant
resources, such as Level 3 and Qwest Communications, are building fiber optic
networks, primarily in the United States, for Internet telephony traffic. These
networks can be expected to carry voice and fax and these newer companies may
expand into international markets.
The nature of the telecommunications marketplace is such that carriers buy from
and sell to each other. Major carriers have multiple routes to virtually every
destination, and frequently buy and sell based on the strength and capacity to a
particular country. We have relationships with many of these carriers and have
carried traffic for them in the past. We expect to continue to exchange traffic
with many of these companies in the future, even as they begin to devote more
resources to competing in the Internet telephony market.
13
INTERNET TELEPHONY SERVICE PROVIDERS
A number of companies have started Internet telephony operations in last few
years. AT&T Clearinghouse, GRIC Communications and ITXC sell international voice
and fax over the Internet, and compete directly with us. Other Internet
telephony companies, including Net2Phone and deltathree.com, are currently
focusing on the retail market and personal computer-based Internet telephony,
but may compete with us in the future.
GOVERNMENT REGULATION
UNITED STATES GOVERNMENT REGULATION OF THE INTERNET AND INTERNET TELEPHONY. We
believe that under United States law the Internet-related services that we
provide constitute information services, rather than telecommunications
services. As such, our services are not currently regulated by the Federal
Communications Commission or state agencies responsible for regulating
telecommunications carriers, although aspects of our operations may be subject
to state or federal regulation such as regulations governing universal service
funding, confidentiality of communications, copyright and excise taxes. However,
several efforts have been made to enact federal legislation that would either
regulate or exempt from regulation services provided over the Internet.
Therefore, we cannot assure you that Internet-related services such as ours will
not be regulated in the future. Increased regulation of the Internet may slow
its growth by negatively impacting the cost of doing business over the Internet.
This would materially adversely affect our business, financial condition and
results of operations.
We also cannot assure you that Internet telephony will continue to be lightly
regulated by the FCC and state regulatory agencies. Although the FCC has
determined that, at present, information service providers, including Internet
telephony providers, are not telecommunications carriers, we cannot be certain
that this position will continue. On April 10, 1998, the FCC issued a report to
Congress discussing its implementation of certain universal service provisions
contained in the 1996 amendments to the Communications Act of 1934. In its
report, the FCC stated that it would undertake an examination of whether
phone-to-phone Internet telephony should be considered an information service or
a telecommunications service. The FCC noted that certain forms of phone-to-phone
Internet telephony appeared to lack the characteristics of an information
service and to have the same functionality as non-Internet protocol
telecommunications services. In addition, the FCC is currently considering
whether to impose surcharges and/or other common carrier regulations upon
certain providers of Internet telephony, primarily those which, unlike us,
provide Internet telephony services to end-users. If the FCC determines that
Internet telephony is subject to regulation as a telecommunications service, it
may subject providers of Internet telephony services to traditional common
carrier regulation and require them to make universal service contributions and
pay access charges. It is also possible that the FCC will adopt a regulatory
framework for Internet telephony providers different than that applied to
traditional common carriers. Finally, Congressional dissatisfaction with the
FCC's conclusions regarding Internet telephony could result in legislation
requiring the FCC to impose greater or lesser regulation. Any change in the
existing regulation of Internet telephony by the FCC or Congress could
materially adversely affect our business, financial condition and results of
operations.
In addition to the FCC and Congress, state regulatory authorities and
legislators may assert jurisdiction over the provision of intrastate Internet
telephony services. Some states already have initiated proceedings to examine
the regulation of such services. While we do not currently provide intrastate
services and have no current plans to do so, additional regulation of Internet
telephony by the states could preclude us from entering the intrastate market or
make entrance more difficult.
INTERNATIONAL GOVERNMENT REGULATION OF THE INTERNET AND INTERNET TELEPHONY. We
provide our Internet telephony services in various countries in Europe, Asia,
Latin America, and the Middle East. The regulatory treatment of Internet
telephony in these countries varies widely and is subject to constant
14
change. Some countries currently impose little or no regulation on Internet
telephony, as in the United States. Conversely, other countries that prohibit or
limit competition for traditional voice telephony services generally do not
permit Internet telephony or strictly limit the terms under which it may be
provided. Still other countries regulate Internet telephony like traditional
voice telephony services or determine on a case-by-case basis whether to
regulate Internet telephony as a voice service or as another telecommunications
service. Finally, in many countries, Internet telephony has not been addressed
by legislation or the regulatory authorities. The varying and constantly
changing regulation of Internet telephony in the countries in which we currently
provide or may provide services may materially adversely affect our business
financial condition and results of operations.
The European Union, for example, distinguishes between voice telephony, which
may be more heavily regulated by the member states, and other telecommunications
services. With regard to Internet telephony, the European Commission concluded
in a Communication to the Member States that at present Internet telephony
should not be considered voice telephony and thus should not be regulated as
such by the member states. However, the Commission noted that providers of
Internet telephony whose services satisfied the European Union's definition of
voice telephony could be considered providers of voice telephony and could be
regulated as such by the member states. Moreover, Commission Communications are
not binding on the member states. Therefore, we cannot assure you that the
services provided by us in the European Union will not be deemed voice telephony
and, accordingly, subject to heightened regulation by one or more European Union
countries in the future. We also provide our services in countries where the
regulation of Internet telephony is more restrictive than in the United States
and the European Union. For example, we have a contractual relationship with
China Unicom, the second largest telecommunications company in the People's
Republic of China, to provide international Internet telephony and facsimile
services in China. China limits competition in the telecommunications industry
to several government-owned companies. At present, Internet telephony may be
offered only to four companies including China Unicom.
Similarly, we provide our services in other countries in which the regulatory
status of Internet telephony is unclear or in the process of development, and in
countries in which regulatory processes are not as transparent as in the United
States and Europe. Changes in the regulatory regimes of these countries that
have the effect of limiting or prohibiting Internet telephony, or that impose
new or additional regulatory requirements on providers of such services, may
result in our being unable to provide service to one or more countries in which
we currently operate. That result could have a material adverse effect on our
business, financial condition and results of operations.
In addition, as we expand into additional foreign countries, such countries may
assert that we are required to qualify to do business in the particular foreign
country, that we are otherwise subject to regulation, or that we are prohibited
from conducting our business in that country. Our failure to qualify as a
foreign corporation in a jurisdiction in which we are required to do so, or to
comply with foreign laws and regulations, would materially adversely affect our
business, financial condition and results of operations, including by subjecting
us to taxes and penalties and/or by precluding us from, or limiting us in,
enforcing contracts in such jurisdictions. Likewise, our customers and partners
may be or become subject to requirements to qualify to do business in a
particular foreign country, to otherwise comply with regulations, or to cease
from conducting business in that country. We cannot be certain that our
customers and partners are currently in compliance with regulatory or other
legal requirements in their respective countries, that they will be able to
comply with existing or future requirements, and/ or that they will continue in
compliance with any requirements. The failure of our customers and partners to
comply with these requirements could materially adversely affect our business,
financial conditions and results of operations.
OTHER UNITED STATES REGULATIONS AFFECTING THE INTERNET. Congress has recently
adopted legislation that regulates certain aspects of the Internet, including
online content, user privacy, and taxation. In addition, Congress and other
federal entities are considering other proposals that would further
15
regulate use of the Internet. For example, Congress is currently considering
legislation on a wide range of issues including Internet spamming, database
privacy, gambling, pornography and child protection, Internet fraud, privacy,
and digital signatures. Similarly, various states have adopted or are
considering Internet-related legislation. Increased regulation of the Internet
may slow its growth, which may negatively impact the cost of doing business over
the Internet and materially adversely impact our business, financial condition
and results of operations.
OTHER INTERNATIONAL REGULATIONS AFFECTING THE INTERNET. The European Union also
has enacted legislation that affects the Internet. For example, the European
Union imposes restrictions on the collection and use of personal data and grants
European Union citizens broad rights to access and limit the use of their
personal data. United States companies that collect or transmit information over
the Internet from individuals in European Union Member States are subject to
European Union legislation, which imposes restrictions that are more stringent
than existing Internet privacy standards in the United States. Although we do
not engage in the collection of personal data for purposes other than routing
and billing for our services, the legislation is broadly applicable. The
potential effect on us of development in this area is uncertain; however, a
prohibition on the export of personal data by us would have a material adverse
impact on our business, financial condition and results of operations.
INTELLECTUAL PROPERTY
We regard our copyrights, service marks, trademarks, trade dress, trade secrets
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 our employees, customers, partners and others to protect
our proprietary rights. We pursue the registration of our trademarks and service
marks in the United States and have applied for the registration of certain of
our trademarks and service marks. We have been granted trademark registration
for the mark VIP Calling-Registered Trademark- in the United States, and have
pending registration applications for the service marks Assured Quality
Routing-SM-, Broadbandit-SM- and iBasis-SM-. In addition, we have pending
registration for the marks iBasis and iBasis and design in the United States.
However, effective protection may not be available in every country in which
iBasis has, or will have, a commercial presence.
EMPLOYEES
As of December 31, 1999, we had 147 full-time employees and one part-time
employee, with approximately 62 in sales and marketing, 47 in engineering and
operations and 38 in general and administrative. As of December 31, 1999, we
engaged approximately 51 independent contractors and we employ a limited number
of temporary employees. Our employees are not represented by a labor union and
we consider our labor relations to be good.
16
RISK FACTORS
YOU SHOULD CONSIDER CAREFULLY THE FOLLOWING RISKS, ALONG WITH THE OTHER
INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS ANNUAL REPORT ON
FORM 10-K. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES,
WHICH MAY AFFECT IBASIS. ADDITIONAL RISKS AND UNCERTAINTIES MAY ALSO ADVERSELY
AFFECT IBASIS'S BUSINESS AND OPERATIONS. IF ANY OF THE FOLLOWING EVENTS ACTUALLY
OCCURS, IBASIS'S BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS WOULD
LIKELY SUFFER, POSSIBLY MATERIALLY.
RISKS RELATED TO OUR OPERATIONS
WE HAVE A LIMITED OPERATING HISTORY UPON WHICH TO BASE YOUR INVESTMENT DECISION,
AND YOU MAY INACCURATELY ASSESS OUR PROSPECTS FOR SUCCESS.
We were incorporated in August 1996 and first began to offer commercial services
in May 1997. Due to our limited operating history, it is difficult for us to
predict future results of operations. Moreover, we cannot be sure that we have
accurately identified all of the risks to our business, especially because we
use new, and in many cases, unproven technologies and provide new services. As a
result, our past results and rates of growth may not be a meaningful indicator
of our future results of operations. Also, your assessment of the prospects for
our success may prove inaccurate.
WE HAVE A HISTORY OF OPERATING LOSSES, ANTICIPATE LOSSES FOR THE FORESEEABLE
FUTURE AND MAY NEVER BECOME PROFITABLE.
We incurred net losses of $21.1 million during fiscal 1999. As of December 31,
1999, we had an accumulated deficit of $27.8 million. We expect to continue
incurring operating losses and negative cash flows as we incur significant
operating expenses and make capital investments in our business. Our future
profitability will depend on our being able to deliver calls over our network at
a cost to us that is less than what we are able to charge for our calls. Our
costs to deliver calls are dependent on a number of factors, including the
countries to which we direct calls and whether we are able to use the Internet,
rather than another component of our network or more expensive back-up networks,
to deliver calls. The prices that we are able to charge to deliver calls over
our network vary, based primarily on the prices currently prevailing in the
international long distance carrier market to specific countries. While we are
currently able to terminate a substantial number of the calls carried over our
network profitably on an operating basis, we have been unable to operate our
entire network profitably on an operating basis for sustained periods of time.
We may not ever generate sufficient revenues, or reduce costs, to permit us to
achieve profitability. Even if we do become profitable, we may not sustain or
increase profitability on a quarterly or annual basis in the future. See
"Selected Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for detailed information on our history of
losses and anticipation of continued losses.
FLUCTUATIONS IN OUR QUARTERLY RESULTS OF OPERATIONS THAT RESULT FROM VARIOUS
FACTORS INHERENT IN OUR BUSINESS MAY CAUSE THE MARKET PRICE OF OUR COMMON STOCK
TO FALL.
Our revenue and results of operations have fluctuated and may continue to
fluctuate significantly from quarter to quarter in the future due to a number of
factors, many 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;
- pricing pressure in the international long distance market;
- the percentage of traffic that we are able to carry over the Internet, or
over our dedicated international private circuit lines, rather than over
the more costly traditional public-switched telephone network;
17
- loss of arbitrage opportunities resulting from declines in international
settlement rates or tariffs;
- our ability to negotiate changes in the termination fees charged by our
local providers when our margins deteriorate;
- capital expenditures required to expand or upgrade our network;
- changes in call volume among the countries to which we complete calls;
- technical difficulties or failures of our network systems or third-party
delays in expansion or provisioning system problems;
- our ability to offer value-added services that are appealing to the
market; and
- currency fluctuations 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 and investors.
Such a discrepancy could cause the price of our common stock to decline
significantly.
THE MARKET PRICE OF OUR SHARES MAY EXPERIENCE EXTREME PRICE AND VOLUME
FLUCTUATIONS FOR REASONS OVER WHICH WE HAVE LITTLE CONTROL.
The stock market has, from time to time, experienced, and is likely to continue
to experience, extreme price and volume fluctuations. Prices of securities of
Internet-related companies have been especially volatile and have often
fluctuated for reasons that are unrelated to the operating performance of the
affected companies. The market price of shares of our common stock has
fluctuated greatly since our initial public offering and could continue to
fluctuate due to a variety of factors. In the past, companies that have
experienced volatility in the market price of their stock have been the objects
of securities class action litigation. If we were the object of securities class
action litigation, it could result in substantial costs and a diversion of our
management's attention and resources. For more information on the market price
of shares of our common stock, see "Market Information."
WE MAY NEVER GENERATE SUFFICIENT REVENUE TO ATTAIN PROFITABILITY IF
TELECOMMUNICATIONS CARRIERS AND OTHER COMMUNICATIONS SERVICE PROVIDERS 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 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; and
- our inability to deliver traffic over the Internet with significant cost
advantages.
The growth of our 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. If the volume
of international voice and fax traffic fails to increase, or decreases, and
these third-parties do not employ our network, our ability to become profitable
will be materially and adversely affected.
On February 3, 2000, we announced our intention to deploy Cisco Systems'
uOne-TM- application on the iBasis Network, thereby allowing communications
service providers to provide unified communications
18
services to their end-user customers over our network. We cannot assure you that
communications service providers and their end-user customers will be receptive
to, and subscribe for, any unified communications services we are able to offer,
or any other additional services we elect to deploy on our network. Any
perceived problems with the reliability or functionality of any new services
that we offer could discourage communications service providers from offering
these services to their customers. In addition, the development of new services,
such as unified communications, may require substantial capital expenditures to
be made well in advance of generating any revenue from such services or
demonstrating any market acceptance of such services. If carriers and
communications service providers do not employ our network to offer any new
services to their customers, or if their customers do not subscribe for the
services when offered, our results of operations will be materially adversely
affected.
We cannot assure you that end-users will continue to purchase services from our
customers or that our customers will maintain a demand for our services.
WE MAY FACE QUALITY AND CAPACITY PROBLEMS OVER OUR NETWORK UPON FAILURES BY
THIRD PARTIES.
VENDORS. We rely upon third-party vendors to provide us with the equipment and
software that we use to transfer and translate calls from traditional voice
networks to the Internet, and vice versa. For example, we purchase substantially
all of our Internet telephony equipment from Cisco Systems. We cannot assure you
that we will be able to continue purchasing such equipment and software from
Cisco on acceptable terms, if at all. If we become unable to purchase from Cisco
the equipment needed to maintain and expand our network as currently configured,
we may not be able to maintain or expand our network to accommodate growth and
we may consequently be unable to grow revenues sufficiently to become
profitable.
PARTIES THAT MAINTAIN PHONE AND DATA LINES. Our business model depends on the
availability of the Internet to transmit voice and fax calls, and to provide
other value-added services. Third parties maintain, and in many cases own, the
traditional voice networks as well as data networks and other components that
comprise the Internet. Some of these third parties are national telephone
companies. They may increase their charges for using these lines at any time and
decrease our profitability. They may also fail to properly maintain their lines
and disrupt our ability to provide service to our customers. Any failure by
these third parties to maintain these lines and networks that leads to a
material disruption of our ability to complete calls over the Internet 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 voice to data in that country. We rely upon these
third parties to both 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 cannot
assure you that we will 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 cannot assure you that we will be able to increase the number of
countries to which we provide service. We also may not be able to enter into
relationships with enough overseas local service providers to handle increases
in the volume of calls that we receive from our customers. Finally, any
technical difficulties that these providers suffer would 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 in large part on our joint marketing and product
development efforts with Cisco Systems to achieve market acceptance and
19
brand recognition in certain markets. Cisco or other strategic relationship
partners may choose not to renew existing arrangements on commercially
acceptable terms, if at all. In general, if we lose this key strategic
relationship, or if we fail to develop new relationships in the future, our
ability to expand the scope and capacity of our network, and to maintain
state-of-the-art technology, would be materially adversely affected.
WE MAY NOT BE ABLE TO SUCCEED IN THE INTENSELY COMPETITIVE MARKET FOR OUR
SERVICES.
The market for Internet voice, fax and other value-added services is extremely
competitive and will likely become more competitive. Internet protocol and
Internet telephony service providers, such as GRIC Communications and ITXC
Corp., route traffic to destinations worldwide and compete directly with us.
Also, Internet telephony service providers, such as Net2Phone, that presently
focus on retail customers may in the future enter our market and compete with
us. In addition, major telecommunications carriers, such as AT&T, Deutsche
Telekom, MCI WorldCom and Qwest Communications, have all entered or announced
plans to enter the Internet telephony market. Many of these companies are larger
than we are and have substantially greater managerial and financial resources
than we do. Intense competition in our markets can be expected to continue to
put downward pressure on prices and adversely affect our profitability. We
cannot assure you that we will be able to compete successfully against our
competitors and we may lose customers or fail to grow our business as a result
of this competition.
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 for
call completion on our network. If this downward pricing pressure continues, we
cannot assure you that we will 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. The
continued downward pressure on prices and our failure to renegotiate favorable
terms in a particular country would have a material adverse effect on our
ability to operate our network and business profitably.
A VARIETY OF RISKS ASSOCIATED WITH OUR INTERNATIONAL OPERATIONS COULD MATERIALLY
ADVERSELY AFFECT OUR BUSINESS.
Because we provide substantially all of our services internationally, we are
subject to additional risks related to operating in foreign countries. These
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;
- foreign taxes; and
- foreign currency fluctuations, which could result in increased operating
expenses and reduced revenues.
20
These and other risks associated with our international operations may
materially adversely affect our ability to attain or maintain profitable
operations.
During the fiscal year ended December 31, 1999, 49% of our revenue was generated
by delivering calls to Asian countries, 18% of our revenue was generated by
delivering calls to Middle Eastern countries, and 22% of our revenue was
generated by delivering calls to Latin America. Many countries in these
geographic regions have experienced political and economic instability over the
past decade. Repeated political or economic instability in countries to which we
deliver substantial volumes of traffic could lead to difficulties in completing
calls through our regional service providers or decreased call volume to such
countries.
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 depend is changing rapidly. Significant
technological changes could render the equipment which we use obsolete, and
competitors may begin to offer new services that we are unable to offer. We must
adapt to our rapidly changing market by continually improving the
responsiveness, reliability, services and features of our network and by
developing new features and applications to meet customer needs. If we are
unable to successfully respond 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 TO ACCOMMODATE
ANY FUTURE GROWTH.
Our business requires that we handle a large number of international calls
simultaneously. As we expand our operations, we expect to handle significantly
more calls. We will need to expand and upgrade our hardware and software to
accommodate such increased traffic. If we do not expand and upgrade quickly
enough, we will not have sufficient capacity to handle the traffic and our
operating performance would suffer. Consequently, we could develop a negative
reputation with our customers and lose business.
IF WE FAIL TO MANAGE OUR GROWTH, WE COULD LOSE CUSTOMERS.
We have grown rapidly to date and expect to continue to grow rapidly. In order
to increase the number of our customers and the size of our operations, we will
need to improve our administrative, accounting, operating systems and controls.
We may need to redesign several internal systems. Our attention to these matters
may distract us from other aspects of our business. Moreover, failure to
implement new systems and controls may hamper our ability to provide services to
customers and may impair the quality of our services which could result in the
loss of customers.
OUR REVENUE WOULD DECLINE SIGNIFICANTLY IF WE LOSE ONE OR MORE OF OUR MOST
SIGNIFICANT CUSTOMERS.
We generate much of our revenue from a limited number of customers. During the
fiscal year ended December 31, 1999, three customers, World Access Telecom
Group, MCI WorldCom and WorldxChange Communications, accounted for approximately
29% of our net revenue. Customers may discontinue their use of our services at
any time, and without notice. Therefore, in any given quarter, we would lose a
significant amount of revenue if we lost one or more major customers.
WE DEPEND ON OUR KEY PERSONNEL AND MAY HAVE DIFFICULTY ATTRACTING AND RETAINING
THE SKILLED EMPLOYEES WE NEED TO EXECUTE OUR GROWTH PLANS.
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, Michael
21
Hughes, our Chief Financial Officer, John Henson, our Vice President,
Engineering & Operations and Charles Giambalvo, our Senior Vice President of
Worldwide Sales. If any of these individuals is unable or unwilling to continue
in their present positions, our business, financial condition and results of
operations would 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 ATTRACT SKILLED PERSONNEL TO EXECUTE OUR GROWTH PLANS. Our
future success will depend, in large part, on our ability to attract, retain and
motivate highly skilled employees, particularly engineering and technical
personnel. Competition for such employees in our industry is intense. We have
from time to time in the past experienced, and we expect to continue to
experience in the future, difficulty in hiring and retaining employees with
appropriate qualifications. We may not be able to retain our employees or
attract, assimilate or retain other highly qualified employees in the future. If
we do not succeed in attracting and retaining skilled personnel, we may not be
able to grow at a sufficient rate to attain profitable operations.
A FAILURE TO OBTAIN NECESSARY ADDITIONAL CAPITAL IN THE FUTURE ON ACCEPTABLE
TERMS COULD PREVENT US FROM EXECUTING OUR BUSINESS PLAN.
We expect to 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. Cash flow from operations, cash on hand
and funds from this offering may not be sufficient to cover our operating
expenses and capital investment needs. We cannot assure you that additional
financing will be available on terms acceptable to us, if at all. A failure to
obtain additional funding could prevent us from making expenditures that are
needed to allow us to grow or maintain our operations.
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. If we raise additional
funds through debt financing, we could incur significant borrowing costs. The
failure to obtain additional financing when required could result in us being
unable to grow as required to attain profitable operations.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, OUR COMPETITIVE POSITION
WOULD BE ADVERSELY AFFECTED.
We rely on 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. Despite our
precautions, however, 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. While we do not have any
patents pending, we may seek to patent certain software or equipment in the
future. We do not know if any of our future 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, and no third party has asserted a patent infringement claim against us.
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
22
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. We have not
requested or obtained an opinion from counsel as to whether our services
infringe upon the intellectual property rights of any third parties. A party
making an infringement claim could secure a substantial monetary award or obtain
injunctive relief which could effectively block our ability to provide services
in the United States or abroad.
If any of these risks materialize, we could be forced to suspend operations, to
pay significant amounts to defend our rights, and a substantial amount of the
attention of our management may be diverted from our ongoing business, each of
which could materially adversely affect our ability to attain or maintain
profitability.
We rely on a variety of technology, primarily software, that we license from
third parties. Continued use of this technology by us may require that we
purchase new or additional licenses from third parties. There can be no
assurances that we can 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 IN THE FUTURE AND ANY DIFFICULTIES FROM
INTEGRATING SUCH ACQUISITIONS COULD DAMAGE OUR ABILITY TO ATTAIN OR MAINTAIN
PROFITABILITY.
We may acquire businesses and technologies that complement or augment our
existing businesses, services and technologies. Integrating any newly acquired
businesses or technologies could be expensive and time-consuming. We may not be
able to integrate any acquired business successfully. Moreover, 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.
PROVISIONS OF OUR GOVERNING DOCUMENTS AND DELAWARE LAW COULD 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;
- 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;
- stockholders may not take action by written consent; and
- 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.
23
YEAR 2000 PROBLEMS COULD RESULT IN DISRUPTIONS OF OUR BUSINESS.
Many currently installed computer systems and software products only accept two
digits to identify the year in any date. Therefore, the year 2000 will appear as
"00," which the system might consider to be the year 1900 rather than the year
2000. While we have not experienced disruptions as a result of year 2000 issues
to date, as yet unidentified problems could arise and result in system failures,
delays or miscalculations causing disruptions to our operations.
The failure of our network or of any systems maintained by third parties to be
year 2000 compliant could:
- cause a complete disruption of our Internet telephony services to any or
all countries;
- cause a disruption of our billing cycles;
- cause us to incur significant expenses to remedy any problems;
- impose unmanageable burdens on our technical support staff; and
- cause customers or partners to be dissatisfied with our network and
services.
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.
The technology that allows voice and fax communications over the Internet, and
the delivery of other value-added services, is still in its early stages of
development. 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 requires 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 must also be accepted as an alternative to
traditional voice and fax service by communications service providers. Because
the Internet telephony market is new and evolving, predicting the size of this
market and its growth rate is difficult. If our market fails to develop, then we
will be unable to grow our customer base and our results of operations will be
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 bandwith 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 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. Any future outages or delays could
adversely affect our ability to complete calls. 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.
24
WE CANNOT BE CERTAIN THAT OUR ABILITY TO PROVIDE OUR COMMUNICATIONS SERVICES
USING THE INTERNET WILL NOT BE ADVERSELY AFFECTED BY COMPUTER VANDALISM.
Recently, computer vandals have caused certain leading Internet sites to shut
down temporarily and have materially affected the performance of the Internet
during key business hours by bombarding targeted sites with numerous false
requests for data. While we do not operate any websites like those recently
affected, we do rely on the Internet to deliver our international communications
services. If the overall performance of the Internet is seriously downgraded by
such website attacks or other acts of computer vandalism, 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 insurance products purporting to cover these
losses, we do not have any of this insurance at this time.
INTERNATIONAL GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES COULD LIMIT OUR
ABILITY TO PROVIDE OUR SERVICES OR MAKE THEM MORE EXPENSIVE.
The regulatory treatment of Internet telephony outside of the United States
varies widely from country to country. A number of countries currently prohibit
or limit competition in the provision of traditional voice telephony services.
Some countries prohibit, limit or regulate how companies provide Internet
telephony. Some countries have indicated they will evaluate proposed Internet
telephony service on a case-by-case basis and determine whether to regulate it
as a voice service or as another telecommunications service, and in doing so
potentially imposing settlement rates on Internet telephony providers. Finally,
many countries have not yet addressed Internet telephony in their legislation or
regulations. Increased regulation of the Internet and/or Internet telephony
providers, or the prohibition of Internet telephony in one or more countries,
could limit our ability to provide our services or make them more expensive.
In addition, as we make our services available in foreign countries, and as we
work to enable sales by our customers to end-users in foreign countries, such
countries may claim that we are required to qualify to do business in that
particular country, that we are otherwise subject to regulation, including
requirements to obtain authorization, or that we are prohibited in all cases
from conducting our business in that foreign country. Our failure to qualify as
a foreign corporation in a jurisdiction in which we are required to do so or to
comply with foreign laws and regulations could seriously restrict our ability to
provide services in such jurisdiction, or limit our ability to enforce contacts
in that jurisdiction. Our customers also currently are, or in the future may
become, subject to these same requirements. We cannot assure you that our
customers are currently in compliance with any such requirements or that they
will be able to continue to comply with any such requirements. The failure of
our customers to comply with applicable laws and regulations could prevent us
from being able to conduct business with them. Additionally, it is possible that
laws may be applied by the United States and/or other countries to transport
services provided over the Internet, including laws governing:
- sales and other taxes;
- user privacy;
- pricing controls;
- characteristics and quality of products and services;
- consumer protection;
- cross-border commerce, including laws that would impose tariffs, duties
and other import restrictions;
25
- copyright, trademark and patent infringement; and
- 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 regulate or prohibit Internet
telephony, this regulation could have a material adverse effect on our ability
to attain or maintain profitability.
WE MAY BE REQUIRED TO SUSPEND OR DISCONTINUE OUR OPERATIONS IN ISRAEL WHICH
WOULD PREVENT US FROM GENERATING REVENUE BY COMPLETING CALLS TO THAT COUNTRY.
On October 6, 1999, our Israeli operations manager received a letter from the
Israel Ministry of Communications alleging that our termination in Israel of
international calls placed with calling cards from outside Israel and carried
over the Internet, as described on our website, constituted the unauthorized
provision of telecommunications services under Israeli law. This letter stated
that we must immediately cease to supply these services. We and our Israeli
telecommunications counsel initiated discussions with the Ministry of
Communications, however the Ministry has not pursued this matter further. As of
the date of this annual report, we are unable to predict whether we will be
forced to suspend or discontinue operations in Israel as a result of this action
by the Ministry of Communications. We believe that we have valid defenses to the
claims made in the letter and we have continued to terminate calls in Israel. In
the event that we are unable to prevail in our discussions with the Ministry of
Communications, we may be forced to suspend or permanently discontinue our
operations in Israel. If we are required to suspend or permanently discontinue
our operations in Israel, we will no longer be able to generate revenue from the
termination of international traffic in Israel and our ability to increase our
net revenue and achieve profitability will be adversely affected. For the period
from inception, August 2, 1996, to December 31, 1996 and the years ended
December 31, 1997, 1998 and 1999, we generated net revenue from our operations
in Israel of approximately $0, $0, $261,000, and $2.2 million, respectively.
THE TELECOMMUNICATIONS INDUSTRY IS SUBJECT TO DOMESTIC GOVERNMENTAL
REGULATION AND LEGAL UNCERTAINTIES WHICH COULD PREVENT US FROM EXECUTING OUR
BUSINESS PLAN.
While the Federal Communications Commission has tentatively decided that
information service providers, including Internet telephony providers, are not
telecommunications carriers for regulatory purposes, various companies have
challenged that decision. Congress is dissatisfied with the conclusions of the
FCC and the FCC could impose greater or lesser regulation on our industry. The
FCC is currently considering, for example, whether to impose surcharges or other
regulations upon certain providers of Internet telephony, primarily those that,
unlike us, provide Internet telephony services to end-users located within the
United States.
Aspects of our operations may be, or become, subject to state or federal
regulations governing universal service funding, disclosure of confidential
communications and copyright and excise taxes. We cannot assure you that
government agencies will not increasingly regulate Internet-related services.
Increased regulation of the Internet may slow its growth. This regulation may
also negatively impact the cost of doing business over the Internet and
materially adversely affect our ability to attain or maintain profitability.
26
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors, executive officers and key employees of iBasis, and their ages as
of January 31, 2000, are as follows.
NAME AGE POSITION
- ---- -------- --------
EXECUTIVE OFFICERS AND DIRECTORS
Ofer Gneezy (1).................... 48 President and Chief Executive Officer, Director
Gordon J. VanderBrug............... 56 Executive Vice President, Director
Michael J. Hughes.................. 37 Vice President, Finance and Chief Financial Officer
John G. Henson, Jr................. 57 Vice President, Engineering and Operations
Charles Giambalvo.................. 44 Senior Vice President of Worldwide Sales
Charles N. Corfield (2)............ 40 Director
John Jarve (1)..................... 44 Director
Izhar Armony (1)(2)................ 36 Director
Robert Maginn...................... 43 Director
Charles S. Houser.................. 56 Director
Charles M. Skibo (1)............... 61 Director
Carl Redfield (2).................. 52 Director
KEY EMPLOYEES
Dan Powdermaker.................... 36 Vice President, Europe, Middle East and Africa
Gerald E. O'Loughlin............... 35 Vice President, North America
Juan Bergelund..................... 43 Vice President, Latin America
Craig Inouye....................... 38 Vice President, Asia
Matthew Kristin.................... 37 Chief Information Officer and Vice President of
Information Systems
Mary Cogan......................... 51 Vice President of Human Resources
- ------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
MR. GNEEZY has served as the President, Chief Executive Officer and as a
director of iBasis since our formation in August 1996. From 1994 to 1996, Mr.
Gneezy was President of Acuity Imaging, Inc., a multinational public company
focused on the industrial automation industry. From 1980 to 1994, prior to being
renamed Acuity Imaging in connection with a merger with Itran, Mr. Gneezy was an
executive of Automatix Inc., a public industrial automation company, most
recently serving as its President and Chief Executive Officer. Mr. Gneezy
graduated from Tel-Aviv University, obtained his Masters of Science from the
Massachusetts Institute of Technology and is a graduate of the Advanced
Management Program of the Harvard Business School.
DR. VANDERBRUG has served as Executive Vice President and as a director of
iBasis 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, an M.A. in mathematics from Wayne State
University, and his Ph.D. in computer science from the University of Maryland.
MR. HUGHES has served as Vice President of Finance and Administration and Chief
Financial Officer of iBasis since August 1998. From 1995 to 1998, Mr. Hughes was
Director of Finance/Controller at Teleport Communications Group, a provider of
local and long distance telecommunications services, including voice, data, and
Internet services. Prior to joining TCG in 1995, Hughes held various financial
27
positions at Houghton Mifflin Company and previously served as an auditor at
KPMG Peat Marwick. Mr. Hughes received a B.S. in accounting from Bentley College
and an M.B.A. in finance from Babson College. Mr. Hughes is a certified public
accountant.
MR. HENSON has served as Vice President, Engineer ing and Operations of iBasis
since 1998. Prior to joining iBasis, Mr. Henson was Vice President, Network
Operations at LCI International Inc., a telecommunications company that was
recently acquired by Qwest Communications. From 1992 to 1996, Mr. Henson was a
Senior Vice President at BancOne Services Corporation, where he was responsible
for telecommunications and data communications services.
MR. GIAMBALVO has served as Senior Vice President of Worldwide Sales of iBasis
since January 2000. From 1998 to 1999, Mr. Giambalvo was the president of
VocalTec Communications, Inc., a company that helped pioneer commercial Internet
telephony. Prior to joining VocalTec, in 1998, Mr. Giambalvo was vice president
of sales at Stratus Computer, a computer maker. From 1990 to 1998,
Mr. Giambalvo was the senior vice president of sales and customer service at ECI
Telecom, Inc., a leading manufacturer of telecommunications transmission
equipment. Mr. Giambalvo received an M.S. in telecommunications management from
Golden Gate University and a B.S. in electrical engineering and a B.F.A in
communications from The New York Institute of Technology.
MR. CORFIELD has been a director of iBasis since September 1997. Mr.Corfield has
been a partner at each of Whitman Capital and Mercury Capital, both investment
firms, since 1996. 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 it was acquired by Adobe
Systems in 1995.
MR. JARVE has been a director of iBasis since August 1998. Since 1985, Mr. Jarve
has been employed by Menlo Ventures, a venture capital firm focused on the
software, communications, health care, and Internet sectors, where he currently
serves as a general partner and managing director. Mr. Jarve serves on the board
of directors of Digital Insight Corporation, a provider of Internet banking
services. Mr. Jarve received a B.S. and M.S. in electrical engineering from the
Massachusetts Institute of Technology and an M.B.A. from Stanford University.
MR. ARMONY has been a director of iBasis since August 1998. He is currently a
partner at Charles River Ventures, a venture capital firm. Mr. Armony was an
associate with General Atlantic Partners in 1996. From 1988 to 1995, Mr. Armony
was the Vice President of Marketing and Business Development at Onyx
Interactive. Mr. Armony received an M.A. in cognitive psychology from the
University of Tel Aviv, an M.A. in international studies from the University of
Pennsylvania, and an M.B.A. from Wharton.
MR. MAGINN has been a director of iBasis since November 1997. Since 1983, Mr.
Maginn has been employed by Bain & Company, Inc., a strategy consulting firm.
Mr. Maginn currently serves as an officer and director of Bain & Company, Inc.
MR. HOUSER has been a director of iBasis since October 1997. He is currently a
principal and managing director of Seruus Capital Partners, LP and Seruus
Telecom Fund, LP. Mr. Houser is the Chairman and Chief Executive Officer of
State Communications Inc. (d/b/a Trivergent Communications), a
telecommunications company. He was Executive Vice President of LCI
International, a long-distance company, from October 1995 until May 1996. Prior
to that date, he was Chairman and CEO of Corporate Telemanagement Group from its
inception in November 1989 until its sale to LCI International in
September 1995.
MR. SKIBO has been a director of iBasis since September 1999. Currently, Mr.
Skibo is the Chief Executive Officer and Chairman of Colo.com, a provider of
facilities and co-location services to the communication and information
technology industries. Since 1994, Mr. Skibo has served as Chairman and Chief
Executive Officer of Strategic Enterprises and Communications, Inc., a venture
capital firm.
28
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. REDFIELD has been a director of iBasis since September 1999. Mr. Redfield
has been Senior Vice President, Manufacturing and Logistics of Cisco since
February 1997. From September 1993 to February 1997, Mr. Redfield was Vice
President of Manufacturing at Cisco. Mr. Redfield also is a director of CTC
Communications Corp., and VA Linux Systems, Inc. Mr. Redfield received a B.S. in
Materials Engineering from Rensselaer Polytechnic Institute.
MR. POWDERMAKER has served as Vice President, Asia of iBasis since 1998, prior
to that, from 1997 to 1998, Mr. Powdermaker was our Director of Carrier Sales.
From 1996 to 1997, Mr. Powdermaker was client business manager of BCS Global
Markets, a networking services division of AT&T focused on the world's 2,000
largest telecommunications users. From 1995 to 1996, Mr. Powdermaker was a sales
manager with AT&T. In 1994, Mr. Powdermaker was employed in a business
development position with MFS Communications Company. Mr. Powdermaker received
an A.B. in political science from Boston College and an M.A. in Latin American
studies and M.B.A. in finance and marketing from the University of Chicago's
Graduate School of Business.
MR. O'LOUGHLIN has served as Vice President, North America of iBasis since
June 1999. From December 1998 to May 1999, Mr. O'Loughlin was our Director of
Carrier Sales. Prior to joining iBasis, Mr. O'Loughlin was General Manager for
Allied Communication Holdings. From July 1997 until April 1998, Mr. O'Loughlin
was a vice president of carrier services at Arbinet Communications. From October
1994 to June 1997, Mr. O'Loughlin served as Director of Carrier Sales for
TresCom International.
MR. BERGELUND has served as Vice President, Latin America of iBasis since
December 1998. From March 1996 to 1998, Mr. Bergelund was Chief Operating
Officer of IPTEL--Americas Exchange, Inc., a start-up Latin American Internet
telephony network. From 1992 to 1996, Mr. Bergelund was a senior manager
consultant at Oracle Corporation's Latin America Division. Mr. Bergelund
received a B.S. in Electrical Engineering and an M.S. in telecommunications
engineering from the Instituto de Ciencias JEN, Madrid, Spain.
MR. INOUYE has served as Vice President, Asia for iBasis since January 2000.
From 1998 to 2000, Mr. Inouye was director of international business development
and carrier sales for DirectNet Telecommunications, a provider of wholesale
international telecommunications products and services. From 1986 to 1998,
Mr. Inouye served in a variety of managerial and sales positions, including
regional director for international relations, with GTE Hawaiian Telephone
Company. Mr. Inouye received a B.A. in business administration from the
University of Hawaii.
MR. KRISTIN has served as the Chief Information Officer of iBasis since
June 1999 and Vice President of Information Systems since December 1999. From
1994 to 1999, Mr. Kristin served as manager of workflow solutions for Concert
Communication Services, a global telecommunications carrier.
MS. COGAN has served as Vice President of Human Resources of iBasis since
January 2000. From 1997 to 1999, Ms. Cogan was a human resources consultant with
MSC Associates, a human resource consulting group. From 1994 to 1997, Ms. Cogan
served as the senior director of human resources for Cascade Communications
Corp., a global provider of wide area networking products and services for the
telecommunications and Internet industries. In addition, Ms. Cogan has held
human resource positions as Summa Four, Inc., Northern Telecom and Data General
Corp. Ms. Cogan received an M.B.A. in finance and human resources from
Northeastern University and a B.A. from the University of Massachusetts.
29
ITEM 2. PROPERTIES
We are headquartered at 20 Second Avenue in Burlington, Massachusetts, where we
lease approximately 27,235 square feet of commercial space pursuant to a term
lease that expires in March 2005, subject to a five year renewal at our option.
We also lease approximately 14,462 square feet of commercial space at 10 Second
Avenue in Burlington, Massachusetts pursuant to a term lease that expires in
March 2005, subject to a five year renewal at our option. These facilities are
principally used for executive office space, including sales and marketing and
finance and administration. We also maintain our global network operations
center at this location. We lease an additional 3,156 square feet of space in
Los Angeles, California to house telecommunications equipment pursuant to a term
lease that expires in April 2009. We also maintain a facility in New York, New
York, to house telecommunications equipment, where we lease approximately 4,372
square feet of commercial space pursuant to a ten year term lease that expires
in July 2008. We also maintain a facility in Miami, Florida to house
telecommunications equipment, where we lease approximately 5,250 square feet of
space pursuant to a lease that expires in February 2010. 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.
ITEM 3. LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
As of September 15, 1999, a majority of our stockholders voted on and approved
various matters in connection with our initial public offering, including the
amending and restating of our Certificate of Incorporation and by-laws, the
amendment of our Employee Stock Incentive Plan, and the adoption of our Employee
Stock Purchase Plan.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
Our common stock began trading publicly on the Nasdaq National Market on
November 10, 1999 and is traded under the symbol "IBAS." The following table
shows the range of the high and low per share bid prices of the common stock, as
reported by the Nasdaq National Market for the period indicated.
HIGH LOW
-------- --------
Fourth Quarter ended December 31, 1999 (from November 10,
1999)..................................................... $42.31 $24.13
First Quarter ending March 31, 2000 (through March 24,
2000)..................................................... $93.06 $28.25
On March 24, 2000, the closing price of the common stock on the Nasdaq National
Market was $57.75 per share, the high and low sales prices were approximately
$68.13 and $54.50.
HOLDERS
As of March 24, 2000 there were 132 stockholders of record. This does not
reflect persons or entities who hold their stock in nominee or "street" name
through various brokerage firms.
DIVIDENDS
iBasis has never declared or paid cash dividends on its common stock. iBasis
intends to retain all future earnings to finance future growth, and, therefore,
does not anticipate paying any cash dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
During the period from January 1, 1999 through December 31, 1999, we issued and
sold 206,125 shares of common stock upon exercise of employee stock options
under our 1997 Stock Incentive Plan for an aggregate consideration of $1,857.50
in cash. These issuances of stock were made in reliance on Section 4(2) of the
Securities Act and Rule 701 promulgated under the Securities Act of 1933.
During the period from January 1, 1999 through December 31, 1999, we did not
issue or sell any shares of common stock under our 1999 Employee Stock Purchase
Plan.
SERIES C PREFERRED STOCK. In July 1999, we issued 5,744,103 shares of Series C
preferred stock to a number of independent investors, our founders and certain
existing stockholders at a purchase price of $4.37 per share, for a total cash
consideration to us of approximately $25.1 million. These sales were made in
reliance upon Rule 506 of Regulation D, promulgated under the Securities Act and
Section 4(2) of the Securities Act, as transactions to accredited investors by
an issuer not involving a public offering. All of the outstanding Series C
preferred stock automatically converted into common stock on a share-for-share
basis upon the closing of our initial public offering.
GRANTS OF STOCK OPTIONS
From January 1, 1999 to December 31, 1999, we granted stock options to purchase
2,028,600 shares of common stock at exercise prices ranging from $1.00 to $37.94
per share to employees, consultants and directors pursuant to our 1997 Stock
Incentive Plan.
USE OF PROCEEDS FROM OUR INITIAL PUBLIC OFFERING
On November 8, 1999 our registration statement on Form S-1 (File No. 333-85545)
related to our initial public offering became effective and on November 12, 1999
we closed this offering. BancBoston Robertson Stephens, Inc., Hambrecht & Quist
LLC and U.S. Bancorp Piper Jaffray Inc. were the
31
managing underwriters of this offering. In our initial public offering, we
received net proceeds of $116 million from the sale of 7.8 million shares of our
common stock, which includes 1.02 million shares sold pursuant to the exercise
of the underwriter's over-allotment option. We incurred net expenses of
$1.40 million in connection with this offering. During 1999, we did not use any
portion of the proceeds. We anticipate that the proceeds will be used for
working capital and general corporate purposes, including possible acquisitions.
ITEM 6. SELECTED FINANCIAL DATA
The following historical selected financial information of iBasis is qualified
by reference to, and should be read in conjunction with, the consolidated
financial statements and related notes included elsewhere in this document.
PERIOD FROM INCEPTION
(AUGUST 2, 1996)
TO DECEMBER 31, YEAR ENDED DECEMBER 31,
--------------------- ------------------------------
1996 1997 1998 1999
--------------------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net revenue.................................... $ -- $ 127 $ 1,978 $ 19,417
Operating expenses:
Data communications and telecommunications..... -- 187 2,730 21,007
Research and development....................... 76 317 1,674 6,183
Selling and marketing.......................... -- 97 1,160 5,568
General and administrative..................... -- 454 1,365 5,309
Depreciation and amortization.................. -- 19 364 2,997
Loss (gain) on disposal of property and
equipment...................