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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 000-27127
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iBASIS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or
organization)
04-3332534
(I.R.S. Employer Identification No.)
20 SECOND AVENUE, BURLINGTON, MA 01803
(Address of executive offices, including zip code)
(781) 505-7500
(Registrant's telephone number, including area code)
----------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes / / No /X/
As of October 29, 2004, there were 62,470,856 shares of the Registrant's Common
Stock, par value $0.001 per share, outstanding.
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iBASIS, INC.
INDEX
Page
PART I -- FINANCIAL
INFORMATION
ITEM 1 -- Condensed Consolidated Financial Statements 3
Condensed Consolidated Balance Sheets at September 30, 2004
and December 31, 2003 (unaudited) 3
Condensed Consolidated Statements of Operations for the Three
Months Ended September 30, 2004 and 2003 (unaudited) 4
Condensed Consolidated Statements of Operations for the Nine
Months Ended September 30, 2004 and 2003 (unaudited) 5
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2004 and 2003 (unaudited) 6
Condensed Notes to Consolidated Financial Statements
(unaudited) 7
ITEM 2 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations 21
ITEM 3 -- Quantitative and Qualitative Disclosures About Market Risk 42
ITEM 4 -- Controls and Procedures 42
PART II -- OTHER
INFORMATION 42
ITEM 1 -- Legal Proceedings 42
ITEM 6 -- Exhibits and Reports on Form 8-K 44
Signature 45
Certifications
2
PART I - FINANCIAL INFORMATION
iBASIS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2004 2003
----------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
Cash and cash equivalents $ 46,587 $ 17,270
Accounts receivable, net of allowance for doubtful accounts of $3,282 and $3,128,
respectively 29,315 21,767
Prepaid expenses and other current assets 3,665 5,295
----------------- -----------------
Total current assets 79,567 44,332
Property and equipment, at cost:
Network equipment 67,896 67,441
Equipment under capital lease 11,279 9,558
Computer software 9,010 8,387
Leasehold improvements 6,437 6,414
Furniture and fixtures 1,064 1,062
----------------- -----------------
95,686 92,862
Less: Accumulated depreciation and amortization (84,140) (75,687)
----------------- -----------------
Property and equipment, net 11,546 17,175
Deferred debt financing costs, net 128 326
Long term investment in non-marketable security -- 5,000
Other assets 390 705
----------------- -----------------
Total assets $ 91,631 $ 67,538
================= =================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable $ 23,220 $ 19,902
Accrued expenses 17,553 18,652
Deferred revenue 5,099 417
Current portion of long-term debt 1,942 2,097
----------------- -----------------
Total current liabilities 47,814 41,068
Long term debt, net of current portion 67,383 65,829
Other long term liabilities 1,079 2,749
Stockholders' deficit:
Common stock, $0.001 par value, authorized - 170,000 and 85,000 shares, respectively;
issued - 62,198 and 45,913 shares, respectively; 63 46
Treasury stock; 1,135 shares at cost (341) (341)
Additional paid-in capital 404,129 370,393
Accumulated deficit (428,496) (412,206)
----------------- -----------------
Total stockholders' deficit (24,645) (42,108)
================= =================
Total liabilities and stockholders' deficit $ 91,631 $ 67,538
================= =================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
3
iBASIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30,
-------------------------------------
2004 2003
-------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenue $ 70,359 $ 44,032
Costs and operating expenses:
Data communications and telecommunications (excluding depreciation and amortization) 60,037 38,502
Research and development 3,585 2,893
Selling and marketing 2,308 1,877
General and administrative 3,480 1,228
Depreciation and amortization 2,141 4,267
Non-cash stock-based compensation -- 29
----------------- -----------------
Total cost and operating expenses 71,551 48,796
----------------- -----------------
Loss from operations (1,192) (4,764)
Interest income 13 30
Interest expense (1,441) (801)
Other expenses, net (71) (98)
Refinancing transaction costs (205) --
----------------- -----------------
Loss from continuing operations (2,896) (5,633)
Income from discontinued operations 1,861 --
----------------- -----------------
Net loss $ (1,035) $ (5,633)
================= =================
Basic and diluted net loss (income) per share:
Loss from continuing operations $ (0.06) $ (0.13)
Income from discontinued operations 0.04 --
----------------- -----------------
Net loss per share $ (0.02) $ (0.13)
================= =================
Weighted average common shares outstanding:
Basic 47,884 44,714
Diluted 47,884 44,714
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
4
iBASIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------
2004 2003
----------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenue $ 188,542 $ 124,992
Costs and operating expenses:
Data communications and telecommunications (excluding depreciation and amortization) 160,693 106,799
Research and development 10,665 10,017
Selling and marketing 6,440 5,774
General and administrative 9,699 6,557
Depreciation and amortization 8,452 16,129
Non-cash stock-based compensation -- 86
----------------- -----------------
Total cost and operating expenses 195,949 145,362
----------------- -----------------
Loss from operations (7,407) (20,370)
Interest income 41 142
Interest expense (2,989) (3,200)
Gain on bond exchanges -- 16,615
Other expenses, net (156) (292)
Loss on long-term non-marketable security (5,000) --
Refinancing transaction costs (2,159) --
Refinancing related interest expense (481) --
----------------- -----------------
Loss from continuing operations (18,151) (7,105)
Income from discontinued operations 1,861 --
----------------- -----------------
Net loss $ (16,290) $ (7,105)
================= =================
Basic and diluted net loss (income) per share:
Loss from continuing operations $ (0.39) $ (0.16)
Income from discontinued operations 0.04 --
----------------- -----------------
Net loss per share $ (0.35) $ (0.16)
================= =================
Weighted average common shares outstanding:
Basic 46,411 44,672
Diluted 46,411 44,672
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
5
iBASIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------
2004 2003
----------------- -----------------
(IN THOUSANDS)
Cash flows from operating activities:
Loss from continuing operations $ (18,151) $ (7,105)
Adjustments to reconcile net loss to net cash used in operating activities:
Gain on bond exchanges -- (16,615)
Depreciation and amortization 8,452 16,129
Amortization of deferred debt financing costs 198 265
Amortization of deferred compensation -- 86
Bad debt (recovery) expense 154 (1,900)
Impairment of investment in long-term non-marketable security 5,000 --
Fair value of warrant issued 2,140 --
Changes in assets and liabilities
Accounts receivable (7,702) 3,684
Prepaid expenses and other current assets (978) 1,163
Other assets 315 409
Accounts payable 3,318 176
Accrued expenses 2,481 (2,225)
Deferred revenue 4,682 1,052
Other long term liabilities (1,670) (391)
----------------- -----------------
Net cash used in continuing operating activities (1,761) (5,272)
----------------- -----------------
Cash flows from investing activities:
Purchases of property and equipment (2,823) (3,769)
Adjustments to proceeds from sale of Speech Solutions Business -- (736)
Proceeds from earn-out receivable related to sale of Speech Solutions Business 1,108 --
Proceeds from receipt of escrow receivable related to sale of Speech Solutions Business 1,500 --
----------------- -----------------
Net cash used in investing activities (215) (4,505)
----------------- -----------------
Cash flows from financing activities:
Bank borrowings 4,600 6,900
Payments of bank borrowings (6,900) (6,900)
Proceeds from private equity placement 31,500 --
Private equity placement transaction costs (1,045) --
Proceeds from issuance of 8% Secured Convertible Notes 29,000 --
Prepayment of 11 1/2% Senior Secured Notes (25,175) --
Proceeds from equipment lease financing 1,765 --
Payments of principal on capital lease obligations (1,856) (4,734)
Refinancing transaction costs (1,984) (935)
Proceeds from exercise of warrants 1,091 --
Proceeds from exercises of common stock options 297 77
----------------- -----------------
Net cash provided by (used in) financing activities 31,293 (5,592)
----------------- -----------------
Net increase (decrease) in cash and cash equivalents 29,317 (15,369)
Cash and cash equivalents, beginning of period 17,270 32,317
----------------- -----------------
Cash and cash equivalents, end of period $ 46,587 $ 16,948
================= =================
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 6,388 $ 5,513
Supplemental disclosure of non-cash investing and financing activities:
Private equity placement:
Fair value of warrant issued for partial payment of investment banking services $ 2,808 $ --
Refinancing of 5 3/4% Convertible Subordinated Notes and 11 1/2% Senior Secured Notes:
Fair value of warrant issued $ 2,140 $ --
Reduction of accrued interest on 11 1/2% Senior Secured Notes $ (1,659) $ --
Investment banking services paid in shares of common stock $ 175 $ --
Conversion of 6 3/4% Convertible Subordinated Note due June 2009 to common stock $ 35 $ --
Termination of contingent liabilities relating to discontinued operations $ 1,861 $ --
Exchange of 5 3/4% Convertible Subordinated Notes for 11 1/2% Senior Secured Notes:
Face value of 5 3/4% Convertible Subordinated Notes surrendered $ -- $ 50,350
Face value of 11 1/2% Senior Secured Notes issued $ -- $ 25,175
Future interest payments on 11 1/2% Senior Secured Notes $ -- $ 5,527
Fair value of warrants issued $ -- $ 1,375
Reduction in deferred financing costs $ -- $ 723
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
6
iBASIS, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BUSINESS, MANAGEMENT PLANS AND PRESENTATION
BUSINESS
We are a leading wholesale carrier of international long distance telephone
calls and a provider of retail prepaid calling services. Our continuing
operations consist primarily of our Voice-Over-Internet-Protocol, or "VoIP",
business. We offer wholesale services through our worldwide network to
carriers, telephony resellers and others around the world by operating
through various service agreements with local service providers in the United
States, Europe, Asia, the Middle East, Latin America, Africa and Australia.
During the third quarter of 2003, we introduced our retail prepaid calling
card services and have marketed such services primarily to ethnic communities
within major domestic markets through distributors.
Beginning in the second quarter of 2004, our recently created operating segment,
retail prepaid calling card services and other enhanced services ("Retail")
became a reportable business segment, in addition to our international wholesale
VoIP services ("Wholesale"). Since we introduced our retail prepaid calling card
services, revenue from our Retail business had been less than 10% of total
revenue. Beginning in the second quarter of 2004, revenue from our Retail
business has exceeded 10% of total net revenue. In September 2004, we
launched a prepaid calling service as part of our Retail business segment,
Pingo, offered directly to consumers through an eCommerce web interface.
Revenue from Pingo in the third quarter of 2004 was insignificant.
We have a history of operating losses and, as of September 30, 2004, our
accumulated deficit was $428.5 million and our stockholders' deficit was $24.6
million. We used $1.8 million and $3.2 million in cash from operations in the
nine months ended September 30, 2004 and the year ended December 31, 2003,
respectively. These results are primarily attributable to the expenditures
necessary to build our network and develop and expand our market.
In June 2004, we completed a refinancing of our outstanding debt obligations. As
part of the refinancing, we completed an exchange offer (the "Exchange Offer"),
pursuant to which $37.3 million of our outstanding 5 3/4% Convertible
Subordinated Notes due in March 2005, representing approximately 98% of the
total amount of the notes outstanding, were tendered for the same principal
amount of new 6 3/4% Convertible Subordinated Notes due in June 2009.
Approximately $0.9 million of the 5 3/4% Convertible Subordinated Notes due in
March 2005 remain outstanding after the Exchange Offer. Simultaneously with the
Exchange Offer, we prepaid all $25.2 million of our 11 1/2% Senior Secured Notes
due in January 2005 for cash equal to the principal amount plus accrued but
unpaid interest and the issuance of warrants exercisable for an aggregate of
5,176,065 shares of our common stock, at $1.85 per share. We issued $29.0
million of new 8% Secured Convertible Notes due in June 2007 of which $25.2
million was used to prepay the 11 1/2% Senior Secured Notes due in January 2005.
The new 6 3/4% Convertible Subordinated Notes and the new 8% Secured Convertible
Notes due in June 2007 are convertible into shares of common stock at $1.85 per
share.
In September 2004, we completed a private equity placement of 15,000,000 shares
of our common stock at $2.10 per share, for total gross proceeds of $31.5
million, to a group of institutional and accredited investors. Investment
banking fees and other costs of the transaction were approximately $1.5 million,
resulting in net proceeds to us from the private equity placement of
approximately $30.0 million. The net proceeds from the private equity placement
will be used for working capital requirements, capital asset purchases and
general corporate purposes.
MANAGEMENT PLANS
We continue to expand our market share in international wholesale VoIP
services by expanding our customer base and by introducing cost-effective
solutions for our customers to interconnect with our network. During the
first quarter of 2004, we introduced our DirectVoIP service which eliminates
the need for certain switches for our customers to interconnect to our
network, thus reducing capital equipment costs for both us and our customers.
Our strategy is to continue the deployment of our Retail calling services
which leverage our international VoIP network with our real time back office
systems, and have the potential to deliver higher margins and improve cash
flow. In addition, we continue to increase the traffic we terminate to mobile
phones, which generally delivers higher average revenue per minute and
margins than typical fixed-line traffic. We also continue to control
operating expenses and capital expenditures, as well as to monitor and manage
accounts payable and accounts receivable, and restructure existing debt to
enhance cash flow.
Our plans include:
- expanding our market share for our Retail calling services;
- increasing revenues generated through mobile phone terminations;
- increasing our customer base by introducing cost-effective solutions to
interconnect with our network;
- use of our switchless architecture, which eliminates the need for costly
telecommunication switches and other equipment; and
- aggressive management of credit risk.
From 2001 to date, we took a series of actions to reduce operating expenses,
restructure operations, reduce outstanding debt
7
and provide additional liquidity. Such actions primarily included:
- reductions in workforce and consolidation of Internet Central Offices.
As a result of our restructuring programs and our continued focus on
controlling expenses, our research and development, selling and marketing
and general and administrative expenses, in total, declined to $28.6
million in 2003 from $53.2 million in 2002;
- sale of our previous messaging business and the assets associated with
our previous Speech Solutions Business;
- settlement of certain capital lease obligations;
- repurchase of a portion of our 5 3/4% Convertible Subordinated Notes due
in March 2005 for cash;
- exchange of a portion of our 5 3/4% Convertible Subordinated Notes due
in March 2005 for 11 1/2% Senior Secured Notes due in January 2005 and
warrants to purchase common stock;
- establishment of a new credit facility with a bank; and
- completion of our refinancing plan, pursuant to which $37.3 million (98%
of the total outstanding) of our 5 3/4% Convertible Subordinated Notes due
in March 2005 were tendered for the same principal amount of our new 6 3/4%
Convertible Subordinated Notes due in June 2009 and we issued $29.0 million
of 8% Secured Convertible Notes due in June 2007 to finance the prepayment
of all $25.2 million of our 11 1/2% Senior Secured Notes due in January
2005.
- completion of a private equity placement in September 2004 that resulted
in net proceeds to us of approximately $30.0 million.
We anticipate that the September 30, 2004 balance of $46.6 million in cash and
cash equivalents, together with cash flow generated from operations, will be
sufficient to fund our operations and debt service requirements for at least the
next twelve months.
8
PRESENTATION
The unaudited condensed consolidated financial statements presented herein have
been prepared by us and, in the opinion of management, reflect all adjustments
of a normal recurring nature necessary for a fair presentation. Interim results
are not necessarily indicative of results for a full year.
The unaudited condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in the annual
financial statements prepared in accordance with generally accepted accounting
principles have been omitted pursuant to those rules and regulations, but we
believe that the disclosures are adequate to make the information presented not
misleading. The condensed consolidated financial statements and notes included
herein should be read in conjunction with the consolidated financial statements
and notes in our Annual Report on Form 10-K for the year ended December 31,
2003.
(2) STOCK BASED COMPENSATION
We account for stock-based compensation in accordance with Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," using
the intrinsic-value method as permitted by Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." SFAS No.
123 encourages, but does not require, the recognition of compensation expense
for the fair value of stock options and other equity instruments issued to
employees and non-employee directors.
At September 30, 2004, we had one stock-based employee compensation plan. The
following table illustrates the effect on net income or net loss, and net income
or net loss per share, if we had applied the fair value recognition provisions
of SFAS No. 123.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ----------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2004 2003 2004 2003
- -------------------------------------------------------- ---------------- ---------------- --------------- ----------------
Net loss:
As reported $ (1,035) $ (5,633) $ (16,290) $ (7,105)
Add: Stock-based employee compensation expense included
in reported net loss -- 29 -- 86
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards (432) (1,080) (2,072) (1,370)
---------------- ---------------- --------------- ----------------
Net loss - pro forma $ (1,467) $ (6,684) $ (18,362) $ (8,389)
================ ================ =============== ================
Basic and diluted net loss per share:
As reported $ (0.02) $ (0.13) $ (0.35) $ (0.16)
================ ================ =============== ================
Pro forma $ (0.03) $ (0.16) $ (0.40) $ (0.19)
================ ================ =============== ================
9
We estimate the fair value of our stock-based awards to employees using the
Black-Scholes option pricing model. The Black-Scholes model was developed for
use in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, the Black-Scholes model
required the input of highly subjective assumptions including the expected stock
price volatility. Because stock-based awards to employees have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
our opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of stock-based awards to employees. The fair value of
stock-based awards to employees was estimated assuming no expected dividends and
the following weighted average assumptions.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ----------------------------------
2004 2003 2004 2003
---------------- ---------------- --------------- ----------------
Risk free interest rate 3.38% 3.13% 3.29% 3.13%
Dividend yield 0.00% 0.00% 0.00% 0.00%
Expected life 5 years 5 years 5 years 5 years
Volatility 133% 122% 136% 122%
Fair value of options granted $ 1.86 $ 0.88 $ 1.79 $ 0.88
(3) BUSINESS SEGMENT INFORMATION
Beginning in the second quarter of 2004, our recently created operating segment,
retail prepaid calling card services and other enhanced services ("Retail")
became a reportable business segment, in addition to our international wholesale
VoIP services ("Wholesale"). Since we introduced our retail prepaid calling
card services, revenue from our Retail business had been less than 10% of
total revenue. Beginning in the second quarter of 2004, revenue from our
Retail business has exceeded 10% of total net revenue.
Our Wholesale business consists of international long distance services we
provide using VoIP. We offer wholesale services through our worldwide network to
carriers, telephony resellers and others around the world by operating through
various service agreements with local service providers in United States,
Europe, Asia, the Middle East, Latin America, Africa and Australia.
Our Retail business consists of our retail prepaid calling card services and
other enhanced services. To date, we have marketed our retail prepaid calling
card services primarily to ethnic communities within major domestic markets
through distributors. Revenue from our retail prepaid calling card services were
92% and 83% of our total Retail revenue in the three and nine months ended
September 30, 2004, respectively. We expect that revenue from our retail prepaid
calling card services will continue to be an increasingly large percentage of
our total Retail revenue in the future. Our other enhanced services primarily
consist of revenue derived from the outsourcing of our retail prepaid calling
card platform.
Our executive management team uses net revenue and gross margin, which is net
revenue less data communications and telecommunications costs, as the basis for
measuring profit or loss and making decisions on our Wholesale and Retail
businesses. We do not allocate our research and development expenses, selling
and marketing expenses, general and administrative expenses and depreciation and
amortization between Wholesale and Retail.
Operating results, excluding interest income and expense, other income and
expense, and refinancing related charges, for our two business segments are as
follows:
THREE MONTHS ENDED SEPTEMBER 30, 2004
-----------------------------------------------------
(IN THOUSANDS)
WHOLESALE RETAIL TOTAL
---------------- ---------------- ----------------
Net revenue $ 58,598 $ 11,761 $ 70,359
Data communications and telecommunication (excluding depreciation and
amortization) 50,054 9,983 60,037
---------------- ---------------- ----------------
Gross margin $ 8,544 $ 1,778 10,322
================ ================
Research and development expenses 3,585
Selling and marketing expenses 2,308
General and administrative expenses 3,480
Depreciation and amortization 2,141
----------------
Loss from operations $ (1,192)
================
THREE MONTHS ENDED SEPTEMBER 30, 2003
-------------------------------------------
(IN THOUSANDS)
WHOLESALE RETAIL TOTAL
-------------- ------------- -------------
Net revenue $ 42,566 $ 1,466 $ 44,032
Data communications and telecommunication
(excluding depreciation and amortization) 37,370 1,132 38,502
-------------- ------------- -------------
Gross margin $ 5,196 $ 334 5,530
============== =============
Research and development expenses 2,893
Selling and marketing expenses 1,877
General and administrative expenses 1,228
Depreciation and amortization 4,267
Non-cash stock-based compensation 29
-------------
Loss from operations $ (4,764)
=============
NINE MONTHS ENDED SEPTEMBER 30, 2004
-----------------------------------------------------
(IN THOUSANDS)
WHOLESALE RETAIL TOTAL
---------------- ---------------- ----------------
Net revenue $ 165,292 $ 23,250 $ 188,542
Data communications and telecommunication (excluding depreciation and
amortization) 141,504 19,189 160,693
---------------- ---------------- ----------------
Gross margin $ 23,788 $ 4,061 27,849
================ ================
Research and development expenses 10,665
Selling and marketing expenses 6,440
General and administrative expenses 9,699
Depreciation and amortization 8,452
----------------
Loss from operations $ (7,407)
----------------
NINE MONTHS ENDED SEPTEMBER 30, 2003
-------------------------------------------
(IN THOUSANDS)
WHOLESALE RETAIL TOTAL
-------------- ------------- -------------
Net revenue $ 121,816 $ 3,176 $ 124,992
Data communications and telecommunication
(excluding depreciation and amortization) 104,699 2,100 106,799
-------------- ------------- -------------
Gross margin $ 17,117 $ 1,076 18,193
============== =============
Research and development expenses 10,017
Selling and marketing expenses 5,774
General and administrative expenses 6,557
Depreciation and amortization 16,129
Non-cash stock-based compensation 86
-------------
Loss from operations $ (20,370)
-------------
AS OF SEPTEMBER 30, 2004
-----------------------------------------------------
(IN THOUSANDS)
WHOLESALE RETAIL TOTAL
---------------- ---------------- ----------------
Segment assets $ 24,222 $ 5,093 $ 29,315
---------------- ----------------
Non-segment assets 62,316
----------------
Total assets $ 91,631
================
(4) DISCONTINUED OPERATIONS
LOSS FROM DISCONTINUED OPERATIONS. On July 15, 2002 we completed the sale of
substantially all the assets of our Speech Solutions Business for $18.5
million in cash ($1.5 million of this amount was held in escrow until March
2004). The loss from discontinued operations has been recorded under the
provisions of SFAS No. 144, "Accounting for the Impairment or Disposal of
Long Lived Assets." In the fourth quarter of 2003, we recognized additional
consideration of $1.3 million for an earn-out payment based on the
achievement of certain 2003 revenue-based milestones associated with this
business. The cash payment associated with the earn-out was $1.1 million and
was received in February 2004. In addition, in March 2004, we received the
$1.5 million escrow balance that had been held in escrow from the sale of
this business since July 2002. In the third quarter of 2004, we recognized
income from discontinued operations of $1.9 million resulting from the
expiration of certain contingent obligations.
(5) LONG-TERM INVESTMENT IN NON-MARKETABLE SECURITY
Our long-term investment in a non-marketable security represents an equity
investment in a privately-held company that was made in 2000 in connection with
a round of financing with other third-party investors. As our investment does
not permit us to exert significant influence or control over the entity in which
we have invested, the recorded amount represents our cost of the investment less
any adjustments we make when we determine that an investment's carrying value is
other than temporarily impaired.
The process of assessing whether the equity investment's net realizable value is
less than its carrying cost requires a significant amount of judgment due to the
lack of a mature and stable public market for investments of this type. In
making this judgment, we carefully considered the investee's most recent
financial results, cash position, recent cash flow data, projected cash flows
(both short and long-term), financing needs, recent financing rounds, most
recent valuation data, the current investing
10
environment, management or ownership changes, and competition. This valuation
process is based primarily on information that we request, receive and discuss
with the investees' management on a quarterly basis. Such evaluation is
performed on a quarterly basis.
Based on our evaluation for the quarter ended March 31, 2004, we determined that
our investment in this privately-held company has been other than temporarily
impaired and, as a result, we recorded a $5.0 million non-cash charge to
continuing operations for the first quarter of 2004. Our decision was based on
our evaluation of the company's current cash position and recent operating
results, as well as the perceived inability of the company to obtain additional
financing at a level, and in a timely manner, to support its continued
operations.
(6) ACCRUED RESTRUCTURING COSTS
During 2001 and 2002, the Company announced a restructuring plan to better align
the organization with its corporate strategy and recorded a charge to its
Statements of Operations in those periods in accordance with the criteria set
forth in EITF 94-3 and SEC Staff Accounting Bulletin 100. The restructuring
included the write-off of property and equipment, the termination of certain
contractual obligations, exiting certain leased facilities and the reduction in
the Company's workforce resulting in employee benefit costs.
As of September 30, 2004, the accrued restructuring costs consisted of costs
accrued for certain leased facilities obligations. A summary of the accrued
restructuring costs for the nine months ended September 30, 2004 is as follows:
(IN THOUSANDS)
LEASED FACILITY
2001 RESTRUCTURING CHARGE: OBLIGATIONS
- ----------------------------------------------------- --------------------
(IN THOUSANDS)
Accrual as of December 31, 2003 $ 181
Payments (152)
--------------------
Accrual as of September 30, 2004 $ 29
====================
EMPLOYEE
LEASED FACILITY SEVERANCE
2002 RESTRUCTURING CHARGE: OBLIGATIONS COSTS TOTAL
- ----------------------------------------------------- -------------------- -------------------- --------------------
(IN THOUSANDS)
Accrual as of December 31, 2003 $ 2,051 $ 25 $ 2,076
Payments (391) (25) (416)
-------------------- -------------------- --------------------
Accrual as of September 30, 2004 $ 1,660 $ -- $ 1,660
==================== ==================== ====================
11
(7) LONG-TERM DEBT
Long-term debt consists of the following:
SEPTEMBER 30, DECEMBER 31,
2004 2003
--------------- ---------------
(IN THOUSANDS)
5 3/4% Convertible Subordinated Notes, due in March, 2005 $ 895 $ 38,180
6 3/4% Convertible Subordinated Notes, due in June, 2009 37,250 --
11 1/2% Senior Secured Notes, due in January, 2005 -- 25,175
8% Secured Convertible Notes due in June, 2007 29,000 --
Capital lease obligations 2,180 2,271
Revolving line of credit -- 2,300
--------------- ---------------
Total long term debt 69,325 67,926
Less-current portion 1,942 2,097
=============== ===============
Long term debt, net of current portion $ 67,383 $ 65,829
=============== ===============
In June 2004, we completed a refinancing of our outstanding debt obligations. As
part of the refinancing, we completed an exchange offer, pursuant to which $37.3
million of our 5 3/4% Convertible Subordinated Notes due in March 2005,
representing approximately 98% of the total amount outstanding, were tendered
for the same principal amount of new 6 3/4% Convertible Subordinated Notes due
in June 2009. Approximately $0.9 million of the 5 3/4% Convertible Subordinated
Notes due in March 2005 remain outstanding after the exchange offer.
Simultaneously with the exchange offer, we prepaid all $25.2 million of our 11
1/2% Senior Secured Notes due in January 2005 for cash equal to the principal
amount plus accrued but unpaid interest and the issuance of warrants exercisable
for an aggregate of 5,176,065 shares of our common stock at $1.85 per share. We
issued $29.0 million of new 8% Secured Convertible Notes due in June 2007, of
which $25.2 million was used to prepay the 11 1/2% Senior Secured Notes due in
January 2005. The 8% Secured Convertible Notes due in June 2007 are convertible
into shares of common stock at $1.85 per share. In the third quarter of 2004,
holders of $35,000 of 6 3/4% Convertible Subordinated Notes due in June 2009
voluntarily converted their notes into 18,918 shares of common stock at the
conversion price of $1.85 per share.
In December 2003, we amended and extended our revolving line of credit with our
bank. The new $15.0 million revolving line of credit replaced two secured lines
of credit that totaled $15.0 million. The revolving line of credit bears
interest at the bank's prime rate plus 1%, matures on January 5, 2005 and is
collateralized by substantially all of our assets. Borrowings under the
revolving line of credit are on a formula basis and are limited to eligible
accounts receivable. The revolving line of credit requires us to comply with
various non-financial covenants and financial covenants, including minimum
profitability. At December 31, 2003, we had $2.3 million in borrowings
outstanding under this line. At September 30, 2004, we had no borrowings
outstanding under this line. At September 30, 2004 we had outstanding letters of
credit totaling $2.8 million and unused borrowing capacity of $6.1 million under
this line.
In the three months ended September 30, 2004, we entered into capital lease
agreements to finance $1.8 million in equipment purchases for The iBasis
Network. The capital lease agreements have a term of three years.
(8) GAIN ON EXCHANGES OF 5 3/4% CONVERTIBLE SUBORDINATED NOTES
During the year ended December 31, 2003, we entered into agreements with
principal holders of our 5 3/4% Convertible Subordinated Notes which resulted in
the retirement of $50.4 million of such notes in exchange for new debt
instruments at 50% of the face value of the retired notes. Under the terms of
the agreement, the holders of the retired notes received $25.2 million of 11
1/2% Senior Secured Notes and warrants to purchase 4,915,416 shares of our
common stock. Each warrant has an initial exercise price of $0.65 per share and
is exercisable over a five-year term. The 11 1/2% Senior Secured Notes had a
maturity date of January 15, 2005 and shared in a
12
second priority lien on our assets and were subordinated to our revolving line
of credit with our bank.
In accordance with SFAS No. 15, "Accounting by Debtors and Creditors
Regarding Troubled Debt Restructuring," we recorded a gain on the exchange of
approximately $16.6 million during the nine months ended September 30, 2003,
of which $12.9 million related to the first quarter of 2003 and $3.7 million
related to the second quarter of 2003. SFAS No. 15 requires that the gain on
the exchange be recorded net of the accrual for future interest payments on
the 11 1/2% Senior Secured Notes, the fair value of the warrants issued, the
reduction of the net book value of the deferred financing costs originally
capitalized with the issuance of our 5 3/4% Convertible Subordinated Notes
and any other fees or costs.
The gain recognized for the debt exchanges that occurred in the nine months
ended September 30, 2003 was calculated as follows:
NINE MONTHS
ENDED SEPTEMBER
30,
2003
(IN THOUSANDS)
Face value of surrendered 5 3/4% Convertible Subordinated Notes $ 50,350
Less: Face value of issued 11 1/2% Senior Secured Notes (25,175)
Future interest payments on 11 1/2% Senior Secured Notes (5,527)
Fair value of warrants issued (1,375)
Reduction of deferred debt financing costs (723)
Professional fees (935)
---------------
Gain $ 16,615
===============
(9) NET (LOSS) INCOME PER SHARE
Basic and diluted net loss per common share is determined by dividing net loss
by the weighted average common shares outstanding during the period. Basic net
loss per share and diluted net loss per share are the same, as outstanding stock
options, shares issuable upon conversion of the 6 3/4% Convertible Subordinated
Notes, shares issuable upon conversion of the remaining 5 3/4% Convertible
Subordinated Notes, shares issuable upon conversion of the 8% Secured
Convertible Notes, and warrants to purchase common shares are anti-dilutive.
Basic net income per common share is determined by dividing net income by the
weighted average common shares outstanding during the period. Diluted net income
per common share is determined by dividing the net income by the weighted
average common shares, which includes weighted average common shares outstanding
and weighted average outstanding stock options, shares issuable upon conversion
of the 6 3/4% Convertible Subordinated Notes, shares issuable upon conversion of
the remaining 5 3/4% Convertible Subordinated Notes, shares issuable upon
conversion of the 8% Secured Convertible Notes and warrants to purchase common
shares.
The following common shares have been excluded from the computation of basic net
income or loss for the periods presented:
13
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------
2004 2003
--------------- ----------------
(IN THOUSANDS)
Outstanding stock options 6,806 6,430
Shares to be issued upon conversion of 5 3/4% Convertible Subordinated Notes 10 443
Shares to be issued upon conversion of 6 3/4% Convertible Subordinated Notes 20,135 --
Shares to be issued upon conversion of 8% Secured Convertible Notes 15,676 --
Warrants to purchase shares, issued in connection with the 11 1/2% Senior Secured Notes 3,237 4,915
Warrants to purchase common shares, issued in connection with prepayment of 11 1/2% Senior
Secured Notes 5,176 --
Warrants to purchase shares as partial compensation for investment banking services 1,733 --
Warrants to purchase shares in connection with 2002 bank lines of credit -- 338
--------------- ----------------
Total shares excluded 52,773 12,126
--------------- ----------------
(10) CONTINGENCIES
In addition to litigation that we have initiated or responded to in the ordinary
course of business, we are currently party to the following potentially material
legal proceedings:
Beginning July 11, 2001, we were served with several class action complaints
that were filed in the United States District Court for the Southern District of
New York against us and several of our officers, directors, and former officers
and directors, as well as against the investment banking firms that underwrote
our November 10, 1999 initial public offering of the common stock and our March
9, 2000 secondary offering of the common stock. The complaints were filed on
behalf of persons who purchased the common stock during different time periods,
all beginning on or after November 10, 1999 and ending on or before December 6,
2000.
The complaints are similar to each other and to hundreds of other complaints
filed against other issuers and their underwriters, and allege violations of the
Securities Act of 1933 and the Securities Exchange Act of 1934 primarily based
on the assertion that there was undisclosed compensation received by our
underwriters in connection with our public offerings and that there were
understandings with customers to make purchases in the aftermarket. The
plaintiffs have sought an undetermined amount of monetary damages in relation to
these claims. On September 4, 2001, the cases against us were consolidated. On
October 9, 2002, the individual defendants were dismissed from the litigation by
stipulation and without prejudice.
On June 11, 2004, we and the individual defendants, as well as many other
issuers named as defendants in the class action proceeding, entered into an
agreement-in-principle to settle this matter, and on June 14, 2004, this
settlement was presented to the court. A motion for preliminary approval of the
settlement was filed on June 25, 2004 and is pending. Once the court
preliminarily approves the settlement and notice has been mailed, there will be
an objection period, followed by a hearing for final approval of the settlement.
Although we believe
14
that we and the individual defendants have meritorious defenses to the claims
made in the complaints, in deciding to pursue settlement, we considered, among
other factors, the substantial costs and the diversion of our management's
attention and resources that would be required by litigation.
Pursuant to the terms of the proposed settlement, in exchange for a termination
and release of all claims against us and the individual defendants and certain
protections against third-party claims, we will assign to the plaintiffs certain
claims we may have as an issuer against the underwriters, and our insurance
carriers, along with the insurance carriers of the other issuers, will ensure a
floor of $1 billion for any underwriter-plaintiff settlement. Although the
financial effect of the settlement on us will not be material, our insurance
carriers' exposure in this connection will range from zero to a few hundred
thousand dollars, and will be reduced proportionately by any amounts recovered
by plaintiffs directly from the underwriters.
We cannot assure you that the settlement which has been finalized will be
accepted by the court, or that we will be fully covered by collateral or related
claims from underwriters, and that we would be successful in resulting
litigation. In addition, even though we have insurance and contractual
protections that could cover some or all of the potential damages in these
cases, or amounts that we might have to pay in settlement of these cases, an
adverse resolution of one or more of these lawsuits could have a material
adverse affect on our financial position and results of operations in the period
in which the lawsuits are resolved. We are not presently able to estimate
potential losses, if any, related to the lawsuits.
We are also party to suits for collection, related commercial disputes, claims
from carriers and foreign service partners over reconciliation of payments for
circuits, Internet bandwidth and/or access to the public switched telephone
network, and claims from estates of bankrupt companies alleging that we received
preferential payments from such companies prior to their bankruptcy filings. We
intend to prosecute vigorously claims that we have brought and employ all
available defenses in contesting claims against us. Nevertheless, in deciding
whether to pursue settlement, we will consider, among other factors, the
substantial costs and the diversion of management's attention and resources that
would be required in litigation. In light of such costs, we have settled various
and in some cases similar matters on what we believe have been favorable terms
which did not have a material impact our financial position, results of
operations, or cash flows. The results or failure of any suit may have a
material adverse affect on our business.
(11) SUBSIDIARY GUARANTORS
In June 2004, we completed a refinancing of our outstanding debt obligations. As
part of the refinancing, we prepaid all $25.2 million of our 11 1/2% Senior
Secured Notes due in January 2005 ("Existing Senior Notes") plus accrued but
unpaid interest and issued warrants exercisable for an aggregate of 5,176,065
shares of our common stock at $1.85 per share (the "Warrants"). In conjunction
with the refinancing we issued $29.0 million of new 8% Secured Convertible Notes
("New Secured Notes") due in June 2007, proceeds of $25.2 million were used to
prepay the Existing Senior Notes. The New Secured Notes are convertible into
shares of common stock at $1.85 per share. Our New Secured Notes due in June
2007 are fully and unconditionally guaranteed, jointly and severally, by our
wholly-owned subsidiaries, iBasis Global, Inc., iBasis Holdings, Inc. and iBasis
Securities Corporation.
The following tables contain condensed consolidating financial information for
iBasis, Inc ("Parent Company") and iBasis Global, Inc., iBasis Holdings, Inc.,
and iBasis Securities Corporation (collectively, "Subsidiary Guarantors"), on a
combined basis, for the periods presented. Separate financial statements of the
Subsidiary Guarantors are not presented as we believe they would be immaterial
to investors.
CONDENSED CONSOLIDATING BALANCE SHEET (UNAUDITED)
AS OF SEPTEMBER 30, 2004
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
---------------- --------------- ------------- --------------
ASSETS
Cash and cash equivalents $ 43,288 $ 3,299 $ --- $ 46,587
Accounts receivable, net 28,555 760 29,315
Prepaid expenses and other current
assets 2,302 1,363 3,665
Due from Parent 11,182 (11,182) ---
---------------- --------------- ------------- --------------
Total current assets 74,145 16,604 (11,182) 79,567
Property and equipment, net 11,415 131 11,546
Deferred debt financing costs, net 128 128
Other assets 330 60 390
Investment in subsidiary guarantors 51 (51) ---
---------------- --------------- ------------- --------------
Total assets $ 86,069 $ 16,795 $ (11,233) $ 91,631
================ =============== ============= ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable $ 17,886 $ 5,334 $ --- $ 23,220
Accrued expenses 12,832 4,721 17,553
Deferred revenue 5,099 5,099
Current portion of long-term debt 1,942 1,942
Due to Subsidiary Guarantors 1,052 (1,052) ---
---------------- --------------- ------------- --------------
Total current liabilities 38,811 10,055 (1,052) 47,814
Long-term debt, net of current portion 67,383 67,383
Other long-term liabilities 1,079 1,079
Stockholders' equity (deficit):
Common stock, $0.001 par value,
authorized 170,000 shares; issued and
outstanding 62,198 shares 63 63
Treasury stock; 1,135 shares at cost (341) (341)
Additional paid-in capital 404,129 10,130 (10,130) 404.129
Capital stock ofsubsidiary guarantors 100 (100) ---
Accumulated deficit (425,055) (3,490) 49 (428,496)
---------------- --------------- ------------- --------------
Total stockholders' equity (deficit) (21,204) 6,740 (10,181) (24,645)
---------------- --------------- ------------- --------------
Total liabilities and stockholders'
equity (deficit) $ 86,069 $ 16,795 $ (11,233) $ 91,631
================ =============== ============= ==============
15
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2003
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
---------------- --------------- ------------- --------------
ASSETS
Cash and cash equivalents $ 15,520 $ 1,750 $ --- $ 17,270
Accounts receivable, net 21,247 520 21,767
Prepaid expenses and other current
assets 4,568 727 5,295
Due from parent 13,121 (13,121) ---
---------------- --------------- ------------- --------------
Total current assets 41,335 16,118 (13,121) 44,332
Property and equipment, net 16,931 244 17,175
Deferred debt financing costs, net 326 326
Long-term investment in non-
marketable security 5,000 5,000
Other assets 620 85 705
Investment in subsidiary guarantors 51 (51) ---
---------------- --------------- ------------- --------------
Total assets $ 64,263 $ 16,447 $ (13,172) $ 67,538
================ =============== ============= ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable $ 17,678 $ 2,224 $ --- $ 19,902
Accrued expenses 14,399 4,253 18,652
Deferred revenue 417 417
Current portion of long-term debt 2,097 2,097
Due to subsidiary guarantors 2,991 (2,991) --
---------------- --------------- ------------- --------------
Total current liabilities 37,582 6,477 (2,991) 41,068
Long-term debt, net of current portion 65,829 65,829
Other long-term liabilities 2,749 2,749
Stockholders' equity (deficit):
Common stock, $0.001 par value,
authorized 85,000 shares; issued and
outstanding 45,193 shares 46 46
Treasury stock; 1,135 shares at cost (341) (341)
Additional paid-in capital 370,393 10,130 (10,130) 370,393
Capital stock of subsidiary guarantors 100 (100) ---
Accumulated deficit (411,995) (260) 49 (412,206)
---------------- --------------- ------------- --------------
Total stockholders' equity (deficit) (41,897) 9,970 (10,181) (42,108)
---------------- --------------- ------------- --------------
Total liabilities and stockholders'
equity (deficit) $ 64,263 $ 16,447 $ (13,172) $ 67,538
================ =============== ============= ==============
16
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2004
(IN THOUSANDS)
(UNAUDITED)
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
---------------- --------------- ------------- --------------
Net revenue $ 70,202 $ 1,946 $ (1,789) $ 70,359
Costs and expenses:
Data communications and
telecommunications 60,099 1,687 (1,749) 60,037
Research and development 3,143 442 3,585
Selling and marketing 1,819 489 2,308
General and administrative 2,953 567 (40) 3,480
Depreciation and amortization 2,104 37 2,141
---------------- --------------- ------------- --------------
Total costs and expenses 70,118 3,222 (1,789) 71,551
Loss (income) from operations 84 (1,276) --- (1,192)
Interest income 12 1 13
Interest expense (1,394) (47) (1,441)
Other expenses, net (66) (66)
Refinancing transaction costs (205) (205)
Refinancing related interest expense --- ---
---------------- --------------- ------------- --------------
Loss from continuing operations (1,569) (1,327) --- (2,896)
Income from discontinued operations
1,861 1,861
---------------- --------------- ------------- --------------
Net loss (income) $ 292 $ (1,327) $ --- $ (1,035)
================ =============== ============= ==============
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS)
(UNAUDITED)
PARENT SUBSIDIARY CONSOLIDATED
COMPANY GUARANTORS ELIMINATIONS TOTAL
---------------- --------------- ------------- --------------
Net revenue $ 44,153 $ 5,606 $ (5,727) $ 44,032
Costs and expenses:
Data communications and
telecommunications 34,385 6,928 (2,811) 38,502
Research and development 2,467 426 2,893
Selling and marketing 1,346 531 1,877
General and administrative 3,753 391 (2,916) 1,228
Depreciation and amortization 4,200 67 4,267
Non-cash stock-based compensation 29 29
---------------- --------------- ------------- --------------
Total costs and expenses 46,180 8,343 (5,727) 48,796
Loss from operations (2,027) (2,737) --- (4,764)
Interest income 29 1 30
Interest expense (801) (801)
Other expenses, net (98) (98)
---------------- --------------- ------------- --------------
Net loss $ (2,897) $ (2,736) $ --- $ (5,633)
================ =============== ============= ==============
17
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2004
(IN THOUSANDS)
(UNAUDITED)
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
---------------- --------------- ------------- --------------
Net revenue $ 188,122 $ 6,026 $ (5,606) $ 188,542
Costs and expenses:
Data communications and
telecommunications 160,905 5,094 (5,306) 160,693
Research and development 9,325 1,340 10,665
Selling and marketing 4,837 1,603 6,440
General and administrative 8,966 1,033 (300) 9,699
Depreciation and amortization 8,336 116 8,452
---------------- --------------- ------------- --------------
Total costs and expenses 192,369 9,186 (5,606) 195,949
Loss from operations (4,247) (3,160) (7,407)
Interest income 40 1 41
Interest expense (2,941) (48) (2,989)
Loss on investment in long-term
non-marketable security (5,000) (5,000)
Other expenses, net (133) (23) (156)
Refinancing transaction costs (2,159) (2,159)
Refinancing related interest expense (481) (481)
---------------- --------------- ------------- --------------
Loss from continuing operations (14,921) (3,230) --- (18,151)
Income from discontinued operations 1,861 1,861
---------------- --------------- ------------- --------------
Net loss $ (13,060) $ (3,230) $ --- $ (16,290)
================ =============== ============= ==============
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS)
(UNAUDITED)
PARENT SUBSIDIARY CONSOLIDATED
COMPANY GUARANTORS ELIMINATIONS TOTAL
---------------- --------------- ------------- --------------
Net revenue $ 124,936 $ 14,960 $ (14,904) $ 124,992
Costs and expenses:
Data communications and
telecommunications 98,647 14,310 (6,158) 106,799
Research and development 8,695 1,322 10,017
Selling and marketing 4,163 1,611 5,774
General and administrative 14,397 906 (8,746) 6,557
Depreciation and amortization 15,835 294 16,129
Non-cash stock-based compensation 86 86
---------------- --------------- ------------- --------------
Total costs and expenses 141,823 18,443 (14,904) 145,362
Loss from operations (16,887) (3,483) --- (20,370)
Interest income 141 1 142
Interest expense (3,199) (1) (3,200)
Gain on bond exchanges 16,615 16,615
Other expenses, net (292) (292)
---------------- --------------- ------------- --------------
Net loss $ (3,622) $ (3,483) $ --- $ (7,105)
================ =============== ============= ==============
18
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2004
(IN THOUSANDS)
(UNAUDITED)
PARENT SUBSIDIARY
COMPANY GUARANTORS ELIMINATIONS CONSOLIDATED
-------------- --------------- ------------- --------------
Cash flows from operating activities:
Loss from continuing operations $ (14,921) $ (3,230) $ --- $ (18,151)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization 8,336 116 8,452
Amortization of deferred debt
Financing costs 198 198
Bad debt expense 154 154
Impairment of investment in long-
term non-marketable security 5,000 5,000
Fair value of warrant issued 2,140 2,140
Change in assets and liabilities
Accounts receivable (7,462) (240) (7,702)
Prepaid expenses and other
current assets (342) (636) (978)
Other assets 290 25 315
Accounts payable 208 3,110 3,318
Accrued expenses 2,013 468 2,481
Deferred revenue 4,682 4,682
Other long-term liabilities (1,670) (1,670)
Due from parent 1,939 1,939
Due to subsidiary guarantors (1,939) (1,939)
-------------- --------------- ------------- --------------
Net cash provided by (used in)
continuing operating activities (3,313) 1,552 (1,761)
-------------- --------------- ------------- --------------
Cash flows from investing activities:
Purchases of property and equipment (2,820) (3) (2,823)
Proceeds from earn-out receivable
Related to sale of Speech Solutions
Business 1,108 1,108
Proceeds from receipt of escrow
Receivable related to sale of Speech
Solutions Business 1,500 1,500
-------------- --------------- ------------- --------------
Net cash provided by (used in) investing
activities (212) (3) (215)
-------------- --------------- ------------- --------------
Cash flows from financing activities:
Bank borrowings 4,600 4,600
Payments of bank borrowings (6,900) (6,900)
Proceeds from private equity placement 31,500 31,500
Private equity placement transaction
costs (1,045) (1,045)
Proceeds from issuance of 8% Secured
Convertible Notes 29,000 29,000
Prepayment of 11 1/2% Senior Secured
Notes (25,175) (25,175)
Proceeds from equipment lease financing 1,765 1,765
Payments of principal on capital lease
obligations (1,856) (1,856)
Refinancing transaction costs (1,984) (1,984)
Proceeds from exercise of warrants 1,091 1,091
Proceeds from exercises of common
stock options 297 297
-------------- --------------- ------------- --------------
Net cash provided by financing
activities 31,293 31,293
-------------- --------------- ------------- --------------
Net increase (decrease) in cash and cash
equivalents 27,768 1,549 29,317
-------------- --------------- ------------- --------------
Cash and cash equivalents, beginning
of period 15,520 1,750 17,270
-------------- --------------- ------------- --------------
Cash and cash equivalents, end of
period $ 43,288 $ 3,299 $ --- $ 46,587
============== =============== ============= ==============
19
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2003
(IN THOUSANDS)
(UNAUDITED)
PARENT SUBSIDIARY CONSOLIDATED
COMPANY GUARANTORS ELIMINATIONS TOTAL
-------------- --------------- ------------- --------------
Cash flows from operating activities:
Loss from continuing operations $ (3,622) $ (3,483) $ --- $ (7,105)
Adjustments to reconcile net loss to
net cash used in operating activities
Gain on bond exchanges (16,615) (16,615)
Depreciation and amortization 15,835 294 16,129
Amortization of deferred debt
Financing costs 265 265
Amortization of deferred
compensation 86 86
Bad debt (recovery) expense (1,900) (1,900)
Change in assets and liabilities
Accounts receivable 3,204 480 3,684
Prepaid expenses and other
current assets 724 439 1,163
Other assets 423 (14) 409
Accounts payable (486) 662 176
Accrued expenses (3,347) 1,122 (2,225)
Deferred revenue 1,052 1,052
Other long-term liabilities (391) (391)
Due from parent 318 318
Due to subsidiary guarantors (318) (318)
-------------- --------------- ------------- --------------
Net cash provided by (used in)
continuing operating activities (5,090) (182) (5,272)
-------------- --------------- ------------- --------------
Cash flows from investing activities:
Purchases of property and equipment (3,756) (13) (3,769)
Adjustments to proceeds from sale of
Speech Solutions Business (736) (736)
-------------- --------------- ------------- --------------
Net cash provided by (used in) investing
activities (4,492) (13) (4,505)
-------------- --------------- ------------- --------------
Cash flows from financing activities:
Bank borrowings 6,900 6,900
Payments of bank borrowings (6,900) (6,900)
Payments of principal on capital lease
obligations (4,734) (4,734)
Refinancing transaction costs (935) (935)
Proceeds from exercises of common
stock options 77 77
Dividends paid 10,130 (10,130) ---
-------------- --------------- ------------- --------------
Net cash used in financing activities 4,538 (10,130) (5,592)
-------------- --------------- ------------- --------------
Net increase (decrease) in cash and cash
equivalents (5,044) (10,325) (15,369)
-------------- --------------- ------------- --------------
Cash and cash equivalents, beginning
of period 20,359 11,958 32,317
-------------- --------------- ------------- --------------
Cash and cash equivalents, end of
period $ 15,315 $ 1,633 $ --- $ 16,948
============== =============== ============= ==============
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a leading wholesale carrier of international long distance telephone
calls and a provider of retail prepaid calling services. Our continuing
operations consist primarily of our Voice-Over-Internet-Protocol ("VoIP")
business. We offer wholesale services through our worldwide network to carriers,
telephony resellers and others around the world by operating through various
service agreements with local service providers in the United States, Europe,
Asia, the Middle East, Latin America, Africa and Australia.
During 2003, many major telecommunications carriers announced plans to deploy
VoIP technology in their networks, to migrate their traffic to VoIP, and to
introduce VoIP-based services to their retail customers. In addition, new
providers of retail telephony services based on VoIP emerged during 2003. We
believe this trend may have a positive impact on our business in the future by
lowering the level of capital investment required for our network and
potentially positioning us to receive a larger volume of international traffic
in the future. Telephone calls that enter The iBasis Network as traditional PSTN
(TDM) calls must be converted into Internet protocol (IP) for transport through
our VoIP infrastructure and over the public Internet. In contrast, telephone
calls that enter our network already in the form of IP do not require conversion
from traditional PSTN to IP through a VoIP gateway. Thus, VoIP-based traffic we
receive require a lower capital investment in our network. These major carriers
have initially focused their VoIP plans on their U.S. networks, rather than
their international network. We believe that it may be more economical for these
major carriers to send their VoIP-based international traffic to our network
rather than making the capital investment necessary in their international
network infrastructure. Many of the new providers of VoIP-based telephony
services do not have an international infrastructure in place and, similarly, we
believe it may be more economical for these emerging carriers to send their
VoIP-based international traffic to us.
During the third quarter of 2003, we introduced our retail prepaid calling card
services and have marketed such services primarily to ethnic communities within
major domestic markets through distributors. Our entry into the retail prepaid
calling card business is based on our strategy to leverage our existing
international VoIP network with additional services that have the potential to
deliver higher margins than our wholesale international VoIP services. In
addition, the retail prepaid calling card business typically has a faster
cash collection cycle than wholesale international VoIP services. Beginning
in the second quarter of 2004, our recently created operating segment, retail
prepaid calling card services and other enhanced services ("Retail") became a
reportable business segment, in addition to our international wholesale VoIP
services. Since we introduced our retail prepaid calling card services,
revenue from our Retail business had been less than 10% of total revenue.
Beginning in the second quarter of 2004, revenue from our Retail business has
exceeded 10% of our total net revenue. In September 2004, we launched a
prepaid calling service as part of our Retail business segment, Pingo,
offered directly to consumers through an eCommerce web interface. Revenue
from Pingo in the third quarter of 2004 was insignificant.
We have a history of operating losses and, as of September 30, 2004, our
accumulated deficit was $428.5 million and our stockholders' deficit was $24.6
million. We used $1.8 million and $3.2 million in cash from operations in the
nine months ended September 30, 2004 and the year ended December 31, 2003,
respectively.
In June 2004, we completed a refinancing of our outstanding debt obligations.
As part of the refinancing, we completed an exchange offer pursuant to which
$37.3 million of our outstanding 5 3/4% Convertible Subordinated Notes due in
March 2005, representing approximately 98% of the total amount of the notes
outstanding, were tendered for the same principal amount of new 6 3/4%
Convertible Subordinated Notes due in June 2009. Approximately $0.9 million
of the 5 3/4% Convertible Subordinated Notes due in March 2005 remain
outstanding after the exchange offer. Simultaneously with the exchange offer,
we prepaid all $25.2 million of our 11 1/2% Senior Secured Notes due in
January 2005 for cash equal to the principal amount plus accrued but unpaid
interest and the issuance of warrants exercisable for an aggregate of
5,176,065 shares of our common stock at $1.85 per share. We issued $29.0
million of new 8% Secured Convertible Notes due in June 2007 of which $25.2
million was used to prepay the 11 1/2% Senior Secured Notes due in January
2005. The new 6 3/4% Convertible Subordinated Notes due in June 2009 and the
new 8% Secured Convertible Notes due in June 2007 are convertible into shares
of common stock at $1.85 per share.
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In September 2004, we completed a private equity placement of 15,000,000 shares
of our common stock at $2.10 per share, for total gross proceeds of $31.5
million, to a group of institutional and accredited investors. Investment
banking fees and other costs of the transaction were approximately $1.5 million,
resulting in net proceeds to us from the private equity placement of
approximately $30.0 million. The net proceeds from the private equity placement
will be used for working capital requirements, capital asset purchases and
general corporate purposes.
MANAGEMENT PLANS
We continue to expand our market share in international wholesale VoIP
services by expanding our customer base and by introducing cost-effective
solutions for our customers to interconnect with our network. During the
first quarter of 2004, we introduced our DirectVoIP service which eliminates
the need for certain switches for our customers to interconnect to our
network, thus reducing capital equipment costs for both us and our customers.
Our strategy is to continue the deployment of our Retail calling services
which leverage our international VoIP network with our real time back office
systems, and have the potential to deliver higher margins and improve cash
flow. In addition, we continue to increase the traffic we terminate to mobile
phones, which generally delivers higher average revenue per minute and
margins than typical fixed-line traffic. We also continue to control
operating expenses and capital expenditures, as well as to monitor and manage
accounts payable and accounts receivable and restructure existing debt to
enhance cash flow.
Our plans include:
- expanding our market share for our Retail calling services;
- increasing revenues generated through mobile phone terminations;
- increasing our customer base by introducing cost-effective solutions to
interconnect with our network;
- use of our switchless architecture, which eliminates the need for costly
telecommunications switches and other equipment; and
- aggressive management of credit risk.
From 2001 to date, we took a series of actions to reduce operating expenses,
restructure operations, reduce outstanding debt and provide additional
liquidity. Such actions primarily included:
- reductions in workforce and consolidation of Internet Central Offices.
As a result of our restructuring programs and our continued focus on
controlling expenses, our research and development; selling and marketing
and general and administrative expenses, in total, declined to $28.6
million in 2003 from $53.2 million in 2002;
- sale of our previous messaging business and the assets associated with
our previous Speech Solutions Business;
- settlement of certain capital lease obligations;
- repurchase of a portion of our 5 3/4% Convertible Subordinated Notes for
cash;
- exchange of a portion of our 5 3/4% Convertible Subordinated Notes for
11 1/2% Senior Secured Notes and warrants to purchase common stock;
- establishment of a new credit facility with a bank; and
- completion of our refinancing plan, pursuant to which $37.3 million (98%
of the total outstanding) of our 5 3/4% Convertible Subordinated Notes due
in March 2005 were tendered for the same principal amount of our new 6 3/4%
Convertible Subordinated Notes due in June 2009 and $29.0 million of 8%
Secured Convertible Notes due in June 2007 were issued to finance the
prepayment of all $25.2 million of our 11 1/2% Senior Secured Notes due in
January 2005.
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- completion of a private equity placement in September 2004 that resulted
in net proceeds to us of approximately $30.0 million.
We anticipate that the September 30, 2004 balance of $46.6 million in cash and
cash equivalents, together with cash flow generated from operations, will be
sufficient to fund our operations and debt service requirements for at least the
next twelve months.
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