<PAGE>
Filed pursuant to
Rule No. 424(b)(4)
Registration No. 333-85545
[LOGO]
6,800,000 SHARES
COMMON STOCK
iBasis, Inc. is offering 6,800,000 shares of its common stock. This is our
initial public offering. The shares being sold in this offering have been
approved for quotation on the Nasdaq National Market under the symbol "IBAS."
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public Offering Price....................................... $16.00 $108,800,000
Underwriting Discounts and Commissions...................... $ 1.12 $ 7,616,000
Proceeds to iBasis ......................................... $14.88 $101,184,000
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
iBasis has granted the underwriters a 30-day option to purchase up to an
additional 1,020,000 shares of common stock to cover over-allotments. BancBoston
Robertson Stephens Inc. expects to deliver the shares of common stock to
purchasers on November 16, 1999.
------------------------
ROBERTSON STEPHENS
HAMBRECHT & QUIST
U.S. BANCORP PIPER JAFFRAY
THE DATE OF THIS PROSPECTUS IS NOVEMBER 10, 1999.
<PAGE>
[Outside Front Gate]
(Frames with stylized "iBasis" logo, text and graphics. The text summarizes
the Company's business as a provider of high quality International
Internet-based communication services of telecommunications carriers.)
<PAGE>
[Inside Front Gate]
(Under the heading "iTrac-Interactive Traffic Revenue Analysis Center" appear
text, bar-graphs and pictures of iBasis's Global Network Operations Center
facilities. The text indicates that through iTrac and the Global Network
Operations Center iBasis is able to manage their networks and deliver
consistently high quality network services.)
<PAGE>
[Inside Front Cover]
(Two frames with images and text. The first frame, entitled "The iBasis
Solution," contains a diagram depicting how the Internet may be used to
provide carriers Internet-based service opportunities as calls are routed
through carriers' networks and the Internet to end users. The second frame,
entitled "the iBasis Network," contains a world map, marked to show the
location of Points of Presence, Super Points of Presence and locations where
iBasis has peering arrangements.)
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.
UNTIL DECEMBER 5, 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS REQUIREMENT IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
Summary..................................................... 2
Risk Factors................................................ 6
Forward-Looking Statements.................................. 15
Use of Proceeds............................................. 16
Dividend Policy............................................. 16
Capitalization.............................................. 17
Dilution.................................................... 18
Selected Consolidated Financial Data........................ 19
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 21
Business.................................................... 32
Management.................................................. 45
Certain Transactions........................................ 54
Principal Stockholders...................................... 57
Description of Capital Stock................................ 59
Shares Eligible for Future Sale............................. 63
Underwriting................................................ 65
Legal Matters............................................... 68
Experts..................................................... 68
Where You Can Find More Information......................... 68
Index to Consolidated Financial Statements.................. F-1
</TABLE>
------------------------
IBASIS-SM- and the IBASIS logos are trademarks and service marks of iBasis.
VIP Calling-Registered Trademark- is a registered trademark of iBasis, and
iTrac-SM-, Assured Quality Routing-SM- and Broadbandit-SM- are service marks of
iBasis. This prospectus contains other trade names, trademarks and service marks
of iBasis and of other companies.
1
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. YOU SHOULD READ THE ENTIRE PROSPECTUS, INCLUDING "RISK FACTORS" AND
OUR CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN
THIS PROSPECTUS, BEFORE DECIDING TO INVEST IN OUR COMMON STOCK.
IBASIS
<TABLE>
<S> <C>
Our Business............ 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.
Substantially all of our revenue to date has come from fees
we charge our customers to carry voice and fax traffic over
the iBasis Network, our international telecommunications
network. We have not been profitable on an operating basis
since inception, and there can be no assurance that we will
ever be profitable.
We provide telecommunications carriers and other
communications service providers with access to the iBasis
Network through "points of presence" strategically located
in major cities in North America, Asia, Latin America,
Europe and Africa. Points of presence are composed of
gateways, which digitize, compress and packetize voice and
fax transmissions at both the originating and terminating
points and enable calls to be routed via the Internet. Our
services provide the following key benefits to our
customers:
- HIGH QUALITY VOICE AND FAX TRANSMISSIONS. Our proprietary
technology, which includes our global network operations
center and proprietary Assured Quality Routing software,
enables us to effectively monitor and route voice and fax
traffic in ways that ensure consistently high quality.
- INTERNATIONAL HIGH-CAPACITY NETWORK. Our network consists
of more than 2,400 lines deployed internationally through
our relationships with communications service providers
around the world. During our third quarter ended
September 30, 1999, we transported approximately 44.7
million minutes of traffic over the iBasis Network.
- COST EFFECTIVE SOLUTIONS. We use the Internet's highly
efficient technology to deliver international voice and fax
traffic and other value-added applications at costs lower
than those of traditional networks.
- FLEXIBLE BACK OFFICE SOLUTION THAT FACILITATES NEW
SERVICES AND EFFECTIVE BUSINESS MANAGEMENT. Our back office
systems allow us to provide timely statistics and
integrated billing that enable communications service
providers to offer new services more readily and manage
their business more efficiently.
- EASE OF DEPLOYMENT AND TIME TO MARKET. Using our services
requires no special equipment or technical expertise on the
part of the carrier. Our customers can complete calls to
any country on our network without having to establish
separate contracts with local service providers in each
country.
- OPEN, SCALEABLE ARCHITECTURE DESIGNED FOR NEW
SERVICES. Our network architecture is scaleable, which
allows us to increase capacity in efficient increments,
and based on industry standards, which allows for fast and
efficient deployment of call completion and other
value-added services.
</TABLE>
2
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<TABLE>
<S> <C>
Our Market.............. The market for worldwide Internet telephony is projected to
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 messaging, according to
International Data Corporation, a market research firm.
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. Our Internet telephony services
enable telecommunications carriers and other communications
service providers to utilize the technologies and
efficiencies of the Internet to cut costs and offer new
services in order to add and retain customers.
Our Customers........... We provide services to both established and emerging
international telecommunications carriers and communications
service providers. As of September 30, 1999, our customers
included many of the highest volume U.S.-based international
long distance telecommunications carriers.
Overseas we have developed relationships with established
national carriers and emerging service providers that have
the local market expertise and relationships to build strong
businesses. These carriers and other service providers
terminate calls for us in their local jurisdictions for a
fee, and in some cases, send calls that originate in those
locations over the iBasis Network to their final
destination.
Our Strategy............ Our goal is to be the leading provider of high quality
Internet-based communications services by continuing to
build on our Internet telephony expertise, by targeting
high-volume communications service providers, by providing
high quality services, by focusing on the international
market and by expanding our geographic presence. We also
intend to introduce new services that communications service
providers can offer over our network or their own networks,
which we believe will increase our customer base.
</TABLE>
iBasis, Inc. is a Delaware corporation organized in 1996. We changed our
name to iBasis, Inc. from VIP Calling, Inc. in July 1999. Our principal
executive offices are located at 20 Second Avenue in Burlington, Massachusetts
and our telephone number is (781) 505-7500. Our website is located at
www.ibasis.net. Information contained on our website should not be considered a
part of this prospectus.
------------------------
UNLESS OTHERWISE INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS
REFLECTS:
- THE CONVERSION OF ALL OUTSTANDING SHARES OF OUR PREFERRED STOCK AND CLASS
B COMMON STOCK INTO CLASS A COMMON STOCK; AND
- THE SUBSEQUENT CONVERSION OF ALL OUTSTANDING SHARES OF OUR CLASS A COMMON
STOCK INTO 23,738,353 SHARES OF COMMON STOCK.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
COMMON STOCK OFFERED BY IBASIS.............................. 6,800,000 shares
COMMON STOCK TO BE OUTSTANDING AFTER THIS OFFERING.......... 30,538,353 shares (1)
USE OF PROCEEDS............................................. For general corporate and working
capital purposes. See "Use of
Proceeds."
NASDAQ NATIONAL MARKET SYMBOL............................... IBAS
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
Listed below is our consolidated statements of operations data for the
period from inception (August 2, 1996) to December 31, 1996 and for the years
ended December 31, 1997 and 1998 and also for the nine months ended
September 30, 1998 and 1999. You will also find our consolidated balance sheet
data both as of September 30, 1999 and as of September 30, 1999 giving effect to
the completion of this offering. You should read this information in conjunction
with our consolidated financial statements and related notes appearing elsewhere
in this prospectus. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." "Pro Forma" data below takes into account
the conversion of all outstanding Series A preferred stock, Series B preferred
stock, Series C preferred stock and Class B common stock into Class A common
stock, and the subsequent conversion of the Class A common stock into an
aggregate of 23,738,353 shares of common stock, upon the completion of this
offering.
"Pro Forma As Adjusted" data gives effect to the completion of this offering
as of September 30, 1999.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(AUGUST 2, 1996) YEARS ENDED NINE MONTHS ENDED
TO DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
---------------- ------------------- -------------------
1996 1997 1998 1998 1999
---------------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenue............................... $ -- $ 127 $ 1,978 $ 573 $ 11,817
Total operating expenses.................. 76 1,074 7,828 3,887 25,262
Loss from operations...................... (76) (947) (5,850) (3,313) (13,445)
Net loss.................................. (76) (926) (5,727) (3,288) (13,535)
Net loss applicable to common
stockholders............................ (76) (926) (5,946) (3,348) (14,321)
Basic and diluted net loss per share...... $(0.01) $(0.15) $ (0.99) $ (0.56) $ (2.36)
Basic and diluted weighted average common
shares outstanding (2).................. 6,000 6,006 6,023 6,021 6,058
Pro forma basic and diluted net loss
per share (2)........................... $ (0.44) $ (0.69)
Pro forma basic and diluted weighted
average common shares outstanding (2)... 13,068 19,574
</TABLE>
- ------------------------
(FOOTNOTES ON FOLLOWING PAGE)
4
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 15,983 $15,983 $115,767
Working capital............................................. 10,798 10,798 110,582
Total assets................................................ 36,184 36,184 135,968
Capital lease obligations, net of current portion........... 7,130 7,130 7,130
Redeemable convertible preferred stock...................... 36,608 -- --
Total stockholders' (deficit) equity........................ (16,995) 19,613 119,397
</TABLE>
- ------------------------
(1) This number does not include:
- 58,125 shares of common stock issuable to our warrant holders for $1.00
per share under warrants outstanding at September 30, 1999; and
- 2,500,800 shares of common stock issuable upon the exercise of stock
options outstanding at September 30, 1999, at a weighted average exercise
price of $2.42 per share.
(2) Computed on the basis described in Note 1(f) of the notes to our
consolidated financial statements appearing elsewhere in this prospectus.
5
<PAGE>
RISK FACTORS
ANY INVESTMENT IN OUR SHARES OF COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW, WHICH WE BELIEVE ARE
ALL THE MATERIAL RISKS TO OUR BUSINESS, TOGETHER WITH THE INFORMATION CONTAINED
ELSEWHERE IN THE PROSPECTUS, BEFORE YOU MAKE A DECISION ON INVESTING IN OUR
COMPANY.
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 since 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 $5.7 million during fiscal 1998 and $13.5 million
for the nine months ended September 30, 1999. As of September 30, 1999, we had
an accumulated deficit of $20.3 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
Consolidated 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;
- 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;
6
<PAGE>
- 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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 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 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
- traffic may not be able to be delivered 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 adversely affected. We can not 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.
7
<PAGE>
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 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. See "Business--Industry
Overview."
8
<PAGE>
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.
These and other risks associated with our international operations may
materially adversely affect our ability to attain or maintain profitable
operations.
During the nine months ended September 30, 1999, 52.2% of our revenue was
generated by delivering calls to Asian countries, 19.0% of our revenue was
generated by delivering calls to Middle Eastern countries, and 15.4% 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.
9
<PAGE>
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 nine month period ending September 30, 1999, three customers, World Access
Telecom Group, Star Telecomm, and WorldxChange Communications accounted for
approximately 32% 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 Hughes, our Chief
Financial Officer, and John Henson, our Vice President, Engineering &
Operations. 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 will
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
10
<PAGE>
addition, the laws of some foreign countries do no 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
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.
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. This could 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.
11
<PAGE>
For a more detailed discussion on the anticipated impact of the year 2000 on
our business, please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 Readiness."
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.
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
12
<PAGE>
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;
- 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 web-site, 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 have begun discussions with the Ministry of
Communications, and intend to defend vigorously our ability to perform our
services in Israel. As of the date of this prospectus, 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 pending resolution of our discussions with the
Ministry of Communications. 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, the years ended December 31, 1997 and 1998, and the nine months ended
September 30, 1999, we generated net revenue from our operations in Israel of
approximately $0, $0, $261,000, and $1.5 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 FCC 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
13
<PAGE>
telephony, primarily those which, 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, 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. Such regulation may also
negatively impact the cost of doing business over the Internet and materially
adversely affect our ability to attain or maintain profitability.
RISKS RELATED TO THE OFFERING
IF THE INITIAL PUBLIC OFFERING PRICE IS HIGHER THAN THE PUBLIC PERCEPTION OF THE
VALUE OF OUR EQUITY, THEN THE PRICE OF THE SECURITIES WILL DECLINE AFTER THIS
OFFERING.
The initial public offering price for the shares has been determined by
negotiations between us and the representatives of the underwriters and may not
be indicative of prices that will prevail in the public market after we complete
this offering. The market price of shares of our common stock may decline below
the initial public offering price immediately after we complete this offering.
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 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 could fluctuate greatly 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.
AFTER THIS OFFERING, OUR EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL
STOCKHOLDERS WILL STILL OWN A MAJORITY OF OUR VOTING STOCK AND WILL BE ABLE TO
EXERT SIGNIFICANT INFLUENCE OVER DECISIONS REQUIRING A STOCKHOLDER VOTE.
We anticipate that our executive officers, directors and principal
stockholders and their affiliates will, in the aggregate, beneficially own
approximately 62.2% of our outstanding common stock following the completion of
this offering, assuming no exercise of options outstanding as of September 30,
1999. As a result, our executive officers, directors and principal stockholders
will be able to exercise significant control over all matters requiring approval
by our stockholders, including the election of directors and approval of mergers
and other significant corporate transactions. This concentration of ownership
may also have the effect of delaying or preventing a change in control that
might otherwise benefit our stockholders.
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;
14
<PAGE>
- 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.
WE MAY SPEND A SUBSTANTIAL PORTION OF THE NET PROCEEDS IN WAYS WHICH YOU MAY
BELIEVE TO BE IMPRUDENT.
We currently have no specific uses for a substantial portion of the net
proceeds of this offering. Accordingly, investors in this offering will be
relying on our management's judgment with only limited information about our
specific intentions regarding the use of proceeds. We may spend most of the net
proceeds from this offering in ways that prove to be imprudent. Our failure to
apply these funds effectively could have a material adverse effect on our
business, financial condition and results of operations. See "Use of Proceeds."
STOCKHOLDERS MAY SELL SHARES OF OUR COMMON STOCK IN A MANNER THAT NEGATIVELY
AFFECTS THE PRICE OF COMMON STOCK.
If any of our stockholders sell a substantial number of shares of common
stock after the offering, those sales could adversely affect the market price of
our common stock and could impair our ability to raise capital through the sale
of equity securities. Upon the completion of this offering, we will have
30,538,353 shares of common stock outstanding. In addition, as of September 30,
1999, we had reserved for issuance 5,563,250 shares of common stock issuable
upon exercise of stock options and 58,125 shares of common stock issuable upon
exercise of outstanding warrants. The 6,800,000 shares sold in this offering
will be freely transferable without restriction under the Securities Act, unless
they are acquired by "affiliates" of ours as that term is used under the
Securities Act. Of the remaining 23,738,353 shares, 2,850,751 shares will be
freely transferable without restriction under the Securities Act, unless they
are held by our "affiliates" and will be available for public sale upon
expiration of the "lock-up" agreements described in "Underwriting."
INVESTORS IN THIS OFFERING WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION.
The initial public offering price is substantially higher than the value of
our assets minus our liabilities after giving effect to this offering. In
addition, although investors in this offering will have contributed
$108,800,000, or 73.1% of the total capital invested in our company from
inception to the completion of this offering, they will own only 22.3% of
outstanding common stock after this offering. This is because we expect that
some elements of our market value will not originate from measurable
transactions. Therefore, there is not a corresponding rise in "book" or
historical cost accounting value for our rise in expected market value. Examples
of these elements include the perceived value associated with our strategic
relationships, perceived growth prospects of the Internet telephony market and
our perceived competitive position within that market. If you are purchasing
shares in this offering, you will incur immediate and substantial dilution of
$12.09 in net tangible book value per share of common stock from the initial
public offering price of $16.00. To the extent outstanding stock options and
warrants are exercised, you will suffer further dilution. See "Dilution."
FORWARD-LOOKING STATEMENTS
This prospectus contains "forward-looking statements." These forward-looking
statements include, without limitation, statements about our market opportunity,
strategies, competition, expected activities and investments as we pursue our
business plan, and the adequacy of our available cash resources. These
forward-looking statements are usually accompanied by words such as "believe,"
"anticipate," "plan," "seek," "expect," "intend" and similar expressions. Our
actual results could differ materially from those expressed or implied by these
forward-looking statements as a result of various factors, including the risk
factors described above and elsewhere in this prospectus.
15
<PAGE>
USE OF PROCEEDS
We expect to receive net proceeds of $99,784,000 from the sale of 6,800,000
shares of common stock in this offering, or $114,961,600 if the underwriters'
over-allotment option is exercised in full, based on an initial public offering
price of $16.00 per share and after deducting underwriting discounts and
commissions and the estimated offering expenses payable by us. We intend to use
the proceeds of this offering for general corporate and working capital
purposes.
In addition, we may use a portion of the net proceeds of this offering to
acquire or invest in businesses, products, services or technologies
complementary to our current business, through mergers, acquisitions, joint
ventures or otherwise. However, we have no specific agreements or commitments
with respect to these transactions. Accordingly, our management will retain
broad discretion as to the allocation of the net proceeds of this offering. We
intend to invest the net proceeds of this offering in short-term,
interest-bearing investment grade securities pending the above uses.
The principal purposes of this offering are to:
- increase available working capital;
- create a public market for our common stock; and
- increase our visibility in the marketplace.
We believe that this cash and cash equivalents, together with the net
proceeds of the offering, will be sufficient to meet our working capital and
capital expenditure requirements for at least the next twelve months.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock and do
not anticipate paying any dividends in the foreseeable future. We currently
intend to retain future earnings, if any, to operate and expand our business.
Furthermore, our existing loan agreement prohibits the payment of dividends.
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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999:
- on an actual basis;
- on a pro forma basis to give effect to the automatic conversion upon the
completion of this offering of all outstanding shares of our Series A
preferred stock into 3,750,000 shares of Class A common stock, all
outstanding Series B preferred stock into 6,562,500 shares of Class A
common stock, all outstanding Series C preferred stock into 5,744,103
shares of Class A common stock and all outstanding Class B common stock
into 1,500,000 shares of Class A common stock, and the subsequent
conversion of all outstanding shares of Class A common stock into
23,738,353 shares of common stock; and
- on a pro forma as adjusted basis to give effect to the conversion of the
Series A, Series B and Series C preferred stock and Class B common stock
into Class A common stock and the subsequent conversion of the Class A
common stock into common stock upon the completion of this offering, and
the sale of 6,800,000 shares of common stock in this offering at the
initial public offering price of $16.00 per share.
This table should be read in conjunction with our consolidated financial
statements and related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- --------- -----------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Capital lease obligations, net of current portion........... $ 7,130 $ 7,130 $ 7,130
-------- -------- ----------
Redeemable convertible preferred stock:
Series B preferred stock, $0.001 par value per share;
6,875,000 shares authorized; 6,562,500 shares issued and
outstanding, actual; none issued and outstanding, pro
forma and pro forma as adjusted......................... 11,192 -- --
Series C preferred stock, $0.001 par value per share;
5,775,000 shares authorized; 5,744,103 shares issued and
outstanding, actual; none issued and outstanding, pro
forma and pro forma as adjusted......................... 25,416 -- --
-------- -------- ----------
Total redeemable convertible preferred stock.............. 36,608 -- --
Stockholders' equity (deficit):
Series A convertible preferred stock, $.001 par value per
share; 1,256,875 shares authorized; 1,250,000 shares
issued and outstanding, actual; none issued and
outstanding, pro forma and pro forma as adjusted........ 1 -- --
Common stock, $.001 par value per share; no shares
authorized, issued and outstanding, actual; 85,000,000
authorized, 23,738,353 shares issued and outstanding,
pro forma; 30,538,353 shares issued and outstanding, pro
forma as adjusted....................................... -- 24 31
Class A common stock, $0.001 par value per share;
30,000,000 shares authorized; 6,181,750 shares issued
and outstanding, actual; none issued and outstanding,
pro forma and pro forma as adjusted..................... 6 -- --
Class B common stock, $0.001 par value per share;
1,500,000 shares authorized; 1,500,000 shares issued and
outstanding, actual; none issued and outstanding, pro
forma and pro forma as adjusted......................... 2 -- --
Additional paid-in capital.................................. 5,609 42,202 141,979
Deferred compensation....................................... (2,350) (2,350) (2,350)
Accumulated deficit......................................... (20,263) (20,263) (20,263)
-------- -------- ----------
Total stockholders' (deficit) equity.................... (16,995) 19,613 119,397
-------- -------- ----------
Total capitalization.................................. $ 26,743 $ 26,743 $ 126,527
======== ======== ==========
</TABLE>
The common stock to be outstanding after this offering is based on 6,181,750
shares outstanding as of September 30, 1999 and excludes:
- 2,558,925 shares of common stock issuable upon the exercise of outstanding
stock options and warrants outstanding at September 30, 1999 at a weighted
average exercise price of $2.39 per share; and
- 3,062,450 additional shares of common stock reserved for issuance under
our stock incentive plan. See "Management--1997 Stock Incentive Plan."
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DILUTION
As of September 30, 1999, we had a pro forma net tangible book value of
$19.6 million, or $0.82 per share of common stock after giving effect to the
conversion of all outstanding shares of preferred stock and Class B common stock
into Class A common stock, and the subsequent conversion of all outstanding
shares of Class A common stock into common stock. Pro forma net tangible book
value per share before the offering is determined by dividing our net tangible
book value (total tangible assets less total liabilities) by the total number of
shares of common stock outstanding at, on an as-converted basis, September
30, 1999. After taking into account the conversion of all outstanding shares of
preferred stock and Class B common stock into Class A common stock, the
conversion of all outstanding shares of Class A common stock into common stock
and the sale of shares offered hereby by us at an assumed initial public
offering price of $16.00 per share and after deducting the underwriting
discounts and commissions and estimated offering expenses payable by us, the
adjusted pro forma net tangible book value as of September 30, 1999 would have
been $119.4 million, or $3.91 per share. Based on the foregoing, there would be
an immediate increase in pro forma net tangible book value to existing
stockholders of $3.09 per share and an immediate dilution of $12.09 per share to
new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $16.00
Pro forma net tangible book value per share as of
September 30, 1999...................................... $0.82
Pro forma increase per share attributable to new
investors............................................... 3.09
-----
Adjusted pro forma net tangible book value per share after
this offering............................................. 3.91
------
Pro forma dilution per share to new investors............... $12.09
======
</TABLE>
The following table summarizes, on a pro forma basis as of September 30,
1999, after giving effect to the conversion of all outstanding shares of
preferred stock and Class B common stock into 17,556,603 shares of Class A
common stock and the conversion of all outstanding shares of Class A common
stock into 23,738,353 shares of common stock upon the completion of this
offering, the number of shares of common stock purchased from us, the total
consideration paid to us and the average price per share paid by the existing
stockholders and by new investors purchasing shares of common stock in this
offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ------------------------ PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders................... 23,738,353 77.7% $ 39,979,590 26.9% $ 1.68
New investors........................... 6,800,000 22.3 108,800,000 73.1% 16.00
---------- ----- ------------ ---------
Total............................. 30,538,353 100.0% $148,779,590 100.0%
========== ===== ============ =========
</TABLE>
As of September 30, 1999, there were options outstanding to purchase a total
of 2,500,800 shares of common stock, at a weighted average exercise price of
$2.42 per share and 3,032,450 additional shares reserved for future grants and
issuances under our stock incentive plan. Additionally, at September 30, 1999,
there were outstanding warrants to purchase a total of 58,125 shares of common
stock at a weighted average exercise price of $1.00 per share. To the extent
that any of these options or warrants are exercised, there will be further
dilution to new investors. See "Management--1997 Stock Incentive Plan" and
"Description of Capital Stock--Common Stock Warrants."
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following historical selected consolidated financial data should be read
in conjunction with our consolidated financial statements and related notes,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and other financial information appearing elsewhere in this
prospectus. The consolidated statements of operations data set forth below for
the period from inception (August 2, 1996) to December 31, 1996 and the years
ended December 31, 1997 and 1998, and the nine months ended September 30, 1999
and the consolidated balance sheet data at December 31, 1997 and 1998 and
September 30, 1999 are derived from, and qualified by reference to, our
consolidated financial statements which have been audited by Arthur Andersen
LLP, independent public accountants, and together with their report thereon, are
included elsewhere in this prospectus. The consolidated balance sheet data at
December 31, 1996 is derived from our financial statements that have been
audited by Arthur Andersen LLP, independent public accountants. The consolidated
statements of operations data set forth below for the nine months ended
September 30, 1998, are derived from unaudited consolidated financial statements
that include, in the opinion of our management, all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
information.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(AUGUST 2, 1996) YEAR ENDED NINE MONTHS
TO DECEMBER 31, DECEMBER 31, ENDED SEPTEMBER 30,
---------------- ------------------- ----------------------
1996 1997 1998 1998 1999
---------------- -------- -------- ----------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net revenue......................................... $ -- $ 127 $ 1,978 $ 573 $ 11,817
Operating expenses:
Data communications and telecommunications.......... -- 187 2,730 1,239 12,819
Research and development............................ 76 317 1,887 1,128 4,406
Selling and marketing............................... -- 97 1,160 668 3,567
General and administrative.......................... -- 454 1,156 640 2,595
Depreciation and amortization....................... -- 19 364 212 1,890
Loss (gain) on disposal of property and equipment... -- -- 531 -- (15)
------ ------ ------- -------- --------
Total operating expenses.......................... 76 1,074 7,828 3,887 25,262
Loss from operations.............................. (76) (947) (5,850) (3,314) (13,445)
------ ------ ------- -------- --------
Interest income..................................... -- 17 179 76 304
Interest expense.................................... -- (4) (53) (47) (446)
Other income (expense), net......................... -- 8 (3) (3) 3
Minority interest in loss of joint venture.......... -- -- -- -- 49
------ ------ ------- -------- --------
Net loss.......................................... (76) (926) (5,727) (3,288) (13,535)
Accretion of dividends on redeemable convertible
preferred stock................................... -- -- (219) (60) (786)
------ ------ ------- -------- --------
Net loss applicable to common stockholders........ $ (76) $ (926) $(5,946) $ (3,348) $(14,321)
====== ====== ======= ======== ========
Pro forma net loss applicable to common
stockholders...................................... $(5,727) $(13,535)
======= ========
Basic and diluted net loss per share applicable to
common stockholders............................... $(0.01) $(0.15) $ (0.99) $ (0.56) $ (2.36)
====== ====== ======= ======== ========
Basic and diluted weighted average common shares
outstanding (1)................................... 6,000 6,006 6,023 6,021 6,058
Pro forma basic and diluted net loss per share (1)
(2)............................................... $ (0.44) $ (0.69)
======= ========
Pro forma basic and diluted weighted average common
shares outstanding (1) (2)........................ 13,068 19,574
</TABLE>
- ------------------------
(FOOTNOTES ON FOLLOWING PAGE)
19
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, 1999
------------------------------ --------------------
1996 1997 1998 ACTUAL PRO FORMA
-------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 2 $1,689 $ 7,399 $ 15,983 $15,983
Working (deficit) capital................................ (10) 1,369 4,241 10,798 10,798
Total assets............................................. 35 2,518 12,772 36,184 36,184
Capital lease obligations, net of current portion........ -- 123 213 7,130 7,130
Redeemable convertible preferred stock................... -- -- 10,719 36,608 --
Total stockholders' equity (deficit)..................... 24 1,971 (2,697) (16,995) 19,613
</TABLE>
- ------------------------
(1) Computed on the basis described in Note 1(f) of the notes to our
consolidated financial statements appearing elsewhere in this prospectus.
(2) Adjusted to give effect to the automatic conversion upon the completion of
this offering of all outstanding Series A preferred stock into 3,750,000
shares of Class A common stock, all outstanding Series B preferred stock
into 6,562,500 shares of Class A common stock, all outstanding Series C
preferred stock into 5,744,103 shares of common stock and all outstanding
Class B common stock into 1,500,000 shares of Class A common stock and the
subsequent conversion of all outstanding Class A common stock into
23,738,353 shares of common stock.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED
FINANCIAL STATEMENTS AND RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS.
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS. OUR ACTUAL RESULTS
MAY DIFFER SIGNIFICANTLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT MIGHT CAUSE FUTURE RESULTS TO DIFFER MATERIALLY FROM THOSE
PROJECTED IN THE FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED IN "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
We are a provider of international voice and fax call completion services,
and other value-added services using the Internet. We were incorporated in
August 1996 and commenced commercial operations in May 1997. We first recorded
revenue from the sale of equipment in May 1997, and first recorded revenue from
the sale of voice and fax services over our network in January 1998. In
July 1999, we changed our name from "VIP Calling, Inc." to "iBasis, Inc." During
the period from inception to the commencement of substantial scale commercial
operations in the first quarter of 1998, our operating activities were focused
primarily upon:
- assembling an experienced management team;
- obtaining additional financing;
- testing available gateway technologies and evaluating gateway vendors;
- developing relationships with local service providers in overseas
destinations;
- developing and testing our proprietary software, Assured Quality Routing,
including developing quality measurements and thresholds; and
- providing gateway vendors technical support and analysis.
Since the first quarter of 1998, we have been principally involved in the
following operating activities:
- increasing the capacity of and improving our network by deploying
additional equipment and enhancing our global network operations center;
- increasing the number of countries to which we provide service over our
network by entering into arrangements with local service providers at
various destinations;
- refining our proprietary software applications to enable us to offer high
quality international voice and fax call completion services, and other
value-added services; and
- increasing our sales and marketing efforts to increase the traffic over
our network.
Since January 1998, we have derived substantially all of our revenue from
the provision of international voice and fax call completion services over our
network. In order to complete voice or fax calls to a particular destination, we
are required to enter into arrangements with local service providers that have
the ability to route the calls to their eventual destinations. This process
typically involves several steps, including the search for a local service
provider, the negotiation of terms with this provider, and upon reaching terms,
establishing connections from the local service provider to the Internet and the
local phone company. At the same time, our carrier sales department begins to
sell the newly contracted destination to our carrier customers. The entire
process, from the beginning of the search for a local service provider to the
commencement of commercial traffic, can take several months.
21
<PAGE>
To date, we have not been able to handle traffic over our network for
sustained periods at a cost less than the revenue we derive from completing such
traffic. In part, this has resulted from the costs associated with using
traditional circuit-switched voice networks for back-up and to complete calls to
destinations where our network does not have sufficient capacity. We are
deploying systems and strengthening operating procedures intended to
significantly reduce the negative impact of that traffic, however, there can be
no assurance that such systems and procedures will prove effective. We believe
that if we are able to generate sufficient volumes of traffic and develop
sufficient capacity over our network, economies of scale will result that will
permit us to complete voice and fax calls, and deliver other value-added
services, on a profitable basis.
Since our inception in August 1996, we have experienced operating losses in
each quarterly and annual period and negative cash flows from operations in each
quarter since we commenced offering services over our network in January 1998.
As of September 30, 1999, we had an accumulated deficit of approximately
$20.3 million. The profit potential of our business is unproven, and our limited
operating history makes an evaluation of our company and our prospects
difficult. We may not generate revenue sufficient to achieve profitability or,
if we achieve profitability, we might not sustain profitability.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
NET REVENUE. Our primary source of revenue is the fees that we receive from
customers for completing calls over our network. This revenue is dependent on
the volume of voice and fax traffic carried over the network, which is measured
in minutes. We charge our customers fees per minute of traffic that are
dependent on the length and destination of the call and recognize this revenue
in the period in which the call is completed. We also derive a limited amount of
revenue from the sale of equipment to our customers. Most of these equipment
sales are financed by us by setting off termination fees otherwise payable by
local service providers against the equipment purchase price until the full
purchase price has been paid.
Our net revenue increased by $11.2 million to $11.8 million in the nine
month period ended September 30, 1999 from $573,000 in the nine month period
ended September 30, 1998. This increase was primarily driven by an increase in
revenue from voice and fax call completion services to $11.3 million for the
1999 period from $471,000 for the 1998 period. The increase in voice and fax
call completion services net revenue resulted from an increase in the amount of
traffic carried over our network to 92.7 million minutes in the 1999 period from
3.0 million minutes in the 1998 period. Net revenue from the sale of equipment
increased to $485,000 in the 1999 period from $102,000 in the 1998 period.
DATA COMMUNICATIONS AND TELECOMMUNICATIONS EXPENSES. Data communications
and telecommunications expense is comprised primarily of termination fees,
purchased minutes, equipment expense and other expenses associated with data
communications and telecommunications. Termination fees are paid to local
service providers to terminate calls received from our network. This traffic is
measured in minutes, and the per minute rates charged for terminating calls are
negotiated with the local provider and included in our contract with our local
service provider. Should competition cause a decrease in our prices and, as a
result our profit margins, our contracts with our provider typically provide us
with the right to renegotiate the per minute termination fees. Purchased minutes
are fees we pay to other telecommunications carriers for completing calls over
the public circuit-switched network to destinations outside of our network, and
as a back-up to our network when our proprietary Assured Quality Routing
software indicates that either these lines are needed to maintain the quality of
our services or our capacity to a particular destination has been exceeded. The
amount of these fees depends on the volume of voice and fax traffic carried over
the public circuit-switched network, which is also measured in minutes of
traffic. The per minute rate charge for purchased minutes is negotiated
22
<PAGE>
with public circuit-switched network carriers for each destination served. The
primary direct expenses that we incur in selling our equipment are those
incurred to purchase the component parts of our equipment from a variety of
vendors. These expenses are recorded when the equipment is installed and
operational. The expenses vary on the basis of the number of units to be
completed and delivered in a particular period, and will increase as equipment
sales increase. Other data communication and telecommunications expenses include
charges for Internet access at our points of presence, fees for the fiber optic
connections between our points of presence and our customers and/or suppliers,
facilities charges for overseas Internet access and phone lines to the primary
telecommunications carriers in particular countries, and charges for the limited
number of dedicated international private line circuits we use.
Data communications and telecommunications expenses increased by
$11.6 million to $12.8 million in the 1999 period from $1.2 million in the 1998
period. The increase in data communications and telecommunications expense was
driven by the increase in traffic described above, as termination fees increased
to $5.0 million in the 1999 period from $162,000 in the 1998 period, and
purchased minutes increased to $4.9 million in the 1999 period from $249,000 in
the 1998 period. Equipment expenses directly related to equipment sales
increased to $437,000 in the 1999 period from $83,000 in the 1998 period. Other
data communications and telecommunications expenses, including Internet access,
public circuit-switched network access, and international private line charges,
increased to $2.5 million in the 1999 period from $744,000 in the 1998 period.
As a percentage of total revenue, data communications and telecommunications
expenses decreased to 108% in the 1999 period from 216% in the 1998 period. We
expect termination fee expense and purchased minute expense to increase as our
net revenue increases. We also expect other data communications and
telecommunications expenses to increase as we enter into new relationships with
local service providers in international destinations and as we add capacity to
our network.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
include the expenses of developing, operating, supporting and expanding our
international and domestic network, expenses associated with improving and
operating our global network operations center, salary, and payroll taxes and
benefits paid for employees directly involved in the development and operation
of our global network operations center and the rest of our network. Also
included in this category are research and development expenses which consist
primarily of expenses incurred in enhancing, developing, updating and supporting
our network and our proprietary software applications.
Research and development expenses increased by $3.3 million to $4.4 million
in the 1999 period from $1.1 million in the 1998 period. This increase in
research and development expenses is due principally to the increase in
personnel within the group to 41 at the end of the 1999 period from 17 at the
end of the 1998 period. As a percentage of total revenue, research and
development expenses decreased to 37% in the 1999 period from 197% in the 1998
period. We expect that research and development expense will continue to
increase as we expand the coverage of our network, increase the number of our
service offerings and increase the functionality of our network.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses include
expenses relating to the salaries, payroll taxes, benefits and commissions that
we pay for sales personnel and the expenses associated with the development and
implementation of our promotion and marketing campaigns, including expenses
relating to our outside public relations firm and industry analysts. Selling and
marketing expenses increased by $2.9 million to $3.6 million in the 1999 period
from $668,000 in the 1998 period. This increase is attributable to an increase
in the number of personnel employed in selling and marketing to 29 in the 1999
period from 5 in the 1998 period, and increased marketing expenses, particularly
in connection with a public relations campaign we initiated in October 1998. As
a percentage of total revenue, selling and marketing expenses decreased to 30%
in 1999 from 117% in 1998. We anticipate that selling and marketing expenses
will increase in the future as we expand our
23
<PAGE>
domestic and international sales force, hire additional marketing personnel and
increase expenditures for promotion and marketing.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
include salary, payroll tax and benefit expenses and related costs for general
corporate functions, including executive management, administration, facilities,
information technology and human resources. General and administrative expenses
increased by $2.0 million to $2.6 million in the 1999 period from $639,000 in
the 1998 period. General and administrative expenses increased primarily due to
an increase in the number of employees to 26 in the 1999 period from 5 in the
1998 period, an increase in consulting and professional fees, and an increase in
our allowance for doubtful accounts. As a percentage of total revenue, general
and administrative expenses decreased to 22% in the 1999 period from 112% in the
1998 period. We expect that general and administrative expenses will increase in
the future as we hire additional personnel and incur additional costs related to
the growth of our business and operations. In addition, we expect to expand our
facilities and incur associated expenses to support our anticipated growth.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses increased by $1.7 million to $1.9 million in the 1999 period from
$211,000 in the 1998 period. This increase primarily resulted from additional
purchases of capital equipment and software that were needed to support our
expanding network. As a percentage of total revenue, depreciation and
amortization expense decreased to 16% in 1999 from 37% in 1998.
INTEREST INCOME AND INTEREST EXPENSE. Interest expense is primarily
comprised of interest paid on the various capital leases pursuant to which we
have financed a substantial majority of the hardware components of our network.
Interest income is primarily composed of income earned on our cash and cash
equivalents. Interest income increased by $228,000 to $304,000 in the 1999
period from $76,000 in the 1998 period. This increase was primarily attributable
to increased interest earnings on our cash and cash equivalents. Interest
expense increased by $399,000 to $446,000 in the 1999 period from $47,000 in the
1998 period. This increase was attributable to interest paid on capital
equipment financing.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
NET REVENUE. Our net revenue increased by $1.9 million to $2.0 million in
the year ended December 31, 1998 from $127,000 in the year ended December 31,
1997. This increase was primarily driven by an increase in net revenue from
voice and fax services to $1.7 million in 1998 from no net revenue in 1997, as
we did not begin carrying voice and fax call completion services on our network
until January 1998, and in 1998, we carried 12.1 million minutes. In addition,
equipment sales increased to $273,000 in 1998 from $107,000 in 1997
DATA COMMUNICATIONS AND TELECOMMUNICATIONS EXPENSES. Data communications
and telecommunications expenses increased by $2.5 million to $2.7 million in
1998 from $187,000 in 1997. The increase in data communications and
telecommunications expense was driven by the increase in traffic described
above. Termination fees increased to $579,000 in 1998 from no fees in 1997. We
did not incur termination fees in 1997 because we did not carry traffic during
that period. Purchased minutes expense increased to $921,000 in 1998 from
$12,000 in 1997. Equipment expenses directly related to equipment sales
increased to $217,000 in 1998 from $82,000 in 1997. Other data communications
and telecommunications expenses, including Internet access, telco access, and
international private line charges, increased to $1.0 million in 1998 from
$93,000 in 1997. As a percentage of total revenues, data communications and
telecommunications expenses decreased to 138% in 1998 from 146% in 1997.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by $1.6 million to approximately $1.9 million in 1998 from $318,000 in
1997. This increase in research and
24
<PAGE>
development expenses is due principally to the hiring of additional personnel,
from three at December 31, 1997 to 20 at December 31, 1998. As a percentage of
total revenue, research and development expenses decreased to 95% in 1998 from
250% in 1997.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased by
approximately $1.1 million to approximately $1.2 million in 1998 from $98,000 in
1997. This increase is attributable to an increase in the number of personnel
employed in selling and marketing to eight at December 31, 1998 from two at
December 31, 1997, increased travel expenses related to the domestic and
overseas sales efforts which began in 1998, and increased marketing expenses,
particularly in connection with a public relations campaign we initiated in
October 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by $702,000 to $1.2 million in 1998 from $454,000 in 1997. General and
administrative expenses increased primarily due to an increase in the number of
employees to six at December 31, 1998 from two at December 31, 1997, an increase
in professional fees, and an increase in our allowance for doubtful accounts. As
a percentage of total revenue, general and administrative expenses decreased to
58% in 1998 from 356% in 1997.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses increased by $345,000 to $364,000 in 1998 from $19,000 in 1997. This
increase primarily resulted from additional purchases of capital equipment and
software that were needed to support our expanding network. As a percentage of
total revenue, depreciation and amortization expense increased to 18% in 1998
from 15% in 1997.
INTEREST INCOME, INTEREST EXPENSE AND LOSS ON DISPOSAL OF ASSETS. Interest
income increased by $162,000 to $179,000 in 1998 from $17,000 in 1997. This
increase was primarily attributable to increased interest earnings on our cash
and cash equivalents. Interest expense increased by $49,000 to $53,000 in 1998
from $4,000 in 1997. This increase was attributable to interest paid on capital
equipment financing. Loss on disposal was $531,000 in 1998. No loss on disposal
was recorded in 1997. This loss was attributable to the write-off and disposal
of all of our former network equipment, which we replaced with Cisco Systems
hardware during the course of 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by $242,000 to approximately $318,000 in 1997 from $76,000 in 1996.
The increase in research and development expenses is due principally to the
development of our network as we prepared to commence operations.
We were incorporated in August 1996 and commenced commercial operations in
May 1997. As of December 31, 1997, we were still in our development stage and
had not generated any revenue from operations. Accordingly, we believe that
year-to-year comparisons of the results of operations for the years ended
December 31, 1996 and 1997 are not meaningful and should not be relied upon as
an indication of future performance.
25
<PAGE>
UNAUDITED QUARTERLY OPERATING RESULTS
The following tables set forth certain unaudited quarterly operating results
for each of our five fiscal quarters in the 15-month period ended September 30,
1999, certain financial data expressed as a percentage of net revenue, and
certain other operating data. The financial information set forth below has been
derived from unaudited consolidated financial statements that, in management's
opinion, reflect all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the quarterly information. The
operating results for any quarter are not necessarily indicative of the results
to be expected for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1998 1998 1999 1999 1999
--------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Net revenue.................................... $ 387 $ 1,405 $ 2,414 $ 3,623 $ 5,780
Operating expenses:
Data communications and telecommunications... 663 1,491 2,586 4,029 6,204
Research and development..................... 502 759 936 1,491 1,979
Selling and marketing........................ 303 492 809 1,222 1,536
General and administrative................... 268 516 568 701 1,325
Depreciation and amortization................ 95 152 233 632 1,025
Loss (gain) on disposal of property and
equipment.................................. -- 531 -- (15) --
------- ------- ------- ------- -------
Total operating expenses................. 1,831 3,941 5,132 8,060 12,069
------- ------- ------- ------- -------
Loss from operations..................... (1,444) (2,536) (2,718) (4,437) (6,289)
Interest income................................ 51 103 53 31 220
Interest expense............................... (19) (6) (60) (169) (217)
Other income expense, net...................... -- -- (2) (1) 6
Minority interest in loss of joint venture..... -- -- 49 -- --
------- ------- ------- ------- -------
Net loss................................. $(1,412) $(2,439) $(2,678) $(4,576) $(6,280)
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1998 1998 1999 1999 1999
--------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
Net revenue..................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Data communications and telecommunications.... 171.3 106.1 107.1 111.2 107.3
Research and development...................... 129.8 54.1 38.8 41.2 34.2
Selling and marketing......................... 78.2 35.0 33.5 33.7 26.6
General and administrative.................... 69.2 36.7 23.5 19.3 22.9
Depreciation and amortization................. 24.5 10.8 9.7 17.4 17.7
Loss (gain) on disposal of property and
equipment................................... 0.0 37.8 0.0 (0.4) 0.0
------ ------ ------ ------- -------
Total operating expenses.................. 473.0 280.5 212.6 222.4 208.7
------ ------ ------ ------- -------
Loss from operations...................... (373.0) (180.5) (112.6) (122.4) (108.7)
------ ------ ------ ------- -------
Interest income (expense), net.................. 8.1 6.9 (0.2) (3.9) 0.0
Other expense, net.............................. 0.0 0.0 (0.1) 0.0 0.0
Minority interest in loss of joint venture...... 0.0 0.0 2.0 0.0 0.0
------ ------ ------ ------- -------
Net loss.................................. (364.9)% (173.6)% (110.9)% (126.3)% (108.7)%
====== ====== ====== ======= =======
</TABLE>
Our operating results have fluctuated greatly during the period since
inception, and in the period since we began offering commercial scale services
in June 1998. We expect that our operating results will continue to fluctuate
based on a number of factors, including:
- the amount of traffic we are able to sell to our customers, and their
decisions on whether to route traffic over our network;
26
<PAGE>
- 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;
- 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 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.
The telecommunications services market experiences different pricing
pressures for traffic to different destinations. The level of pressure depends
on the regulatory status of Internet telephony in the terminating country,
competition from other carriers to the country, and technological advances
allowing for higher utilization of existing capacity. The rate to each country
differs greatly, so completing calls in different countries yields varying
levels of revenue per minute of traffic. Our revenue per minute will fluctuate
as our mix of traffic among the countries to which we complete calls changes. In
developing our network, we have targeted potential partners in countries that we
believe offer the highest revenue per minute for terminating traffic.
In addition, we have no fixed purchase commitments from our communications
service provider customers, and any customer could decide to route its traffic
over alternative networks practically instantly. Accordingly, it is difficult
for us to accurately project the amount of traffic we will be able to sell in
any future period. Furthermore, because we have derived a significant portion of
our revenue to date from a small number of customers, the loss of one or more
major customers could have a material adverse effect on our business, financial
condition and results of operations. In addition, we depend on local service
providers to terminate calls in our overseas destinations. The loss of a
relationship with one or more of these service providers could result in us
being unable to provide call completion to that country. See "Risk
Factors--Risks Related to Our Operations."
RECENT ISSUANCES OF STOCK OPTIONS
On September 9, 1999, we issued options to purchase an aggregate of 486,600
shares of common stock to certain of our employees at an exercise price of $5.00
per share. In connection with these grants, we recorded deferred compensation
expense of approximately $2.4 million during the third quarter ended
September 30, 1999. This deferred compensation expense will be amortized over
the four-year vesting period of these options.
In October 1999, we issued options to purchase an aggregate of 31,300
additional shares of common stock to certain of our employees at an exercise
price of $5.00 per share. In connection with these grants, we will record
deferred compensation expense of approximately $155,000 during the fourth
quarter ended December 31, 1999. This deferred compensation expense will be
amortized over the four-year vesting period of these options.
On November 5, 1999, we issued options to purchase an aggregate of 487,500
shares of common stock to certain of our employees at an exercise price of
$11.00 per share.
LIQUIDITY AND CAPITAL RESOURCES
Our principal capital and liquidity needs historically have related to the
development of our network infrastructure, our sales and marketing activities,
research and development expenses, and
27
<PAGE>
general capital needs. Our capital needs have been met, in large part, from the
net proceeds from the sale of our Class B common stock and preferred stock. As
we placed greater emphasis on expanding our network infrastructure, we have also
sought to meet our capital needs through vendor capital leases and other
equipment financings. We have also established a line of credit with a bank.
Net cash provided by financing activities was $100,000 for the period
between inception and December 31, 1996, $2.9 million for the year ended 1997,
$11.6 million for the year ended 1998, and $24.6 million for the nine months
ended September 30, 1999. These amounts are primarily attributable to the net
proceeds from the issuance of Class B common stock and preferred stock.
Net cash used in operating activities was $65,000 for the period between
inception and December 31, 1996, $666,000 for the year ended December 31, 1997,
$2.1 million for the year ended December 31, 1998, and $12.0 million for the
nine months ended September 30, 1999. Cash used in operating activities for all
periods resulted from net losses and increases in accounts receivable, which
were partially offset by increases in accounts payable and accrued liabilities.
Net cash used in investing activities was $34,000 for the period between
inception and December 31, 1996, $511,000 for the year ended December 31, 1997,
$3.8 million for the year ended December 31, 1998, and $4.1 million for the nine
months ended September 30, 1999. Cash used in investing activities was primarily
related to purchases of equipment.
The continued development and expansion of our sales and marketing efforts
and network infrastructure, as well as the further development or the possible
acquisition of new services, are expected to require substantial cash
expenditures. In addition, our existing operations are not currently profitable
on a stand-alone basis. As a result, we expect to continue to incur operating
losses and negative cash flows from operations for the foreseeable future. In
September 1999, upon the closing of the sale of our Series C preferred stock, we
had approximately $16.0 million of cash and cash equivalents available for our
working capital needs. We believe that this cash and cash equivalents, together
with the net proceeds of the offering, will be sufficient to meet our working
capital and capital expenditure requirements for at least the next twelve
months. We have budgeted our future capital requirements based on current
estimates of our future revenue and with a view to current competitive factors
and the domestic and international regulatory environment pertaining to our
business. We cannot be certain that actual revenue will be in line with
management's expectations or that expenditures will not be significantly higher
than anticipated. In addition, there can be no assurance that we will be able to
meet our strategic objectives or that we will have access to adequate capital
resources on a timely basis, or at all, or that such capital will be available
on terms that are acceptable to us. We may consider potential acquisitions or
other strategic arrangements that may fit our strategic plan. Any such
acquisitions or strategic arrangements likely would require additional equity or
debt financing, which may result in dilution to investors in this offering.
CLASS B COMMON STOCK AND PREFERRED STOCK FINANCINGS. In February, March and
April 1997, we issued and sold 1,500,000 shares of our Class B common stock to
our founders and a number of independent investors in a transaction that
resulted in gross proceeds of $500,000.
In October, November and December 1997, and March and June 1998, subject to
commitments made in 1997, we issued and sold an aggregate of 1,250,000 shares of
Series A preferred stock to a number of new independent investors, our founders
and certain of our other existing stockholders in a transaction that resulted in
gross proceeds of $3.75 million.
On August 26, 1998, we issued and sold 6,562,500 shares of Series B
preferred stock to a number of new independent investors, our founders and
certain of our other existing shareholders in a transaction that resulted in
gross proceeds of $10.5 million.
In July 1999, we issued and sold an aggregate of 5,744,103 shares of
Series C preferred stock to a number of new independent investors, our founders
and certain of our other existing shareholders in a transaction that resulted in
gross proceeds of $25.1 million.
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Upon completion of this offering, all of the outstanding shares of Class B
common stock and preferred stock will automatically convert, without further
action on our part or the holders of such stock, into 17,556,603 shares of
Class A common stock and all of the outstanding shares of Class A common stock
will automatically convert into 23,738,353 shares of common stock.
EQUIPMENT LEASING AND FINANCING. We lease equipment from Cisco Systems
Capital Corporation and TLP Leasing under master agreements and multiple lease
sub-agreements. Each of the multiple equipment leases specifies its own term,
rate and payment schedule, depending upon the value and amount of equipment
leased. As of September 30, 1999, the aggregate outstanding balance under our
leases from Cisco was $8.1 million, and we had an additional $6.9 million
available for borrowing under that master agreement. As of the same date, the
aggregate outstanding balance under the TLP master lease was $900,000 and an
additional $500,000 was available for borrowing under that lease program.
We have a credit facility allowing us to borrow up to $750,000 from Silicon
Valley Bank in equipment advances for equipment purchased before July 31, 1999.
As of September 30, 1999, we had made borrowings in the aggregate amount of
$505,634 under this equipment facility. Interest accrues on the average
outstanding daily balance of the equipment advances at an annual rate equal to
the prime rate plus 1 1/2%. The outstanding principal and interest of these
equipment advances are payable in 36 equal monthly installments of combined
principal and interest, with the first payment due August 5, 1999. No equipment
advances may be borrowed after July 31, 1999, and any amounts repaid may not be
reborrowed. We expect to continue to use equipment leasing alternatives as we
expand our network if such borrowings are available on favorable terms.
REVOLVING LINE OF CREDIT. On June 18, 1999 we entered into a Loan and
Security Agreement with Silicon Valley Bank that provides us with access to a
$1.5 million revolving credit facility. The line of credit is secured by a lien
on all of our assets, receivables and after acquired property. Interest accrues
daily on the unpaid principal of the facility at an annual rate equal to the
prime rate, as defined in the Loan and Security Agreement, plus 1%. We must make
interest payments on outstanding borrowings on a monthly basis, otherwise any
unpaid interest is added to the outstanding principal amount, and accrues
interest at the same rate. As of September 30, 1999 we had made no borrowings
under the Loan and Security Agreement. All outstanding amounts under our line of
credit shall become due and payable in full on June 18, 2000.
YEAR 2000 READINESS
The Year 2000 problem stems from the fact that many currently installed
computer systems include software and hardware products that are unable to
distinguish 21(st) century dates from those in the 20(th) century. As a result,
computer software and hardware used by many companies and governmental agencies
may need to be upgraded to support Year 2000 requirements or risk system failure
or miscalculations causing disruptions to normal business activities.
We are a comparatively new enterprise, and accordingly, the software and
hardware we use to manage our business has all been purchased or developed by us
within the last 18 months. While this fact does not necessarily protect us
against Year 2000 exposure, we believe we gain some mitigation from the fact
that the information technology we use to manage our business is not based upon
"legacy" hardware and software systems. "Legacy system" is a term often used to
describe hardware and software systems which were developed in previous years
when there was less awareness of Year 2000 issues. Generally, hardware and
software design within more recent years in particular has given greater
consideration to Year 2000 issues. All of the software code we have internally
developed to manage our network traffic, for example, is written and tested to
be Year 2000 ready.
STATE OF READINESS. We are in the process of assessing the corporate
systems and operations that we believe could be affected by the Year 2000
problem. We have focused our Year 2000 compliance review on three areas:
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- information technology infrastructure, including the operation of the
iBasis Network and related software applications;
- third-party compliance; and
- non-information technology systems.
All of the assessment, remediation and testing we have completed has been
performed by our own personnel; to date we have not engaged any outside service
or consultants to test or review our systems for Year 2000 readiness.
INFORMATION TECHNOLOGY INFRASTRUCTURE. Because our network and business
systems are essential to our business, financial condition and results of
operations, we began assessing these systems prior to other less critical
information technology systems. We use the following information technology for
our infrastructure:
- critical systems directly responsible for processing Internet telephony
including:
- our billing and provisioning systems,
- our proprietary software as well as software and hardware we have
purchased,
- equipment in our network that carries traffic, including gateways and
switches, and
- our global network operation center systems;
- Website and Internet systems including local access networks and
firewalls;
- main enterprise systems, such as those used for human resources, e-mail,
intranet and accounting;
- individual workstations, including personal computers and printers; and
- network systems.
We currently believe that all of our critical systems are Year 2000 ready.
We are rechecking the test results of our proprietary Assured Quality Routing
software and our iTrac software. Based on representations from third-party
vendors, we believe that the software and hardware components of our service
switch systems and global network operations center are Year 2000 ready. We are
in the final stages of verifying the Year 2000 readiness of the system suppliers
of our Website and main enterprise systems. We are currently conducting Year
2000 readiness testing of our individual workstations and network systems. To
date, we have not discovered Year 2000 problems in these systems. We have
designed our systems to be Year 2000 ready and will continue to test these
systems.
THIRD-PARTY COMPLIANCE. Our material third-party business relationships
include:
- Cisco Systems;
- several Internet service providers; and
- Datex Communications Corporation, our outsourced billing service bureau.
Cisco Systems provides a substantial majority of the gateways used in the
iBasis Network to provide our Internet telephony services. Any failure of these
systems to be Year 2000 ready would cause a material disruption of our services.
Cisco has represented to us that its gateways and other Cisco components we use
are Year 2000 ready.
In addition, we rely on third-party network infrastructure providers to gain
access to the Internet. If such providers experience business interruptions as a
result of their failure to achieve Year 2000 compliance, our ability to provide
Internet connectivity could be impaired, which could have a material adverse
effect on our business, financial condition and results of operations. We are
still in the process of completing individual surveys of the Year 2000 readiness
of our Internet service providers. We are also in the process of putting in
place redundant arrangements with Internet service providers to address Year
2000 issues and for other business reasons.
Datex Communications Corporation provides our outsourced billing services.
Datex has represented to us that their systems are Year 2000 ready. If Datex'
systems and ability to process our
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billing are impaired by Year 2000 issues, we may be unable to bill and collect
revenues from our customers, which could have a material adverse effect on our
business, financial condition and results of operations.
We are unable to predict, and have not attempted to assess, the Year 2000
readiness of the systems our customers and our partners use to interact with us.
Because the majority of our business involves international communications, we
are dependant upon systems and equipment local to these countries. We currently
do not know the level of testing and preparation for Year 2000 readiness of the
organizations in these countries. Since some countries outside of the United
States and organizations within these countries are not as intensively acting to
remediate their Year 2000 issues, any disruption in these countries could
adversely affect our service in such countries. We will be contacting our
customers and partners to fully understand their Year 2000 readiness. However,
this issue is not unique to us, as all of these customers and partners are
having to face this issue to support their normal business operations.
Year 2000 disruptions in the systems or equipment that our suppliers use
could prevent their delivery of products and services in a timely manner. We are
in the process of developing a standard survey to help us assess the Year 2000
readiness of our suppliers, and have collected documentation from these
companies that claims their products are Year 2000 ready.
NON-INFORMATION TECHNOLOGY SYSTEMS. Some non-information technology systems
used in our business, such as heating, ventilation, and air conditioning
systems; our telephone systems; and other equipment, may contain date-processing
embedded technology. The Year 2000 problem could cause failures in these assets
and disrupt our operations. We are currently assessing the Year 2000 readiness
of these systems. To date, we have not discovered Year 2000 problems in these
systems.
We do not believe that any failure of any of our non-information technology
systems to be Year 2000 ready will have a material adverse effect on our
business, financial condition or results of operations.
COSTS. We have not recorded the amount of employee time expended on Year
2000 assessment, remediation and testing activities. Accordingly, we are unable
to determine the cost of employee time devoted to Year 2000 matters. Until we
have completed our assessment of the Year 2000 readiness of our systems and
those of third-parties with whom we do business, we will be unable to estimate
all of the costs that we may incur in our Year 2000 readiness efforts. We have
funded and will continue to fund these activities principally through cash on
hand and cash flow from operations.
MOST REASONABLY LIKELY WORST CASE SCENARIO. It is possible that problems
related to the Year 2000 date change could result in one or more of the
following:
- a complete disruption of our Internet telephony services to any, and or
all, countries; and
- a disruption of billing cycles.
Most, if not all, of the alternatives that would allow us to run our systems
in the event of such disruptions would result in increased costs, reduced
revenues or service delays, which would increase our operating losses. Extended
disruptions may impact long-term customer and supplier relationships, which
could further impact future profitability.
CONTINGENCY PLAN. To date we have not formulated contingency plans should
any of our or a third-party's systems or equipment fail to be Year 2000 ready.
However, we intend to develop contingency plans to address any Year 2000
readiness problems that we discover through our ongoing assessment, remediation
and testing activities. If our efforts to address Year 2000 readiness are not
successful, or if our customers and partners, domestically and internationally,
do not adequately address their Year 2000 problem, our financial condition and
results of operations would be materially adversely affected.
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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 has grown 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 messaging. 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 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
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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.
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
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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
"points of presence" 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
third quarter ended September 30, 1999, we transported approximately
44.7 million minutes of traffic over the more than 2,400 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.
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.
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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 base and allow us to cross-sell other
services to communications service providers once they are our customers.
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 third quarter ended September 30, 1999,
we transported approximately 44.7 million minutes of traffic over our network.
The iBasis Network consists of four principal elements:
- "points of presence" that translate voice to data for transmission and
retrieval over a data network;
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- 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.
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 Point of Presence, to a cloud labeled "The Internet," continuing
out through another point of presence, 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 Points of Presence 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.]
POINTS OF PRESENCE. The entrance point for communications traffic over the
iBasis Network is a point of presence, three of which have enhanced
functionality and capacity. Our customers can interconnect with the iBasis
Network by connecting dedicated voice circuits from their facilities to one of
three enhanced points of presence, located in New York, Los Angeles and Hong
Kong. Alternatively, our customers may elect to install an iBasis point of
presence directly at their facilities to eliminate the cost of backhauling
traffic from their facilities to one of our enhanced points of presence. Points
of presence receive calls through a local carrier's switched network. Gateways
in each POP digitize, compress and packetize voice and fax calls and then
transmit them over the Internet. At the destination, another point of presence
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 points of presence located in Argentina, Australia,
Brazil, China, Greece, Indonesia, Israel, Korea, Lebanon, Malaysia, Mexico,
Peru, Philippines, Singapore, Taiwan, Venezuela and Zimbabwe. Some of these
points of presence are owned by us and others are owned by our partners. The
points of presence are scaleable and flexible platforms designed for
interconnection with the iBasis Network and are built primarily using Cisco
Systems' equipment. The scaleability of the points of presence permits us to
quickly increase capacity in discrete increments at relatively low cost, either
for a region or a customer. In addition, the point of presence flexible
architecture is designed to easily integrate and support the new services we
intend to offer.
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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 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 point
of presence 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 points of
presence 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.
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.
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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:
- BASIC MESSAGING SERVICES. We may offer additional basic messaging
services, including outsourced voicemail, store-and-forward fax, or
faxmail, and e-mail.
- ADVANCED MESSAGING SERVICES. We may offer advanced messaging services
including unified messaging, which enables subscribers to access different
message types, e.g., voicemail and e-mail, from multiple user interfaces;
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.
- 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.
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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 Super
points of presence for completion overseas. As of September 30, 1999, we were
providing services to seven of the top thirteen 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. 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 these companies to
terminate a substantial number of minutes makes us an attractive partner. As of
September 30, 1999, we have deployed 19 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.
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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. We
intend to work closely with Belle Systems to integrate their billing system into
our network, which we believe will give us a competitive advantage in the
marketplace.
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.
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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.
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 Delta Three.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; however, we cannot be
certain that this position will continue. On April 10, 1998, the FCC issued a
report to
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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
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 regulated by the Member States, and other telecommunications
services, which are fully liberalized.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 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. France is currently conducting an
investigation of how Internet telephony should be regulated. 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
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telecommunications industry to several government-owned companies. At present,
Internet telephony is permitted on an experimental basis only by China Unicom,
China Telecom, and Jitong Communications. It is uncertain whether Internet
telephony will continue to be permitted when the trial period ends.
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 the Company's 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.
CERTAIN 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
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.
CERTAIN 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
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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-,
iTrac-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 September 30, 1999, we had 96 full-time employees and one part-time
employee, with approximately 30 in sales and marketing, 41 in engineering and
operations and 26 in general and administrative. We also employ a limited number
of independent contractors and temporary employees on a periodic basis. Our
employees are not represented by a labor union and we consider our labor
relations to be good.
FACILITIES
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.
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 on July 31, 2008. We believe that our existing facilities are
adequate for our current needs and that suitable additional or alternative space
will be available in the future on commercially reasonable terms.
LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors, executive officers and key employees of iBasis, and their
ages as of September 30, 1999, are as follows.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- --------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Ofer Gneezy (1).................... 47 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 & Operations
Charles N. Corfield (2)............ 40 Director
John Jarve (1)..................... 43 Director
Izhar Armony (1)(2)................ 36 Director
Robert Maginn...................... 42 Director
Charles S. Houser.................. 56 Director
Charles M. Skibo (1)............... 60 Director
Carl Redfield (2).................. 52 Director
KEY EMPLOYEES
Dan Powdermaker.................... 36 Vice President, Asia
Gerald E. O'Loughlin............... 35 Vice President, North America
Juan Bergelund..................... 42 Vice President, Latin America
Matthew Kristin.................... 37 Chief Information Officer
</TABLE>
- ------------------------
(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 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.
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MR. HENSON has served as Vice President, Engineering 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. 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. 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
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on the world's 2000 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. KRISTIN has served as the Chief Information Officer of iBasis since
June 1999. From 1994 to 1999, Mr. Kristin served as manager of workflow
solutions for Concert Communication Services, a global telecommunications
carrier.
BOARD OF DIRECTORS
Our board of directors is divided into the following three classes, with the
members of the respective classes serving for staggered three-year terms.
- Class 1 directors, whose terms expire at the annual meeting of
shareholders to be held in 2000;
- Class 2 directors, whose terms expire at the annual meeting of
shareholders to be held in 2001; and
- Class 3 directors, whose terms expire at the annual meeting of
shareholders to be held in 2002.
Messrs. Armony, Houser and Maginn are our Class 1 directors, Messrs. Jarve,
Skibo and VanderBrug are our Class 2 directors, and Messrs. Corfield, Gneezy and
Redfield are our Class 3 directors. At each annual meeting of shareholders
following this offering, our shareholders will elect the successors to directors
whose terms have expired to serve from the time of election and qualification
until the third annual meeting following election. The classification of the
board of directors may delay or prevent a change in control or in the management
of iBasis. See "Description of Capital Stock--Delaware Law and Certain
Certificate of Incorporation and By-Law Provisions."
Messrs. Gneezy, VanderBrug, Houser, Corfield, Maginn, Armony and Jarve were
nominated and elected as directors by the holders of our common and preferred
stock in accordance with provisions of our current shareholders agreement. This
agreement will terminate upon the completion of this offering. Each of the
individuals will remain as a director until they resign or the stockholders
elect their replacements in accordance with our certificate of incorporation.
Our executive officers are appointed by the board of directors and serve
until their successors have been duly elected and qualified. There are no family
relationships among any of our executive officers or directors.
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DIRECTOR COMPENSATION
Directors of iBasis do not receive cash compensation for their services as
directors. However, non-employee directors are reimbursed for travel expenses.
iBasis maintains directors' and officers' liability insurance and our by-laws
provide for mandatory indemnification of directors and officers to the fullest
extent permitted by Delaware law. In addition, the certificate of incorporation
limits the liability of iBasis directors to either iBasis or its stockholders
for breaches of the directors' fiduciary duties to the fullest extent permitted
by Delaware law. See "Description of Capital Stock--Delaware Law and Certain
Certificate of Incorporation and By-Law Provisions."
Messrs. Gneezy and VanderBrug, each of whom is both a director and executive
officer of iBasis, received a stock option grant in 1998 for their service as an
officer of iBasis. See "Management--Executive Compensation." In addition, in
September 1999, each of Messrs. Skibo and Redfield received an option to
purchase 80,000 shares of common stock under the iBasis 1997 Stock Incentive
Plan, with such options vesting in equal 25% increments on the date of each of
the next four annual meetings of our shareholders following the completion of
this offering, beginning with the annual meeting to take place in 2000, provided
that the director is re-elected to the board of directors at such meeting. Each
of the other nonemployee members of the board of directors, including
Messrs. Armony, Houser, Jarve, Corfield, and Maginn, received an option to
purchase 40,000 shares of common stock on the same terms. The vesting of each of
the options will accelerate by 12 months, or 25% of the total grant, in the
event of a change in control of iBasis, as defined in the option agreements.
COMMITTEES OF THE BOARD OF DIRECTORS
The compensation committee currently consists of Messrs. Armony, Gneezy,
Jarve and Skibo. The compensation committee reviews and evaluates the salaries,
supplemental compensation and benefits of our officers, reviews general policy
matters relating to compensation and benefits of our employees and makes
recommendations concerning these matters to the board of directors. The
compensation committee also administers our 1997 Stock Incentive Plan.
The audit committee currently consists of Messrs. Armony, Corfield and
Redfield. The audit committee reviews with our independent accountants the scope
and timing of its audit services, the accountants' report on our financial
statements following completion of their audit and our policies and procedures
with respect to internal accounting and financial controls. In addition, the
audit committee will make annual recommendations to the board of directors for
the appointment of independent accountants for the ensuing fiscal year.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
With the exception of Mr. Gneezy, no member of the compensation committee is
or has been an officer or employee of ours. All decisions regarding the
compensation of our executive officers for the fiscal year ended December 31,
1998 were made by the compensation committee, except that Mr. Gneezy did not
participate in deliberations or decisions regarding his own compensation. None
of our executive officers serves as a member of the board of directors or
compensation committee of any other entity that has one or more executive
officers serving as a member of our board of directors or compensation
committee.
EMPLOYMENT AGREEMENTS
We currently have employment contracts in effect with Ofer Gneezy, our
President and Chief Executive Officer, Dr. VanderBrug, our Vice President, Mr.
Henson, our Vice President of Engineering and Operations, and Mr. Hughes, our
Vice President of Finance and Chief Financial Officer.
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iBasis and Mr. Gneezy are parties to an employment agreement, dated
August 11, 1997, governing his employment with iBasis as President and Chief
Executive Officer. Under the terms of the employment agreement, Mr. Gneezy is to
be paid a base salary of $125,000, and is eligible to receive an annual bonus at
the discretion of the board of directors. iBasis and Dr. VanderBrug are parties
to an employment agreement, dated August 11, 1997, governing his employment with
iBasis as Executive Vice President. Under the terms of the employment agreement,
Dr. VanderBrug is to be paid a base salary of $115,000, and is eligible to
receive an annual bonus at the discretion of the board of directors. iBasis and
Mr. Henson are parties to an employment agreement dated as of August 17, 1999
governing his employment with iBasis as Vice President, Engineering and
Operations. Under the terms of the employment agreement, Mr. Henson is to be
paid a base salary of $120,000, and is eligible to receive an annual bonus at
the discretion of the chief executive officer or board of directors. iBasis and
Mr. Hughes are parties to an employment agreement dated as of August 17, 1999
governing his employment with iBasis as Vice President, Finance and Chief
Financial Officer. Under the terms of the employment agreement, Mr. Hughes is to
be paid a base salary of $120,000, and is eligible to receive an annual bonus at
the discretion of the chief executive officer or board of directors.
We may terminate the employment agreements with Messrs. Gneezy and
VanderBrug "for cause" or at any time upon at least thirty days prior written
notice, and Messrs. Gneezy and VanderBrug may terminate their employment
agreements "for good reason" or at any time upon at least thirty days prior
written notice. If we terminate either of Messrs. Gneezy and VanderBrug without
cause or if either resigns for good reason, we must continue to pay his base
salary for one year and continue to provide health benefits for one year.
We may terminate the employment agreements with Messrs. Henson and Hughes
agreement "for cause" or at any time upon at least thirty days prior written
notice, and Messrs. Henson and Hughes may terminate their employment agreements
for "good reason" or at any time upon at least thirty days prior written notice.
If, within six months following an acquisition or change in control, we
terminate either of Messrs. Henson or Hughes without cause or if either resigns
for good reason, we must continue to pay his base salary for nine months and
continue to provide health benefits for nine months.
The employment agreements with Messrs. Gneezy, VanderBrug, Henson and Hughes
entitle them to life insurance, health insurance and other employee fringe
benefits to the extent that we make benefits of this type available to our other
executive officers. All intellectual property that Messrs. Gneezy, VanderBrug,
Henson and Hughes may invent, discover, originate or make during the term of
their employment shall be the exclusive property of iBasis. Each of Messrs.
Gneezy, VanderBrug, Henson and Hughes may not, during or after the term of his
employment, disclose or communicate any confidential information without our
prior written consent. Each employment agreement also contains a non-competition
provision that is intended to survive the termination of each officer's
employment for a period of one year. The agreements with Messrs. Gneezy and
VanderBrug also provide that in the event of an acquisition or change in
control, each of their options and restricted shares, if any, shall
automatically become fully vested immediately prior to such event, and each such
option shall remain exercisable until the expiration of such option or until it
sooner terminates in accordance with its terms. The agreements with Messrs.
Henson and Hughes provide that in the event that we terminate the employment of
the officer without cause, or the officer terminates his employment with "good
reason," in either case within six months after the occurrence of an acquisition
or change in control, then his options and restricted stock, if any, shall
immediately vest and become exercisable, and each option shall remain
exercisable until the expiration of the option or until it sooner terminates in
accordance with its terms.
We have also entered into a stock restriction agreement with Mr. Gneezy and
Dr. VanderBrug. Under the terms of the agreement, if either Mr. Gneezy or Dr.
VanderBrug leaves his employment with us, either because he terminates his
employment voluntarily and without "good reason," or he is
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terminated "for cause," we have the right to purchase a percentage of the common
stock held by him at the fair market value, as determined by our board of
directors, on the date of the purchase by iBasis. The percentage we have the
right to acquire under these circumstances decreases over time, from
approximately 25% as of the date of this prospectus to 0% on or after
August 26, 2000, at which time the agreement will terminate. The terms "good
reason" and "for cause" have the same meanings as they do in the officers'
employment agreements.
In general, "good reason" as used in both the employment agreements and the
stock restriction agreement of Messrs. Gneezy, VanderBrug, Hughes and Henson is
defined to mean any material change in the compensation, position, location of
employment or responsibilities of the employee. "For cause" generally means
gross negligence or willful misconduct of the employee, a breach of the
employment agreement or the commission of a crime.
EXECUTIVE COMPENSATION
The following table sets forth information with respect to the compensation
of our chief executive officer and our three other most highly compensated
executive officers whose total salary and bonus exceeded $100,000 for the year
ended December 31, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION (1) ---------------------
----------------------- SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS (#) COMPENSATION
- --------------------------- -------- -------- --------------------- ------------
<S> <C> <C> <C> <C>
Ofer Gneezy........................... $134,866 $37,500 80,000 --
President and Chief Executive
Officer
Gordon J. VanderBrug.................. 122,240 33,750 60,000 --
Executive Vice President
John G. Henson, Jr. (2)............... 67,898 30,000 200,000 $17,791(3)
Vice President, Engineering &
Operations
Michael J. Hughes (4)................. 48,808 12,500 200,000 --
Vice President, Finance and Chief
Financial Officer
</TABLE>
- ------------------------
(1) Excludes certain perquisites and other benefits, the amount of which did not
exceed 10% of the employee's total salary and bonus.
(2) Mr. Henson became Vice President, Engineering & Operations in June 1998.
(3) Represents reimbursed relocation expenses.
(4) Mr. Hughes became Vice President, Finance and Chief Financial Officer in
August 1998.
STOCK OPTION GRANTS
The following table contains information concerning options to purchase
common stock that we granted made in the year ended December 31, 1998 to each of
the officers named in the summary compensation table. We generally grant stock
options at 100% of the fair market value of the common stock as determined by
our board of directors on the date of grant. In reaching the determination of
fair market value at the time of each grant, the board of directors considers a
range of factors, including our current financial position, our recent revenues,
results of operations and cash flows, our assessment of our competitive position
in our markets and prospects for the future, the status of our
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<PAGE>
customer acquisition and marketing efforts, current valuations for comparable
companies and the illiquidity of an investment in the common stock.
OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
INDIVIDUAL GRANTS ASSUMED ANNUAL
----------------------------------------------------------------- RATES OF
PERCENT OF TOTAL STOCK PRICE APPRECIATION
NUMBER OF OPTIONS GRANTED EXERCISE FOR OPTION TERM(2)
SECURITIES UNDERLYING TO EMPLOYEES PRICE PER EXPIRATION -------------------------
NAME OPTIONS GRANTED(1) IN 1998 SHARE DATE 5% 10%
- ---- --------------------- ---------------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Ofer Gneezy.............. 80,000 6.7% $1.10 12/3/2003 $1,545,600 $1,973,500
Gordon J. VanderBrug..... 60,000 5.1 1.10 12/3/2003 1,159,200 1,480,100
John G. Henson, Jr....... 120,000 10.1 0.50 6/11/2008 3,067,500 4,920,000
80,000 6.7 1.00 12/3/2008 2,005,000 3,240,000
Michael J. Hughes........ 120,000 10.1 0.50 8/17/2008 3,067,500 4,920,000
80,000 6.7 1.00 12/3/2008 2,005,000 3,240,000
</TABLE>
- ------------------------
(1) Shares underlying options generally vest over a four-year period, with 6.25%
of the shares vesting on each of the first sixteeen three-month
anniversaries after the grant date. However, during the first year of
employment, no shares underlying an option vest until the first anniversary
of the optionee's employment when all of the shares that would have vested
before such date become exercisable. For disclosure regarding terms of the
stock options, see "Management--1997 Stock Incentive Plan."
(2) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by the rules of the Securities and Exchange Commission and do
not represent an estimate or projection of our future stock prices.
Potential realizable value is determined by multiplying $16.00, the initial
public offering price, by the stated annual appreciated rate compounded
annually for the term of the option, subtracting the exercise price or base
price per share from the product, and multiplying the remainder by the
number of options granted. Actual gains, if any, on stock option exercises
and common stock holdings are dependent on the future performance of the
common stock and overall stock market conditions. There can be no assurance
that the amounts reflected in the table will be achieved.
OPTION EXERCISES AND HOLDINGS
The following table contains information concerning option holdings for the
year ended December 31, 1998 with respect to each of the officers named in the
summary compensation table.
<TABLE>
<CAPTION>
1998 YEAR-END OPTION VALUES
---------------------------------------------------------
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT YEAR END OPTIONS AT YEAR END(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Ofer Gneezy.................................... -- 80,000 $ -- $1,192,000
Gordon J. VanderBrug........................... -- 60,000 -- 894,000
John G. Henson, Jr............................. -- 200,000 -- 3,060,000
Michael J. Hughes.............................. -- 200,000 -- 3,060,000
</TABLE>
- ------------------------
(1) Value is determined by subtracting the exercise price from $16.00, the
initial public offering price, multiplied by the number of shares underlying
the options.
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<PAGE>
1997 STOCK INCENTIVE PLAN
In August 1997, our board of directors approved our 1997 Stock Incentive
Plan, which was amended in December 1998 and in September 1999. The initial
adoption of the plan and each of its amendments were subsequently approved by
our stockholders. Our stock incentive plan provides for the grant of incentive
stock options, nonqualified stock options and restricted stock awards. Employees
(including officers and employee directors), directors, consultants and advisors
are eligible for all awards except incentive stock options. Only employees are
eligible for incentive stock options. A maximum of 5,700,000 shares of common
stock have been authorized for issuance under our stock incentive plan. Under
our stock incentive plan, as of September 30, 1999:
- options for the purchase of 2,500,800 shares of common stock had been
granted and were outstanding under the plan;
- 121,750 shares had been issued upon exercise of options granted under the
plan;
- a grant of 15,000 shares of restricted stock had been made under the plan;
and
- options for the purchase of 395,650 shares that were granted under the
plan had been cancelled.
3,062,450 shares of common stock remained available for the grant of awards
under the plan as of September 30, 1999. No participant in our stock incentive
plan may, in any year, be granted options or restricted stock awards with
respect to more than 100,000 shares of common stock.
The compensation committee administers our stock incentive plan and has the
authority to make all determinations required under our stock incentive plan,
including the eligible persons to whom, and the time or times at which, options
or restricted stock awards may be granted, the exercise price or purchase price
(if any) of each option or restricted stock award, whether each option is
intended to qualify as an incentive stock option or a nonqualified stock option,
and the number of shares subject to each option or restricted stock award. The
compensation committee also has authority to:
- interpret our stock incentive plan;
- determine the terms and provisions of the option or restricted stock award
instruments; and
- make all other determinations necessary or advisable for administration of
our stock incentive plan.
The committee has authority to prescribe, amend, and rescind rules and
regulations relating to our stock incentive plan. The exercise price of options
granted under our stock incentive plan shall not be less than 100% of the fair
market value of the common stock on the date of grant, or 110% in the case of
incentive stock options issued to an employee who at the time of grant owns more
than 10% of the total combined voting power of all classes of iBasis stock. The
options become exercisable at such time or times, during such periods, and for
such numbers of shares as shall be determined by the compensation committee and
expire after a specified period that may not exceed ten years from the date of
grant.
The compensation committee may, in its discretion, provide for the
acceleration of one or more outstanding options and the vesting of unvested
shares held as restricted stock awards upon occurrence of a change of control of
iBasis.
In the event of a merger, consolidation, or sale, transfer, or other
disposition of all or substantially all of our assets, the compensation
committee may, in its discretion, provide for the automatic acceleration of one
or more outstanding options that are assumed or replaced and do not otherwise
accelerate by reason of the transaction. In addition, the compensation committee
may similarly provide for the termination of any of our repurchase rights that
may be assigned in connection with the merger, consolidation, or sale, transfer,
or other disposition of all or substantially all of our assets, in the event
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<PAGE>
that a holder of restricted stock's employment, directorship or consulting or
advising relationship should subsequently terminate following the transaction.
The board of directors may amend, modify, suspend or terminate our stock
incentive plan at any time, subject to applicable law and the rights of holders
of outstanding options and restricted rights awards. Our stock incentive plan
will terminate on August 11, 2007, unless the board of directors terminates it
prior to that time.
1999 EMPLOYEE STOCK PURCHASE PLAN
In September 1999, our board of directors and stockholders approved the 1999
iBasis, Inc. employee stock purchase plan, which enables eligible employees to
acquire shares of our common stock through payroll deductions. Our employee
stock purchase plan is intended to qualify as an employee stock purchase plan
under Section 423 of the Internal Revenue Code. The initial public offering
period will start on the date of this prospectus and will end on June 30, 2000,
unless otherwise determined by the board of directors. Subsequent offerings
under the employee stock purchase plan are planned to start on January 1 and
July 1 of each year and end on June 30 and December 31 of each year. During each
offering period, an eligible employee may select a rate of payroll deduction of
from 1% to 10% of compensation, up to an aggregate of $12,500 in any offering
period. The purchase price for our common stock purchased under our employee
stock purchase plan is 85% of the lesser of the fair market value of the shares
on the first or last day of the offering period. An aggregate of 500,000 shares
of common stock have been reserved for issuance under the employee stock
purchase plan.
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<PAGE>
CERTAIN TRANSACTIONS
PREVIOUS CAPITAL STOCK FINANCINGS
Between February 1997 and July 1999, we sold an aggregate of 1,500,000
shares of our Class B common stock and 13,556,603 shares of our preferred stock
for cash. All of these shares of Class B common stock and preferred stock will
automatically convert into an aggregate of 17,556,603 shares of Class A common
stock, which will subsequently convert into the same number of shares of common
stock, without further action on our part or the holders of such stock, upon the
completion of this offering. See "Principal Stockholders" for more information
regarding our securities which are held by our directors and officers and the
holders of 5% or more of the outstanding common stock.
CLASS A COMMON STOCK. In August 1996, we issued 6,000,000 shares of our
Class A common stock to Ofer Gneezy at a price of $.001 per share, for a total
cash consideration to us of $50. The 6,000,000 shares reflect both a 40-for-1
stock split in February 1997, and a 2-for-1 stock dividend in December 1997. Mr.
Gneezy is our President and Chief Executive Officer and a director.
CLASS B COMMON STOCK. In February, March and April 1997, we issued
1,500,000 shares of our Class B common stock to a number of independent
investors and our founders at a purchase price of $0.33 per share, for a total
cash consideration to us of approximately $500,000. In this transaction, we sold
300,000 shares of Class B common stock to the Charles N. Corfield Trust, 15,000
shares to Ofer Gneezy, 15,000 shares to Gordon J. VanderBrug, 150,000 shares to
Elka, Ltd., 150,000 shares to Henry Meester, Jr., 240,000 shares to Porky
Partners L.L.C., 150,000 shares to Providence Investment Company Limited,
150,000 shares to David J. Roux and 300,000 shares to the Melvin C. VanderBrug
Trust. An additional 30,000 shares were sold to an independent investor. Charles
N. Corfield, the sole trustee of the Charles N. Corfield Trust, is a director of
iBasis. Mr. VanderBrug is our Executive Vice President and a director. All of
the outstanding Class B common stock will automatically, and without further
action on our part or the holders of such stock, convert into Class A common
stock on a share-for-share basis upon the completion of this offering.
SERIES A PREFERRED STOCK. In October, November and December 1997, and March
and June 1998, subject to commitments made in 1997, we issued an aggregate of
1,250,000 shares of Series A preferred stock to a number of independent
investors and our founders at a purchase price of $3.00 per share for a total
cash consideration to us of approximately $3.75 million. In these transactions,
we sold 200,000 shares of Series A preferred stock to the Charles N. Corfield
Trust, 3,333 shares to Ofer Gneezy, 25,000 shares to Henry Meester, Jr., 25,000
shares to the Melvin C. VanderBrug Trust, 16,667 shares to David J. Roux,
333,333 shares to Seruus Telecom Fund, L.P., 16,500 shares to Elka, Ltd.,
278,084 shares to Bain Securities, Inc., 278,084 shares to Sunapee
Securities, Inc. and 1,667 shares to Gordon J. VanderBrug. An additional 72,332
shares of Series A preferred stock were sold to other independent investors,
including two stockholders of iBasis. Mr. Houser, a director of iBasis, is the
chairman and a managing director of Seruus Ventures, LLC, an affiliated entity
of Seruus Telecom Fund, L.P. All of the outstanding Series A preferred stock
will automatically, and without further action on our part or the holders of
such stock, convert into Class A common stock upon the completion of this
offering on the basis of three shares of Class A common stock for each share of
Series A preferred stock.
SERIES B PREFERRED STOCK. On August 26, 1998, we issued 6,562,500 shares of
Series B preferred stock to a number of independent investors, our founders and
certain existing shareholders at a purchase price of $1.60 per share, for a
total cash consideration to us of approximately $10.5 million. In this
transaction, we sold 56,578 shares of Series B preferred stock to Charles River
VIII-A LLC, 3,068,422 shares to Charles River Partnership VIII, LP, 100,000
shares to the Charles N. Corfield Trust, 5,000 shares to Ofer Gneezy, 19,100
shares to David J. Roux, 62,500 shares to Charles S. Houser, 12,500 shares to
Michael J. Hughes, 125,960 shares to Menlo Entrepreneurs Fund VII, L.P., and
2,999,040 shares to Menlo Ventures VII, L.P. An additional 113,400 shares of
Series B preferred stock
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<PAGE>
were sold to other independent investors, including six stockholders of iBasis.
Izhar Armony, a director of iBasis, is a partner at Charles River Ventures, an
affiliated entity of Charles River VIII-A LLC and Charles River Partnership
VIII, LP. Michael J. Hughes is the Vice President, Finance and Chief Financial
Officer of iBasis. John Jarve, a director of iBasis, is a principal and managing
director of Menlo Ventures, an affiliated entity of Menlo Entrepreneurs Fund
VII, L.P. and Menlo Ventures VII, L.P. All of the outstanding Series B preferred
stock will automatically, and without further action on our part or the holders
of such stock, convert into Class A common stock on a share-for-share basis upon
the completion of this offering.
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 shareholders at a purchase price of $4.37 per share, for a
total cash consideration to us of approximately $25.1 million. In this
transaction, we sold 4,577 shares of Series C preferred stock to Ofer Gneezy,
4,577 shares to Michael J. Hughes, 23,000 shares to Elka, Ltd., 114,416 shares
to the Charles N. Corfield Trust, 53,432 shares to Porky Partners II, L.L.C.,
37,500 shares to Charles S. Houser, 12,429 shares to Charles River VIII-A LLC,
114,416 shares to Dirigo Partners, L.L.C., an affiliate of David J. Roux,
674,071 shares to Charles River Partnership VIII, LP, 121,234 shares to the
Melvin C. VanderBrug Trust, 658,829 shares to Menlo Ventures VII, L.P., 27,671
shares to Menlo Entrepreneurs Fund VII, L.P., 517,784 shares to New Media
Investors III, LLC, 1,888,010 shares to TCV III (Q), L.P., an aggregate of
171,487 shares to affiliates of TCV III(Q), 1,137,761 shares to Integral Capital
Partners IV, L.P. and 6,404 shares to one of its affiliates. An additional
176,505 shares of Series C preferred stock were sold to other independent
investors, including eight stockholders of iBasis. All of the outstanding
Series C preferred stock will automatically, and without further action on our
part or the holders of such stock, convert into Class A common stock on a
share-for-share basis upon the closing of the offering.
RIGHTS AND RESTRICTIONS OF CLASS B COMMON STOCK AND PREFERRED STOCK.
When the outstanding Class B common stock and Series A, Series B and
Series C preferred stock convert into Class A common stock, and the outstanding
Class A common stock converts into common stock, upon the completion of this
offering, all rights and restrictions of the Class A and Class B common stock
and the Series A, Series B and Series C preferred stock, including any
redemption rights and special voting rights, will terminate and be of no further
force and effect. Notwithstanding the conversion, the original holders of the
Series A, Series B and Series C preferred stock will be entitled to "piggyback"
and certain demand registration rights with respect to the shares of common
stock into which the Series A, Series B and Series C preferred stock convert.
See "Description of Capital Stock--Registration Rights."
CHANGE IN CONTROL ARRANGEMENTS AND INDEMNIFICATION
Our certificate of incorporation limits the liability of our directors for
monetary damages arising from a breach of their fiduciary duty as directors,
except to the extent otherwise required by Delaware law. Such limitation of
liability does not affect the availability of equitable remedies such as
injunctive relief or rescission.
Our by-laws provide that we may indemnify our directors and officers to the
fullest extent permitted by Delaware law.
Provisions in our employment agreements with Messrs. Gneezy and VanderBrug
are triggered upon a change in control of iBasis. In general, a "change in
control" is defined to mean a merger, consolidation or similar transaction in
which securities possessing more than 50% of the total combined voting power of
our outstanding securities are transferred to a new person, or upon the sale,
transfer or other disposition of all or substantially all of our assets to one
or more persons. Under each agreement, immediately prior to a change in control,
each stock option and restricted share held by the officer shall immediately
vest and become exercisable.
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Provisions in our employment agreements with Messrs. Henson and Hughes are
also triggered upon a change in control of iBasis. Under each agreement, if
within the six month period following the occurrence of an acquisition or change
in control, the company terminates the employment of the officer without cause,
or the officer terminates his employment with "good reason," then he shall be
entitled to the continuation of his salary and health benefits for a period of
nine months from the date of his termination. In general, "good reason" is
defined to mean any material change in the compensation, position or
responsibilities of the officer that is, taken as a whole, inconsistent with
their respective positions held prior to the change in control. Further, upon
any such termination each option to acquire our capital stock held by the
officer shall immediately vest and become exercisable.
Each of the nonemployee members of our board of directors, including
Messrs. Armony, Houser, Jarve, Corfield, and Maginn, received an option to
purchase 40,000 shares of common stock. Each of Mr. Redfield and Mr. Skibo,
nonemployee members of our board of directors, received an option to purchase
80,000 shares of common stock. The vesting of each of the options will
accelerate by 12 months (or 25% of the total grant) in the event of a change in
control of iBasis, as defined in the option agreements. See
"Management--Director Compensation."
FUTURE TRANSACTIONS
We believe all of the transactions set forth above that we consummated with
parties that may be deemed to be affiliated with us were made on terms no less
favorable to us than could have been obtained from unaffiliated third-parties.
We will require that all future transactions with parties affiliated with us,
including loans between us and our officers, directors, principal stockholders
and their affiliates, be approved by a majority of the board of directors,
including a majority of independent and disinterested directors, and that such
transactions be on terms no less favorable to us than could be obtained from
unaffiliated third-parties.
For a description of other transactions and employment and other
arrangements between us and our directors and executive officers, see
"Management--Director Compensation" and "--Employment Agreements."
56
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of common stock as of September 30, 1999, on a pro forma as adjusted
basis to reflect the automatic conversion upon completion of this offering of
the outstanding shares of the Class B common stock, Series A preferred stock,
Series B preferred stock and Series C preferred stock into an aggregate of
17,556,603 shares of Class A common stock and the subsequent automatic
conversion of all outstanding shares of Class A common stock into 23,738,353
shares of common stock, by:
- each person or entity we know owns beneficially more than 5% of our common
stock;
- each of our directors;
- each of our executive officers named in the summary compensation table;
and
- all executive officers and directors as a group.
The numbers set forth in the following table assume the underwriters do not
exercise their over-allotment option. Beneficial ownership is determined in
accordance with the rules and regulations of the Securities and Exchange
Commission. In computing the number of shares beneficially owned by a person and
the percentage ownership of that person, shares of common stock subject to
options held by that person that are currently exercisable or exercisable within
60 days of September 30, 1999 are deemed outstanding. These shares, however, are
not deemed outstanding for the purposes of computing the percentage ownership of
any other person. Except as indicated in the footnotes to this table and
pursuant to applicable community property laws, each stockholder named in the
table has sole voting and investment power with respect to the shares set forth
opposite such stockholder's name. Unless otherwise indicated, the address for
each of the following stockholders is c/o iBasis, Inc., 20 Second Avenue,
Burlington, Massachusetts, 01803.
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES BENEFICIALLY
OWNED
-------------------
NUMBER OF SHARES BEFORE AFTER
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
- ------------------------ ------------------ -------- --------
<S> <C> <C> <C>
Charles River Partnership VIII, LP and affiliated
entities(1).............................................. 3,811,500 16.1% 12.5%
Izhar Armony(1)............................................ 3,811,500 16.1% 12.5%
Menlo Ventures VII, L.P. and affiliated entities(2)........ 3,811,500 16.1% 12.5%
John Jarve(2).............................................. 3,811,500 16.1% 12.5%
Ofer Gneezy(3)............................................. 3,769,576 15.9% 12.3%
Technology Crossover Ventures and affiliated entities(4)... 2,059,497 8.7% 6.7%
Gordon J. VanderBrug(5).................................... 1,836,251 7.7% 6.0%
Robert Maginn(6)........................................... 1,513,784 6.4% 5.0%
G.J. & C.E. VanderBrug Family Limited Partnership.......... 1,317,345 5.5% 4.3%
Charles N. Corfield(7)..................................... 1,114,416 4.7% 3.6%
Charles S. Houser(8)....................................... 1,099,999 4.6% 3.6%
Seruus Telecom Fund, L.P................................... 999,999 4.2% 3.3%
Michael J. Hughes(9)....................................... 72,702 * *
John G. Henson, Jr.(10).................................... 55,625 * *
Carl Redfield.............................................. 0 * *
Charles M. Skibo........................................... 0 * *
All directors and executive officers as a group (11
persons)(11)............................................. 17,085,353 71.6% 55.7%
</TABLE>
- ------------------------
* Represents less than 1% of the outstanding shares of common stock.
(1) Consists of 3,742,493 shares held by Charles River Partnership VIII, LP and
69,007 shares held by Charles River VIII-A, LLC. Mr. Armony, one of our
directors, is a partner of Charles River Ventures, an affiliate of Charles
River Partnership VIII, LP and Charles River VIII-A, LLC.
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<PAGE>
Mr. Armony disclaims beneficial ownership of the shares held by the entities
affiliated with Charles River Ventures, except to the extent of his
pecuniary interest therein. The address for Mr. Armony and Charles River
Ventures is 1000 Winter Street, Suite 3300, Waltham, Massachusetts, 02451.
(2) Consists of 3,657,869 shares held by Menlo Ventures VII, L.P. and 153,631
shares held by Menlo Entrepreneurs Fund VII, L.P. Mr. Jarve, one of our
directors, is managing director of MV Management VII, LLC, the general
partner of Menlo Ventures VII, L.P. and Menlo Entrepreneurs Fund VII, L.P.
Mr. Jarve disclaims beneficial ownership of the shares held by the entities
affiliated with Menlo Ventures, except to the extent of his pecuniary
interest therein. The address for Mr. Jarve and Menlo Ventures is 3000 Sand
Hill Road, Building 4, Suite 100, Menlo Park, California 94025.
(3) Includes 15,000 shares of common stock issuable upon exercise of options
within 60 days of September 30, 1999. Also includes 50,000 shares held by
The Ofer Gneezy 1999 Family Trust for the benefit of Mr. Gneezy's children.
Mr. Gneezy disclaims beneficial ownership of the shares held by The Ofer
Gneezy 1999 Family Trust. Mr. Gneezy is our President, CEO and one of our
directors.
(4) Consists of 14,955 shares held by TCV III (GP), 71,034 shares held by
TCV III, L.P., 1,888,010 shares held by TCV III (Q), L.P. and 85,498 shares
held by TCV III Strategic Partners, L.P. (collectively, the "TCV Funds").
Jay C. Hoag and Richard H. Kimball are the sole managing members of
Technology Crossover Management III, L.L.C. ("TCM III"), the general partner
of each of the TCV Funds. Consequently, TCM III and Messrs. Hoag and Kimball
may each be deemed to beneficially own all of the shares held by the TCV
Funds. TCM III and Messrs. Hoag and Kimball each disclaim beneficial
ownership of such shares, except to the extent of their respective pecuniary
interest in those shares. The address for each of these entities is 575 High
Street, Suite 400, Palo Alto, California 94301.
(5) Includes 11,250 shares of common stock issuable upon exercise of options
within 60 days of September 30, 1999. Also includes 1,317,345 shares held by
the G.J. & C.E. VanderBrug Family Limited Partnership. Dr. VanderBrug
disclaims beneficial ownership of the shares held by the G.J. & C.E.
VanderBrug Family Limited Partnership, except to the extent of his pecuniary
interest therein. Does not include 37,865 shares of common stock held by
Dr. VanderBrug's spouse. Dr. VanderBrug disclaims beneficial ownership of
the shares held by his spouse. Dr. VanderBrug is our Executive Vice
President and one of our directors.
(6) Consists of 996,000 shares held by Sunapee Securities, Inc. and 517,784
shares held by New Media Investors III, LLC. Mr. Maginn, one of our
directors, is a director of Bain & Co., Inc., an affiliate of Sunapee
Securities, Inc. and New Media Investors III, LLC. Mr. Maginn disclaims
beneficial ownership of the shares held by the entities affiliated with
Bain & Co., Inc., except to the extent of his pecuniary interest therein.
The address for Mr. Maginn and Bain & Co., Inc. is Two Copley Place, Boston,
Massachusetts 02116.
(7) Consists of 1,114,416 shares held by the Charles N. Corfield Trust u/a/d
12/19/91, a revocable trust of which Mr. Corfield is the sole trustee.
Mr. Corfield is one of our directors.
(8) Consists of 999,999 shares held by Seruus Telecom Fund, L.P. and 100,000
shares held by Mr. Houser, individually. Mr. Houser, one of our directors,
is the managing director of Seruus Ventures, an affiliate of Seruus Telecom
Fund, L.P. Mr. Houser disclaims beneficial ownership of the shares held by
Seruus Telecom Fund, L.P., except to the extent of his pecuniary interest
therein.
(9) Includes 55,625 shares of common stock issuable upon the exercise of
options within 60 days of September 30, 1999. Mr. Hughes is our Vice
President, Finance and our Chief Financial Officer.
(10) Consists entirely of 55,625 shares of common stock issuable upon the
exercise of options within 60 days of September 30, 1999. Mr. Henson is our
Vice President, Engineering & Operations.
(11) Includes 137,500 shares of common stock issuable upon exercise of options
within 60 days of September 30, 1999 and certain shares held by affiliates
of such directors and executive officers.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, our authorized capital stock will consist
of 85,000,000 shares of common stock and 15,000,000 shares of preferred stock,
each having a par value of $0.001 per share.
COMMON STOCK
As of September 30, 1999, there were 23,738,353 shares of common stock
outstanding and held of record by 91 stockholders, after giving effect to the
conversion of all outstanding shares of Series A, Series B, and Series C
convertible preferred stock and Class B common stock into Class A common stock
and the subsequent conversion of all outstanding shares of Class A common stock
into common stock upon the completion of this offering. Based upon the number of
shares of common stock outstanding as of that date and giving effect to the
issuance of the shares of common stock offered hereby (assuming no exercise of
the underwriters' over-allotment option), there will be 30,538,353 shares of
common stock outstanding upon the closing of this offering.
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled to receive ratably
such dividends, if any, as may be declared by the board of directors out of
funds legally available therefor, subject to any preferential dividend rights of
outstanding preferred stock. Upon our liquidation, dissolution or winding up,
the holders of common stock are entitled to receive ratably the net assets of
our company available after the payment of all debts and other liabilities,
subject to the prior rights of any outstanding preferred stock. Holders of the
common stock have no preemptive, subscription, redemption or conversion rights.
The rights, preferences and privileges of holders of common stock are subject
to, and may be adversely affected by, the rights of the holders of shares of any
series of preferred stock that we may designate and issue in the future. After
the completion of this offering, there will be no shares of preferred stock
outstanding.
COMMON STOCK WARRANTS
As of the date of this prospectus, we had warrants outstanding to purchase a
total of 58,125 shares of common stock, all of which are currently exercisable.
All of these warrants were issued to TLP Leasing Programs, Inc., an equipment
financing company, in connection with the establishment of master equipment
financing relationships. The first of these warrants enables its holder to
purchase a total of 20,625 shares of common stock at an exercise price of $1.00
per share. This warrant was issued in September 1997 and expires on
September 9, 2007. The second warrant enables its holder to purchase a total of
37,500 shares of common stock at an exercise price of $1.00 per share. This
warrant was issued in June 1998 and expires on June 7, 2008. The warrants
provide their holders with certain rights to the registration of the shares of
common stock issuable upon exercise of the warrants. See "Description of Capital
Stock--Registration Rights."
PREFERRED STOCK
The board of directors is authorized, subject to certain limitations
prescribed by law, without further stockholder approval, from time to time to
issue up to an aggregate of 15,000,000 shares of preferred stock in one or more
series and to fix or alter the designations, preferences and rights, and any
qualifications, limitations or restrictions thereof, of the shares of each such
series, including the number of shares constituting any such series and the
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption (including sinking fund provisions), redemption price or prices and
liquidation preferences thereof. The issuance of preferred stock may have the
effect of delaying,
59
<PAGE>
deferring or preventing a change of control of iBasis. We have no present plans
to issue any shares of preferred stock.
REGISTRATION RIGHTS
The holders of approximately 16,056,603 shares of common stock, as
converted, have demand registration rights with respect to those shares under
the Securities Act as of the date of this prospectus. We granted such rights
under the terms of a registration rights agreement, dated as of July 12, 1999,
to investors that participated in our preferred stock financings, some of whom
are affiliates or directors of us. If requested to do so by holders of at least
30% of the holders of our common stock upon the conversion of any or all of our
Series A preferred stock, Series B preferred stock or Series C preferred stock,
we will be required, subject to limitations relating to the timing of the
request, to file a registration statement under the Securities Act covering all
registrable shares, having a market value of at least $1.0 million, requested to
be included. We are required to effect up to two such demand registrations. A
stockholder may not request a registration prior to June 30, 2001 or during the
180-day period following our initial public offering. We will bear all fees,
costs and expenses of any of these demand registrations other than underwriting
discounts and commissions. Once we are eligible to register shares using a
short-form registration statement, we will be required, if requested to do so by
holders of at least 20% of the registrable shares then outstanding, to register
shares having a market value of at least $1.0 million.
We have the right to delay any registration requests for a period not to
exceed 90 days in any 12-month period where registration, in the judgment of our
board of directors, would have an adverse impact on transactions being pursued
by us. We will bear all fees, costs and expenses of any of these demand
registrations other than underwriting discounts and commissions.
In addition, under the agreement described above, holders of registrable
shares have piggyback registration rights. If we propose to register any of our
securities under the Securities Act other than in connection with our employee
benefit plans or a corporate reorganization, then, subject to limitations based
on the number of shares to be registered and the terms on which they are to be
sold, the holders of registrable shares may require us to include all or a
portion of their shares in such registration, although the managing underwriter
of any such offering has the right to limit the number of shares in such
registration. We will bear all fees, costs and expenses of such registrations
other than underwriting discounts and commissions.
The warrants we have issued to TLP Leasing Programs, Inc. to purchase 58,125
shares of common stock contain registration rights that require us to give
notice to the holder of these warrants of our intention to file a registration
statement relating to the common stock. We are required to use our best efforts
to register all of the registrable shares, subject to the rights of the managing
underwriter of a particular offering to cut-back the number of shares being
registered, that the holder of the warrants requests. We will bear all fees,
costs and expenses of such registrations other than underwriting discounts,
commissions and the legal fees of the warrant holder. The rights of TLP Leasing
Programs, Inc. to have its common stock included in the registration statement
of which this prospectus is a part have lapsed.
DELAWARE LAW AND CERTAIN CERTIFICATE OF INCORPORATION AND BY-LAW PROVISIONS
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law. Subject to certain exceptions, Section 203 prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a certain period of time. That period is three
years from the date of the transaction in which the person became an interested
stockholder, unless the interested stockholder attained such status with the
approval of the board of directors or unless the business combination is
approved in a prescribed manner. A "business combination" includes
60
<PAGE>
certain mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. Subject to certain exceptions, an
"interested stockholder" is a person who, together with his or her affiliates
and associates, owns, or owned within three years prior, 15% or more of the
corporation's voting stock.
Our certificate of incorporation and by-laws provide for the division of the
board of directors into three classes, as nearly equal in size as possible, with
each class beginning its three-year term in different years. See
"Management-Executive Officers and Directors." A director may be removed only
for cause by the vote of a majority of the shares entitled to vote for the
election of directors.
Our by-laws provide that for nominations for the board of directors or for
other business to be properly brought by a stockholder before a meeting of
stockholders, the stockholder must first have given timely notice of the matter
in writing to our secretary. To be timely, a notice of nominations or other
business to be brought before an annual meeting must be delivered between
120 days and 150 days prior to date one year after the date of the preceding
year's proxy statement. If the date of the current year's annual meeting is more
than 30 days before or 60 days after such anniversary, or if no proxy statement
was delivered to stockholders in connection with the preceding year's annual
meeting, a stockholder's notice will be timely if it is delivered not earlier
than 90 days prior to the current year's annual meeting and not later than
60 days prior to the annual meeting or 10 days following the date on which
public announcement of the date of the annual meeting is first made by us,
whichever is later. With respect to special meetings, notice must generally be
delivered not more than 90 days prior to such meeting and not later than
60 days prior to such meeting or 10 days following the day on which public
announcement of the date of the annual meeting is first made by us, whichever is
later. The notice must contain, among other things, certain information about
the stockholder delivering the notice and, as applicable, background information
about each nominee or a description of the proposed business to be brought
before the meeting.
Our certificate of incorporation empowers the board of directors, when
considering a tender offer or merger or acquisition proposal, to take into
account factors in addition to potential economic benefits to stockholders.
These factors may include:
- comparison of the proposed consideration to be received by stockholders in
relation to the market price of our capital stock, the estimated current
value of our company in a freely negotiated transaction and the estimated
future value of our company as an independent entity;
- the impact of such a transaction on our employees, suppliers and customers
and its effect on the communities in which we operate; and
- the impact of such a transaction on our unique corporate culture and
atmosphere.
The provisions described above could make it more difficult for a
third-party to acquire, or discourage a third-party from acquiring control of
our company.
Our certificate of incorporation also provides that any action required or
permitted to be taken by our stockholders may be taken only at duly called
annual or special meetings of the stockholders, and that special meetings may be
called only by the chairman of the board of directors, a majority of the board
of directors or our president. These provisions could have the effect of
delaying until the next annual stockholders meeting stockholder actions that are
favored by the holders of a majority of the common stock. These provisions may
also discourage another person or entity from making a tender offer to our
stockholders for the common stock. This is because the person or entity making
the offer, even if it acquired a majority of our outstanding voting securities,
would be unable call a special meeting of the stockholders or to take action by
written consent. As a result, any desired actions they would like to take, such
as electing new directors or approving a merger, would have to wait until the
next duly called stockholders meeting.
61
<PAGE>
The Delaware General Corporation Law provides that the affirmative vote of a
majority of the shares entitled to vote on any matter is required to amend a
corporation's certificate of incorporation or by-laws, unless the corporation's
certificate of incorporation or by-laws, as the case may be, requires a greater
percentage. The certificate of incorporation requires the affirmative vote of
the holders of at least 67% of our outstanding voting stock to amend or repeal
any of the provisions our certificate of incorporation described above, or to
reduce the number of authorized shares of common stock and preferred stock. The
67% vote is also required to amend or repeal any of the provisions of our
by-laws that are described above. Our by-laws may also be amended or repealed by
a majority vote of the board of directors. The 67% stockholder vote would be in
addition to any separate class vote that might in the future be required
pursuant to the terms of any preferred stock that might be outstanding at the
time any amendments are submitted to stockholders.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the common stock is BankBoston, N.A.
62
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have outstanding 30,596,478 shares
of common stock assuming the exercise of all outstanding stock purchase warrants
but no exercise of the underwriters' over-allotment option and no exercise of
outstanding options under our stock incentive plans or other agreements. Of
these shares, the 6,800,000 shares sold in this offering will be freely
transferable without restriction or further registration under the Securities
Act, except for any shares held by an existing "affiliate" of ours, as such term
is defined by Rule 144 under the Securities Act. The remaining shares and
any shares purchased by affiliates in this offering, will be "restricted shares"
as defined in Rule 144.
In addition, substantially all of our option holders, warrant holders and
stockholders, and all of our officers and directors, have agreed under written
"lock-up" agreements not to sell any shares of common stock for 180 days after
the date of this prospectus without the prior written consent of BancBoston
Robertson Stephens Inc. See "Underwriting."
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
this offering, a person (or persons whose shares are aggregated) who owns shares
that were purchased from us or any affiliate at least one year previously,
including a person who may be deemed an affiliate of us, is entitled to sell
within any three-month period a number of shares that does not exceed the
greater of:
- 1% of the then outstanding shares of the common stock which will equal
approximately shares immediately after the completion of this
offering; or
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the date on which
notice of the sale is filed with the Securities and Exchange Commission.
Sales under Rule 144 must be made with the required notice and the
availability of current public information about us.
Any person or persons whose shares are aggregated, who is not deemed to have
been an affiliate of ours at any time during the 90 days preceding a sale, and
who owns shares within the definition of "restricted securities" under Rule 144
under the Securities Act that were purchased from us or any affiliate at least
two years previously, would be entitled to sell such shares under Rule 144(k)
without regard to the volume limitations, manner of sale provisions, public
information requirements, or notice requirements.
RULE 701
Rule 701 may be relied upon with respect to the resale of securities
originally purchased from us by our employees, directors, officers, consultants
or advisers prior to this offering. In addition, the Securities and Exchange
Commission has indicated that Rule 701 will apply to the typical stock options
granted by an issuer before it becomes a public company, along with the shares
acquired upon exercise of such options (including exercises after the date of
this prospectus). Securities issued in reliance on Rule 701 are restricted
securities and, subject to the contractual restrictions described above,
beginning 90 days after the date of this prospectus, may be sold by:
- persons other than affiliates, in ordinary brokerage transactions, and
- by affiliates under Rule 144 without compliance with its one-year holding
requirement.
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<PAGE>
SALES OF RESTRICTED SHARES
As a result of the foregoing regulations, beginning 90 days after the
closing of this offering, we expect that:
- 2,850,751 shares of common stock will be eligible for resale without
restriction under Rule 144(k) or Rule 701, of which 2,663,247 shares are
subject to lock-up agreements;
- upon the expiration of the lock-up agreements 180 days after the date of
this prospectus, an additional 15,143,499 shares of common stock,
including 14,916,999 shares of common stock held by affiliates of ours,
will become eligible for sale under Rule 144, subject to the volume and
other limitations of such rule;
- 5,467,747 shares of common stock will be eligible for sale under Rule 144
beginning on July 12, 2000 and 276,356 shares of common stock will be
eligible for sale under Rule 144 beginning on July 16, 2000.
- in addition, 58,125 shares of common stock acquired pursuant to the
exercise of warrants will be eligible for sale one year from the date the
warrants are exercised.
We have agreed not to offer, sell or otherwise dispose of any shares of
common stock or any securities convertible into or exercisable or exchangeable
for common stock or any rights to acquire common stock for a period of 180 days
after the date of this prospectus, without the prior written consent of the
representative of the Underwriters, subject to certain limited exceptions. See
"Underwriting."
After the completion of this offering, the holders of 16,056,603 shares of
common stock or their transferees would be entitled to have their shares
registered under the Securities Act. See "Description of Capital
Stock--Registration Rights." Registration of such shares under the Securities
Act would cause such shares to be freely tradable without restriction under the
Securities Act, except for shares purchased by affiliates immediately upon the
effectiveness of such registration, which could result in some of such shares
becoming eligible for sale in advance of the date set forth above.
In addition, we intend to file one or more registration statements under the
Securities Act covering the 5,700,000 shares of common stock covered by the 1997
Stock Incentive Plan. See "Management--1997 Stock Incentive Plan." Such
registration statements are expected to be filed within 90 days after the date
of this prospectus and will automatically become effective upon filing.
Following such filing, shares registered under such registration statements
will, subject to the 180-day lock-up agreements described above and Rule 144
volume limitations applicable to affiliates, be available for sale in the open
market upon the exercise of vested options 90 days after the effective date of
this prospectus. As of September 30, 1999, options to purchase an aggregate of
2,500,800 shares were issued and outstanding under the 1997 Stock Incentive
Plan.
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<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc., Hambrecht & Quist LLC and U.S. Bancorp Piper
Jaffray Inc., have severally agreed with us, subject to the terms and conditions
set forth in the underwriting agreement, to purchase from us the number of
shares of common stock set forth opposite their names below. The underwriters
are committed to purchase and pay for all shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ----------- ---------
<S> <C>
BancBoston Robertson Stephens Inc........................... 3,400,000
Hambrecht & Quist LLC....................................... 2,040,000
U.S. Bancorp Piper Jaffray Inc.............................. 1,360,000
---------
Total................................................... 6,800,000
=========
</TABLE>
The representatives have advised us that the underwriters propose to offer
the shares of common stock to the public at the initial public offering price
set forth on the cover page of this prospectus and to certain dealers at that
price less a concession of not in excess of $0.68 per share, of which $0.10 may
be reallowed to other dealers. After this offering, the public offering price,
concession and reallowance to dealers may be reduced by the representatives.
This reduction shall not change the amount of proceeds to be received by us as
stated on the cover page of this prospectus. The common stock is offered by the
underwriters as stated herein, subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part.
The underwriters have informed us that they do not intend to confirm sales
to any accounts over which they exercise discretionary authority.
OVER-ALLOTMENT OPTION. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 1,020,000 additional shares of common stock at the same price per
share as we will receive for the 6,800,000 shares that the underwriters have
agreed to purchase. If the underwriters exercise this option, each of the
underwriters will have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage of such additional shares that the
number of shares of common stock to be purchased by it shown in the above table
bears to the 6,800,000 shares of common stock offered in this offering. If
purchased, such additional shares will be sold by the underwriters on the same
terms as those on which the 6,800,000 shares offered in this offering are being
sold. We will be obligated, pursuant to the option, to sell shares to the
underwriters to the extent the option is exercised. The underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of the shares of common stock offered in this offering. If such option is
exercised in full, the total public offering price, underwriting discounts and
commissions and proceeds to us will be $125,120,000, $8,758,400 and
$116,361,600, respectively.
We estimate that the total expenses payable by us in connection with this
offering, other than the underwriting discounts and commissions referred to
above, will be approximately $1.4 million.
INDEMNITY. The underwriting agreement contains covenants of indemnity among
the underwriters and us against various civil liabilities, including liabilities
under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
LOCK-UP AGREEMENTS. Each executive officer, director, director-nominee, and
a substantial majority of our stockholders, agreed with the representatives for
a period of 180 days after the date of this prospectus, subject to certain
exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose
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<PAGE>
of, loan, pledge or grant any rights with respect to any shares of common stock,
any options or warrants to purchase any shares of common stock, or any
securities convertible into or exchangeable for shares of common stock, owned as
of the date of this prospectus or thereafter acquired directly by such holders
or with respect to which they have or hereafter acquire the power of
disposition, without the prior written consent of BancBoston Robertson
Stephens Inc. BancBoston Robertson Stephens Inc. may, in its sole discretion and
at any time or from time to time without notice, release all or any portion of
the securities subject to the lock-up agreements. There are no agreements
between the representatives and any of our stockholders who have executed a
lock-up agreement providing consent to the sale of shares prior to the
expiration of the lock-up period.
FUTURE SALES. In addition, we have agreed that during the 180 days after
the date of this prospectus we will not, subject to certain exceptions, without
the prior written consent of BancBoston Robertson Stephens Inc. (i) consent to
the disposition of any shares held by shareholders subject to lock-up agreements
prior to the expiration of the lock-up period or (ii) issue, sell, contract to
sell, or otherwise dispose of, any shares of common stock, any options or
warrants to purchase any shares of common stock or any securities convertible
into, exercisable for or exchangeable for shares of common stock other than the
sale of shares in this offering, the issuance of common stock upon the exercise
of outstanding options or warrants and the issuance of options under our
existing stock option and incentive plans, provided that those options do not
vest prior to the expiration of the lock-up period. See "Shares Eligible for
Future Sale."
LISTING. The common stock has been approved for quotation on the Nasdaq
National Market under the symbol "IBAS."
NO PRIOR PUBLIC MARKET. Prior to this offering, there has been no public
market for our common stock. Consequently, the initial public offering price for
the common stock offered hereby has been determined through negotiations between
us and the representatives of the underwriters. Among the factors considered in
such negotiations were prevailing market conditions, certain of our financial
information, market valuations of other companies that we and the
representatives believe to be comparable to us, estimates of our business
potential, the present state of our development and other factors deemed
relevant.
STABILIZATION. The representatives of the underwriters have advised us
that, pursuant to Regulation M under the Securities Act, certain persons
participating in this offering may engage in transactions, including stabilizing
bids, syndicate covering transactions or the imposition of penalty bids, that
may have the effect of stabilizing or maintaining the market price of the common
stock at a level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of shares of common stock on
behalf of the underwriters for the purpose of fixing or maintaining the price of
the common stock. A "syndicate covering transaction" is the bid for or the
purchase of the common stock on behalf of the underwriters to reduce a short
position incurred by the underwriters in connection with this offering. A
"penalty bid" is an arrangement permitting the representatives to reclaim the
selling concession otherwise accruing to an underwriter or syndicate member in
connection with this offering if the common stock originally sold by such
underwriter or syndicate member is purchased by the representatives in a
syndicate covering transaction and has therefore not been effectively placed by
such underwriter or syndicate member. The representatives have advised us that
such transactions may be effected on the Nasdaq National Market or otherwise
and, if commenced, may be discontinued at any time.
DIRECTED SHARE PROGRAM. At our request, the underwriters have reserved up
to 390,000 shares of common stock to be issued by us and offered for sale in
this offering, at the initial public offering price, to our directors, officers,
employees, business associates and related persons. The number of shares of
common stock available for sale to the general public will be reduced to the
extent such individuals purchase such reserved shares. Any reserved shares which
are not so purchased will be
66
<PAGE>
offered by the underwriters to the general public on the same basis as the other
shares offered in this offering.
SHARES ACQUIRED BY EMPLOYEES AND AFFILIATES OF BANCBOSTON ROBERTSON STEPHENS
INC., HAMBRECHT & QUIST LLC AND U.S. BANCORP PIPER JAFFRAY INC. In addition to
the underwriting discounts and commissions set forth above, certain employees
and other affiliates of BancBoston Robertson Stephens Inc., Hambrecht & Quist
LLC and U.S. Bancorp Piper Jaffray Inc., representatives of the underwriters,
acquired an aggregate of 68,648 shares of our Series C preferred stock in July
1999, at a purchase price of $4.37 per share, for an aggregate purchase price of
approximately $300,000. Under the rules of the National Association of
Securities Dealers, Inc., the acquisition of these shares at a price below the
initial public offering price is deemed to be additional compensation to the
underwriters. Based upon the initial public offering price of $16.00 per share,
this additional compensation to the underwriters amounts to approximately
$799,000.
Under the rules of the National Association of Securities Dealers, Inc., the
68,648 shares of common stock which will be held by these employees and
affiliates of BancBoston Robertson Stephens Inc., Hambrecht & Quist LLC and U.S.
Bancorp Piper Jaffray Inc., upon the completion of this offering may not be
sold, transferred, assigned or hypothecated for a period of one year from the
date of this prospectus, except to officers or partners (not directors) of the
underwriters and members of the selling group and/or their officers or partners.
67
<PAGE>
LEGAL MATTERS
Bingham Dana LLP, Boston, Massachusetts will pass upon the validity of the
common stock offered in this offering. The descriptions of the regulatory
requirements under the Communications Act of 1934, as amended, regulations
thereunder and state regulations set forth under "Risk Factors--Risks Related to
the Internet and Internet Telephony Industry" and "Business--Government
Regulation" have been included under the authority of Swidler Berlin Shereff
Friedman, LLP, Washington, D.C. as experts in telecommunications law. Investors
should not rely on Swidler Berlin Shereff Friedman, LLP with respect to any
other matters. Also, Hale and Dorr LLP, Boston, Massachusetts will pass upon
certain legal matters in connection with this offering for the underwriters.
Three attorneys at Bingham Dana LLP own, in the aggregate, 13,729 shares of our
common stock.
EXPERTS
Our consolidated balance sheets at December 31, 1997 and 1998,
September 30, 1999 and for the period from inception (August 2, 1996) to
December 31, 1996, the years ended December 31, 1997 and 1998 and the nine
months ended September 30, 1999 included in this prospectus and registration
statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in giving said
report.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1, including exhibits, schedules and amendments filed with
this registration statement, under the Securities Act with respect to the shares
of common stock to be sold in this offering. This prospectus does not contain
all of the information set forth in the registration statement and exhibits and
schedules thereto. For further information with respect to our Company and the
shares of common stock to be sold in this offering, reference is made to the
registration statement, including the exhibits and schedules thereto. Statements
contained in this prospectus as to the contents of any contract or other
document referred to herein, where that contract is an exhibit to the
registration statement, are qualified in all respects by the exhibit to which
the reference relates. Copies of the registration statement, including the
exhibits and schedules thereto, may be examined without charge at the public
reference room of the Securities and Exchange Commission, 450 Fifth Street, N.W.
Room 1024, Washington, DC 20549, and the Securities and Exchange Commission's
Regional Offices located at 500 West Madison Street, Suite 1400, Chicago, IL
60601, and 7 World Trade Center, 13(th) Floor, New York, NY 10048. Information
about the operation of the public reference room may be obtained by calling the
Securities and Exchange Commission at 1-800-SEC-0300. Copies of all or a portion
of the registration statement can be obtained from the public reference room of
the Securities and Exchange Commission upon payment of prescribed fees. Our
Securities and Exchange Commission filings, including our registration
statement, are also available to you on the Securities and Exchange Commission's
website (http://www.sec.gov).
As a result of this offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act of 1934, as amended, and
will file periodic reports, proxy statements and other information with the
Securities and Exchange Commission. We intend to furnish our stockholders with
annual reports containing audited financial statements and make available to our
stockholders quarterly reports for the first three quarters of each fiscal year
containing unaudited interim financial information.
68
<PAGE>
IBASIS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 1997 and
1998, September 30, 1999
and Pro Forma September 30, 1999.......................... F-3
Consolidated Statements of Operations for the Period from
Inception (August 2, 1996) to December 31, 1996, for the
Years Ended December 31, 1997 and 1998 and for the Nine
Months Ended September 30, 1998 (Unaudited) and 1999...... F-4
Consolidated Statements of Redeemable Convertible Preferred
Stock and Stockholders' Equity (Deficit) for the Period
from Inception (August 2, 1996) to December 31, 1996, for
the Years Ended December 31, 1997 and 1998 and for the
Nine Months Ended September 30, 1999 and Pro Forma
September 30, 1999........................................ F-5
Consolidated Statements of Cash Flows for the Period from
Inception (August 2, 1996) to December 31, 1996, for the
Years Ended December 31, 1997 and 1998 and for the Nine
Months Ended September 30, 1998 (Unaudited) and 1999...... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To iBasis, Inc.:
We have audited the accompanying consolidated balance sheets of
iBasis, Inc. (a Delaware corporation) (formerly VIP Calling, Inc.) and
subsidiaries as of December 31, 1997 and 1998 and September 30, 1999, and the
related consolidated statements of operations, redeemable convertible preferred
stock and stockholders' equity (deficit) and cash flows for the period from
inception (August 2, 1996) to December 31, 1996 and the years ended
December 31, 1997 and 1998 and for the nine months ended September 30, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
iBasis, Inc. and subsidiaries as of December 31, 1997 and 1998 and
September 30, 1999, and the results of their operations and their cash flows for
the period from inception (August 2, 1996) to December 31, 1996 and the years
ended December 31, 1997 and 1998 and the nine months ended September 30, 1999,
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
October 19, 1999
F-2
<PAGE>
IBASIS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
DECEMBER 31, -------------------------
------------------------ PRO FORMA
1997 1998 ACTUAL (NOTE 1(C))
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $1,688,993 $ 7,399,451 $15,983,033 $15,983,033
Accounts receivable, net of allowance for doubtful
accounts of approximately $0 and $127,000 at December
31, 1997 and 1998, and $560,000 at September 30, 1999... 29,820 1,084,623 3,440,434 3,440,434
Prepaid expenses and other current assets................. 73,382 245,644 815,630 815,630
---------- ----------- ----------- -----------
Total current assets................................ 1,792,195 8,729,718 20,239,097 20,239,097
---------- ----------- ----------- -----------
Property and equipment, at cost:
Network equipment......................................... 438,054 3,113,885 4,247,096 4,247,096
Equipment under capital lease............................. 199,696 343,990 9,654,983 9,654,983
Leasehold improvements.................................... 9,921 311,792 1,558,308 1,558,308
Computer software......................................... 14,721 145,626 570,280 570,280
Furniture and fixtures.................................... 9,983 44,555 127,679 127,679
---------- ----------- ----------- -----------
672,375 3,959,848 16,158,346 16,158,346
Less--Accumulated depreciation and amortization........... (18,554) (239,637) (2,111,341) (2,111,341)
---------- ----------- ----------- -----------
653,821 3,720,211 14,047,005 14,047,005
Other Assets................................................ 71,972 321,932 1,898,110 $ 1,898,110
---------- ----------- ----------- -----------
$2,517,988 $12,771,861 $36,184,212 $36,184,212
========== =========== =========== ===========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 251,706 $ 3,752,974 $ 3,468,334 $ 3,468,334
Accrued expenses.......................................... 103,976 483,539 3,395,725 3,395,725
Capital lease obligations, current portion................ 67,986 251,890 2,577,059 2,577,059
---------- ----------- ----------- -----------
Total current liabilities........................... 423,668 4,488,403 9,441,118 9,441,118
---------- ----------- ----------- -----------
Capital lease obligations, net of current portion........... 123,358 212,679 7,129,662 7,129,662
Minority interest (Note 4).................................. -- 49,000 -- --
Commitments (Note 8)
Redeemable convertible preferred stock:
Series B, $.001 par value--
Authorized--6,875,000 shares
Issued and outstanding--6,562,500 shares at
December 31, 1998 and September 30, 1999; no shares
pro forma (stated at redemption value)................ -- 10,719,205 11,191,705 --
Series C, $.001 par value--
Authorized--5,775,000
Issued and outstanding--no shares at December 31, 1997
and 1998; 5,744,103 at September 30, 1999; no shares
pro forma (stated at redemption value)................ -- -- 25,415,512 --
Stockholders' equity (deficit):
Series A convertible preferred stock, $.001 par value--
Authorized--1,256,875 shares
Issued and outstanding--805,250 shares at December 31,
1997; 1,250,000 shares at December 31, 1998 and
September 30, 1999 (preference in liquidation of
$3,750,000); no shares pro forma...................... 805 1,250 1,250 --
Common stock, $.001 par value--
Authorized--no shares at December 31, 1997 and 1998 and
September 30, 1999; 85,000,000 shares pro forma.......
Issued and outstanding--none at December 31, 1997 and
1998 and September 30, 1999, 23,738,353 pro forma..... -- -- -- 23,738
Class A common stock, $.001 par value--
Authorized--30,000,000 shares
Issued and outstanding--6,060,000 shares at
December 31, 1997 and 1998 and 6,181,750 at
September 30, 1999 (preference in liquidation of
$2,060,377); no shares pro forma...................... 6,060 6,060 6,182 --
Class B common stock, $.001 par value--
Authorized--1,500,000 shares
Issued and outstanding--1,500,000 shares at
December 31, 1997 and 1998 and September 30, 1999
(preference in liquidation of $499,950); no shares pro
forma................................................. 1,500 1,500 1,500 --
Additional paid-in capital................................ 2,964,389 4,022,059 5,609,458 42,201,869
Deferred Compensation..................................... -- -- (2,349,568) (2,349,568)
Accumulated deficit....................................... (1,001,792) (6,728,295) (20,262,607) (20,262,607)
---------- ----------- ----------- -----------
Total stockholders' equity (deficit)................ 1,970,962 (2,697,426) (16,993,785) 19,613,432
---------- ----------- ----------- -----------
$2,517,988 $12,771,861 $$36,184,212 $36,184,212
========== =========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-3
<PAGE>
IBASIS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(AUGUST 2, YEARS ENDED NINE MONTHS ENDED
1996) TO DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ------------------------ -------------------------
1996 1997 1998 1998 1999
------------ ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Net revenue.................... $ -- $ 127,425 $ 1,978,430 $ 573,209 $11,817,291
Operating expenses:
Data communications and
telecommunications......... -- 186,587 2,729,980 1,238,813 12,818,596
Research and development..... 76,152 317,992 1,887,403 1,128,394 4,406,412
Selling and marketing........ -- 97,463 1,160,448 668,385 3,567,297
General and administrative... -- 453,617 1,155,666 639,497 2,594,909
Depreciation and
amortization............... -- 18,554 363,821 211,461 1,889,776
Loss (gain) on disposal of
property and equipment..... -- -- 531,129 -- (15,297)
---------- ---------- ----------- ----------- -----------
Total operating expenses... 76,152 1,074,213 7,828,447 3,886,550 25,261,693
---------- ---------- ----------- ----------- -----------
Loss from operations....... (76,152) (946,788) (5,850,017) (3,313,341) (13,444,402)
Interest income................ -- 17,490 179,270 75,701 303,621
Interest expense............... -- (4,171) (52,983) (47,110) (445,949)
Other income (expense), net.... -- 7,829 (2,773) (2,773) 3,418
Minority interest in loss of
joint venture................ -- -- -- -- 49,000
---------- ---------- ----------- ----------- -----------
Net loss................... (76,152) (925,640) (5,726,503) (3,287,523) (13,534,312)
Accretion of dividends on
redeemable convertible
preferred stock.............. -- -- (219,205) (60,411) (786,272)
---------- ---------- ----------- ----------- -----------
Net loss applicable to
common stockholders...... $ (76,152) $ (925,640) $(5,945,708) (3,347,934) (14,320,584)
========== ========== =========== =========== ===========
Net loss per share (Note 1(f)):
Basic and diluted net loss
per share.................. $ (0.01) $ (0.15) $ (0.99) $ (0.56) $ (2.36)
========== ========== =========== =========== ===========
Basic and diluted weighted
average common shares
outstanding................ 6,000,000 6,005,877 6,022,551 6,021,264 6,057,549
========== ========== =========== =========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<PAGE>
IBASIS, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SERIES B REDEEMABLE SERIES C REDEEMABLE
CONVERTIBLE CONVERTIBLE SERIES A CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
------------------------- ------------------------- ----------------------
NUMBER OF REDEMPTION NUMBER OF REDEMPTION NUMBER OF $.001 PAR
SHARES VALUE SHARES VALUE SHARES VALUE
---------- ------------ ---------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Initial capitalization (August 2,
1996)............................... -- $ -- -- $ -- -- $ --
Net loss............................ -- -- -- -- -- --
---------- ------------ ---------- ------------ ---------- -------
Balance, December 31, 1996............ -- -- -- -- -- --
Issuance of Class A common stock.... -- -- -- -- -- --
Sale of Class B common stock, net of
issuance costs of approximately
$10,000........................... -- -- -- -- -- --
Sale of Series A convertible
preferred stock, net of issuance
costs of approximately $35,000.... -- -- -- -- 805,250 805
Net loss............................ -- -- -- -- -- --
---------- ------------ ---------- ------------ ---------- -------
Balance, December 31, 1997............ -- -- -- -- 805,250 805
Sale of Series A convertible
preferred stock................... -- -- -- -- 444,750 445
Sale of Series B redeemable
convertible preferred stock, net
of issuance costs of approximately
$57,000........................... 6,562,500 10,500,000 -- -- -- --
Accretion of dividends on Series B
redeemable convertible preferred
stock............................. -- 219,205 -- -- -- --
Net loss............................ -- -- -- -- -- --
---------- ------------ ---------- ------------ ---------- -------
Balance, December 31, 1998............ 6,562,500 10,719,205 -- -- 1,250,000 1,250
---------- ------------ ---------- ------------ ---------- -------
Sale of Series C redeemable
convertible preferred stock, net of
issuance cost of approximately
$50,100 -- -- 5,744,103 25,101,740 -- --
Compensation expense related to
employee stock option grant -- -- -- -- -- --
Exercise of Class A common stock
options -- -- -- -- -- --
Accretion of dividends on Series B
redeemable convertible preferred
stock -- 472,500 -- -- -- --
Accretion of dividends on Series C
redeemable convertible preferred
stock -- -- -- 313,772 -- --
Deferred compensation related to stock
options -- -- -- -- -- --
Amortization of deferred compensation -- -- -- -- -- --
Net Loss -- -- -- -- -- --
---------- ------------ ---------- ------------ ---------- -------
Balance, September 30, 1999 6,562,500 11,191,705 5,744,103 25,415,512 1,250,000 1,250
Pro forma conversion of preferred
stock and Class B common stock to
Class A common stock (6,562,500) (10,500,000) (5,744,103) (25,101,740) (1,250,000) (1,250)
Pro forma conversion of Class A common
stock into common stock -- -- -- -- -- --
Pro forma reclassification of
dividends on Series B and Series C
redeemable convertible preferred
stock -- (691,705) -- (313,772) -- --
Pro forma balance, September 30, 1999 -- $ -- -- $ -- -- $ --
========== ============ ========== ============ ========== =======
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK COMMON STOCK
------------------------- ----------------------- ---------------------- ADDITIONAL
NUMBER OF $.001 PAR NUMBER OF $.001 PAR NUMBER OF $.001 PAR PAID-IN
SHARES VALUE SHARES VALUE SHARES VALUE CAPITAL
----------- ----------- ----------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial capitalization (August 2,
1996)............................... -- $ -- 6,000,000 $ 6,000 -- $ -- $ 94,000
Net loss............................ -- -- -- -- -- -- --
----------- ----------- ----------- ------- ---------- ------- -----------
Balance, December 31, 1996............ -- -- 6,000,000 6,000 -- -- 94,000
Issuance of Class A common stock.... -- -- 60,000 60 -- -- 1,940
Sale of Class B common stock, net of
issuance costs of approximately
$10,000........................... -- -- -- -- 1,500,000 1,500 488,500
Sale of Series A convertible
preferred stock, net of issuance
costs of approximately $35,000.... -- -- -- -- -- -- 2,379,949
Net loss............................ -- -- -- -- -- -- --
----------- ----------- ----------- ------- ---------- ------- -----------
Balance, December 31, 1997............ -- -- 6,060,000 6,060 1,500,000 1,500 2,964,389
Sale of Series A convertible
preferred stock................... -- -- -- -- -- -- 1,333,806
Sale of Series B redeemable
convertible preferred stock, net
of issuance costs of approximately
$57,000........................... -- -- -- -- -- -- (56,931)
Accretion of dividends on Series B
redeemable convertible preferred
stock............................. -- -- -- -- -- -- (219,205)
Net loss............................ -- -- -- -- -- -- --
----------- ----------- ----------- ------- ---------- ------- -----------
Balance, December 31, 1998............ -- -- 6,060,000 6,060 1,500,000 1,500 4,022,059
----------- ----------- ----------- ------- ---------- ------- -----------
Sale of Series C redeemable
convertible preferred stock, net of
issuance cost of approximately
$50,100 -- -- -- -- -- -- (50,147)
Compensation expense related to
employee stock option grant -- -- -- -- -- -- 13,750
Exercise of Class A common stock
options -- -- 121,750 122 -- -- 25,728
Accretion of dividends on Series B
redeemable convertible preferred
stock -- -- -- -- -- -- (472,500)
Accretion of dividends on Series C
redeemable convertible preferred
stock -- -- -- -- -- -- (313,772)
Deferred compensation related to stock
options -- -- -- -- -- -- 2,384,340
Amortization of deferred compensation -- -- -- -- -- -- --
Net Loss -- -- -- -- -- -- --
----------- ----------- ----------- ------- ---------- ------- -----------
Balance, September 30, 1999 -- -- 6,181,750 6,182 1,500,000 1,500 5,609,458
Pro forma conversion of preferred
stock and Class B common stock to
Class A common stock -- -- 17,556,603 17,556 (1,500,000) (1,500) 35,586,934
Pro forma conversion of Class A common
stock into common stock 23,738,353 23,738 (23,738,353) (23,738) -- -- --
Pro forma reclassification of
dividends on Series B and Series C
redeemable convertible preferred
stock -- -- -- -- -- -- 1,005,477
Pro forma balance, September 30, 1999 23,738,353 $ 23,738 -- $ -- -- $ -- $42,201,869
=========== =========== =========== ======= ========== ======= ===========
<CAPTION>
TOTAL
STOCKHOLDERS'
UNEARNED ACCUMULATED EQUITY
COMPENSATION DEFICIT (DEFICIT)
------------- ------------ -------------
<S> <C> <C> <C>
Initial capitalization (August 2,
1996)............................... $ -- $ -- $ 100,000
Net loss............................ -- (76,152) (76,152)
----------- ------------ ------------
Balance, December 31, 1996............ -- (76,152) 23,848
Issuance of Class A common stock.... -- -- 2,000
Sale of Class B common stock, net of
issuance costs of approximately
$10,000........................... -- -- 490,000
Sale of Series A convertible
preferred stock, net of issuance
costs of approximately $35,000.... -- -- 2,380,754
Net loss............................ -- (925,640) (925,640)
----------- ------------ ------------
Balance, December 31, 1997............ -- (1,001,792) 1,970,962
Sale of Series A convertible
preferred stock................... -- -- 1,334,251
Sale of Series B redeemable
convertible preferred stock, net
of issuance costs of approximately
$57,000........................... -- -- (56,931)
Accretion of dividends on Series B
redeemable convertible preferred
stock............................. -- -- (219,205)
Net loss............................ -- (5,726,503) (5,726,503)
----------- ------------ ------------
Balance, December 31, 1998............ -- (6,728,295) (2,697,426)
----------- ------------ ------------
Sale of Series C redeemable
convertible preferred stock, net of
issuance cost of approximately
$50,100 -- -- (50,147)
Compensation expense related to
employee stock option grant -- -- 13,750
Exercise of Class A common stock
options -- -- 25,850
Accretion of dividends on Series B
redeemable convertible preferred
stock -- -- (472,500)
Accretion of dividends on Series C
redeemable convertible preferred
stock -- -- (313,772)
Deferred compensation related to stock
options (2,384,340) -- --
Amortization of deferred compensation 34,772 -- 34,772
Net Loss -- (13,534,312) (13,534,312)
----------- ------------ ------------
Balance, September 30, 1999 (2,349,568) (20,262,607) (16,993,785)
Pro forma conversion of preferred
stock and Class B common stock to
Class A common stock -- -- 35,601,740
Pro forma conversion of Class A common
stock into common stock -- -- --
Pro forma reclassification of
dividends on Series B and Series C
redeemable convertible preferred
stock -- -- 1,005,477
Pro forma balance, September 30, 1999 $(2,349,568) $(20,262,607) $ 19,613,432
=========== ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
<PAGE>
IBASIS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(AUGUST 2, YEARS ENDED NINE MONTHS ENDED
1996) DECEMBER 31, SEPTEMBER 30,
TO DECEMBER 31, ------------------------- --------------------------
1996 1997 1998 1998 1999
--------------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Cash flows from operating activities:
Net loss................................... $ (76,152) $ (925,640) $(5,726,503) $(3,287,523) $(13,534,312)
Adjustments to reconcile net loss to net
cash used in operating activities........
Depreciation and amortization.......... -- 18,554 363,821 211,461 1,889,776
(Gain) loss on disposal of property and
equipment............................ -- -- 531,129 - (15,297)
Compensation expense related to stock
option grant......................... -- -- -- - 13,750
Minority interest...................... -- -- 49,000 - (49,000)
Amortization of deferred
compensation......................... 34,772
Changes in current assets and
liabilities--........................
Accounts receivable.................. -- (29,820) (1,054,803) (151,882) (2,355,811)
Prepaid expenses and other current
assets............................. -- (73,382) (172,262) (32,755) (569,986)
Accounts payable..................... 11,564 240,142 3,501,268 422,761 (284,640)
Accrued expenses..................... -- 103,976 379,563 231,733 2,912,186
--------- ----------- ----------- ----------- ------------
Net cash used in operating
activities....................... (64,588) (666,170) (2,128,787) (2,606,205) (11,958,562)
--------- ----------- ----------- ----------- ------------
Cash flows from investing activities:
Purchases of property and equipment........ (33,844) (438,835) (3,522,070) (872,546) (2,498,970)
Increase in other assets................... -- (71,972) (249,960) (193,014) (1,576,178)
--------- ----------- ----------- ----------- ------------
Net cash used in investing
activities......................... (33,844) (510,807) (3,772,030) (1,065,560) (4,075,148)
--------- ----------- ----------- ----------- ------------
Cash flows from financing activities:
Net proceeds from issuance of Series A
convertible preferred stock.............. -- 2,380,754 1,334,251 1,334,251 --
Net proceeds from issuance of Series B
redeemable convertible preferred stock... -- -- 10,443,069 10,443,069 --
Net proceeds from issuance of Series C
redeemable convertible preferred stock... -- -- -- -- 25,051,593
Net proceeds from issuance of Class A
common stock............................. 100,000 2,000 -- - --
Net proceeds from issuance of Class B
common stock............................. -- 490,000 -- - --
Proceeds from exercise of stock options.... -- -- -- - 25,850
Payments on capital lease obligations...... -- (8,352) (166,045) (121,401) (460,151)
--------- ----------- ----------- ----------- ------------
Net cash provided by financing
activities......................... 100,000 2,864,402 11,611,275 11,656,219 24,617,292
--------- ----------- ----------- ----------- ------------
Net increase (decrease) in cash and cash
equivalents................................ 1,568 1,687,425 5,710,458 7,984,454 8,583,582
Cash and cash equivalents, beginning of
period..................................... -- 1,568 1,688,993 1,688,993 7,399,451
--------- ----------- ----------- ----------- ------------
Cash and cash equivalents, end of period..... $ 1,568 $ 1,688,993 $ 7,399,451 $9,673,447 15,983,033
========= =========== =========== =========== ============
Supplemental disclosure of cash flow
information:
Cash paid during the period for
interest........................... $ -- $ 4,114 $ 55,274 $ 47,109 $ 105,316
========= =========== =========== =========== ============
Supplemental disclosure of noncash investing
and financing activities:
Equipment acquired under capital
lease obligations.................. $ -- $ 199,696 $ 439,270 $ 439,271 $ 9,699,528
========= =========== =========== =========== ============
Accretion of dividends on Series B
redeemable convertible preferred
stock.............................. $ -- $ -- $ 219,205 $ 60,411 $ 472,500
========= =========== =========== =========== ============
Accretion of dividends on Series C
redeemable convertible preferred
stock.............................. $ -- $ -- $ -- $ -- $ 313,772
========= =========== =========== =========== ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-6
<PAGE>
IBASIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIOD)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
iBasis, Inc. (formerly VIP Calling, Inc.) (the Company) is a
facilities-based international telecommunications carrier that utilizes the
Internet to provide economical international telecommunications services to
carriers and telephony resellers around the world. The Company was originally
incorporated as a Delaware corporation on August 2, 1996 and was renamed VIP
Calling, Inc. on December 30, 1996. In July 1999, the Company amended its
Certificate of Incorporation to effect a name change from VIP Calling, Inc. to
iBasis, Inc. In March 1998, the Company entered into a joint venture agreement
with another company to operate in Hong Kong (see Note 4). In December 1998, the
Company established Ivanet LLC, a wholly owned subsidiary focusing on network
services. The Company currently operates through various service agreements with
local service providers in the United States, Europe, Asia, the Middle East,
Latin America and Africa.
The Company is subject to a number of risks common to companies in similar
stages of development, including dependence on key individuals and key vendors,
the need for adequate financing to fund future operations, the continued
successful development and marketing of its services and the attainment of
profitable operations.
The accompanying consolidated financial statements reflect the application
of certain significant accounting policies as described in this note and
elsewhere in these notes to consolidated financial statements.
(A) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
iBasis, Inc., iBasis Securities Corporation, Ivanet LLC and its majority owned
joint venture. All significant intercompany balances have been eliminated in
consolidation.
(B) INTERIM FINANCIAL STATEMENTS
The accompanying consolidated statements of operations and cash flows for
the nine months ended September 30, 1998 are unaudited, but in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of results for this interim
period. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted, although the Company believes that the disclosures
included are adequate to make the information presented not misleading. The
results of operations for the nine months ended September 30, 1998 and 1999 are
not necessarily indicative of the results to be expected for the entire fiscal
year or any other interim period.
(C) UNAUDITED PRO FORMA PRESENTATION
Upon the closing of the proposed initial public offering of the Company's
stock, the Company plans to amend its Certificate of Incorporation to require
automatic conversion of all issued and outstanding shares of Class A common
stock into a newly authorized series of common stock on a 1:1 basis.
The pro forma consolidated balance sheet as of September 30, 1999 and the
pro forma net loss per share for the year ended December 31, 1998 and for the
nine months ended September 30, 1999 reflect the conversion of all outstanding
shares of Series B and Series C redeemable convertible
F-7
<PAGE>
IBASIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIOD)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
preferred stock, Series A convertible preferred stock and Class B common stock
into 17,556,603 shares of Class A common stock and 23,738,353 shares of Class A
common stock into 23,738,353 shares of common stock, which will occur
automatically upon the closing of the Company's proposed initial public
offering.
(D) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
(E) REVENUE RECOGNITION
In 1997, revenue principally consisted of the resale of certain equipment
gateways to two unrelated companies. Revenue was recognized upon shipment of the
equipment. The resale of equipment was not a material component of the Company's
revenue during 1998 and 1999. In early 1998, the Company commenced the resale of
international minutes of calling time for calls resold through the Company's
gateways. Revenue from the resale of minutes is recognized in the period the
service is provided, net of reserves for potential billing credits.
(F) NET LOSS PER SHARE
Basic and diluted net loss per common share was determined by dividing net
loss by the weighted average common shares outstanding during the period. Basic
and diluted net loss per share are the same as outstanding common stock options
and warrants and the convertible preferred stock and Class B common stock are
antidilutive as the Company has recorded a net loss for all periods presented.
Options and warrants to purchase a weighted average total of 0, 114,441,
310,404, 327,107 and 1,599,739 Class A common shares have been excluded from the
computation of diluted weighted average common shares outstanding for the period
from inception (August 2, 1996) to December 31, 1996, the years ended
December 31, 1997 and 1998 and the nine months ended September 30, 1998 and
1999, respectively. Shares of Class A common stock issuable upon the conversion
of outstanding convertible preferred stock and the convertible Class B common
stock have also been excluded for all periods presented. In accordance with the
SEC Staff Accounting Bulletin No. 98, EARNINGS PER SHARE IN AN INITIAL PUBLIC
OFFERING, the Company determined that there were no nominal issuances of the
Company's common stock prior to the Company's planned initial public offering.
The calculation of pro forma net loss per common share assumes that all
Series B and Series C redeemable convertible preferred stock, Series A
convertible preferred stock and Class B common stock had been converted to
Class A common stock as of the issuance date and the proposed conversion of
Class A common stock into a newly authorized series of common stock on a 1:1
basis.
F-8
<PAGE>
IBASIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIOD)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table reconciles the weighted average common shares
outstanding to the shares used in the computation of basic and diluted and pro
forma basic and diluted weighted average common shares outstanding:
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(AUGUST 2, NINE MONTHS ENDED
1996) TO YEARS ENDED DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ------------------------ ---------------------------
1996 1997 1998 1998 1999
------------ ---------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Weighted average common shares
outstanding........................ 6,000,000 6,036,082 6,060,000 6,060,000 6,085,036
Less--Weighted average unvested
common shares outstanding.......... -- 30,205 37,449 38,736 27,487
---------- --------- ---------- ---------- ----------
Basic and diluted weighted average
common shares outstanding.......... 6,000,000 6,005,877 6,022,551 6,021,264 6,057,549
========== ========= ========== ========== ==========
Add--Weighted average common shares
issuable upon conversion of
preferred stock and Class A and B
common stock....................... 7,045,468 13,516,794
---------- ----------
Pro forma basic and diluted weighted
average common shares
outstanding........................ 13,068,019 19,574,343
========== ==========
Pro forma basic and diluted net loss
per share.......................... $ (0.44) $ (0.69)
========== ==========
</TABLE>
(G) CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments purchased with an original
maturity of 90 days or less at the time of purchase to be cash equivalents. At
December 31, 1997 and 1998 and September 30, 1999, cash equivalents included
money market accounts and commercial paper that are readily convertible into
cash.
F-9
<PAGE>
IBASIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIOD)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(H) PROPERTY AND EQUIPMENT
The Company provides for depreciation using the straight-line method by
charging to operations amounts estimated to allocate the cost of the property
and equipment over their estimated useful lives, as follows:
<TABLE>
<CAPTION>
ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
-------------------- -----------
<S> <C>
Network equipment 3 years
Equipment under capital lease Life of lease
Leasehold improvements Life of lease
Computer software 3 years
Furniture and fixtures 5 years
</TABLE>
(I) RESEARCH AND DEVELOPMENT EXPENSES
The Company charges research and development expenses to operations as
incurred.
(J) CONCENTRATION OF CREDIT RISK/SIGNIFICANT CUSTOMERS
Statement of Financial Accounting Standards (SFAS) No. 105, DISCLOSURE OF
INFORMATION ABOUT FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND
FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK, requires disclosure of
any significant off-balance-sheet and credit risk concentrations. The Company
has no significant off-balance-sheet concentrations such as foreign exchange
contracts, option contracts or other foreign hedging arrangements. The Company
maintains the majority of its cash and cash equivalent balances with one
financial institution. Two customers represented approximately 100%, 42% and 27%
of total accounts receivable at December 31, 1997 and 1998 and September 30,
1999, respectively. The following table represents customers that account for
more than 10% of net revenue in any of the periods reported:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------- -------------------------
1997 1998 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Customer A.................................. -- 7% -- 13%
Customer B.................................. -- 18% 2% 10%
Customer C.................................. -- 7% 13% 5%
Customer D.................................. -- 15% 36% --
Customer E.................................. -- 11% 5% 3%
Customer F.................................. 78% -- -- --
Customer G.................................. 18% -- -- --
</TABLE>
F-10
<PAGE>
IBASIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIOD)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(K) FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments consist principally of cash and cash equivalents,
accounts receivable, accounts payable and redeemable preferred stock. The
estimated fair value of these instruments approximates their carrying value.
(L) STOCK-BASED COMPENSATION
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires the
measurement of the fair value of stock options or warrants to be included in the
consolidated statements of operations or disclosed in the notes to consolidated
financial statements. The Company has determined that it will account for
stock-based compensation for employees under the intrinsic value-based method of
the Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES, and elect the disclosure-only alternative under SFAS
No. 123. The Company accounts for stock-based compensation for nonemployees
under the fair value method prescribed by SFAS No. 123. To date there have been
no material grants to nonemployees.
(M) COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, REPORTING COMPREHENSIVE INCOME. The Company does not have any
components of comprehensive income other than its reported net loss.
(N) LONG-LIVED ASSETS
The Company's long-lived assets consist primarily of property and equipment.
In accordance with SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, the Company has assessed the
realizability of these assets and has determined that there were no asset
impairments.
(O) RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, ACCOUNTING FOR THE COST OF
COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE. SOP 98-1 is effective
for financial statements for the years beginning after December 15, 1998. SOP
98-1 provides guidance regarding accounting for computer software developed or
obtained for internal use, including the requirement to capitalize specified
costs and amortization of such costs. The adoption of this standard has not had
a significant impact on the Company's financial results.
In April 1998, the AICPA issued SOP 98-5, REPORTING ON THE COSTS OF START-UP
ACTIVITIES. SOP 98-5 is effective for fiscal years beginning after December 15,
1998, and provides guidance on the financial reporting of start-up activities
and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. As the Company expensed these
costs as incurred, the adoption of this standard had no impact on the Company's
results of operations, financial position or cash flows.
F-11
<PAGE>
IBASIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIOD)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVES AND
HEDGING ACTIVITIES, which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. SFAS No. 133, as amended by SFAS No. 137, is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. As the Company
does not currently engage in derivatives or hedging transactions, there will be
no current impact to the Company's results of operations, financial position or
cash flows upon the adoption of SFAS No. 133.
(2) ACCRUED EXPENSES
Accrued expenses at December 31, 1997 and 1998 and September 30, 1999
consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- -------------
<S> <C> <C> <C>
Accrued professional fees................... $ 61,398 $ 72,500 $1,322,270
Accrued other............................... 42,578 411,039 2,073,455
-------- -------- ----------
$103,976 $483,539 $3,395,725
======== ======== ==========
</TABLE>
(3) INCOME TAXES
The Company had elected to be treated as an S corporation for income tax
purposes from incorporation until January 1997. Effective January 1, 1997, the
Company terminated its S corporation status and became a C corporation for
income tax purposes. The Company provides for income taxes in accordance with
SFAS No. 109, ACCOUNTING FOR INCOME TAXES. Under SFAS No. 109, deferred tax
assets and liabilities are recognized based on temporary differences between the
financial statement and tax bases of assets and liabilities using currently
enacted tax rates.
No provision for federal or state income taxes has been recorded, as the
Company incurred net operating losses for all periods presented. As of
September 30, 1999, the Company has net operating loss carryforwards of
approximately $19,570,000 available to reduce future federal and state income
taxes, if any. If not utilized, these carryforwards expire at various dates
through 2019. If substantial changes in the Company's ownership should occur, as
defined by section 382 of the Internal Revenue Code (the Code), there could be
annual limitations on the amount of carryforwards which can be realized in
future periods. The Company has completed several financings since its inception
and believes that it may have incurred an ownership change as defined under the
Code.
F-12
<PAGE>
IBASIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIOD)
(3) INCOME TAXES (CONTINUED)
The approximate income tax effects of each type of temporary difference and
carryforward are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1997 1998 1999
--------- ----------- --------------
<S> <C> <C> <C>
Net operating loss carryforwards......... $ 373,000 $ 2,636,000 7,880,000
Other temporary differences.............. (22,000) 38,000 200,000
Valuation allowance...................... (351,000) (2,674,000) (8,080,000)
--------- ----------- -----------
$ -- $ -- $ --
========= =========== ===========
</TABLE>
The Company has recorded a 100% valuation allowance against the net deferred
tax asset as of December 31, 1997 and 1998 and September 30, 1999, because the
future realizability of such asset is uncertain. The increase in the valuation
allowance during these periods primarily relates to the Company's net losses
recorded in each period.
(4) HONG KONG JOINT VENTURE
On March 28, 1998, the Company entered into an agreement to form a joint
venture, iBasis Hong Kong Limited (the Joint Venture), with Microworld Limited
(Microworld) for the purpose of establishing a business that will provide
telecommunications and other services to customers in Hong Kong. Microworld
assigned certain contracts and paid $49,000 of cash for a 49% ownership in the
Joint Venture. The Company paid $51,000 in cash for a 51% ownership in the Joint
Venture.
The Joint Venture will terminate upon the withdrawal of either party by
written notification, the mutual election to terminate the agreement, the
insolvency of either party, or the transfer of the shares of Microworld to the
Company. The joint venture agreement does not provide for the allocation of
losses, income, gains and distributions.
Because the Company has deemed that it has control over the Joint Venture,
it has consolidated the entity for financial statement presentation. As of
December 31, 1998, the Joint Venture had not commenced operations. The Company
has consolidated the Joint Venture and has recorded a minority interest of
$49,000 in the accompanying consolidated balance sheet at December 31, 1998. The
minority interest was reduced to zero in the nine months ended September 30,
1999 as the Joint Venture losses exceeded the invested amounts.
(5) LINE OF CREDIT
On June 18, 1999, the Company entered into a loan and security agreement
(the Agreement) with a bank which provides for a revolving line of credit (the
Revolver) and an equipment line of credit (the Equipment Line).
The Revolver allows the Company to borrow up to $1,500,000. The Revolver
expires in June 2000. Borrowings under the Revolver, collateralized by
substantially all assets of the Company, are payable at maturity and bear
interest at the bank's prime rate (8.25% at September 30, 1999) plus 1% per
annum. The Agreement requires the Company to maintain certain financial
covenants including a minimum
F-13
<PAGE>
IBASIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIOD)
(5) LINE OF CREDIT (CONTINUED)
quick ratio, tangible net worth and liquidity, as defined. The Agreement also
prohibits the payment of dividends. At September 30, 1999, there were no
borrowings under the Revolver.
The Company borrowed $505,634 under the Equipment Line during 1999 for
purposes of equipment purchases. Borrowings under the Equipment Line bear
interest at the bank's prime rate (8.25% at September 30, 1999) plus 1.5% and
are payable in thirty-six equal monthly installments of principal and interest
through August 2002. At September 30, 1999, there was no availability under the
Equipment Line. The amounts under this facility have been included in Capital
lease obligations in the accompanying consolidated balance sheet as of
September 30, 1999.
(6) REDEEMABLE CONVERTIBLE PREFERRED STOCK
In August 1998, the Company sold 6,562,500 shares of Series B redeemable
convertible preferred stock (Series B) for aggregate proceeds of $10,500,000. On
July 12, 1999 the Company sold 5,744,103 shares of Series C redeemable
convertible preferred stock (Series C) for aggregate proceeds of $25,101,740.
The rights, preferences and privileges of the Series B and Series C are as
follows:
VOTING
The holders of Series B and Series C are entitled to the number of votes
equal to the number of common shares into which the preferred shares are
convertible. The preferred shareholders vote together with the holders of common
stock as a single class, except where a separate class vote is otherwise
required by applicable law or the Certificate of Incorporation or bylaws.
DIVIDENDS
The holders of Series B and Series C are entitled to receive dividends, when
and if declared by the Board of Directors, and in preference and prior to any
dividend declared or paid on any shares of common stock in preference to the
holders of common stock. As of September 30, 1999, no dividends have been
declared by the Board of Directors.
LIQUIDATION PREFERENCE
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of Series B and Series C shall be
entitled to be paid out of the assets available for distribution an amount equal
to the greater of $1.60 and $4.37 per share, respectively, plus any declared but
unpaid dividends or the amount that would be distributed to each preferred
stockholder if all shares of Series B and Series C were converted to Class A
common shares. If the assets of the Company are insufficient to pay the full
preferential amounts to the preferred stockholders, the assets shall be
distributed ratably among the outstanding shares of Series B and Series C in
proportion to its aggregate liquidation preference amounts.
F-14
<PAGE>
IBASIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIOD)
(6) REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
CONVERSION
Series B and Series C are convertible at the option of the holders into
Class A common stock by dividing the then-applicable Series B conversion price
($1.60 as of September 30, 1999) by $1.60 and the then-applicable Series C
conversion price ($4.37 as of September 30, 1999) by $4.37. All shares of
Series B and Series C shall automatically be converted into common stock upon
the closing of a public offering of the Company's common stock at an offering
price of at least $10.00 per share yielding aggregate gross proceeds to the
Company of at least $25,000,000. Automatic conversion shall also take place upon
the closing of a public offering upon a vote of 60% of the holders of Series A
and B. All outstanding shares of Series C shall be automatically converted into
shares of Class A upon the consent of the holders of a majority of the
outstanding shares of Series C voting as a separate class and series.
REDEMPTION
At any time on or after August 26, 2003, upon receipt of written request for
redemption from holders of at least 60% of the shares of Series B or Series C
then outstanding, the Company will redeem all of the outstanding shares of
Series B and Series C in three equal annual installments at a redemption price
of $1.60 and $4.37 per share, respectively, plus any declared but unpaid
dividends. For the purpose of redemption, the Series B and Series C will have an
annual 6% accrued dividend. As of September 30, 1999, cumulative dividends on
Series B and Series C totaled $1,005,477. These dividends are not included for
purposes of conversion. It is expected that based upon the proposed initial
public offering the Series B and Series C will be converted into Class A common
stock and, therefore, these dividends have been reclassified to additional
paid-in capital in the pro forma consolidated balance sheet as of September 30,
1999.
(7) STOCKHOLDERS' EQUITY (DEFICIT)
(A) AUTHORIZED CAPITAL STOCK
Effective July 12, 1999, the authorized capital stock of the Company
increased to 45,406,875, consisting of 31,500,000 shares of common stock, $0.001
par value per share, of which 30,000,000 and 1,500,000 shares have been
designated Class A common stock (Class A) and Class B common stock (Class B),
respectively, and 13,906,875 shares of preferred stock, $0.001 par value per
share, of which 1,256,875 shares are designated Series A convertible preferred
stock (Series A), 6,875,000 shares are designated Series B and 5,775,000 shares
are designated Series C.
(B) SERIES A CONVERTIBLE PREFERRED STOCK
During 1997 and 1998, the Company sold an aggregate of 1,250,000 shares of
Series A for aggregate proceeds of $3,750,000.
The rights, preferences and privileges of the Series A are as follows:
VOTING
The holders of Series A are entitled to the number of votes equal to the
number of common shares into which the preferred shares are convertible. The
preferred shareholders vote together with
F-15
<PAGE>
IBASIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIOD)
(7) STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
the holders of common stock as a single class, except where a separate class
vote is otherwise required by applicable law or the Certificate of Incorporation
or bylaws.
DIVIDENDS
The holders of Series A are entitled to receive dividends, when and if
declared by the Board of Directors, and in preference and prior to any dividend
declared or paid on any shares of common stock in preference to the holders of
common stock. As of September 30, 1999, no dividends have been declared by the
Board of Directors.
LIQUIDATION PREFERENCE
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of Series A shall be entitled to be paid
out of the assets available for distribution an amount equal to the greater of
$3.00 per share plus any declared but unpaid dividends or the amount that would
be distributed to each preferred stockholder if all shares of Series A were
converted to Class A common shares. If the assets of the Company are
insufficient to pay the full preferential amounts to the preferred stockholders,
the assets shall be distributed ratably among the outstanding shares of, first,
Series B, and second, Series A, in proportion to their aggregate liquidation
preference amounts.
CONVERSION
Series A is convertible at the option of the holders into Class A common
stock by dividing the then-applicable Series A conversion price ($1.00 as of
September 30, 1999) by $.33. All shares of preferred stock shall automatically
be converted into common stock upon the closing of a public offering of the
Company's common stock at an offering price of at least $10.00 per share
yielding aggregate gross proceeds to the Company of at least $25,000,000.
Automatic conversion shall also take place upon the closing of a public offering
upon a vote of 60% of the holders of Series A.
(C) COMMON STOCK
The Company's Board of Directors approved a 40-for-1 common stock split in
February of 1997 and a 3-for-1 common stock split in December of 1997, which
have been retroactively reflected in the accompanying consolidated financial
statements.
The rights, preferences and privileges of the Class A and Class B are as
follows:
VOTING
The holders of Class A and Class B are entitled to one vote for each share
of stock owned. The common shareholders shall vote as a single class, together
with the holders of Series A and Series B, except where a separate class vote is
otherwise required by applicable law or the Certificate of Incorporation or
bylaws.
F-16
<PAGE>
IBASIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIOD)
(7) STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
DIVIDENDS
Holders of Class B are entitled to dividends, when and if declared by the
Board of Directors, equal to an aggregate of $.33 per share (the Priority
Dividend) prior to any dividends being declared or paid to holders of Class A,
subject to the preferential dividend rights of holders of the Series A and B
preferred stock. Class A is not entitled to any priority dividend. After the
Priority Dividend has been paid, holders of Class A and Class B are entitled to
receive equal dividends, when and if declared by the Board of Directors. As of
September 30, 1999, no dividends have been declared by the Board of Directors.
LIQUIDATION PREFERENCE
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, and subject to the preferential rights of the holders
of Series A and B, the holders of Class B have a liquidation preference over the
holders of Class A of $.33 per share less any Priority Dividend previously paid.
The holders of Class A will then be entitled to a distribution amount of $.33
per share. Any remaining assets of the Company shall be distributed ratably
among the holders of Class A and B. If assets of the Company are insufficient to
pay the full amount to the common stockholders, the assets shall be distributed
ratably among the common stockholders in proportion to, and in order of their
rights to, their aggregate liquidation amounts.
CONVERSION
Holders of Class B can at any time convert their Class B shares for the same
number of shares of Class A. Shares of Class B will be mandatorily converted
upon the closing of a public offering of the Company's stock or a two-thirds
vote by the Class B shareholders. Upon the closing of the proposed initial
public offering of the Company's stock, the Company plans to amend its
Certificate of Incorporation to require automatic conversion of all issued and
outstanding shares of Class A common stock into a newly authorized series of
common stock on a 1:1 basis.
RESTRICTED STOCK AWARD
In connection with a restricted stock award, the Company signed an agreement
with one of its employees stipulating that if the shareholder's employment with
the Company terminates, the Company will have the right to repurchase any
unvested shares for $.0333 per share which was the fair value of the stock on
the date of grant. The shares vest at a rate of 25% per year. At September 30,
1999, there were 22,500 unvested shares under this agreement.
STOCK REPURCHASE AGREEMENT
In connection with the issuance of Series B, the Company signed an agreement
with two of the shareholders that stipulates that if either shareholder's
employment with the Company terminates prior to August 26, 2000, the Company
will have the right to repurchase any unvested Class A shares at fair market
value, as determined by the Board of Directors. At the signing of this
agreement, 55% of each of these shareholders' Class A shares were vested
immediately, with 5.625% vesting every three months. At September 30, 1999,
there were 1,251,000 unvested shares under this agreement.
F-17
<PAGE>
IBASIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIOD)
(7) STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
(D) STOCK INCENTIVE PLAN
The Company's 1997 Stock Incentive Plan (the Plan) provides for the granting
of restricted stock awards and incentive stock options (ISOs) and nonqualified
options to purchase up to 5,700,000 shares of Class A to key employees,
directors and consultants. Under terms of the Plan, the exercise price of
options granted shall be determined by the Board of Directors and for ISOs shall
not be less than fair market value of the stock on the date of grant. Options
vest in sixteen equal installments on each of the first sixteen three-month
anniversaries of the date of grant, provided that no options shall vest during
the optionee's first year of employment. The term of each stock option shall be
determined by the Board of Directors, but shall not exceed 10 years from the
date of grant.
The following table summarizes the option activity for the years ended
December 31, 1997 and 1998 and the nine months ended September 30, 1999:
<TABLE>
<CAPTION>
WEIGHTED
EXERCISE AVERAGE
NUMBER OF PRICE PER EXERCISE
SHARES SHARE PRICE
--------- --------- --------
<S> <C> <C> <C>
Outstanding, January 1, 1997.................. -- $ -- $ --
Granted..................................... 342,300 .03 .03
--------- --------- -----
Outstanding, December 31, 1997................ 342,300 .03 .03
Granted..................................... 1,186,600 .50-1.10 .70
Terminated.................................. (200,000) .50 .50
--------- --------- -----
Outstanding, December 31, 1998................ 1,328,900 .03-1.10 .56
Granted..................................... 1,489,300 1.00-5.00 3.68
Exercised................................... (121,750) .03-50 .21
Terminated.................................. (195,650) .50-1.50 .78
--------- --------- -----
Outstanding, September 30, 1999............... 2,500,800 $.03-5.00 $2.42
========= ========= =====
Exercisable, September 30, 1999............... 278,219 $.03-4.00 $ .68
========= ========= =====
</TABLE>
F-18
<PAGE>
IBASIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIOD)
(7) STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
The following table summarizes information relating to currently outstanding
and exercisable stock options as of September 30, 1999:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------------------------ --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
PRICES SHARES LIFE (YEARS) PRICE SHARES PRICE
- --------------------- --------- ------------ --------- --------- --------
<S> <C> <C> <C> <C> <C>
0$.03 267,300 7.86 $0.03 96,150 $0.03
0.50-0.65 425,800 8.84 0.54 101,269 0.52
1.00-1.10 475,800 9.21 1.03 61,875 1.04
1.50 196,000 9.56 1.50 3,081 1.50
4.00 649,300 9.70 4.00 15,844 4.00
5.00 486,600 9.95 5.00 -- --
--------- -------
2,500,800 278,219
--------- -------
</TABLE>
At September 30, 1999, options to purchase 3,062,450 shares of Class A were
available for future grants under the Plan.
The Company applies the accounting provisions prescribed in APB No. 25 and
related Interpretations. During September 1999, the Company issued stock options
with an exercise price less than the fair market value of the common stock as
determined for accounting purposes. Accordingly, total deferred compensation
related to these stock options of approximately $2,384,000 was recorded during
the nine months ended September 30, 1999, and is being amortized over the
vesting period of the options, generally over four years. Amortization of
deferred compensation of approximately $35,000 has been recognized as an expense
in the nine months ended September 30, 1999. Prior to September 1999, the
Company had not issued stock options with an exercise price less than the fair
market value.
(E) EMPLOYEE STOCK PURCHASE PLAN
On September 9, 1999, the Company's board of directors and stockholders
approved the 1999 iBasis, Inc. employee stock purchase plan (the "Purchase
Plan"), which enables eligible employees to acquire shares of the Company's
common stock through payroll deductions. The Purchase Plan is intended to
qualify as an employee stock purchase plan under Section 423 of the Internal
Revenue Code. The initial public offering period will start on the date of this
prospectus and will end on June 30, 2000, unless otherwise determined by the
board of directors. Subsequent offerings under the Purchase Plan are planned to
start on January 1 and July 1 of each year and end on June 30 and December 31 of
each year. During each offering period, an eligible employee may select a rate
of payroll deduction of from 1% to 10% of compensation, up to an aggregate of
$12,500 in any offering period. The purchase price for common stock purchased
under the Purchase Plan is 85% of the lesser of the fair market value of the
shares on the first or last day of the offering period. An aggregate of 500,000
shares of common stock have been reserved for issuance under the Purchase Plan.
F-19
<PAGE>
IBASIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIOD)
(7) STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
(F) PREFERRED STOCK WARRANTS
The Company has granted warrants for the purchase of Series A and Series B
to an equipment leasing company. At September 30, 1999, warrants for the
purchase of 6,875 shares of Series A and 37,500 shares of Series B were
outstanding at an exercise price per share of $3.00 and $1.00, respectively. At
September 30, 1999, 6,875 and 37,500 warrants were exercisable for Series A and
Series B, respectively. The value of these warrants was calculated and deemed to
be not material to the financial statements.
(G) STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which requires the measurement
of the fair value of stock options or warrants to be included in the statements
of operations or disclosed in the notes to the financial statements. The Company
has determined that it will continue to account for stock-based compensation for
employees under the Accounting Principles Board Opinion No. 25 and elect the
disclosure-only alternative under SFAS No. 123 for options granted in 1997, 1998
and 1999, using the Black-Scholes option pricing model prescribed by SFAS
No. 123.
The weighted average assumptions are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------- -----------------------
1997 1998 1998 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(UNAUDITED)
Risk-free interest rate......................... 6.16% 4.99% 5.35% 5.69%
Expected dividend yield......................... -- -- -- --
Expected lives.................................. 5 years 5 years 5 years 5 years
Volatility...................................... 60% 60% 60% 60%
Weighted average remaining contractual life..... 9.62 years 9.49 years 8.42 years 9.30 years
Weighted average fair value of options
granted....................................... $0.02 $0.39 $0.29 $3.64
</TABLE>
Had compensation expense from the Company's stock incentive plan been
determined consistent with SFAS No. 123, net loss and net loss per share would
have been approximately as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------- --------------------------
1997 1998 1998 1999
--------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Net loss applicable to common stockholders--
As reported............................... $(925,640) $(5,945,708) $(3,347,934) $(14,320,584)
Pro forma................................. (926,282) (5,979,305) (3,368,258) (14,601,312)
Pro forma diluted......................... (5,760,100) (13,534,312)
Basic and diluted net loss per share--
As reported............................... $ (0.15) $ (0.99) $ (0.56) $ (2.36)
Pro forma................................. (0.15) (0.99) (0.56) (2.41)
Pro forma diluted......................... (0.44) (0.69)
</TABLE>
F-20
<PAGE>
IBASIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIOD)
(8) COMMITMENTS
In 1998, the Company entered into an agreement with a leasing company under
which the Company will be able to finance up to $15,000,000 of equipment
purchases with monthly payment terms over the life of each lease. Each
outstanding lease bears interest at an annual rate of 13.6% and has a 36-month
term. As of September 30, 1999, the Company had approximately $6,864,000
available under the leasing agreement.
During 1997, 1998 and 1999, the Company entered into various lease
agreements with another leasing company. Each outstanding lease bears interest
at an annual rate ranging from 10.5%-13.0% and has a term ranging from 24-36
months. As of September 30, 1999, the Company had approximately $900,000
outstanding under these lease agreements and $500,000 available for future
borrowings.
The Company leases its facilities and certain equipment under both operating
and capital leases that expire through 2009. The approximate future minimum
payments under these leases as of September 30, 1999 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR LEASES LEASES
- ---- ---------- -----------
<S> <C> <C>
1999, 3 months...................................... $ 128,574 $ 779,199
2000................................................ 623,236 4,465,382
2001................................................ 623,236 4,702,599
2002................................................ 664,088 1,963,585
2003................................................ 682,078 --
Thereafter.......................................... 1,645,668 --
---------- -----------
Total future minimum lease payments................. $4,366,880 11,910,765
==========
Less--Amounts representing interest................. 2,204,044
-----------
Present value of obligations........................ 9,706,721
Less--Current portion............................... 2,577,059
-----------
$ 7,129,662
===========
</TABLE>
Rent expense included in the consolidated statements of operations was
approximately $0, $83,000, $69,000, $121,000 and $341,000 for the period from
inception (August 2, 1996) to December 31, 1996, the years ended December 31,
1997 and 1998 and the nine months ended September 30, 1998 and 1999,
respectively.
(9) SEGMENT AND GEOGRAPHIC INFORMATION
The Company has adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, in the fiscal year ended December 31, 1998.
SFAS No. 131 establishes standards for reporting information regarding operating
segments in annual financial statements and requires selected information for
those segments to be presented in interim financial reports issued to
stockholders. SFAS No. 131 also establishes standards for related disclosures
about products and services and geographic areas. Operating segments are
identified as components of an enterprise about which separate discrete
financial information is available for evaluation by the chief operating
decision maker, or decision-making group, in deciding how to allocate resources
and assess performance. The
F-21
<PAGE>
IBASIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIOD)
(9) SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
Company's chief decision-maker, as defined under SFAS No. 131, is a combination
of the Chief Executive Officer and the Chief Financial Officer. To date, the
Company has viewed its operations and manages its business as principally one
segment, international telecommunication services. Associated services are not
significant. As a result, the financial information disclosed herein represents
all of the material financial information related to the Company's principal
operating segment.
The following table represents percentage revenue from individual countries:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------- -------------------
1997 1998 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
US.......................................................... --% 86% 80% 95%
Hong Kong................................................... 17 -- -- --
Japan....................................................... 79 -- -- --
Singapore................................................... -- -- 9 --
Greece...................................................... -- -- 9 --
Other....................................................... 4 14 2 5
---- ---- ---- ----
100% 100% 100% 100%
==== ==== ==== ====
</TABLE>
The following table represents percentage of minute revenue for traffic sent
to the specified geographic destinations:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------- -------------------
1997 1998 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Asia...................................................... 100% 56% 56% 52%
Latin America............................................. -- 14 14 15
Middle East............................................... -- 14 14 19
United States............................................. -- 12 12 --
Europe.................................................... -- -- -- 8
Other..................................................... -- 4 4 6
--- --- --- ---
100% 100% 100% 100%
=== === === ===
</TABLE>
As of September 30, 1999, there was approximately $840,000 of equipment held
at our joint venture (see Note 4).
(10) RELATED PARTY
In November 1997, $115,000 of consulting fees were paid to a holder of
Series A and B for services rendered. These fees paid to this related party are
included in general and administrative expenses in the accompanying consolidated
financial statements.
For the year ended December 31, 1998 and nine months ended September 30,
1999, the Company paid approximately $415,000 and $99,000, respectively, to a
related party, Microworld Limited (see
F-22
<PAGE>
IBASIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIOD)
(10) RELATED PARTY (CONTINUED)
Note 9) for services rendered. These fees paid to this related party are
included in data communications and telecommunications costs in the accompanying
consolidated financial statements.
(11) VALUATION AND QUALIFYING ACCOUNTS
The following is a rollforward of the Company's allowance for doubtful
accounts:
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING OF BALANCE AT
PERIOD ADDITIONS DEDUCTIONS END OF PERIOD
------------ --------- ---------- -------------
<S> <C> <C> <C> <C>
Period from inception through December 31,
1996.......................................... $ -- $ -- $ -- $ --
======== ======== ======== ========
Year ended December 31, 1997.................... $ -- $ -- $ -- $ --
======== ======== ======== ========
Year ended December 31, 1998.................... $ -- $126,741 $ -- $126,741
======== ======== ======== ========
Nine months ended September 30, 1999............ $126,741 $437,078 $ (4,000) $559,819
======== ======== ======== ========
</TABLE>
F-23
<PAGE>
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<PAGE>
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