<PAGE>
Filed pursuant to
Rule No. 424(b)(4)
Registration No. 333-96533
$150,000,000
[LOGO]
5 3/4% CONVERTIBLE SUBORDINATED NOTES DUE 2005
The notes are convertible at any time prior to maturity into common stock at
a conversion price of $86.14 per share, subject to adjustment upon certain
events.
Interest is payable on each March 15 and September 15, beginning
September 15, 2000. The notes mature on March 15, 2005. The notes are
subordinated to our senior indebtedness.
We may redeem some or all of the notes on or after March 20, 2003 at the
redemption prices listed in this prospectus, plus accrued interest. Prior to
that date, we may redeem some or all of the notes if the price of our common
stock has exceeded 150% of the conversion price for at least 20 out of 30
consecutive trading days prior to redemption. If we redeem some or all of the
notes prior to March 20, 2003 we will also make an additional payment on the
redeemed notes. You may require us to repurchase your notes upon a repurchase
event in cash or, at our option, common stock, at 105% of the principal amount
of the notes, plus accrued interest.
Our common stock is quoted on the Nasdaq National Market under the symbol
"IBAS." The last reported sales price of our common stock on the Nasdaq National
Market on March 9, 2000 was $73.078 per share.
------------------------
INVESTING IN OUR CONVERTIBLE NOTES INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
------------------------
<TABLE>
<CAPTION>
PER NOTE TOTAL
-------- -----
<S> <C> <C>
Public Offering Price....................................... 100.0% $150,000,000
Underwriting Discounts...................................... 3.0% $ 4,500,000
Proceeds to iBasis ......................................... 97.0% $145,500,000
</TABLE>
The initial public offering price set forth above does not include accrued
interest, if any. Interest on the notes will accrue from March 15, 2000 and must
be paid by the purchaser if the notes are purchased after March 15, 2000.
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 $22,500,000 aggregate principal amount of notes. The underwriters
expect to deliver the notes in book-entry form only through the facilities of
the Depository Trust Company against payment in New York, New York on March 15,
2000.
Concurrently with this note offering, we are offering 3,500,000 shares of
our common stock, under a separate prospectus, consisting of 2,026,637 shares to
be sold by us and 1,473,363 shares to be sold by selling stockholders. Neither
completion of this note offering nor completion of the concurrent common stock
offering is contingent upon completion of the other.
------------------------
ROBERTSON STEPHENS
<PAGE>
CHASE H&Q
U.S. BANCORP PIPER JAFFRAY
DAIN RAUSCHER WESSELS
THE DATE OF THIS PROSPECTUS IS MARCH 9, 2000.
<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 Internet branch offices, Internet central offices 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, NOTES 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 NOTES.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Summary..................................................... 2
Risk Factors................................................ 6
Forward-Looking Statements.................................. 17
Use of Proceeds............................................. 18
Dividend Policy............................................. 18
Ratio of Earnings to Fixed Charges.......................... 18
Price Range of Common Stock................................. 19
Concurrent Offering of Common Stock......................... 20
Capitalization.............................................. 20
Selected Consolidated Financial Data........................ 21
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 22
Business.................................................... 33
Management.................................................. 47
Certain Transactions........................................ 56
Principal Stockholders...................................... 59
Description of Notes........................................ 62
Description of Capital Stock................................ 75
United States Federal Income Tax Considerations............. 78
Shares Eligible for Future Sale............................. 82
Underwriting................................................ 84
Legal Matters............................................... 86
Experts..................................................... 86
Where You Can Find More Information......................... 86
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
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 NOTES.
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 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 "Internet branch offices" strategically
located in major cities in North America, Asia, Latin
America, Europe and Africa. Internet branch offices 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 3,200 lines deployed internationally through
our relationships with communications service providers
around the world. During our fourth quarter ended
December 31, 1999, we transported approximately 63.8
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 is based on industry standards, which allows for fast
and efficient deployment of call completion and other
value-added services.
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
Our Market.............. According to International Data Corporation, a market
research firm, 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
e-commerce and other enhanced services such as unified
communications. Wholesale worldwide Internet telephony,
including wholesale international Internet telephony, is
expected to grow to $2.0 billion by the same date. In
addition, International Data Corporation projects that
international Internet telephony will comprise $17.3 billion
of the total $18.7 billion market in 2004. 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 December 31, 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.
RECENT DEVELOPMENTS
Since our initial public offering in November 1999, we have announced
several developments:
- On December 6, 1999, we announced that we would begin offering Internet
telephony hosting services on the iBasis Network. These services will
provide customers with access to a turnkey solution that enables them to
quickly begin offering voice, fax, pre-paid calling and other value-added
Internet telephony services in our international markets with minimal
capital investment.
- On January 19, 2000, we announced that we will be offering service level
agreements to our international customers, which guarantee customers
sending calls over our network call completion rates equivalent to or
better than those provided by alternative networks, including the
public-switched telephone network.
- On February 3, 2000, we announced our intention to deploy Cisco Systems'
uOne-TM- application on the iBasis Network, thereby allowing
communications service providers to provide unified communications
services to their end-user customers over our network.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered........................ $150 million principal amount of 5 3/4% Convertible
Subordinated Notes due 2005, or notes, which may increase
to up to $172.5 million principal amount of notes if the
underwriters exercise their over-allotment option.
Interest.................................. Interest is payable at the rate of 5 3/4% per year on each
March 15 and September 15, beginning on September 15,
2000.
Maturity.................................. March 15, 2005.
Conversion................................ The notes are convertible at the option of the holder at
any time prior to maturity into common stock at a
conversion price of $86.14 per share, subject to adjustment
upon certain events.
Provisional Redemption.................... We may redeem some or all of the notes at any time prior to
March 20, 2003 if the price of our common stock has
exceeded 150% of the conversion price for at least 20 out
of 30 consecutive trading days prior to redemption. If we
redeem some or all of the notes prior to March 20, 2003, we
will also make an additional payment on the redeemed notes
equal to $152.54 per $1,000 note, minus the amount of any
interest we actually paid on the note. See "Description of
Notes -- Provisional Redemption."
Optional Redemption....................... We may redeem some or all of the notes after March 20, 2003
at the declining redemption prices listed in this
prospectus, plus accrued and unpaid interest.
Repurchase at holder's option upon a
repurchase event........................ You may require us to repurchase your notes upon a
repurchase event in cash, or, at our option upon
satisfaction of certain conditions, in common stock, at
105% of the principal amount of the notes, plus accrued and
unpaid interest.
Ranking................................... The notes are subordinated to our senior indebtedness. As
of December 31, 1999, we had approximately $16.1 million of
senior indebtedness outstanding. The notes will also be
effectively subordinated in right of payment to all
indebtedness and other liabilities of our subsidiaries. We
are not limited from incurring additional debt under the
indenture for the notes.
Use of proceeds........................... We will use the net proceeds from this offering for general
corporate and working capital purposes, including the
purchase of capital equipment in connection with the
deployment of new services.
Trading................................... Our common stock is traded on the Nasdaq National Market
under the symbol "IBAS."
</TABLE>
CONCURRENT OFFERING OF COMMON STOCK
We plan to offer in a separate and concurrent public offering 3,500,000
shares of our common stock of which 2,026,637 shares will be offered by us and
1,473,363 shares will be offered by selling stockholders, or 2,440,045 shares
and 1,584,955 shares if the underwriters' overallotment option is exercised in
full. Neither completion of this note offering nor completion of the concurrent
common stock offering is contingent upon completion of the other.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
Listed below is our consolidated statements of operations data for the years
ended December 31, 1997, 1998 and 1999. You will also find our consolidated
balance sheet data at December 31, 1999. 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 reflects the sale as of December 31, 1999, of $150,000,000
aggregate principal amount of notes offered by iBasis in this offering, after
deducting the estimated underwriting discount and our estimated offering
expenses. The "Pro Forma" data does not reflect the sale of 2,026,637 shares of
common stock in the concurrent offering.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenue................................................. $ 127 $ 1,978 $ 19,417
Total operating expenses.................................... 1,074 7,824 41,049
Loss from operations........................................ (947) (5,846) (21,632)
Net loss.................................................... (926) (5,727) (21,087)
Net loss applicable to common stockholders.................. (926) (5,946) (22,107)
Basic and diluted net loss per share........................ $ (0.15) $ (0.99) $ (2.29)
Basic and diluted weighted average common shares
outstanding (1)........................................... 6,006 6,023 9,655
Pro forma basic and diluted net loss
per share (1) (2)......................................... $ (0.44) $ (0.97)
Pro forma basic and diluted weighted average common shares
outstanding (1) (2)....................................... 13,068 21,651
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
--------------------
ACTUAL PRO FORMA
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $123,666 $268,566
Working capital............................................. 115,154 260,054
Total assets................................................ 153,473 303,473
Long-term debt.............................................. -- 150,000
Capital lease obligations, net of current portion........... 11,689 11,689
Total stockholders' equity.................................. 126,904 126,904
</TABLE>
- --------------------------
(1) Computed on the basis described in Note 1(d) of the notes to our
consolidated financial statements appearing elsewhere in this prospectus.
(2) Adjusted to give effect to the conversion of all shares of preferred stock,
Class A and Class B common stock from the date of original issuance.
5
<PAGE>
RISK FACTORS
ANY INVESTMENT IN OUR NOTES 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
NOTES.
RISKS RELATED TO OUR OPERATIONS
WE HAVE A LIMITED OPERATING HISTORY UPON WHICH TO BASE YOUR INVESTMENT DECISION,
AND YOU MAY INACCURATELY ASSESS OUR PROSPECTS FOR SUCCESS.
We were incorporated in August 1996 and first began to offer commercial
services in May 1997. Due to our limited operating history, it is difficult for
us to predict future results of operations. Moreover, we cannot be sure that we
have accurately identified all of the risks to our business, especially because
we use new, and in many cases, unproven technologies and provide new services.
As a result, our past results and rates of growth may not be a meaningful
indicator of our future results of operations. Also, your assessment of the
prospects for our success may prove inaccurate.
WE HAVE A HISTORY OF OPERATING LOSSES, ANTICIPATE LOSSES FOR THE FORESEEABLE
FUTURE AND MAY NEVER BECOME PROFITABLE.
We incurred net losses of $21.1 million during fiscal 1999. As of
December 31, 1999, we had an accumulated deficit of $27.8 million. We expect to
continue incurring operating losses and negative cash flows as we incur
significant operating expenses and make capital investments in our business. Our
future profitability will depend on our being able to deliver calls over our
network at a cost to us that is less than what we are able to charge for our
calls. Our costs to deliver calls are dependent on a number of factors,
including the countries to which we direct calls and whether we are able to use
the Internet, rather than another component of our network or more expensive
back-up networks, to deliver calls. The prices that we are able to charge to
deliver calls over our network vary, based primarily on the prices currently
prevailing in the international long distance carrier market to specific
countries. While we are currently able to terminate a substantial number of the
calls carried over our network profitably on an operating basis, we have been
unable to operate our entire network profitably on an operating basis for
sustained periods of time. We may not ever generate sufficient revenues, or
reduce costs, to permit us to achieve profitability. Even if we do become
profitable, we may not sustain or increase profitability on a quarterly or
annual basis in the future. See "Selected 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 NOTES AND 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;
6
<PAGE>
- our ability to negotiate changes in the termination fees charged by our
local providers when our margins deteriorate;
- capital expenditures required to expand or upgrade our network;
- changes in call volume among the countries to which we complete calls;
- technical difficulties or failures of our network systems or third-party
delays in expansion or provisioning system problems;
- our ability to offer value-added services that are appealing to the
market; and
- currency fluctuations in countries where we operate.
Because of these factors, you should not rely on quarter-to-quarter
comparisons of our results of operations as an indication of our future
performance. It is possible that, in future periods, our results of operations
will be significantly lower than the estimates of public market analysts and
investors. Such a discrepancy could cause the price of our notes and 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, INCLUDING ANY NEW
SERVICES, IN SUFFICIENT VOLUME.
If the market for Internet telephony and new services does not develop as we
expect, or develops more slowly than expected, our business, financial condition
and results of operations will be materially and adversely affected.
Our customers may be reluctant to use our services for a number of reasons,
including:
- perceptions that the quality of voice transmitted over the Internet is
low;
- perceptions that Internet telephony is unreliable; and
- our inability to deliver traffic over the Internet with significant cost
advantages.
The growth of our business depends on carriers and other communications
service providers generating an increased volume of international voice and fax
traffic and selecting our network to carry at least some of this traffic. If the
volume of international voice and fax traffic fails to increase, or decreases,
and these third-parties do not employ our network, our ability to become
profitable will be materially and adversely affected.
On February 3, 2000, we announced our intention to deploy Cisco Systems'
uOne-TM- application on the iBasis Network, thereby allowing communications
service providers to provide unified communications services to their end-user
customers over our network. We cannot assure you that communications service
providers and their end-user customers will be receptive to, and subscribe for,
any unified communications services we are able to offer, or any other
additional services we elect to deploy on our network. Any perceived problems
with the reliability or functionality of any new services that we offer could
discourage communications service providers from offering these services to
their customers. In addition, the development of new services, such as unified
communications, may require substantial capital expenditures to be made well in
advance of generating any revenue from such services or demonstrating any market
acceptance of such services. If carriers and communications service providers do
not employ our network to offer any new services to their customers, or if their
customers do not subscribe for the services when offered, our financial
condition and results of operations will be materially adversely affected.
We cannot assure you that end-users will continue to purchase services from
our customers or that our customers will maintain a demand for our services.
7
<PAGE>
WE MAY FACE QUALITY AND CAPACITY PROBLEMS OVER OUR NETWORK UPON FAILURES BY
THIRD PARTIES.
VENDORS. We rely upon third-party vendors to provide us with the equipment
and software that we use to transfer and translate calls from traditional voice
networks to the Internet, and vice versa. For example, we purchase substantially
all of our Internet telephony equipment from Cisco Systems. We cannot assure you
that we will be able to continue purchasing such equipment and software from
Cisco on acceptable terms, if at all. If we become unable to purchase from Cisco
the equipment needed to maintain and expand our network as currently configured,
we may not be able to maintain or expand our network to accommodate growth and
we may consequently be unable to grow revenues sufficiently to become
profitable.
PARTIES THAT MAINTAIN PHONE AND DATA LINES. Our business model depends on
the availability of the Internet to transmit voice and fax calls, and to provide
other value-added services. Third parties maintain, and in many cases own, the
traditional voice networks as well as data networks and other components that
comprise the Internet. Some of these third parties are national telephone
companies. They may increase their charges for using these lines at any time and
decrease our profitability. They may also fail to properly maintain their lines
and disrupt our ability to provide service to our customers. Any failure by
these third parties to maintain these lines and networks that leads to a
material disruption of our ability to complete calls over the Internet could
discourage our customers from using our network, which could have the effect of
delaying or preventing our ability to become profitable.
LOCAL COMMUNICATIONS SERVICE PROVIDERS. We maintain relationships with
local communications service providers in many countries, some of whom own the
equipment that translates voice to data in that country. We rely upon these
third parties to both provide lines over which we complete calls and to increase
their capacity when necessary as the volume of our traffic increases. There is a
risk that these third parties may be slow, or fail, to provide lines, which
would affect our ability to complete calls to those destinations. We cannot
assure you that we will be able to continue our relationships with these local
service providers on acceptable terms, if at all. Because we rely upon entering
into relationships with local service providers to expand into additional
countries, we cannot assure you that we will be able to increase the number of
countries to which we provide service. We also may not be able to enter into
relationships with enough overseas local service providers to handle increases
in the volume of calls that we receive from our customers. Finally, any
technical difficulties that these providers suffer would affect our ability to
transmit calls to the countries that those providers help serve.
STRATEGIC RELATIONSHIPS. We depend in part on our strategic relationships
to expand our distribution channels and develop and market our services. In
particular, we depend in large part on our joint marketing and product
development efforts with Cisco Systems to achieve market acceptance and 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
8
<PAGE>
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."
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 fiscal year ended December 31, 1999, 49% of our revenue was
generated by delivering calls to Asian countries, 18% of our revenue was
generated by delivering calls to Middle Eastern countries, and 22% of our
revenue was generated by delivering calls to Latin America. Many countries in
these geographic regions have experienced political and economic instability
over the past decade. Repeated political or economic instability in countries to
which we deliver substantial volumes of traffic could lead to difficulties in
completing calls through our regional service providers or decreased call volume
to such countries.
9
<PAGE>
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 and operating systems and
controls. We may need to redesign several internal systems. Our attention to
these matters may distract us from other aspects of our business. Moreover,
failure to implement new systems and controls may hamper our ability to provide
services to customers and may impair the quality of our services which could
result in the loss of customers.
OUR REVENUE WOULD DECLINE SIGNIFICANTLY IF WE LOSE ONE OR MORE OF OUR MOST
SIGNIFICANT CUSTOMERS.
We generate much of our revenue from a limited number of customers. During
the fiscal year ended December 31, 1999, three customers, World Access Telecom
Group, MCI WorldCom and WorldxChange Communications, accounted for approximately
29% of our net revenue. Customers may discontinue their use of our services at
any time, and without notice. Therefore, in any given quarter, we would lose a
significant amount of revenue if we lost one or more major customers.
WE DEPEND ON OUR KEY PERSONNEL AND MAY HAVE DIFFICULTY ATTRACTING AND RETAINING
THE SKILLED EMPLOYEES WE NEED TO EXECUTE OUR GROWTH PLANS.
WE DEPEND HEAVILY ON OUR KEY MANAGEMENT. Our future success will depend, in
large part, on the continued service of our key management and technical
personnel, including Ofer Gneezy, our President and Chief Executive Officer,
Gordon VanderBrug, our Executive Vice President, Michael Hughes, our Chief
Financial Officer, John Henson, our Vice President, Engineering and Operations
and Charles Giambalvo, our Senior Vice President of Worldwide Sales. If any of
these individuals is unable or unwilling to continue in their present positions,
our business, financial condition and results of operations would suffer. We do
not carry key person life insurance on our personnel. While each of the
individuals named above has entered into an employment agreement with us, these
agreements do not ensure their continued employment with us.
WE WILL NEED TO ATTRACT SKILLED PERSONNEL TO EXECUTE OUR GROWTH PLANS. Our
future success will depend, in large part, on our ability to attract, retain and
motivate highly skilled employees, particularly engineering and technical
personnel. Competition for such employees in our industry is intense. We
10
<PAGE>
have from time to time in the past experienced, and we expect to continue to
experience in the future, difficulty in hiring and retaining employees with
appropriate qualifications. We may not be able to retain our employees or
attract, assimilate or retain other highly qualified employees in the future. If
we do not succeed in attracting and retaining skilled personnel, we may not be
able to grow at a sufficient rate to attain profitable operations.
A FAILURE TO OBTAIN NECESSARY ADDITIONAL CAPITAL IN THE FUTURE ON ACCEPTABLE
TERMS COULD PREVENT US FROM EXECUTING OUR BUSINESS PLAN.
We expect to need additional capital in the future to fund our operations,
finance investments in equipment and corporate infrastructure, expand our
network, increase the range of services we offer and respond to competitive
pressures and perceived opportunities. Cash flow from operations, cash on hand
and funds from this offering may not be sufficient to cover our operating
expenses and capital investment needs. We cannot assure you that additional
financing will be available on terms acceptable to us, if at all. A failure to
obtain additional funding could prevent us from making expenditures that are
needed to allow us to grow or maintain our operations.
If we raise additional funds by selling equity securities, the relative
equity ownership of our existing investors could be diluted or the new investors
could obtain terms more favorable than previous investors. If we raise
additional funds through debt financing, we could incur significant borrowing
costs. The failure to obtain additional financing when required could result in
us being unable to grow as required to attain profitable operations.
IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, OUR COMPETITIVE POSITION
WOULD BE ADVERSELY AFFECTED.
We rely on trademark and copyright law, trade secret protection and
confidentiality and/or license agreements with our employees, customers,
partners and others to protect our intellectual property. Despite our
precautions, however, unauthorized third parties may copy our services or
reverse engineer or obtain and use information that we regard as proprietary.
End-user license provisions protecting against unauthorized use, copying,
transfer and disclosure of any licensed program may be unenforceable under the
laws of certain jurisdictions and foreign countries. While we do not have any
patents pending, we may seek to patent certain software or equipment in the
future. We do not know if any of our future patent applications will be issued
with the scope of the claims we seek, if at all. In addition, the laws of some
foreign countries do not protect proprietary rights to the same extent as do the
laws of the United States. Our means of protecting our proprietary rights in the
United States or abroad may not be adequate and third parties may infringe or
misappropriate our copyrights, trademarks and similar proprietary rights. If we
fail to protect our intellectual property and proprietary rights, our business,
financial condition and results of operations would suffer.
We believe that we do not infringe upon the proprietary rights of any third
party, and no third party has asserted a patent infringement claim against us.
It is possible, however, that such a claim might be asserted successfully
against us in the future. Our ability to provide our services depends on our
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.
11
<PAGE>
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. While we have not experienced disruptions as a result of year
2000 issues to date, as yet unidentified problems could arise and result in
system failures, delays or miscalculations causing disruptions to our
operations.
The failure of our network or of any systems maintained by third parties to
be year 2000 compliant could:
- cause a complete disruption of our Internet telephony services to any or
all countries;
- cause a disruption of our billing cycles;
- cause us to incur significant expenses to remedy any problems;
- impose unmanageable burdens on our technical support staff; and
- cause customers or partners to be dissatisfied with our network and
services.
For a more detailed discussion on the 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
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<PAGE>
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.
WE CANNOT BE CERTAIN THAT OUR ABILITY TO PROVIDE OUR COMMUNICATIONS SERVICES
USING THE INTERNET WILL NOT BE ADVERSELY AFFECTED BY COMPUTER VANDALISM.
Recently, computer vandals have caused certain leading Internet sites to
shut down temporarily and have materially affected the performance of the
Internet during key business hours by bombarding targeted sites with numerous
false requests for data. While we do not operate any websites like those
recently affected, we do rely on the Internet to deliver our international
communications services. If the overall performance of the Internet is seriously
downgraded by such website attacks or other acts of computer vandalism, our
ability to deliver our communication services over the Internet could be
adversely impacted, which could cause us to have to increase the amount of
traffic we have to carry over alternative networks, including the more costly
public-switched telephone network. In addition, traditional business
interruption insurance may not cover losses we could incur because of any such
disruption of the Internet. While some insurers are beginning to offer insurance
products purporting to cover these losses, we do not have any of this insurance
at this time.
INTERNATIONAL GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES COULD LIMIT OUR
ABILITY TO PROVIDE OUR SERVICES OR MAKE THEM MORE EXPENSIVE.
The regulatory treatment of Internet telephony outside of the United States
varies widely from country to country. A number of countries currently prohibit
or limit competition in the provision of traditional voice telephony services.
Some countries prohibit, limit or regulate how companies provide Internet
telephony. Some countries have indicated they will evaluate proposed Internet
telephony service on a case-by-case basis and determine whether to regulate it
as a voice service or as another telecommunications service, and in doing so
potentially imposing settlement rates on Internet telephony providers. Finally,
many countries have not yet addressed Internet telephony in their legislation or
regulations. Increased regulation of the Internet and/or Internet telephony
providers, or the prohibition of Internet telephony in one or more countries,
could limit our ability to provide our services or make them more expensive.
In addition, as we make our services available in foreign countries, and as
we work to enable sales by our customers to end-users in foreign countries, such
countries may claim that we are required to qualify to do business in that
particular country, that we are otherwise subject to regulation, including
requirements to obtain authorization, or that we are prohibited in all cases
from conducting our
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<PAGE>
business in that foreign country. Our failure to qualify as a foreign
corporation in a jurisdiction in which we are required to do so or to comply
with foreign laws and regulations could seriously restrict our ability to
provide services in such jurisdiction, or limit our ability to enforce contacts
in that jurisdiction. Our customers also currently are, or in the future may
become, subject to these same requirements. We cannot assure you that our
customers are currently in compliance with any such requirements or that they
will be able to continue to comply with any such requirements. The failure of
our customers to comply with applicable laws and regulations could prevent us
from being able to conduct business with them. Additionally, it is possible that
laws may be applied by the United States and/or other countries to transport
services provided over the Internet, including laws governing:
- sales and other taxes;
- user privacy;
- pricing controls;
- characteristics and quality of products and services;
- consumer protection;
- cross-border commerce, including laws that would impose tariffs, duties
and other import restrictions;
- copyright, trademark and patent infringement; and
- claims based on the nature and content of Internet materials, including
defamation, negligence and the failure to meet necessary obligations.
If foreign governments or other bodies begin to regulate or prohibit
Internet telephony, this regulation could have a material adverse effect on our
ability to attain or maintain profitability.
WE MAY BE REQUIRED TO SUSPEND OR DISCONTINUE OUR OPERATIONS IN ISRAEL WHICH
WOULD PREVENT US FROM GENERATING REVENUE BY COMPLETING CALLS TO THAT COUNTRY.
On October 6, 1999, our Israeli operations manager received a letter from
the Israel Ministry of Communications alleging that our termination in Israel of
international calls placed with calling cards from outside Israel and carried
over the Internet, as described on our website, constituted the unauthorized
provision of telecommunications services under Israeli law. This letter stated
that we must immediately cease to supply these services. We and our Israeli
telecommunications counsel initiated discussions with the Ministry of
Communications, however the Ministry has not pursued this matter further. As of
the date of this 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. In the
event that we are unable to prevail in our discussions with the Ministry of
Communications, we may be forced to suspend or permanently discontinue our
operations in Israel. If we are required to suspend or permanently discontinue
our operations in Israel, we will no longer be able to generate revenue from the
termination of international traffic in Israel and our ability to increase our
net revenue and achieve profitability will be adversely affected. For the period
from inception, August 2, 1996, to December 31, 1996 and the years ended
December 31, 1997, 1998 and 1999, we generated net revenue from our operations
in Israel of approximately $0, $0, $261,000, and $2.2 million, respectively.
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THE TELECOMMUNICATIONS INDUSTRY IS SUBJECT TO DOMESTIC GOVERNMENTAL
REGULATION AND LEGAL UNCERTAINTIES WHICH COULD PREVENT US FROM EXECUTING OUR
BUSINESS PLAN.
While the Federal Communications Commission has tentatively decided that
information service providers, including Internet telephony providers, are not
telecommunications carriers for regulatory purposes, various companies have
challenged that decision. Congress is dissatisfied with the conclusions of the
FCC and the FCC could impose greater or lesser regulation on our industry. The
FCC is currently considering, for example, whether to impose surcharges or other
regulations upon certain providers of Internet telephony, primarily those that,
unlike us, provide Internet telephony services to end-users located within the
United States.
Aspects of our operations may be, or become, subject to state or federal
regulations governing universal service funding, disclosure of confidential
communications, copyright and excise taxes. We cannot assure you that government
agencies will not increasingly regulate Internet-related services. Increased
regulation of the Internet may slow its growth. This regulation may also
negatively impact the cost of doing business over the Internet and materially
adversely affect our ability to attain or maintain profitability.
RISKS RELATING TO THE OFFERING
THE NOTES ARE SUBORDINATED TO OUR SENIOR INDEBTEDNESS.
The notes are unsecured and subordinated to our senior indebtedness. As a
result, we will not be able to make payments on the notes until we have paid in
full all of our senior indebtedness in the event of our insolvency, liquidation,
reorganization or payment default on senior indebtedness. We may, therefore, not
have sufficient assets to pay the amounts due on the notes. Neither we nor our
subsidiaries are prohibited from incurring debt under the notes indenture. If we
incur additional debt, our ability to pay amounts due on the notes could be
adversely affected. As of December 31, 1999, we had approximately $16.1 million
of senior indebtedness. We may also incur additional debt in the future.
The notes are obligations exclusively of iBasis. Our cash flow and our
ability to service our debt, including the notes, is partially dependent upon
the earning of our subsidiaries. In addition, we are partially dependent on the
distribution of earnings, loans or other payments by our subsidiaries to us. Our
subsidiaries are separate and distinct legal entities. Our subsidiaries have no
obligation to pay any amounts due on the notes or to provide us with funds for
our payment obligations, whether by dividends, distributions, loans or other
payments. In addition, any payment of dividends, distributions, loans or
advances by our subsidiaries to us could be subject to statutory or contractual
restrictions. Payments to us by our subsidiaries will also be contingent upon
our subsidiaries' earnings and business considerations.
Our right to receive any assets of any subsidiary upon its liquidation or
reorganization, and, therefore your right to participate in those assets, will
be effectively subordinated to the claims of that subsidiary's creditors,
including trade creditors. In addition, even if we were a creditor of any of our
subsidiaries, our rights as a creditor would be subordinate to any security
interest in the assets of our subsidiaries and any indebtedness of our
subsidiaries senior to that held by us. As of December 31, 1999, our
subsidiaries had no obligations to which the notes are effectively subordinated.
WE MAY BE REQUIRED TO REPURCHASE THE NOTES UPON A REPURCHASE EVENT.
You may require us to repurchase all or any portion of your notes upon a
repurchase event. A repurchase event includes a change in control or a delisting
of the common stock into which the notes are convertible. We may not have
sufficient cash funds to repurchase the notes upon a repurchase event. We may
elect, subject to specified conditions, to pay the repurchase price in common
stock.
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Although there are currently no restrictions on our ability to pay the
repurchase price, future debt agreements may prohibit us from repaying the
repurchase price in either cash or common stock. If we are prohibited from
repurchasing the notes we could seek consent from our lenders to repurchase the
notes. If we are unable to obtain their consent, we could attempt to refinance
the notes. If we were unable to obtain a consent or refinance, we would be
prohibited from repurchasing the notes. If we were unable to repurchase the
notes upon a repurchase event, it would result in an event of default under our
indenture. An event of default under the indenture could result in a further
event of default under our other then-existing debt. In addition, the occurrence
of the repurchase event may be an event of default under our other debt. As a
result, we would be prohibited from paying amounts due on the notes under the
subordination provisions of the indenture.
WE WILL BE SUBSTANTIALLY INCREASING OUR INDEBTEDNESS.
As a result of the sale of the notes, we will incur $150 million of
additional indebtedness assuming that the underwriters' over-allotment option is
not exercised, increasing our ratio of debt to equity, expressed as a
percentage, from approximately 12.7% to approximately 130.9% as of December 31,
1999 on a pro forma basis giving effect to the sale of the notes. Our principal
and interest payment obligations will increase substantially as a result of this
indebtedness. There is a possibility that we may be unable to generate cash
sufficient to pay the principal, interest and other amounts due in respect of
our own indebtedness when due. We may also obtain additional long-term debt and
working capital lines of credit to meet future financing needs. There can be no
assurance that additional financing arrangements will be available on
commercially reasonable terms or at all. Our substantial leverage could have
significant negative consequences, including:
- increasing our vulnerability to general adverse economic and industry
conditions;
- limiting our ability to obtain additional financing;
- requiring the dedication of a substantial portion of our expected cash
flow from operations to service our indebtedness, thereby reducing the
amount of our expected cash flow available for other purposes, including
capital expenditures;
- limiting our flexibility in planning for, or reacting to, changes in our
business and the industry in which we compete; and
- placing us at a possible competitive disadvantage in relation to less
leveraged competitors and competitors that have better access to capital
resources.
WE MAY NOT BE ABLE TO PAY OUR DEBT AND OTHER OBLIGATIONS.
Our cash flow generated during the year ended December 31, 1999 would have
been insufficient to pay the amount of interest payable annually on the notes,
and there can be no assurance that we will be able to pay interest and other
amounts due on the notes as and when they become due and payable. If our cash
flow is inadequate to meet our obligations, we could face substantial liquidity
problems. If we are unable to generate sufficient cash flow or otherwise obtain
funds necessary to make required payments on the notes or our other obligations,
we would be in default under their terms, which would permit the holders of the
notes to accelerate the maturity of the notes and could also cause defaults
under current indebtedness or future indebtedness we may incur. Any default
could have a material adverse effect on our business, prospects, financial
condition and operating results. In addition, there can be no assurance that we
would be able to repay amounts due on the notes if payment of the notes were to
be accelerated following the occurrence of an event of default as defined in the
notes indenture.
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THERE IS NO PUBLIC MARKET FOR THE NOTES.
There has been no trading market for the notes prior to this offering.
Although the underwriters have advised us that they intend to make a market in
the notes, they are not obligated to make a market in the notes. The
underwriters could stop making a market at any time without notice. Accordingly,
no market for the notes may develop, and any market that develops may not last.
We do not intend to apply for listing of the notes on any security exchange or
other stock market.
ANY RATING OF THE NOTES MAY CAUSE THEIR TRADING PRICE TO FALL.
We believe that one or more rating agencies may rate the notes. If the
rating agencies rate the notes, they may assign a lower rating than expected by
investors. Rating agencies may also lower ratings on the notes in the future. If
the rating agencies assign a lower than expected rating or reduce their ratings
in the future, the trading price of the notes could decline.
OUR BUSINESS COULD BE HURT IF MANAGEMENT USES OUR PROCEEDS FROM THIS OFFERING
INEFFECTIVELY.
Our management will have flexibility in applying the net proceeds of this
offering. We intend to use the proceeds of this offering for general corporate
purposes, including capital expenditures to be made in connection with the
deployment of new services. These purposes could also include strategic
acquisitions or investments, international expansion, technical upgrades of
internal systems and other working capital requirements. We expect to spend a
significant portion of the net proceeds of this offering on capital equipment
purchases necessary to deploy our new services. There can be no assurance that
these services will be accepted by our customers, or that we will be able to
generate sufficient revenue from such services to justify such capital
expenditures. The failure of our management to apply the proceeds of this
offering effectively could have a material adverse effect on our business,
results of operations and financial conditions. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a more detailed description of how management intends to apply
the proceeds of this offering.
FORWARD-LOOKING STATEMENTS
This prospectus contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. We intend
the forward-looking statements to be covered by the safe harbor for
forward-looking statements in these sections. These forward-looking statements
include, without limitation, statements about our market opportunity,
strategies, competition, expected activities and investments as we pursue our
business plan, and the adequacy of our available cash resources. These
forward-looking statements are usually accompanied by words such as "believe,"
"anticipate," "plan," "seek," "expect," "intend" and similar expressions. The
forward-looking information is based on various factors and was derived using
numerous assumptions. Our actual results could be materially different or worse
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.
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USE OF PROCEEDS
We expect to receive net proceeds of $144.9 million from the sale of notes
in this offering, or $166.7 million if the underwriters' over-allotment option
is exercised in full, and after deducting underwriting discounts and the
estimated offering expenses payable by us. We intend to use the proceeds of this
offering for general corporate and working capital purposes, including the
purchase of capital equipment in connection with the deployment of new services.
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; and
- increase our visibility in the marketplace.
We believe that the net proceeds of the offering and cash balances 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.
RATIO OF EARNINGS TO FIXED CHARGES
Our ratio of earnings to fixed charges for each of the periods indicated is
as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Ratio of earnings to fixed charges.......................... (28.1) (74.4) (19.1)
Pro forma ratio of earnings to fixed charges (1).......... -- -- (2.18)
Deficiency of earnings available to cover fixed charges (in
thousands)................................................ 32 76 1,049
</TABLE>
- ------------------------
(1) Gives effect to the issuance of the notes.
For purposes of computing the ratio of earnings to fixed charges, earnings
consist of income before taxes plus fixed charges. Fixed charges consist of
interest expense incurred, including capital leases, amortization of interest
costs and the portion of rental expense under operating leases that we deem to
be representative of the interest factor.
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PRICE RANGE OF COMMON STOCK
Our common stock began trading publicly on the Nasdaq National Market on
November 10, 1999 and is traded under the symbol "IBAS." The following table
shows the range of the high and low per share bid prices of the common stock, as
reported by the Nasdaq National Market for the period indicated.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
Fourth Quarter ended December 31, 1999 (from November 10,
1999)..................................................... $42.31 $24.13
First Quarter ending March 31, 2000 (through March 9,
2000)..................................................... $93.06 $28.25
</TABLE>
On March 9, 2000, the closing price of the common stock on the Nasdaq
National Market was $73.078 per share, the high and low bid prices were
approximately $83.50 and $66.38 and there were approximately 120 holders of
record of the common stock.
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CONCURRENT OFFERING OF COMMON STOCK
We plan to offer in a separate and concurrent public offering 3,500,000
shares of our common stock (4,025,000 shares if the underwriters' over-allotment
option is exercised in full), of which 2,026,637 shares are offered by us and
1,473,363 shares are being offered by selling stockholders (2,440,045 shares and
1,584,955 shares if the underwriters' over-allotment option is exercised in
full). Neither completion of this note offering nor completion of the concurrent
common stock offering is contingent upon completion of the other.
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999:
- on an actual basis; and
- on a pro forma basis to give effect to the sale of $150 million aggregate
principal amount of notes.
This table should be read in conjunction with our consolidated financial
statements and related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------
ACTUAL PRO FORMA
---------- ---------
<S> <C> <C>
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Long-term obligations:
5 3/4% Convertible Subordinated Notes due 2005............ $ -- $ 150,000
Capital lease obligations, net of current portion......... 11,689 11,689
-------- ---------
Stockholders' equity (deficit):
Common stock, $0.001 par value per share; 85,000,000
shares authorized, 31,642,728 issued and outstanding,
actual and pro forma.................................... 32 32
Additional paid-in capital.................................. 156,888 156,888
Deferred compensation....................................... (2,201) (2,201)
Accumulated deficit......................................... (27,815) (27,815)
-------- ---------
Total stockholders' equity.............................. 126,904 126,904
-------- ---------
Total capitalization.................................. $138,593 $ 288,593
======== =========
</TABLE>
The common stock to be outstanding after this offering is based on
31,642,728 shares outstanding as of December 31, 1999 and excludes:
- 3,005,850 shares of common stock issuable upon the exercise of outstanding
stock options and warrants outstanding at December 31, 1999 at a weighted
average exercise price of $4.31 per share;
- 2,531,150 additional shares of common stock reserved for issuance under
our stock incentive plan. See "Management--1997 Stock Incentive Plan";
- 1,741,351 additional shares of common stock initially issuable upon
conversion of the notes offered hereby; and
- 2,026,637 additional shares of common stock that we may sell in a
concurrent public offering of common stock. Neither completion of this
note offering nor completion of the concurrent common stock offering is
contingent upon completion of the other.
20
<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, are derived
from, and qualified by reference to, our consolidated financial statements which
have been audited by Arthur Andersen LLP, independent public accountants but are
not included in this prospectus. The consolidated statements of operations data
set forth below for the years ended December 31, 1997, 1998 and 1999, and the
consolidated balance sheet data at December 31, 1998 and 1999 are derived from,
and qualified by reference to, our consolidated financial statements which have
been audited by Arthur Andersen LLP, together with their report thereon included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(AUGUST 2, 1996)
TO DECEMBER 31, YEAR ENDED DECEMBER 31,
--------------------- ------------------------------
1996 1997 1998 1999
--------------------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net revenue................................................. $ -- $ 127 $ 1,978 $ 19,417
Operating expenses:
Data communications and telecommunications.................. -- 187 2,730 21,007
Research and development.................................... 76 317 1,674 6,183
Selling and marketing....................................... -- 97 1,160 5,568
General and administrative.................................. -- 454 1,365 5,309
Depreciation and amortization............................... -- 19 364 2,997
Loss (gain) on disposal of property and equipment........... -- -- 531 (15)
------ ------ ------- --------
Total operating expenses.................................. 76 1,074 7,824 41,049
Loss from operations...................................... (76) (947) (5,846) (21,632)
------ ------ ------- --------
Interest income............................................. -- 17 179 1,329
Interest expense............................................ -- (4) (53) (836)
Other income (expense), net................................. -- 8 (7) 3
Minority interest in loss of joint venture.................. -- -- -- 49
------ ------ ------- --------
Net loss.................................................. (76) (926) (5,727) (21,087)
Accretion of dividends on redeemable convertible preferred
stock..................................................... -- -- (219) (1,020)
------ ------ ------- --------
Net loss applicable to common stockholders................ $ (76) $ (926) $(5,946) $(22,107)
====== ====== ======= ========
Pro forma net loss applicable to common stockholders........ $(5,727) $(21,087)
======= ========
Basic and diluted net loss per share applicable to common
stockholders.............................................. $(0.01) $(0.15) $ (0.99) $ (2.29)
====== ====== ======= ========
Basic and diluted weighted average common shares outstanding
(1)....................................................... 6,000 6,006 6,023 9,655
Pro forma basic and diluted net loss per share (1) (2)...... $ (0.44) $ (0.97)
======= ========
Pro forma basic and diluted weighted average common shares
outstanding (1) (2)....................................... 13,068 21,651
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 7,399 $123,666
Working capital............................................. 4,241 115,154
Total assets................................................ 12,772 153,473
Capital lease obligations, net of current portion........... 213 11,689
Redeemable convertible preferred stock...................... 10,719 --
Total stockholders' equity.................................. (2,697) 126,904
</TABLE>
- --------------------------
(1) Computed on the basis described in Note 1(d) of the notes to our
consolidated financial statements appearing elsewhere in this prospectus.
(2) Adjusted to give effect to the conversion of all shares of preferred stock,
Class A and Class B common stock from the date of original issuance.
21
<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." In
November 1999, we completed our initial public offering and issued 7,820,000
shares of common stock, which resulted in total net proceeds to us of
approximately $114.7 million. 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.
22
<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 the completion of
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 December 31, 1999, we had an accumulated deficit of approximately
$27.8 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.
Since our initial public offering in November 1999, we have announced
several developments:
- On December 6, 1999, we announced that we would begin offering Internet
telephony hosting services on the iBasis Network. These services will
provide customers with access to a turnkey solution that enables them to
quickly begin offering voice, fax, pre-paid calling and other value-added
Internet telephony services in our international markets with minimal
capital investment.
- On January 19, 2000, we announced that we will be offering service level
agreements to our international customers, which guarantee customers
sending calls over our network call completion rates equivalent to or
better than those provided by alternative networks, including the
public-switched telephone network.
- On February 3, 2000, we announced our intention to deploy Cisco Systems'
uOne-TM- application on the iBasis Network, thereby allowing
communications service providers to provide unified communications
services to their end-user customers over our network.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 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 offsetting termination fees otherwise payable to
local service providers against the equipment purchase price until the full
purchase price has been paid.
Our net revenue increased by $17.4 million to $19.4 million in the year
ended December 31, 1999 from $2.0 million in the year ended December 31, 1998.
This increase was primarily driven by an increase in revenue from voice and fax
call completion services to $19.0 million in 1999 from $1.7 million in 1998. 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 156.5 million
minutes in 1999 from 12.1 million minutes in 1998. Net revenue from the sale of
equipment increased to $435,000 in 1999 from $273,000 in 1998.
DATA COMMUNICATIONS AND TELECOMMUNICATIONS EXPENSES. Data communications
and telecommunications expenses are comprised primarily of termination fees,
purchased minutes, equipment expense and other expenses associated with data
communications and telecommunications.
23
<PAGE>
Termination fees are paid to local service providers to terminate calls received
from our network. This traffic is measured in minutes, and the per minute rates
charged for terminating calls are negotiated with the local service provider and
included in our contract with our local service provider. Should competition
cause a decrease in our prices and, as a result our profit margins, our
contracts with our providers 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 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 Internet branch offices, fees for the fiber
optic connections between our Internet branch offices and our customers and/or
suppliers, facilities charges for overseas Internet access and phone lines to
the primary telecommunications carriers in particular countries, and charges for
the limited number of dedicated international private line circuits we use.
Data communications and telecommunications expenses increased by
$18.3 million to $21.0 million in 1999 from $2.7 million in 1998. The increase
in data communications and telecommunications expense was driven by the increase
in traffic described above, as termination fees increased to $8.5 million in
1999 from $579,000 in 1998, and purchased minutes increased to $7.7 million in
1999 from $921,000 in 1998. Equipment expenses directly related to equipment
sales increased to $437,000 in 1999 from $217,000 in 1998. Other data
communications and telecommunications expenses, including Internet access,
public circuit-switched network access, and international private line charges,
increased to $4.4 million in 1999 from $1.0 million in 1998. As a percentage of
total revenue, data communications and telecommunications expenses decreased to
108% in 1999 from 138% in 1998. 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 that consist
primarily of expenses incurred in enhancing, developing, updating and supporting
our network and our proprietary software applications.
Research and development expenses increased by $4.5 million to $6.2 million
in 1999 from $1.7 million in 1998. This increase in research and development
expenses is due principally to the increase in personnel within the group to 62
at the end of 1999 from 20 at the end of 1998. As a percentage of total revenue,
research and development expenses decreased to 32% in 1999 from 85% in 1998. 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.
24
<PAGE>
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 $4.4 million to $5.6 million in 1999 from
$1.2 million in 1998. This increase is attributable to an increase in the number
of personnel employed in selling and marketing to 47 at the end of 1999 from
eight at the end of 1998, 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 29% in
1999 from 59% in 1998. We anticipate that selling and marketing expenses will
increase in the future as we expand our 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 $3.9 million to $5.3 million in 1999 from $1.4 million in 1998.
General and administrative expenses increased primarily due to an increase in
the number of employees to 38 at the end of 1999 from six at the end of 1998, 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 27% in 1999 from 69% in 1998. 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 $2.6 million to $3.0 million in 1999 from $364,000 in
1998. 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
15% in 1999 from 18% 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 $1.1 million to $1.3 million in 1999
from $179,000 in 1998. This increase was primarily attributable to increased
interest earnings on our cash and cash equivalents, which increased by
$116.3 million from $7.4 million as a result of our initial public offering,
which was completed in November 1999. Interest expense increased by $783,000 to
$836,000 in 1999 from $53,000 in 1998. 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
25
<PAGE>
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 $1.4 million to approximately $1.7 million in 1998 from $318,000 in
1997. This increase in research and 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 85% 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 $912,000 to $1.4 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
69% 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.
26
<PAGE>
UNAUDITED QUARTERLY OPERATING RESULTS
The following tables set forth certain unaudited quarterly operating results
for each of our six fiscal quarters in the 18-month period ended December 31,
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, DEC. 31,
1998 1998 1999 1999 1999 1999
--------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net revenue............................ $ 387 $ 1,405 $ 2,414 $ 3,623 $ 5,780 $ 7,600
Operating expenses:
Data communications and
telecommunications................. 663 1,491 2,586 4,029 6,204 8,188
Research and development............. 454 651 865 1,317 1,837 2,164
Selling and marketing................ 303 492 837 1,210 1,534 1,987
General and administrative........... 316 624 611 887 1,470 2,341
Depreciation and amortization........ 95 152 233 632 1,024 1,108
Loss (gain) on disposal of property
and equipment...................... -- 531 -- (15) -- --
------- ------- ------- ------- ------- -------
Total operating expenses......... 1,831 3,941 5,132 8,060 12,069 15,788
------- ------- ------- ------- ------- -------
Loss from operations............. (1,444) (2,536) (2,718) (4,437) (6,289) (8,188)
Interest income........................ 51 103 53 31 220 1,025
Interest expense....................... (19) (6) (60) (169) (217) (390)
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) $(7,553)
======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1999 1999 1999 1999
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Net revenue.............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Operating expenses:
Data communications and
telecommunications................... 171.3 106.1 107.1 111.2 107.3 107.7
Research and development............... 117.3 46.3 35.8 36.4 31.8 28.5
Selling and marketing.................. 78.2 35.0 34.7 33.4 26.5 26.1
General and administrative............. 81.7 44.5 25.3 24.4 25.4 30.8
Depreciation and amortization.......... 24.5 10.8 9.7 17.4 17.7 14.6
Loss (gain) on disposal of property and
equipment............................ 0.0 37.8 0.0 (0.4) 0.0 0.0
------ ------ ------ ------ ------ ------
Total operating expenses........... 473.0 280.5 212.6 222.4 208.7 207.7
------ ------ ------ ------ ------ ------
Loss from operations............... (373.0) (180.5) (112.6) (122.4) (108.7) (107.7)
------ ------ ------ ------ ------ ------
Interest income (expense), net........... 8.1 6.9 (0.2) (3.9) 0.0 8.4
Other expense, net....................... 0.0 0.0 (0.1) 0.0 0.0 0.0
Minority interest in loss of joint
venture................................ 0.0 0.0 2.0 0.0 0.0 0.0
------ ------ ------ ------ ------ ------
Net loss........................... (364.9)% (173.6)% (110.9)% (126.3)% (108.7)% (99.3)%
====== ====== ====== ====== ====== ======
</TABLE>
27
<PAGE>
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;
- 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."
LIQUIDITY AND CAPITAL RESOURCES
Our principal capital and liquidity needs historically have related to the
development of our network infrastructure, our sales and marketing activities,
research and development expenses, and general capital needs. Our capital needs
have been met, in large part, from the net proceeds from our initial public
offering and 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 $2.9 million for the year
ended December 31, 1997, $11.6 million for the year ended December 31, 1998, and
$139.0 million for the year ended
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December 31, 1999. These amounts are primarily attributable to the net proceeds
from our initial public offering and the issuance of Class B common stock and
preferred stock.
Net cash used in operating activities was $666,000 for the year ended
December 31, 1997, $2.1 million for the year ended December 31, 1998, and
$16.7 million for the year ended December 31, 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 $511,000 for the year ended
December 31, 1997, $3.8 million for the year ended December 31, 1998, and
$6.0 million for the year ended December 31, 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. 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.
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.
INITIAL PUBLIC OFFERING. In November 1999, we completed our initial public
offering and issued 7,820,000 shares of common stock, which resulted in total
net proceeds to us of $114.7 million.
Upon the completion of our initial public offering, all outstanding shares
of our preferred stock and Class B common stock automatically converted into the
following number of shares of Class A common stock:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
CLASS A COMMON STOCK
---------------------
<S> <C>
Series A preferred stock................................. 3,750,000
Series B preferred stock................................. 6,562,500
Series C preferred stock................................. 5,744,103
Class B common stock..................................... 1,500,000
</TABLE>
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Subsequently, all outstanding shares of Class A common stock converted 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 December 31, 1999, the aggregate outstanding balance under our
leases from Cisco was $14.0 million, and we had an additional $1.0 million
available for borrowing under that master agreement. As of the same date, the
aggregate outstanding balance under the TLP master lease was $1.4 million, with
no additional amount 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 December 31, 1999, we had made borrowings in the aggregate amount of
$506,000 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 alternatives 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 December 31, 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 continuing to assess the corporate systems and
operations that we believe could be affected by the year 2000 problem. We
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.
Our own personnel performed all of the assessment, remediation and testing
of our systems; 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 continue to believe that all of our critical systems are year 2000 ready.
While to date we have not experienced any material disruptions as a result of
year 2000 problems, 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 will continue to function properly in the year 2000. We will continue to
monitor the year 2000 readiness of the system suppliers of our website, main
enterprise systems, 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 function properly as a result of the year 2000 date change 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 these providers experience business interruptions,
which to date have not been apparent, as a result of their failure to function
properly as a result of the year 2000 date change, 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.
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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 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. However, this issue is not
unique to us, as all of our customers and partners are having to face this issue
to support their normal business operations.
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 continuing to monitor 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 year 2000 failure of any of our non-information
technology systems 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. We have
funded and will continue to fund, if necessary, our year 2000 monitoring and
preparations 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.
We intend to develop contingency plans to address any year 2000 readiness
problems if necessary.
MARKET RISK
To date, we have not engaged in trading market risk sensitive instruments or
purchasing hedging instruments that would be likely to expose us to market risk,
whether interest rate, foreign currency exchange, commodity price or equity
price risk. We have not purchased options or entered into swaps of forward or
futures contracts. Our primary market risk exposure is that of interest rate
risk on borrowings under our credit lines, which are subject to interest rates
based on the banks' prime rate, and a change in the applicable interest rate
would affect the rate at which we could borrow funds or finance equipment
purchases. While to date our global operations have generated revenues in United
States dollars, we are currently evaluating the impact of foreign currency
exchange risk on our results of operations as we continue to expand globally.
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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 communications. Wholesale worldwide Internet telephony,
including wholesale international Internet telephony, is expected to grow to
$2.0 billion by the same date. In addition, International Data Corporation
projects that international Internet telephony will comprise $17.3 billion of
the total $18.7 billion market in 2004.
Internet telephony offers communications service providers the following
advantages over traditional voice networks, allowing them to complete calls at
comparable quality with lower costs, and offer new services:
- TECHNOLOGICAL EFFICIENCIES. Traditional voice networks use circuit
switching technology, which establishes dedicated lines between an
originating and terminating point for the duration of a call. In contrast,
Internet telephony is based on packet switching technology. This
technology completes a call by digitizing and dividing a speaker's voice
into small packets that travel to their destination along lines carrying
packets of other Internet traffic. Packets from multiple calls or faxes
can be carried over the same line simultaneously with data from other
sources, which results in a higher utilization of transmission lines than
can be achieved with circuit-switched technology. Unlike circuit-switched
traffic, data packets also can be compressed, which means
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that Internet telephony uses less bandwidth per call than traditional
circuit-switched calling. As a result of these features, calls can be
completed at a lower cost using Internet telephony. We believe that
packet-switched networks, including the Internet, will allow other
traditional services to be offered more cost-effectively as well.
- ECONOMIES OF SCALE. Internet telephony calls are carried over large and
rapidly growing data networks. Businesses recently have spent billions of
dollars to upgrade their data networks to accommodate dramatic increases
in data traffic. According to TeleGeography, the total bandwidth used for
data surpassed that used for voice in the United States long distance
market in 1998. This growth is driven largely by technological innovation
and the rapid expansion of the Internet as a global medium for
communications and commerce. As data networks continue to grow,
communications service providers should benefit from greater economies of
scale and be able to offer Internet-based services, such as Internet
telephony, more cost effectively than services over traditional voice
networks.
- OPPORTUNITY TO BY-PASS INTERNATIONAL SETTLEMENT RATES. Traditional
international long distance calls are completed over international voice
networks. These networks are typically owned by government bodies or
telecommunications carriers who charge settlement rates or tariffs for
their use. International calls routed over the Internet bypass a
significant portion of these fees, and as a result can generally be
completed at lower cost.
- ADDITIONAL CHANNEL FOR CARRIERS. Carriers regularly outsource their voice
and fax traffic to take advantage of the lowest-cost provider to a
particular destination and partner with companies that can provide
additional channels. Internet telephony offers an opportunity for service
providers with access to necessary technology to develop networks that can
provide these additional channels.
- MORE SERVICES AND EASIER ROLL OUT. In contrast to the closed, proprietary
structure inherent in traditional circuit-switched voice networks,
Internet telephony embraces an open architecture and open standards, which
facilitates innovation at lower costs. Traditional voice networks are
designed specifically to provide one basic service, making it difficult to
introduce new services over those networks. In contrast, data networks
convert all services into data packets, and allow for the introduction of
an indefinite variety of packet-based services that were not possible over
the traditional network. Since rollout of new services does not
necessitate network-wide upgrades, it is easier for communications service
providers to deploy new services quickly. While voice and fax are the
dominant services provided today, additional services, such as Internet
call waiting, unified communications and electronic commerce can be
provided over data networks.
DEMAND FOR INTERNET TELEPHONY SOLUTIONS. While there are many reasons for
telecommunications carriers and other communications service providers to take
advantage of Internet telephony, for the most part, they have been slow to
establish in-house Internet telephony capability for a number of reasons. These
reasons include:
- lack of adequate Internet telephony technology until recently;
- concerns over quality;
- prior substantial investment in circuit-switched networks and the
associated expertise; and
- a hesitation to build new networks and cannibalize traffic from their
traditional voice networks.
Developing an international Internet telephony network for a substantial
portion of a communications service provider's traffic would also be expensive
and time-consuming, requiring each service provider to negotiate agreements in
each country where it would like to be able to complete calls. Therefore, many
communications service providers are looking to outsource their Internet
telephony services.
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To date, however, few Internet telephony providers have been able to offer
the quality, reliability and back office support necessary to meet the carriers'
strict requirements. In addition, most Internet telephony providers do not have
the international presence to be able to complete calls to a sufficient number
of destinations, and do not have the capacity to carry the volume of traffic
required by carriers to any given location.
THE IBASIS SOLUTION
We provide high quality Internet-based communication services to
telecommunications carriers and other communications service providers. Our
solution enables communications service providers to outsource their
international voice, fax and other value-added services over the Internet at
substantially lower costs than over traditional networks while maintaining high
quality service. We provide our customers access to the iBasis Network, our
international, scaleable, standards-based Internet telephony network through
"Internet branch offices" strategically located in major cities in North
America, Asia, Latin America, Europe and Africa. Our services provide the
following key benefits to our customers:
HIGH QUALITY VOICE AND FAX TRANSMISSIONS. Our proprietary technology
enables us to complete international voice and fax calls over the iBasis Network
with quality comparable to that of traditional circuit-switched voice networks.
This is supported by the fact that carriers are able to provide our Internet
telephony services to their customers undifferentiated from their traditional
services. Through our global network operations center and proprietary Assured
Quality Routing software, we are able to monitor our network and route traffic
over dedicated private lines or traditional circuit-switched lines when
necessary to maintain high quality. This enables us to provide consistently high
quality services to communications service providers.
COST EFFECTIVE SOLUTIONS. Our transmission costs are lower because packet
switching is more efficient than traditional circuit switching. In addition, we
leverage the Internet to deliver traffic, which results in lower costs than
transmission alternatives that deploy dedicated connections. Our packet-based
scaleable solution also allows us to better match our investment in equipment
with capacity needs, and provide lower cost world-class operating support
systems. Also, we are currently able to circumvent many of the international
tariffs or settlement rates associated with international calls over
circuit-switched voice networks, which results in additional cost savings.
INTERNATIONAL HIGH-CAPACITY NETWORK. Our iBasis Network is a growing
international network that allows us to complete calls worldwide. During our
fourth quarter ended December 31, 1999, we transported approximately
63.8 million minutes of traffic over the more than 3,200 lines we have deployed
internationally through our relationships with communications service providers.
FLEXIBLE BACK OFFICE SOLUTION THAT FACILITATES NEW SERVICES AND EFFECTIVE
BUSINESS MANAGEMENT. We provide communications service providers with an
integrated network, making possible advanced reporting and monitoring that
customers can access from an easy to use web-based application. The flexibility
of our back office systems allows us to provide timely statistics and integrated
billing that enables a communications service provider to manage its costs more
effectively and offer new services more readily.
EASE OF DEPLOYMENT AND TIME TO MARKET. We enable carriers to route calls
over our network in a timely and cost effective manner. Carriers and other
communications service providers need no special equipment or technical
expertise in order to access our services as connections are made in the same
manner as traditional voice-based services. Our solution shortens communications
service providers' time-to-market by enabling them to complete calls to any
country on our network without experiencing the delays typically incurred in
establishing separate contracts with local service providers in each country.
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OPEN, SCALEABLE ARCHITECTURE DESIGNED FOR NEW SERVICES. Our network
architecture is open, scaleable and standards based. This allows for fast
deployment of services to new countries, and enables us to offer other
value-added services over our network quickly and easily. We currently offer
voice, fax and billing services and will offer other new value-added services.
On February 3, 2000, we announced our intention to deploy Cisco Systems'
uOne-TM- application on the iBasis Network, thereby allowing communications
service providers to provide unified communications services to their end-user
customers over our network.
OUR STRATEGY
Our objective is to be the leading provider of high quality Internet-based
communication services to telecommunications carriers and other communications
service providers. We plan to accomplish this by pursuing the following
strategies:
FOCUS ON HIGH-VOLUME COMMUNICATIONS SERVICE PROVIDERS. We are focused on
providing Internet-based communications services to high-volume carriers. By
focusing on carriers, rather than the end-users, we are able to avoid the time
and expense associated with building a retail sales and support infrastructure.
Our focus on carriers has the added benefit that we do not compete with our
customers for end-users.
PROVIDE CARRIER-CLASS SERVICES USING THE INTERNET. Through our proprietary
technologies, we offer high quality voice and fax completion services using the
Internet. By using the Internet to deliver a majority of our services, we are
able to avoid the costs associated with developing an extensive network of
private dedicated lines. We intend to continue to use the Internet to provide
our high quality services at competitive prices. We will continue to introduce
only those services that we can offer at carrier-class quality.
FOCUS ON THE INTERNATIONAL MARKET AND EXPAND OUR GEOGRAPHIC PRESENCE THROUGH
PARTNERSHIPS AND ACQUISITIONS. The international long distance market segment is
large and growing and has historically offered higher revenue per minute than
the domestic long distance market segment. We intend to build the leading
international Internet telephony network to allow carriers to use us for their
international Internet telephony services around the world. We will continue to
focus on the international segment and partner with communications service
providers such as China Unicom and Dacom, the second largest carriers in China
and Korea respectively, that can originate and terminate calls in their
respective countries. We will also consider acquiring other complementary
businesses or technologies if attractive opportunities arise.
CONTINUE TO BE AT THE FOREFRONT OF INTERNET-BASED COMMUNICATIONS
TECHNOLOGY. In order to provide these high quality services and stay at the
forefront of Internet-based communications technology and service offerings, we
will continue to invest in improving our technology, and partner with leaders in
Internet-based communications hardware and software.
INCREASE SALES AND MARKETING EFFORTS AND BRAND AWARENESS. We will continue
to expand our sales and marketing activities, while focusing on communications
service providers domestically as well as internationally. We intend to build
iBasis into the premier brand in the Internet telephony marketplace and will
strive to make our name synonymous with high quality, value-added Internet
telephony services for communications service providers. We are in the process
of hiring additional sales, sales support and marketing professionals with
specific experience in our target markets and regions.
OFFER ADDITIONAL INTERNET-BASED COMMUNICATION SERVICES. We intend to
introduce new services that carriers can offer over our network or their own
networks. We are focused on applications that will allow carriers to expand
their business, improve service quality and cut costs. We also intend to offer
new services such as dedicated Internet and circuit-switched network access,
which will help our customers enter new markets quickly. We believe that these
new services will increase our customer
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base and allow us to cross-sell other services to communications service
providers once they are our customers. On February 3, 2000, we announced our
intention to deploy Cisco Systems' uOne-TM- application on the iBasis Network,
thereby allowing communications service providers to provide unified
communications services to their end-user customers over our network.
THE IBASIS NETWORK
The iBasis Network is our international network over which we deliver large
volumes of high quality international voice, fax and other value-added services
at significant cost savings. During our fourth quarter ended December 31, 1999,
we transported approximately 63.8 million minutes of traffic over our network.
The iBasis Network consists of four principal elements:
- "Internet central offices" and "Internet branch offices" that translate
voice to data for transmission and retrieval over a data network;
- the transmission medium, which is principally the Internet;
- Assured Quality Routing, our proprietary software; and
- our global network operations center, from which we oversee and coordinate
the operation of the gateways and the transmission network.
Following is a diagram of the iBasis Network.
[Diagram depicting the flow of information, moving clockwise from the lower
left with arrows connecting the various points, from a telephone, cellular phone
and fax machine, through telephone lines, labeled "Circuit-Switched Network,"
into an iBasis Internet Central Office/Internet Branch Office, to a cloud
labeled "The Internet," continuing out through another Internet Central Office/
Internet Branch Office, to another picture of telephone lines, labeled
"Circuit-Switched Network," and concluding with the depiction of a telephone,
cellular phone and fax machine. In the center of the diagram, connection to the
Internet Central Offices/Internet Branch Offices and the Internet, is a box with
the text "iBasis Global Network Operations Center" and "Assured Quality
Routing." Above the Internet cloud is a small cloud labeled "Alternate Routes"
connected the to Points of Presence with dotted lines.]
INTERNET CENTRAL OFFICES AND INTERNET BRANCH OFFICES. The entrance point
for communications traffic over the iBasis Network is an Internet branch office,
four of which have enhanced functionality and capacity and are referred to as
Internet central offices. Our customers can interconnect with the iBasis Network
by connecting dedicated voice circuits from their facilities to one of four
Internet central
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offices, located in New York; Los Angeles; London, England; and Hong Kong,
China. Alternatively, our customers may elect to install an iBasis Internet
branch office directly at their facilities to eliminate the cost of backhauling
traffic from their facilities to one of our Internet central offices. Internet
branch offices receive calls through a local carrier's switched network.
Gateways in each Internet branch office digitize, compress and packetize voice
and fax calls and then transmit them over the Internet. At the destination,
another Internet branch office reverses the process and the call is switched
back from the Internet to a local carrier's circuit-switched network in the
destination country.
We currently operate Internet branch offices located in more than two dozen
countries worldwide, including Australia, China, Germany, Hong Kong, Japan,
Korea, the United Kingdom and the United States. Some of these Internet branch
offices are owned by us and others are owned by our partners. The Internet
branch offices are scaleable and flexible platforms designed for interconnection
with the iBasis Network and are built primarily using Cisco Systems' equipment.
The scaleability of the Internet branch offices permits us to quickly increase
capacity in discrete increments at relatively low cost, either for a region or a
customer. In addition, the Internet branch office flexible architecture is
designed to easily integrate and support the new services we intend to offer.
THE INTERNET. We use the Internet to transmit the substantial majority of
our voice and fax traffic and deliver other value-added services, because of its
global coverage, rapid growth and flexible connectivity. By using the Internet,
we avoid having to build a private, dedicated network of fiber and cable
connections, which would delay our time-to-market in many locations and would be
more costly to deploy. We have addressed the challenges present in using the
Internet by:
- selecting only high quality, service-oriented Internet service providers
as our vendors;
- purchasing high-speed connections into the Internet backbone; and
- continuously monitoring the quality of the connections between each
Internet branch office and the Internet.
We also use data transmission over private leased lines or traditional
circuit-based voice networks where the Internet is not available or would not
permit us to meet our quality standards.
ASSURED QUALITY ROUTING. We have deployed a proprietary software
application, Assured Quality Routing, to maintain high quality voice and fax
service. This application monitors the quality of calls placed over our network
by applying defined quality parameters to each processed call. These quality
parameters include measures of voice and fax quality that are important to
carriers, including overall voice quality, call completion rates and post-dial
delay. The system alerts us whenever the transmission quality drops below
specific thresholds. We temporarily route subsequent calls to a circuit-switched
network or an alternate Internet-based network to restore high quality.
GLOBAL NETWORK OPERATIONS CENTER. We manage our network of Internet central
offices and Internet branch offices around the world and implement our
proprietary Assured Quality Routing software through our global network
operations center. It is comprised of network management tools from
Hewlett-Packard and a number of other vendors that permit us to monitor, test
and diagnose all components of the iBasis Network. The global network operations
center is staffed and running 7 days a week, 24 hours a day at our Burlington,
Massachusetts headquarters, complete with:
- real-time, end-to-end monitoring and analysis of call behavior patterns on
the iBasis Network to identify and address potential problems before they
become serious and to anticipate issues related to network growth;
- system redundancy, including power back-up and multiple network paths; and
- a help desk, which allows us to respond to our customers problems on a
timely basis.
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OUR SERVICES
Our current services include international voice and fax call completion and
a retail rating or billing solution. We also provide customers with our
web-based traffic revenue reporting system called iTrac. Customers have the
option to purchase these services as a complete suite or separately.
INTERNATIONAL VOICE AND FAX SERVICES. We offer international voice and fax
call completion services, and other value-added services, that provide our
customers a high quality, low-cost alternative for international voice and fax
transport of phone-to-phone or fax-to-fax calls placed by their business and
residential customers. Our proprietary Assured Quality Routing software and
web-based extranet are important components of our services and are integrated
elements of our advanced operational support systems.
On January 19, 2000, we announced that we will be offering service level
agreements to our international customers. These service level agreements for
international termination services guarantee customers sending calls over our
network call completion rates equivalent to or better than those provided by
alternative networks, including the public-switched telephone network. The call
completion rate, known in the telecommunications industry as the answer seizure
ratio, represents the percentage of calls out of all attempts that are
successfully completed. The higher the answer seizure ratio, the more reliable
the network and the more billable calls that result for a carrier.
RETAIL RATING SERVICE. We introduced our retail rating service to provide a
simple and easy-to-implement outsourced billing solution to customers who want
to offer prepaid or postpaid calling card origination services. Under this
program, we maintain and administer a billing support system that performs the
authentication, authorization and accounting for this service. At the same time,
our customers control the end-user calling settlement rates, and remain
responsible for card fulfillment, sales, marketing and end-user customer care.
The customer benefits of this service are:
- faster time-to-market for the introduction of calling card services;
- no up-front or ongoing investments in billing system hardware and
software; and
- reduced staffing and training expenses.
INTERACTIVE TRAFFIC REVENUE ANALYSIS CENTER. iTrac is proprietary web-based
traffic reporting analysis software that enables our customers to better manage
their operations through real-time information exchange. iTrac provides
statistics on service quality and traffic volume, helping customers to quickly
address issues that affect service and to do effective network capacity
planning. This information is delivered in a cost-efficient manner using
sophisticated and secure extranet technologies that customers access using a
standard web browser.
FUTURE SERVICES. We intend to add new services that leverage components of
the iBasis Network to generate additional sources of revenue. We believe that
our ability to deploy new Internet-based communication services makes us an
attractive partner for application developers. We also believe that the ability
to offer these new services will be beneficial to our customers, regardless of
whether or not they directly charge their end-users for these services, because
they will help our customers attract new subscribers and retain and "up-sell"
their existing subscriber base. Some of the services that we may choose to
introduce in the future include:
- UNIFIED COMMUNICATIONS. On February 3, 2000, we announced that we intend
to deploy Cisco Systems' uOne-TM- unified communications application on
the iBasis Network. This application will permit our customers to offer a
communications solution that will unify the storage and retrieval of
e-mail and voice-mail messages as well as faxes. With the proliferation of
messaging worldwide and as people send more and more e-mail, voice-mail
and faxes, unified communications services will allow subscribers to
access their messages any place from a phone or a computer.
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- INTERNET TELEPHONY HOSTING. On December 6, 1999, we announced that we
would begin offering Internet telephony hosting services on the iBasis
Network. These services will provide customers with access to a turnkey
solution that enables them to quickly begin offering voice, fax, pre-paid
calling and other value-added Internet telephony services with a global
footprint with minimal capital investment.
- BASIC MESSAGING SERVICES. We may offer additional basic messaging
services, including outsourced voice-mail, store-and-forward fax, or
faxmail, and e-mail.
- OTHER ADVANCED MESSAGING SERVICES. We may offer other advanced messaging
services including: one-number service, which allows subscribers to
consolidate existing office, home, and mobile numbers into a single
contact or "follow-me" number; Internet call management services such as
caller ID, call waiting and call forwarding; and message delivery that
includes the recording and scheduling of a message, repeated delivery
attempts and message delivery confirmation. These services may in some
cases leverage components of our network to provide international
call-termination services and operational support services.
- INFORMATION SERVICES. We may offer Internet-based information services
that deliver detailed, metered billing information that can help customers
to understand better how their network is being used.
- DIRECTORY SERVICES. We may offer subscriber-based directory services that
maintain important customer information. This would enable communications
service providers to customize and automate their services.
- INTERNET AND CIRCUIT-SWITCHED INFRASTRUCTURE. We may offer
circuit-switched access, dedicated Internet access, and equipment
co-location services to help our customers meet their time-to-market
objectives.
- CONFERENCING SERVICES. We may offer audio, video and data conferencing
services.
- BILLING SERVICES. We may offer additional outsourced billing services such
as on-line bill presentment and Internet telephony clearinghouse
settlement services.
MARKETS AND CUSTOMERS
Telephone companies can be segregated by size into first tier, second tier
and third tier carriers. Generally, first tier carriers are large domestic and
international carriers, such as MCI WorldCom, Cable & Wireless and certain
government-affiliated monopolies, such as the Japanese telecommunications
carrier KDD. First tier carriers generally have annual revenues in excess of
$2 billion. Second tier carriers have revenues generally in the $750 million to
$2 billion range, but have fewer direct operating agreements with other carriers
and fewer international facilities. Examples of tier two carriers are RSL,
WorldxChange Communications, World Access Telecomm Group, Star Telecomm and PGE.
Third tier carriers are typically switch-based resellers with revenues of less
than $750 million.
We provide services to members of all three tiers of United States carriers,
who transmit voice and fax traffic through our New York or Los Angeles Internet
central offices for completion overseas. As of December 31, 1999, we were
providing services to ten of the top twelve highest volume United States-based
international carriers. The ability to provide quality consistently acceptable
to these classes of carriers is of vital importance, because these carriers
often have traffic volumes that regularly overflow their capacity.
Overseas we have established relationships with in-country companies and
local service providers that have local market expertise and relationships to
build strong businesses. Some of our overseas partners/customers are very large
well-established national carriers, such as the Korean company,
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Dacom, and China Unicom. Others are emerging carriers or Internet service
providers who are able to provide the services necessary to terminate minutes
for us in their country.
SALES AND MARKETING
SALES STRATEGY. Our sales efforts target leading telecommunications
carriers both in the United States and overseas. Our sales force, made up of
experienced personnel with long-time relationships in the telecommunications
industry, is frequently supplemented by senior members of management. As of
December 31, 1999, we had deployed nine sales personnel to cover domestic
carriers, with an additional seven in sales support roles. In the United States,
we sell directly to carriers and have successfully developed brand awareness and
beneficial relationships through numerous channels including the web, trade
shows, speaking engagements and joint marketing programs. The ability to provide
quality acceptable to leading carriers is a strong selling point for us. These
carriers have traffic that frequently exceeds their capacity and compels them to
seek alternative channels that offer comparable quality, particularly where
those channels can offer better pricing. Our sales process often involves a test
by our potential customers of our services with traffic to a particular country.
Our experience has been that once a carrier has begun to use our network for a
single country and has found our quality to be acceptable, the sales process for
other countries becomes easier.
In overseas markets, we seek to establish relationships with local service
providers that have the local market expertise to provide the termination
services we need. We believe that the opportunity we offer these companies to
terminate a substantial number of minutes makes us an attractive partner. As of
December 31, 1999, we had deployed eleven sales personnel to cover international
markets, two of whom are employed by our majority-owned joint venture in Hong
Kong. We have also established an office in Seoul, Korea that covers Korea,
Japan and Taiwan; an office in Jakarta covering the Southeast Asian countries
and employ an in-country sales person in China. Other countries are covered from
the United States where we have a sales office in Dallas and our worldwide
headquarters in Burlington, Massachusetts. Prime candidates for overseas
partners are carriers, call back companies, cellular, PCS and paging companies
and Internet service providers.
In Hong Kong, we have formed a joint venture with a local equipment
provider, MicroWorld, to help us develop a stronger local market presence. We
hope to use this joint venture to accelerate our penetration throughout Asia.
MARKETING STRATEGY. Our marketing strategy includes public relations
campaigns, interaction with industry analysts, attendance at trade shows and a
comprehensive website at www.ibasis.net. We have engaged a public relations firm
to conduct a campaign to position us as the preeminent Internet telephony
provider. We aggressively pursue favorable coverage in the trade and business
press and participate in a variety of industry trade shows, including Voice on
the Net, Telecommunications Resellers Association and Telecom Business. We
believe our website will continue to be an effective marketing tool in
international markets.
STRATEGIC TECHNOLOGY RELATIONSHIPS
We have entered into strategic technology relationships with a number of
leading technology providers in the Internet telephony industry, including Cisco
Systems, Belle Systems and NetSpeak Corporation. We believe that our strategic
technology relationships are important because they give us early access to new
technologies and because many of our strategic relationship partners are an
important part of our sales and marketing programs.
CISCO SYSTEMS
As a Cisco Alliance Partner, we have access to Cisco's sales, marketing and
technical resources to aid our global expansion. We understand that Cisco has
selected fewer than 30 companies to participate
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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.
Under the agreement, we are licensing computer software from Belle Systems
that allows us to integrate their billing system into our network, in exchange
for which we pay product and license fees, which for specified products are not
to exceed the lowest price offered by Belle Systems to any of its customers for
the same or similar products. Belle Systems will provide general service and
support for the system, and use its best efforts to provide any additional
assistance for a reasonable price, also not to exceed the lowest prices charged
by Belle Systems to other customers. The agreement also contains a limited
warranty for the system, a mutual non-disclosure obligation, and a source code
escrow at our expense.
NETSPEAK CORPORATION
We have entered into a strategic partnership agreement with NetSpeak, a
leading developer of Advanced Intelligent Network technologies that enable
innovative solutions for concurrent, real-time interactive voice, video and data
communications over data networks. Under the agreement, we are licensing
computer software from NetSpeak that we and our customers can use to assist in
call routing and completion and, in exchange for which, we are obligated to pay
product and licensing fees. NetSpeak will also provide us with software
maintenance and support services for which we are obligated to pay maintenance
and support fees. Under the terms of the agreement, we have a limited obligation
to upgrade our NetSpeak software to maintain some of NetSpeak's service
obligations. We will also work with NetSpeak in the development and deployment
of new functions and features to the software that will, among other things, add
value-added service capabilities that will enhance and differentiate our
offerings to service providers. Each of NetSpeak and iBasis will also engage in
co-branding and are obligated to engage in co-marketing activities to increase
customer awareness of the services offered by each company and to represent each
other as a strategic partner.
COMPETITION
The market for international voice and fax call completion services is
highly competitive. We face competition from a variety of sources, including
large communications service providers with more resources, longer operating
histories and more established positions in the telecommunications marketplace,
some of whom have begun to develop Internet telephony capabilities. Many of our
competitors are larger companies. We also compete with small companies who have
focused primarily
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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 deltathree.com, are currently
focusing on the retail market and personal computer-based Internet telephony,
but may compete with us in the future.
GOVERNMENT REGULATION
UNITED STATES GOVERNMENT REGULATION OF THE INTERNET AND INTERNET
TELEPHONY. We believe that under United States law the Internet-related
services that we provide constitute information services, rather than
telecommunications services. As such, our services are not currently regulated
by the Federal Communications Commission or state agencies responsible for
regulating telecommunications carriers, although aspects of our operations may
be subject to state or federal regulation such as regulations governing
universal service funding, confidentiality of communications, copyright and
excise taxes. However, several efforts have been made to enact federal
legislation that would either regulate or exempt from regulation services
provided over the Internet. Therefore, we cannot assure you that
Internet-related services such as ours will not be regulated in the future.
Increased regulation of the Internet may slow its growth by negatively impacting
the cost of doing business over the Internet. This would materially adversely
affect our business, financial condition and results of operations.
We also cannot assure you that Internet telephony will continue to be
lightly regulated by the FCC and state regulatory agencies. Although the FCC has
determined that, at present, information service providers, including Internet
telephony providers, are not telecommunications carriers, we cannot be certain
that this position will continue. On April 10, 1998, the FCC issued a report to
Congress discussing its implementation of certain universal service provisions
contained in the 1996 amendments to the Communications Act of 1934. In its
report, the FCC stated that it would undertake an examination of whether
phone-to-phone Internet telephony should be considered an information service or
a telecommunications service. The FCC noted that certain forms of phone-to-phone
Internet telephony appeared to lack the characteristics of an information
service and to have the same functionality as non-Internet protocol
telecommunications services. In addition, the FCC is currently
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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 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
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are not as transparent as in the United States and Europe. Changes in the
regulatory regimes of these countries that have the effect of limiting or
prohibiting Internet telephony, or that impose new or additional regulatory
requirements on providers of such services, may result in our being unable to
provide service to one or more countries in which we currently operate. That
result could have a material adverse effect on our business, financial condition
and results of operations.
In addition, as we expand into additional foreign countries, such countries
may assert that we are required to qualify to do business in the particular
foreign country, that we are otherwise subject to regulation, or that we are
prohibited from conducting our business in that country. Our failure to qualify
as a foreign corporation in a jurisdiction in which we are required to do so, or
to comply with foreign laws and regulations, would materially adversely affect
our business, financial condition and results of operations, including by
subjecting us to taxes and penalties and/or by precluding us from, or limiting
us in, enforcing contracts in such jurisdictions. Likewise, our customers and
partners may be or become subject to requirements to qualify to do business in a
particular foreign country, to otherwise comply with regulations, or to cease
from conducting business in that country. We cannot be certain that our
customers and partners are currently in compliance with regulatory or other
legal requirements in their respective countries, that they will be able to
comply with existing or future requirements, and/ or that they will continue in
compliance with any requirements. The failure of our customers and partners to
comply with these requirements could materially adversely affect our business,
financial conditions and results of operations.
OTHER UNITED STATES REGULATIONS AFFECTING THE INTERNET. Congress has
recently adopted legislation that regulates certain aspects of the Internet,
including online content, user privacy, and taxation. In addition, Congress and
other federal entities are considering other proposals that would further
regulate use of the Internet. For example, Congress is currently considering
legislation on a wide range of issues including Internet spamming, database
privacy, gambling, pornography and child protection, Internet fraud, privacy,
and digital signatures. Similarly, various states have adopted or are
considering Internet-related legislation. Increased regulation of the Internet
may slow its growth, which may negatively impact the cost of doing business over
the Internet and materially adversely impact our business, financial condition
and results of operations.
OTHER INTERNATIONAL REGULATIONS AFFECTING THE INTERNET. The European Union
also has enacted legislation that affects the Internet. For example, the
European Union imposes restrictions on the collection and use of personal data
and grants European Union citizens broad rights to access and limit the use of
their personal data. United States companies that collect or transmit
information over the Internet from individuals in European Union Member States
are subject to European Union legislation, which imposes restrictions that are
more stringent than existing Internet privacy standards in the United States.
Although we do not engage in the collection of personal data for purposes other
than routing and billing for our services, the legislation is broadly
applicable. The potential effect on us of development in this area is uncertain;
however, a prohibition on the export of personal data by us would have a
material adverse impact on our business, financial condition and results of
operations.
INTELLECTUAL PROPERTY
We regard our copyrights, service marks, trademarks, trade dress, trade
secrets and similar intellectual property as critical to our success and we rely
on trademark and copyright law, trade secret protection and confidentiality
and/or license agreements with our employees, customers, partners and others to
protect our proprietary rights. We pursue the registration of our trademarks and
service marks in the United States and have applied for the registration of
certain of our trademarks and service marks. We have been granted trademark
registration for the mark VIP Calling-Registered Trademark- in the United
States, and have pending registration applications for the service marks Assured
Quality Routing-SM-, Broadbandit-SM- and iBasis-SM-. In addition, we have
pending registration for the marks iBasis and iBasis
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and design in the United States. However, effective protection may not be
available in every country in which iBasis has, or will have, a commercial
presence.
EMPLOYEES
As of December 31, 1999, we had 147 full-time employees and one part-time
employee, with approximately 62 in sales and marketing, 47 in engineering and
operations and 38 in general and administrative. As of December 31, 1999, we
engaged approximately 51 independent contractors and employed a limited number
of temporary employees. 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.
We also lease approximately 14,462 square feet of commercial space at 10 Second
Avenue in Burlington, Massachusetts pursuant to a term lease that expires in
March 2005, subject to a five year renewal at our option. These facilities are
principally used for executive office space, including sales and marketing and
finance and administration. We also maintain our global network operations
center at this location. We lease an additional 3,156 square feet of space in
Los Angeles, California to house telecommunications equipment pursuant to a term
lease that expires in April 2009. We also maintain a facility in New York, New
York, to house telecommunications equipment, where we lease approximately 4,372
square feet of commercial space pursuant to a ten year term lease that expires
in July 2008. We also maintain a facility in Miami, Florida to house
telecommunications equipment, where we lease approximately 5,250 square feet of
space pursuant to a lease that expires in February 2010. We believe that our
existing facilities are adequate for our current needs and that suitable
additional or alternative space will be available in the future on commercially
reasonable terms.
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 January 31, 2000, are as follows.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- --------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Ofer Gneezy (1).................... 48 President and Chief Executive Officer, Director
Gordon J. VanderBrug............... 56 Executive Vice President, Director
Michael J. Hughes.................. 37 Vice President, Finance and Chief Financial Officer
John G. Henson, Jr................. 57 Vice President, Engineering and Operations
Charles Giambalvo.................. 44 Senior Vice President of Worldwide Sales
Charles N. Corfield (2)............ 40 Director
John Jarve (1)..................... 44 Director
Izhar Armony (1)(2)................ 36 Director
Robert Maginn...................... 43 Director
Charles S. Houser.................. 56 Director
Charles M. Skibo (1)............... 61 Director
Carl Redfield (2).................. 52 Director
KEY EMPLOYEES
Dan Powdermaker.................... 36 Vice President, Europe, Middle East and Africa
Gerald E. O'Loughlin............... 35 Vice President, North America
Juan Bergelund..................... 43 Vice President, Latin America
Craig Inouye....................... 38 Vice President, Asia
Matthew Kristin.................... 37 Chief Information Officer and Vice President of
Information Systems
Mary Cogan......................... 51 Vice President of Human Resources
</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
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auditor at KPMG Peat Marwick. Mr. Hughes received a B.S. in accounting from
Bentley College and an M.B.A. in finance from Babson College. Mr. Hughes is a
certified public accountant.
MR. HENSON has served as Vice President, Engineer ing and Operations of
iBasis since 1998. Prior to joining iBasis, Mr. Henson was Vice President,
Network Operations at LCI International Inc., a telecommunications company that
was recently acquired by Qwest Communications. From 1992 to 1996, Mr. Henson was
a Senior Vice President at BancOne Services Corporation, where he was
responsible for telecommunications and data communications services.
MR. GIAMBALVO has served as Senior Vice President of Worldwide Sales of
iBasis since January 2000. From 1998 to 1999, Mr. Giambalvo was the president of
VocalTec Communications, Inc., a company that helped pioneer commercial Internet
telephony. Prior to joining VocalTec, in 1998, Mr. Giambalvo was vice president
of sales at Stratus Computer, a computer maker. From 1990 to 1998,
Mr. Giambalvo was the senior vice president of sales and customer service at ECI
Telecom, Inc., a leading manufacturer of telecommunications transmission
equipment. Mr. Giambalvo received an M.S. in telecommunications management from
Golden Gate University and a B.S. in electrical engineering and a B.F.A in
communications from The New York Institute of Technology.
MR. CORFIELD has been a director of iBasis since September 1997. Mr.Corfield
has been a partner at each of Whitman Capital and Mercury Capital, both
investment firms, since 1996. Mr. Corfield serves on the board of directors of
Liberate Technologies, a web-based, enhanced television company. Mr. Corfield
co-founded Frame Technology, a software company, in 1986 and was a member of its
board of directors and its Chief Technology Officer until it was acquired by
Adobe Systems in 1995.
MR. JARVE has been a director of iBasis since August 1998. Since 1985, Mr.
Jarve has been employed by Menlo Ventures, a venture capital firm focused on the
software, communications, health care, and Internet sectors, where he currently
serves as a general partner and managing director. Mr. Jarve serves on the board
of directors of Digital Insight Corporation, a provider of Internet banking
services. Mr. Jarve received a B.S. and M.S. in electrical engineering from the
Massachusetts Institute of Technology and an M.B.A. from Stanford University.
MR. ARMONY has been a director of iBasis since August 1998. He is currently
a partner at Charles River Ventures, a venture capital firm. Mr. Armony was an
associate with General Atlantic Partners in 1996. From 1988 to 1995, Mr. Armony
was the Vice President of Marketing and Business Development at Onyx
Interactive. Mr. Armony received an M.A. in cognitive psychology from the
University of Tel Aviv, an M.A. in international studies from the University of
Pennsylvania, and an M.B.A. from Wharton.
MR. MAGINN has been a director of iBasis since November 1997. Since 1983,
Mr. Maginn has been employed by Bain & Company, Inc., a strategy consulting
firm. Mr. Maginn currently serves as an officer and director of Bain &
Company, Inc.
MR. HOUSER has been a director of iBasis since October 1997. He is currently
a principal and managing director of Seruus Capital Partners, LP and Seruus
Telecom Fund, LP. Mr. Houser is the Chairman and Chief Executive Officer of
State Communications Inc. (d/b/a Trivergent Communications), a
telecommunications company. He was Executive Vice President of LCI
International, a long-distance company, from October 1995 until May 1996. Prior
to that date, he was Chairman and CEO of Corporate Telemanagement Group from its
inception in November 1989 until its sale to LCI International in
September 1995.
MR. SKIBO has been a director of iBasis since September 1999. Currently, Mr.
Skibo is the Chief Executive Officer and Chairman of Colo.com, a provider of
facilities and co-location services to the communication and information
technology industries. Since 1994, Mr. Skibo has served as Chairman and Chief
Executive Officer of Strategic Enterprises and Communications, Inc., a venture
capital firm. 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.
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MR. REDFIELD has been a director of iBasis since September 1999.
Mr. Redfield has been Senior Vice President, Manufacturing and Logistics of
Cisco since February 1997. From September 1993 to February 1997, Mr. Redfield
was Vice President of Manufacturing at Cisco. Mr. Redfield also is a director of
CTC Communications Corp., and VA Linux Systems, Inc. Mr. Redfield received a
B.S. in Materials Engineering from Rensselaer Polytechnic Institute.
MR. POWDERMAKER has served as Vice President, Asia of iBasis since 1998,
prior to that, from 1997 to 1998, Mr. Powdermaker was our Director of Carrier
Sales. From 1996 to 1997, Mr. Powdermaker was client business manager of BCS
Global Markets, a networking services division of AT&T focused on the world's
2,000 largest telecommunications users. From 1995 to 1996, Mr. Powdermaker was a
sales manager with AT&T. In 1994, Mr. Powdermaker was employed in a business
development position with MFS Communications Company. Mr. Powdermaker received
an A.B. in political science from Boston College and an M.A. in Latin American
studies and M.B.A. in finance and marketing from the University of Chicago's
Graduate School of Business.
MR. O'LOUGHLIN has served as Vice President, North America of iBasis since
June 1999. From December 1998 to May 1999, Mr. O'Loughlin was our Director of
Carrier Sales. Prior to joining iBasis, Mr. O'Loughlin was General Manager for
Allied Communication Holdings. From July 1997 until April 1998, Mr. O'Loughlin
was a vice president of carrier services at Arbinet Communications. From October
1994 to June 1997, Mr. O'Loughlin served as Director of Carrier Sales for
TresCom International.
MR. BERGELUND has served as Vice President, Latin America of iBasis since
December 1998. From March 1996 to 1998, Mr. Bergelund was Chief Operating
Officer of IPTEL--Americas Exchange, Inc., a start-up Latin American Internet
telephony network. From 1992 to 1996, Mr. Bergelund was a senior manager
consultant at Oracle Corporation's Latin America Division. Mr. Bergelund
received a B.S. in Electrical Engineering and an M.S. in telecommunications
engineering from the Instituto de Ciencias JEN, Madrid, Spain.
MR. INOUYE has served as Vice President, Asia for iBasis since
January 2000. From 1998 to 2000, Mr. Inouye was director of international
business development and carrier sales for DirectNet Telecommunications, a
provider of wholesale international telecommunications products and services.
From 1986 to 1998, Mr. Inouye served in a variety of managerial and sales
positions, including regional director for international relations, with GTE
Hawaiian Telephone Company. Mr. Inouye received a B.A. in business
administration from the University of Hawaii.
MR. KRISTIN has served as the Chief Information Officer of iBasis since
June 1999 and Vice President of Information Systems since December 1999. From
1994 to 1999, Mr. Kristin served as manager of workflow solutions for Concert
Communication Services, a global telecommunications carrier.
MS. COGAN has served as Vice President of Human Resources of iBasis since
January 2000. From 1997 to 1999, Ms. Cogan was a human resources consultant with
MSC Associates, a human resource consulting group. From 1994 to 1997, Ms. Cogan
served as the senior director of human resources for Cascade Communications
Corp., a global provider of wide area networking products and services for the
telecommunications and Internet industries. In addition, Ms. Cogan has held
human resource positions as Summa Four, Inc., Northern Telecom and Data General
Corp. Ms. Cogan received an M.B.A. in finance and human resources from
Northeastern University and a B.A. from the University of Massachusetts.
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
stockholders to be held in 2000;
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- Class 2 directors, whose terms expire at the annual meeting of
stockholders to be held in 2001; and
- Class 3 directors, whose terms expire at the annual meeting of
stockholders 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 stockholders, our
stockholders will elect the successors to directors whose terms have expired to
serve from the time of election and qualification until the third annual meeting
following election. The classification of the board of directors may delay or
prevent a change in control 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 a shareholders agreement. This agreement
terminated upon completion of our initial public offering in November 1999. Each
of the individuals will remain as a director until he resigns or the
stockholders elect his replacement 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.
DIRECTOR COMPENSATION
Our directors do not receive cash compensation for their services as
directors. However, non-employee directors are reimbursed for travel expenses.
We maintain directors' and officers' liability insurance and our by-laws provide
for mandatory indemnification of directors and officers to the fullest extent
permitted by Delaware law. In addition, our certificate of incorporation limits
the liability of our directors to either 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
officers 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 stockholders following our initial public
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 non-employee 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 and our
1999 Employee Stock Purchase 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
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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,
1999 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, Mr. Hughes, our Vice
President of Finance and Chief Financial Officer and Mr. Giambalvo, our Senior
Vice President of Worldwide Sales.
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. iBasis and
Mr. Giambalvo are parties to an employment agreement, dated as of February 8,
2000, governing his employment with iBasis as Senior Vice President of Worldwide
Sales. Under the terms of the employment agreement, Mr. Giambalvo is to be paid
a base salary of $185,000, and is eligible to receive an annual bonus at the
discretion of the 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, Hughes and
Giambalvo "for cause" or at any time upon at least thirty days prior written
notice, and Messrs. Henson, Hughes and Giambalvo 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, Hughes and Giambalvo 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.
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The employment agreements with Messrs. Gneezy, VanderBrug, Henson, Hughes
and Giambalvo 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, Hughes and Giambalvo 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, Hughes and
Giambalvo 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, Hughes and Giambalvo 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 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 16.9% 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, Henson and
Giambalvo 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.
Our employment agreement with Mr. Giambalvo also contains provisions
relating to Mr. Giambalvo's relocation to the Boston area. Under the terms of
Mr. Giambalvo's employment agreement, we have agreed to provide Mr. Giambalvo
with $70,000 to cover his relocation expenses. In addition, we have agreed to
guarantee a loan of up to $500,000 to Mr. Giambalvo for a period of six months,
in the event he purchases a home in the Boston area before he sells his existing
home.
EXECUTIVE COMPENSATION
The following table sets forth information for the fiscal years ended
December 31, 1998 and 1999 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,
1999.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION (1) ---------------------
-------------------------------------- SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS (#) COMPENSATION
- --------------------------- -------- -------- -------- --------------------- ------------
<S> <C> <C> <C> <C> <C>
Ofer Gneezy................. 1999 $150,000 $135,000 -- --
President and Chief 1998 134,866 37,500 80,000 --
Executive Officer
Gordon J. VanderBrug........ 1999 135,000 122,400 -- --
Executive Vice President 1998 122,240 33,750 60,000 --
John G. Henson, Jr. (2)..... 1999 125,000 85,600 50,000 --
Vice President, 1998 67,898 30,000 200,000 $17,791(3)
Engineering & Operations
Michael J. Hughes (4)....... 1999 120,000 75,750 50,000 --
Vice President, Finance 1998 48,808 12,500 200,000 --
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, 1999 to each of
the officers named in the summary compensation table.
OPTION GRANTS IN 1999
<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 1999 SHARE DATE 5% 10%
- ---- --------------------- ---------------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Ofer Gneezy............. -- -- -- -- -- --
Gordon J. VanderBrug.... -- -- -- -- -- --
John G. Henson, Jr...... 50,000 2.5% $ 4.00 6/3/2009 $2,142,000 $3,529,000
Michael J. Hughes....... 50,000 2.5% 4.00 6/3/2009 2,142,000 3,529,000
</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 $28.75, the closing
price of the common stock on the Nasdaq National Market on December 31,
1999, by
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<PAGE>
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, 1999 with respect to each of the officers named in the
summary compensation table.
<TABLE>
<CAPTION>
1999 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.................................... 20,000 60,000 $ 553,000 $1,659,000
Gordon J. VanderBrug........................... 15,000 45,000 414,750 1,244,250
John G. Henson, Jr............................. 71,250 178,750 1,980,938 4,866,563
Michael J. Hughes.............................. 63,750 186,250 1,769,063 5,078,438
</TABLE>
- ------------------------
(1) Value is determined by subtracting the exercise price from $28.75, the
closing price of the common stock on the Nasdaq National Market on
December 31, 1999, multiplied by the number of shares underlying the
options.
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 December 31, 1999:
- options for the purchase of 2,947,725 shares of common stock had been
granted and were outstanding under the plan;
- 206,125 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 403,650 shares that were granted under the
plan had been cancelled.
2,531,150 shares of common stock remained available for the grant of awards
under the plan as of December 31, 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
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<PAGE>
- 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
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. In December 1999,
the employee stock purchase plan was amended. 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 offering period started on January 1,
2000 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
automatically converted into an aggregate of 17,556,603 shares of common stock
upon the completion of our initial public offering in November 1999. See
"Principal Stockholders" for 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. Our Class A
common stock converted into common stock on a share-for-share basis upon the
completion of our initial public offering.
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 automatically converted into common stock
on a share-for-share basis upon the completion of our initial public 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
automatically converted into common stock upon the completion of our initial
public offering on the basis of three shares of 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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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 automatically converted into common stock on a share-for-share basis upon
the completion of our initial public 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 automatically converted into common stock
on a share-for-share basis upon the closing of our initial public offering.
RIGHTS AND RESTRICTIONS OF CLASS B COMMON STOCK AND PREFERRED STOCK.
When the Class A and Class B common stock and Series A, Series B and
Series C preferred stock converted into common stock upon the completion of our
initial public 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, terminated. Notwithstanding the
conversion, the original holders of the Series A, Series B and Series C
preferred stock are 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 converted. 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, Hughes and
Giambalvo 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,
non-employee 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."
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of common stock as of December 31, 1999, 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.
Beneficial ownership is determined in accordance with the rules and
regulations of the Securities and Exchange Commission. The table below does not
reflect the beneficial ownership of these principal stockholders after giving
effect to a concurrent public offering of 3,500,000 shares of common stock in
which 1,473,363 shares are to be sold by stockholders of the Company, including
some of the stockholders set forth below, assuming no exercise of the
over-allotment option granted to the underwriters of that offering. 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 December 31,
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>
SHARES
BENEFICIALLY OWNED
---------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT
- ------------------------ ---------- --------
<S> <C> <C>
Charles River Partnership VIII, LP and affiliated
entities(1)............................................... 3,811,500 12.1%
Izhar Armony(1)............................................. 3,811,500 12.1%
Menlo Ventures VII, L.P. and affiliated entities(2)......... 3,811,500 12.1%
John Jarve(2)............................................... 3,811,500 12.1%
Ofer Gneezy(3).............................................. 3,774,576 11.9%
Technology Crossover Ventures and affiliated entities(4).... 2,209,497 7.0%
Gordon J. VanderBrug(5)..................................... 1,835,001 5.8%
Robert Maginn(6)............................................ 1,513,784 4.8%
Charles N. Corfield(7)...................................... 1,214,416 3.8%
Charles S. Houser(8)........................................ 1,099,999 3.5%
Seruus Telecom Fund, L.P.................................... 999,999 3.2%
Michael J. Hughes(9)........................................ 80,827 *
John G. Henson, Jr.(10)..................................... 71,250 *
Carl Redfield............................................... 0 *
Charles M. Skibo............................................ 0 *
All directors and executive officers as a group (12
persons)(11).............................................. 17,215,853 54.1%
</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. 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. Based upon information
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provided by Charles River Partnership VIII L.P. and affiliated entities'
Schedule 13G, filed with the SEC February 2, 2000. 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. Based upon information provided by Menlo Ventures VII,
L.P. and affiliated entities' Schedule 13G, filed with the SEC February 4,
2000. The address for Mr. Jarve and Menlo Ventures is 3000 Sand Hill Road,
Building 4, Suite 100, Menlo Park, California 94025.
(3) Includes 20,000 shares of common stock issuable upon exercise of options
within 60 days of December 31, 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. Based in part upon information provided by Ofer
Gneezy's Schedule 13G, filed with the SEC February 14, 2000. Mr. Gneezy is
our President, CEO and one of our directors.
(4) Consists of 16,044 shares held by TCV III (GP), 76,208 shares held by
TCV III, L.P., 2,025,520 shares held by TCV III (Q), L.P. and 91,725 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. Based upon information provided by Technology Crossover
Ventures and affiliated entities' Schedule 13G, filed with the SEC
January 31, 2000. The address for each of these entities is 575 High Street,
Suite 400, Palo Alto, California 94301.
(5) Includes 15,000 shares of common stock issuable upon exercise of options
within 60 days of December 31, 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, and
100,000 shares held by Mr. Corfield, individually. 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
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the shares held by Seruus Telecom Fund, L.P., except to the extent of his
pecuniary interest therein.
(9) Includes 63,750 shares of common stock issuable upon the exercise of
options within 60 days of December 31, 1999. Mr. Hughes is our Vice
President, Finance and our Chief Financial Officer.
(10) Consists entirely of 71,250 shares of common stock issuable upon the
exercise of options within 60 days of December 31, 1999. Mr. Henson is our
Vice President, Engineering & Operations.
(11) Includes 170,000 shares of common stock issuable upon exercise of options
within 60 days of December 31, 1999 and certain shares held by affiliates of
such directors and executive officers.
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DESCRIPTION OF NOTES
We will issue the notes under an indenture to be dated as of March 15, 2000
between us and The Bank of New York, as trustee. The following summarizes some,
but not all, of the provisions of the notes and the indenture. You should refer
to the actual terms of the notes and the indenture, copies of which have been
filed as exhibits to the registration statement of which this prospectus is a
part, for the definitive terms and conditions. We will provide to you, upon
request, copies of the proposed forms of the notes and indenture. As used in
this description, the words "we," "us" or "our" do not include any current or
future subsidiary of iBasis.
GENERAL
The notes are unsecured general obligations that are subordinate in right of
payment as described under "--Subordination." The notes are convertible into
common stock as described under "--Conversion." The aggregate principal amount
of the notes will be limited to $150 million ($172.5 million if the
underwriters' option to purchase additional notes is exercised in full). The
notes will be issued in fully registered form and denominated in integral
multiples of $1,000. The notes will mature on March 15, 2005 unless earlier
converted, redeemed or repurchased.
The notes will bear interest at the annual rate shown on the cover page of
this prospectus. Interest will be paid on each March 15 and September 15 of each
year, beginning September 15, 2000, subject to limited exceptions if the notes
are converted, redeemed or repurchased prior to the interest payment date. The
record dates for payment of interest will be March 1 and September 1. Interest
will be computed on the basis of a 360-day year consisting of twelve 30-day
months.
We will maintain an office in the Borough of Manhattan in New York, New York
where the notes may be presented for registration, transfer, exchange or
conversion. Initially, this will be an office or agency of the trustee. We may,
at our option, pay interest on the notes by check mailed to the registered
holders of notes. However, holders of more than $2,000,000 in principal amount
of notes may elect in writing to be paid by wire transfer; provided that any
payment to The Depository Trust Company or its nominee will be made by wire
transfer of immediately available funds to the account of DTC or its nominee.
We are not restricted from paying dividends or repurchasing securities or
incurring indebtedness under the indenture. The indenture has no financial
covenants. You are not protected in the event of a highly leveraged transaction
or a change in control of iBasis, except as described under "--Repurchase at
Option of Holders Upon a Repurchase Event" below.
Holders will not be required to pay a service charge for registration,
exchange or transfer of their notes. We may, however, require holders to pay any
tax or other governmental charge in connection with the transfer or exchange of
the notes other than stamp or other duties imposed with respect to the issuance
of the notes. We are not required to exchange or register the transfer of:
- any note for a period of 15 days before selection for redemption;
- any note or portion selected for redemption;
- any note or portion surrendered for conversion; or
- any note or portion surrendered for repurchase but not withdrawn in
connection with a repurchase event.
FORM, DENOMINATION AND REGISTRATION
The notes will be evidenced by a global security initially deposited with
DTC, and registered in the name of Cede & Co. as DTC's nominee. The global
security will be deposited upon issuance with the
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trustee as custodian for DTC, in New York, New York, and registered in the name
of DTC or its nominee, in each case for credit to an account of a direct or
indirect participant in DTC, as described below.
Transfers of beneficial interests in the global security will be subject to
the applicable rules and procedures of DTC and its direct and indirect
participants, which may change from time to time.
Except as set forth below, the global security may be transferred, in whole
and not in part, only to another nominee of DTC or to a successor of DTC or its
nominee.
THE DESCRIPTIONS OF THE OPERATIONS AND PROCEDURES OF DTC THAT FOLLOW ARE
PROVIDED SOLELY AS A MATTER OF CONVENIENCE. THESE OPERATIONS AND PROCEDURES ARE
SOLELY WITHIN THE CONTROL OF DTC AND ARE SUBJECT TO CHANGES BY THEM FROM TIME TO
TIME. IBASIS TAKES NO RESPONSIBILITY FOR THESE OPERATIONS AND PROCEDURES AND
URGES INVESTORS TO CONTACT DTC OR ITS PARTICIPANTS DIRECTLY TO DISCUSS THESE
MATTERS.
Institutions that have accounts with DTC or its nominees (called
"participants") may own a beneficial interest in a global note. Persons that are
not participants may beneficially own interests in the global security held by
DTC only through participants or banks, brokers, dealers, trust companies and
other parties that clear through or maintain a custodial relationship with a
participant, either directly or indirectly ("indirect participants"). So long as
Cede, as the nominee of DTC, is the registered owner of the global security,
Cede will be considered the sole holder of the global security for all purposes.
Except as provided below, owners of beneficial interests in the global security
will not:
- be entitled to have certain certificates registered in their names;
- be entitled to receive physical delivery of certificates in definitive
form; or
- be considered the registered holders thereof.
A beneficial interest in the global security may not be exchanged for a note
in certificated form unless (i) DTC (x) notifies us that it is unwilling or
unable to continue as depositary for the global security or (y) has ceased to be
a clearing agency registered under the Exchange Act and in either case we fail
to appoint a successor depositary, (ii) we, at our option, notify the trustee in
writing that we elect to cause the issuance of the notes in certificated form or
(iii) an event of default or any event which after notice or lapse of time or
both would be an event of default occurs, and is continuing, with respect to the
notes. In all cases, certificated notes delivered in exchange for any global
security or beneficial interest therein will be registered in the names, and
issued in any approved denominations, requested by or on behalf of the
depositary (in accordance with its customary procedures).
Transfers between participants will be affected in the ordinary way in
accordance with DTC rules and will be settled in clearinghouse funds. The laws
of some states require that some persons take physical delivery of securities in
definitive form. As a result, holders may be unable to transfer beneficial
interests in the global security to those persons.
We will make cash payments of interest on and principal and redemption or
repurchase price of the global security to Cede, the nominee for DTC as the
registered holder of the global security. We will make these payments by wire
transfer of immediately available funds. Neither we, the trustee nor any paying
agent will have any responsibility or liability for:
- any aspect of the records relating to, or payments made on account of,
beneficial ownership interests in the global security; or
- maintaining, supervising or reviewing any records relating to those
beneficial ownership interests.
We have been informed that DTC's practice is to credit participants'
accounts on the payment date with payments in amounts proportionate to their
respective beneficial interests in the notes represented by the global security
as shown on DTC's records, unless DTC has reason to believe that it will not
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receive payment on the payment date. Payments by participants to owners of
beneficial interests in notes represented by the global security held through
participants will be the responsibility of those participants, as is now the
case with securities held for the accounts of customers registered in "street
name."
We will send any redemption notices to Cede. We will understand that if less
than all of the notes are being redeemed, DTC's practice is to determine by lot
the amount of the holdings of each participant to be redeemed.
We also understand that neither DTC nor Cede will consent or vote with
respect to the notes. We have been advised that under its usual procedures, DTC
will mail an "omnibus proxy" to us as soon as possible after the record date.
The omnibus proxy assigns Cede's consenting or voting rights to those
participants to whose accounts the notes are credited on the record date
identified in a listing attached to the omnibus proxy.
A person having a beneficial interest in notes represented by the global
security may be unable to pledge that interest to persons or entities that do
not participate in the DTC system, or to take other actions in respect of that
interest, because that beneficial interest is not represented by a physical
certificate.
We and the trustee have no responsibility for the performance by DTC, its
participants and its indirect participants of their respective obligations under
the rules and procedures governing their operations. DTC has advised us that it
will take any action permitted to be taken by a holder of notes, including the
presentation of notes for conversion as described below, only at the direction
of one or more participants those participants to whose DTC accounts are
credited with interests in the global security and only in respect of the
principal amount of the notes represented by the global security as to which
those participants have given such a direction.
DTC has advised us as follows:
- DTC is a limited purpose trust company organized under the laws of the
State of New York;
- a member of the Federal Reserve System;
- a "clearing corporation" within the meaning of the Uniform Commercial
Code; and
- a "clearing agency" registered pursuant to the provisions of Section 17A
of the Exchange Act.
DTC was created to hold securities for its participants and to facilitate
the clearance and settlement of securities transactions between participants
through electronic book-entry changes to accounts of its participants.
Participants include securities brokers and dealers, banks, trust companies and
clearing corporations and may include other types of organizations. Some of the
participants, together with other entities, own DTC. Indirect access to the DTC
system is available to others such as banks, brokers, dealers and trust
companies that clear through, or maintain a custodial relationship with a
participant, either directly or indirectly.
DTC is under no obligation to perform or continue to perform the above
procedures, and these procedures may be discounted at any time. If DTC is at any
time unwilling or unable to continue as depositary and a successor depositary is
not appointed by us within 90 days, we will cause notes to be issued in
definitive form in exchange for the global security.
The laws of some states require that certain persons take physical delivery
in definitive form of securities that they own. Consequently, the ability to
transfer beneficial interests in a global note to such persons may be limited to
that extent. Because DTC can act only on behalf of its participants, which in
turn act on behalf of indirect participants and certain banks, the ability of a
person having beneficial interests in a global note to pledge such interest to
persons or entities that do not participate
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in the DTC system, or otherwise take actions in respect of such interests, may
be affected by the lack of a physical certificate evidencing such interests.
CONVERSION BY HOLDERS
You may, at your option, convert your notes, in whole or in part, at any
time prior to maturity into our common stock at an initial conversion price of
$86.14 per share. You may convert notes in denominations of $1,000 and multiples
of $1,000. The conversion price is subject to adjustment as described below. If
the notes are called for redemption, your conversion rights on the notes called
for redemption will expire at the close of business of the last business day
before the redemption date, unless we default in payment of the redemption
price. If you have submitted your note for repurchase after a repurchase event,
you may only convert your note if you deliver a withdrawal notice before the
close of business on the last business day before the repurchase date.
Except as described below, we will not make any adjustment for accrued
interest or dividends on common stock upon conversion of the notes. If you
convert your notes after a record date and prior to the next interest payment,
you will have to pay us interest, unless the notes have been called for
redemption or are eligible for repurchase under the indenture. We will pay a
cash adjustment for any fractional shares based on the market price of our
common stock on the last business day before the conversion date.
You can convert your notes by delivering the notes to an office or agency of
the Trustee in the Borough of Manhattan, the City of New York, along with a duly
signed and completed notice of conversion, a form of which may be obtained from
the trustee. In the case of a global security, DTC will effect the conversion
upon notice from the holder of a beneficial interest in the global security in
accordance with DTC's rules and procedures. The conversion date will be the date
on which the note and the duly signed and completed notice of conversion are
delivered. As promptly as practicable on or after the conversion date, but no
later than three business days after the conversion date, we will issue and
deliver to the conversion agent certificates for the number of full shares of
common stock issuable upon conversion, together with any cash payment for
fractional shares. If you have previously elected to have us repurchase your
notes, you will have to withdraw such election prior to conversion.
If you deliver a note for conversion, you will not be required to pay any
taxes or duties for the issue or delivery of common stock on conversion.
However, we will not pay any transfer tax or duty payable as a result of the
issuance or delivery of the common stock in a name other than that of the holder
of the note. We will not issue or deliver common stock certificates unless we
have been paid the amount of any transfer tax or duty or we have been provided
satisfactory evidence that the transfer tax or duty has been paid.
The conversion price of $86.14 per share will be adjusted if:
1. we dividend or distribute on our common stock shares of our common stock;
2. we subdivide or combine our common stock;
3. we issue rights or warrants to all holders of our common stock to purchase
common stock at less than the current market price;
4. we dividend or distribute to all holders of our common stock, capital stock
or evidences of indebtedness, cash or assets, but excluding:
- dividends, distribution and rights or warrants referred to in (1) and
(3) above, or
- dividends and distribution paid exclusively in cash.
5. we make a dividend or distribution consisting exclusively of cash to all
holders of common stock if the aggregate amount of these distributions
combined together with (A) all other all-cash
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distributions made within the preceding 12 months in respect of which we
made no adjustment plus (B) any cash and the fair market value of other
consideration payable in any tender offers by iBasis or any of our
subsidiaries for common stock concluded within the preceding 12 months in
respect for which we made no adjustment, exceeds 10% of our market
capitalization, being the product of the then current market price of the
common stock multiplied by the number of shares of our common stock then
outstanding;
6. the purchase of common stock pursuant to a tender offer made by us or any of
our subsidiaries involves an aggregate consideration that, together with (A)
any cash and the fair market value of any other consideration payable in any
other tender offer by us or any of our subsidiaries for common stock
expiring within the 12 months preceding such tender offer plus (B) the
aggregate amount of any such all-cash distributions referred to in (5) above
to all holders of common stock within the 12 months preceding the expiration
of the tender offer for which we have made no adjustment, exceeds 10% of our
market capitalization on the expiration of such tender offer; or
7. payment on tender offers or exchange offers by a third party other than us
or our subsidiaries if, as of the closing date of the offer, our board of
directors does not recommend rejection of the offer. We will only make this
adjustment if a tender offer increases the person's ownership to more than
25% of our outstanding common stock and the payment per share is greater
than the current market price of the common stock. We will not make this
adjustment if the tender offer is a merger or transaction described below
under "--Consolidation, Merger or Assumption."
If we implement a stockholders' rights plan, we will be required under the
indenture to provide that the holders of notes will receive the rights upon
conversion of the notes, whether or not these rights were separated from the
common stock prior to conversion.
If we reclassify our common stock, consolidate, merge or combine with
another person or sell or convey our property and assets as an entirety or
substantially as an entirety, each note then outstanding will, without the
consent of the holder of any note, become convertible only into the kind and
amount of securities, cash and other property receivable upon such
reclassification, consolidation, merger, combination, sale or conveyance by a
holder of the number of shares of common stock into which the note was
convertible immediately prior to the reclassification, consolidation, merger,
combination, sale or conveyance. This calculation will be made based on the
assumption that the holder of common stock failed to exercise any rights of
election that the holder may have to select a particular type of consideration.
The adjustment will not be made for a consolidation, merger or combination that
does not result in any reclassification, conversion, exchange or cancellation of
our common stock.
You may, in some circumstances, be deemed to have received a distribution or
dividend subject to United States federal income tax as a result of an
adjustment (or the nonoccurrence of an adjustment) to the conversion price. See
"United States Federal Income Tax Considerations."
We are permitted to reduce the conversion price of the notes for limited
periods of time, if our board of directors deems it advisable. Any such
reduction shall be effective for not less than 20 days. We are required to give
at least 15 days prior notice of any such reduction. We may also reduce the
conversion price to avoid or diminish income tax to holders of our common stock
in connection with a dividend or distribution of stock or similar event.
No adjustment in the conversion price will be required unless it would
result in a change in the conversion price of at least one percent. Any
adjustment not made will be taken into account in subsequent adjustments.
PROVISIONAL REDEMPTION
We may redeem some or all of the notes at any time prior to March 20, 2003,
at a redemption price equal to $1,000 per note plus accrued and unpaid interest
to the redemption date if the closing
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price of our common stock has exceeded 150% of the conversion price for at least
20 trading days in any consecutive 30-trading day period ending on the trading
day prior to the mailing of the notice of redemption.
If we redeem some or all of the notes prior to March 20, 2003, we will also
make an additional payment on the redeemed notes equal to $152.54 per $1,000
note, minus the amount of any interest we actually paid on the note prior to the
date we mailed the notice. We must make these additional payments on all notes
called for redemption, including notes converted after the date we mailed the
notice.
OPTIONAL REDEMPTION
At any time on or after March 20, 2003, we may redeem the notes, in whole or
in part, at our option, at the redemption prices specified below. The redemption
price, expressed as a percentage of the principal amount, is as follows for the
12-month periods beginning on March 20 of the year indicated:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ---- ----------------
<S> <C>
2003........................................................ 102.300%
2004........................................................ 101.150
</TABLE>
and 100% of the principal amount on and after March 15, 2005. In each case we
will also pay accrued and unpaid interest to, but excluding, the redemption
date. If the redemption date is an interest payment date, we will pay interest
to the record holders as of the relevant record date. We are required to give
notice of redemption not more than 60 and not less than 30 days before the
redemption date under the indenture.
No "sinking fund" is provided for the notes, which means that the indenture
does not require us to redeem or retire the notes periodically. We may not
redeem the notes if there is a default under the indenture.
REPURCHASE AT OPTION OF HOLDERS UPON A REPURCHASE EVENT
If a repurchase event occurs, you will have the right, at your option, to
require us to repurchase all or any portion of your notes 40 days after we mail
holders a notice of repurchase event. The repurchase price we are required to
pay will be 105% of the principal amount of the notes submitted for repurchase,
plus accrued and unpaid interest to, but excluding, the repurchase date. If a
repurchase date is an interest payment date, we will pay to the record holder on
the record date.
At our option, instead of paying the repurchase price in cash, we may pay
the repurchase price in common stock, valued at 95% of the average of the
closing prices for the five trading days immediately before and including the
third trading day preceding the repurchase date. We may only pay the repurchase
price in common stock if we satisfy conditions provided in the indenture.
We will be required to mail you a notice within 10 days after the occurrence
of a repurchase event. The notice must describe the repurchase event, your right
to elect repurchase of the notes and the repurchase date. We must deliver a copy
of the notice to the trustee and cause a copy, or a summary of the notice, to be
published in a newspaper of general circulation in New York, New York. You may
exercise your repurchase rights by delivering written notice to us and the
trustee. The notice must be accompanied by the notes duly endorsed for transfer
to us. You must deliver the exercise notice on or before the close of business
on the thirty-fifth calendar day after the mailing date of the repurchase
notice.
A repurchase event will be considered to have occurred if:
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1. our common stock or other common stock into which the notes are
convertible is neither listed for trading on a United States national
securities exchange nor approved for trading on an established automated
over-the-counter trading market in the United States, or
2. one of the following "change in control" events occurs:
- any person or group is a beneficial owner of more than 50% of the
voting power of our outstanding securities entitled to generally vote
for directors;
- our stockholders approve any plan or proposal for our liquidation,
dissolution or winding up;
- we consolidate with or merge into any other corporation or any other
corporation merges into us and, as a result, our outstanding common
stock is changed or exchanged for other assets or securities unless our
stockholders immediately before the transaction own, directly or
indirectly, immediately following the transaction at least 51% of the
combined voting power of the corporation resulting from the transaction
in substantially the same proportion as their ownership of our voting
stock immediately before the transaction;
- we convey, transfer or lease all or substantially all of our assets to
any person; or
- the "continuing directors" do not constitute a majority of our board of
directors at any time.
However, a change in control will not be deemed to have occurred if:
- the last sale price of our common stock for any 5 trading days during
the 10 trading days immediately before the change in control is equal
to at least 105% of the conversion price, or
- all of the consideration, excluding cash payments for fractional shares
in the transaction constituting the change in control consists of
common stock traded on a United States national securities exchange or
quoted on the Nasdaq National Market, and as a result of the
transaction the notes become convertible solely into that common stock.
The term "continuing director" means at any date a member of our board of
directors:
- who was a member of our board of directors on December 31, 1999; or
- who was nominated or elected by at least a majority of the directors
who were continuing directors at the time of the nomination or election
or whose election to our board of directors was recommended by at least
a majority of the directors who were continuing directors at the time
of the nomination or election or by the nominating committee comprised
of our independent directors.
Under the above definition of continuing directors, if the current board of
directors approve a new director or directors and then resigned, no change in
control would occur, even though the current director would then cease to be an
officer. The interpretation of the phrase "all or substantially all" used in the
definition of change in control would likely depend on the facts and
circumstances existing at such time. As a result, there may be uncertainty as to
whether or not a sale or transfer of "all or substantially all" of our assets
has occurred.
You may require us to repurchase all or any portion of your notes upon a
repurchase event. We may not have sufficient cash funds to repurchase the notes
upon a repurchase event. We may elect, subject to certain conditions, to pay the
repurchase price in common stock. Although there are currently no restrictions
on our ability to pay the purchase price, future debt agreements may prohibit us
from repaying the repurchase price in either cash or common stock. If we are
prohibited from repurchasing the notes, we could seek consent from our lenders
to repurchase the notes. If we are
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unable to obtain their consent, we could attempt to refinance the notes. If we
were unable to obtain a consent or refinance, we would be prohibited from
repurchasing the notes. If we were unable to repurchase the notes upon a
repurchase event, it would result in an event of default under our indenture. An
event of default under the indenture could result in a further event of default
under our other then-existing debt. In addition, the occurrence of the
repurchase event may be an event of default under our other debt. As a result,
we would be prohibited from paying amounts due on the notes under the
subordination provisions of the indenture.
The change in control feature may not necessarily afford you protection in
the event of a highly leveraged transaction, a change in control of us or
similar transactions involving us. We could, in the future, enter into
transactions including recapitalizations, that would not constitute a change in
control but that would increase the amount of our senior indebtedness or other
debt. We are not prohibited from incurring senior indebtedness or debt under the
indenture. If we incur significant amounts of additional debt, this could have
an adverse effect on our ability to make payments on the notes.
In addition, our management could undertake leveraged transactions that
could constitute a change in control. The board of directors does not have the
right under the indenture to limit or waive the repurchase right in the event of
these types of leveraged transaction. Our requirement to repurchase notes upon a
repurchase event could delay, defer or prevent a change of control. As a result,
the repurchase right may discourage:
- a merger, consolidation or tender offer;
- the assumption of control by a holder of a large block of our shares; and
- the removal of incumbent management.
The repurchase feature was a result of negotiations between us and the
underwriters of the offering. The repurchase feature is not the result of any
specific effort to accumulate shares of common stock or to obtain control of us
by means of a merger, tender offer or solicitation, or part of a plan by us to
adopt a series of anti-takeover provisions. We have no present intention to
engage in a transaction involving a change of control, although it is possible
that we would decide to do so in the future.
The Exchange Act and SEC rules thereunder require the distribution of
specified types of information to security holders in the event of issuer tender
offers and may apply in the event of a repurchase. We will comply with these
rules to the extent applicable.
SUBORDINATION
The notes are subordinated to the prior payment in full of all existing and
future senior indebtedness as provided in the indenture. Upon any distribution
of our assets upon our dissolution, winding up, liquidation or reorganization,
payments on the notes will be subordinated to the prior payment in full of all
senior indebtedness. If the notes are accelerated following an event of default
under the indenture, the holders of any senior indebtedness will be entitled to
payment in full before the holders of the notes are entitled to receive any
payment on the notes.
We may not make any payments on the notes if:
- we default in any payment on senior indebtedness beyond any grace period,
or
- any other default occurs and is continuing under any designated senior
indebtedness that permits holders of the designated senior indebtedness to
accelerate its maturity, and we and the trustee receive a notice known as
a payment blockage notice from a person permitted to give this notice
under the indenture.
We may resume making payments on the notes:
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- in the case of a payment default, when the default is cured or waived or
ceases to exist; and
- in the case of a nonpayment default, the earlier of when the default is
cured or waived or ceases to exist or 179 days after receipt of the
payment blockage notice.
No new period of payment blockage may be commenced unless:
- 365 days have elapsed since our receipt of the prior payment blockage
notice; and
- all scheduled payments on the notes have been paid in full.
No default that existed on any senior indebtedness on the date of delivery
of any payment blockage notice may be the basis for a subsequent payment
blockage notice.
The term "senior indebtedness" means the principal, premium, if any, and
interest on, including bankruptcy interest, and any other payment on the
following:
- our indebtedness for money borrowed or evidenced by notes, debentures,
bonds or other securities;
- our reimbursement obligations under letters of credit, bank guarantees or
bankers' acceptances;
- our indebtedness under interest rate and currency swap agreements, cap,
floor and collar agreements, currency spot and forward contracts and other
similar agreements and arrangements;
- our indebtedness consisting of commitment or standby fees under our credit
facilities or letters of credit;
- our obligations under leases required or permitted to be capitalized under
generally accepted accounting principles;
- our obligations of the type listed above that has been assumed or
guaranteed by us or in effect guaranteed, directly or indirectly, by us
through an agreement to purchase; and
- any amendment, modification, renewal, extension or refunding of any
indebtedness or obligation of type listed in the bullet points above.
Senior indebtedness will not include:
- any indebtedness or amendment or modification that expressly provides that
it is subordinate to or is not senior to or is on the same basis as the
notes;
- any indebtedness to any subsidiary;
- indebtedness for trade payables or the deferred purchase price of assets
or services incurred in the ordinary course of business; or
- the notes.
The term "designated senior indebtedness" means our obligations under any
particular senior indebtedness in which the instrument creating or evidencing
the same or the assumption or guarantee thereof (or related agreements or
documents to which we are a party) expressly provides that such indebtedness
shall be "designated senior indebtedness" for purposes of the Indenture
(provided that such instrument, agreement or other document may place
limitations and conditions on the right of such senior indebtedness to exercise
the rights of designated senior indebtedness).
If the trustee or any holder of notes receives any payment or distribution
of our assets of any kind on the notes in contravention of any of the terms of
the indenture, then such payment or distribution will be held by the recipient
in trust for the benefit of the holders of senior indebtedness, and will be
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immediately paid or delivered to the holders of senior indebtedness or their
representative or representatives.
The notes are unsecured and subordinated to our senior indebtedness. As a
result, we will not be able to make payments on the notes until we have paid in
full all of our senior indebtedness in the event of our insolvency, liquidation,
reorganization or payment default on senior indebtedness. We may therefore not
have sufficient assets to pay the amounts due on the notes. Neither we nor our
subsidiaries are prohibited from incurring debt under the notes indenture. If we
incur additional debt, our ability to pay amounts due on the notes could be
adversely affected. As of December 31, 1999, we had approximately $16.1 million
of senior indebtedness. We may also incur additional debt in the future. The
subordination provisions will not prevent the occurrence of any default or event
of default or limit the rights of any holder of notes to pursue any other rights
or remedies with respect to the notes.
The notes are obligations exclusively of iBasis. As a result, our cash flow
and our ability to service our debt, including the notes, is partially dependent
upon the earnings of our subsidiaries. In addition, we are partially dependent
on the distribution of earnings, loans or other payments by our subsidiaries to
us.
Our subsidiaries are separate and distinct legal entities. Our subsidiaries
have no obligation to pay any amounts due on the notes or to provide us with
funds for our payment obligations, whether by dividends, distributions, loans or
other payments. In addition, any payment of dividends, distributions, loans or
advances by our subsidiaries to us could be subject to statutory or contractual
restrictions. Payments to us by our subsidiaries will also be contingent upon
our subsidiaries' earnings and business considerations.
Our right to receive any assets of any of our subsidiaries upon their
liquidation or reorganization, and therefore your right to participate in these
assets, will be effectively subordinated to the claims of that subsidiary's
creditors, including trade creditors. In addition, even if we were a creditor of
any of our subsidiaries, our rights as a creditor would be subordinate to any
security interest in the assets of our subsidiaries and any indebtedness of our
subsidiaries senior to that held by us. As of December 31, 1999, our
subsidiaries did not have any indebtedness to which the notes are effectively
subordinated.
As a result of the subordination provisions, in the event of the
liquidation, bankruptcy, reorganization, insolvency, receivership or similar
proceedings, holders of the notes may receive less than other creditors on a
ratable basis.
EVENTS OF DEFAULT AND REMEDIES
The following events constitute "events of default" under the indenture:
- we fail to pay the principal or premium, if any, on any of the notes when
due, whether or not prohibited by the subordination provisions of the
indenture;
- we fail to pay interest on the notes when due if such failure continues
for 30 days, whether or not prohibited by the subordination provisions of
the indenture;
- we fail to deliver shares of our common stock, including cash for
fractional shares, 5 days after conversion of a note;
- we fail to perform any covenant in the indenture if such failure continues
for 45 days after notice is given in accordance with the indenture;
- we fail to repurchase any notes after a repurchase event;
- we fail to provide timely notice of a repurchase event;
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- we fail or any of our significant subsidiaries fail to make any payment at
maturity on any indebtedness, including any applicable grace periods, in
an amount in excess of $5,000,000, and such amount has not been paid or
discharged within 30 days after notice is given in accordance with the
indenture;
- a default by us or any significant subsidiary on any indebtedness that
results in the acceleration of indebtedness in an amount in excess of
$5,000,000, without this indebtedness being discharged or the acceleration
being rescinded or annulled for 30 days after notice is given in
accordance with the indenture; or
- certain events involving bankruptcy, insolvency or reorganization of us or
any significant subsidiary.
The trustee is generally required under the indenture, within 90 days after
its becoming aware of a default, to provide holders written notice of all
incurred default. However, the trustee may except in the case of a payment
default on the notes, withhold this notice of default if it determines that
withholding the notice is in the best interest of the holders.
If an event of default has occurred and is continuing, the trustee or the
holders of not less than 25% in principal amount of outstanding notes, may
declare the principal and premium on the notes to be immediately due and
payable. After acceleration, but before a judgment or decree based on
acceleration, the holders of a majority in aggregate principal amount of
outstanding notes may, under circumstances set forth in the indenture, rescind
the acceleration of all events of default, other than the payment of principal
of the notes that have become due solely because of the acceleration, have been
cured or waived as provided in the indenture. If an event of default arising
from events of bankruptcy, insolvency or reorganization occurs and is continuing
with respect to iBasis, all unpaid principal of and accrued interest on the
outstanding notes would become due and payable immediately without any
declaration or other act on the part of the trustee or holders of notes.
Holders of a majority in principal amount of outstanding notes may direct
the time, method and place of conducting any proceeding for any remedy available
to the trustee or exercising any trust or power conferred on the trustee,
subject to specified limitations. Before exercising any right or power under the
indenture at the direction of the holders, the trustee will be entitled to
receive from such holders reasonable security or indemnity against any costs,
expenses and liabilities that it might incur as a result.
Before you may take any action to institute any proceeding relating to the
indenture, or to appoint a receiver or a trustee, or for any other remedy, each
of the following must occur:
- you must have given the trustee written notice of a continuing event of
default;
- the holders of at least 25% of the aggregate principal amount of all
outstanding notes must make a written request of the trustee to take
action because of the default;
- holders must have offered reasonable indemnification to the trustee
against the cost, expenses and liabilities of taking action; and
- the trustee must not have taken action for 60 days after receipt of such
notice and offer of indemnification.
These limitations do not apply to a suit for the enforcement of payment of
the principal of or any premium or interest on a note or the right to convert
the note in accordance with the indenture.
Generally, the holders of not less than a majority of the aggregate
principal amount of outstanding notes may waive any default or event of default,
except if:
- we fail to pay principal, premium or interest on any note when due;
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- we fail to convert any note into common stock; or
- we fail to comply with any of the provisions of the indenture that would
require the consent of the holder of each outstanding note affected.
We will send the trustee annually a statement as to whether we are in
default and the nature of any default under the indenture.
CONSOLIDATION, MERGER OR ASSUMPTION
We may not consolidate or merge into another person or sell, lease, convey
or transfer all or substantially all of our assets to another person, whether in
a single or series of related transactions, unless:
- either (A) we are the surviving entity, or (B) the resulting corporation
is a U.S. corporation and expressly assumes in writing all of our
obligations under the notes and the indenture;
- no default or event of default exists or would occur; and
- other specified conditions are satisfied.
MODIFICATIONS OF THE INDENTURE
The consent of the holders of a majority in principal amount of the
outstanding notes affected is required to make a modification or amendment to
the indenture. However, a modification or amendment requires the consent of the
holder of each outstanding note affected if it would:
- reduce the interest rate or change the time of payment of interest on any
note;
- reduce the principal amount or any premium of any note;
- extend the fixed maturity of any note;
- reduce any amount payable upon redemption or repurchase of any note;
- adversely change our obligation to repurchase any note upon a repurchase
event;
- adversely change the holder's right to institute suit for the payment of
any note;
- change the place where, or currency in which, any note is payable;
- adversely modify the right to convert the notes;
- adversely modify the subordination provisions of the notes;
- change the percentage required to consent to modifications and amendments;
- reduce the percentage of outstanding notes necessary for waiver of
compliance with certain provisions of the indenture or for the waiver of
certain defaults; or
- reduce the percentage in aggregate principal amount of outstanding notes
required for the adoption of a resolution or the quorum required at any
meeting of noteholders at which a resolution is adopted.
SATISFACTION AND DISCHARGE
We may discharge our obligations under the indenture while notes remain
outstanding if:
- all notes will become due in one year or are scheduled for redemption in
one year; and
- we deposit sufficient funds to pay all outstanding notes on their
scheduled maturity or redemption date.
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NOTICES
Notice to holders of the notes will be given by mail to the addresses of
such holders as they appear in the security register. Such notices will be
deemed to have been given on the date of mailing of the notice.
REPLACEMENT OF NOTES
We will replace notes that become mutilated, destroyed, stolen or lost at
the expense of the holder upon delivery to the trustee of the mutilated notes or
evidence of the loss, theft or destruction thereof satisfactory to us and the
trustee. In the case of a lost, stolen or destroyed note, indemnity satisfactory
to the trustee and to us may be required at the expense of the holder of such
note before a replacement note will be issued.
GOVERNING LAW
The notes, the indenture and the registration rights agreement will be
governed by the laws of the State of New York, without regard to conflicts of
laws principles.
CONCERNING THE TRUSTEE
We have appointed the trustee as the initial paying agent, conversion agent,
registrar and custodian for the notes. We may maintain deposit accounts and
conduct other banking transactions with the trustee or its affiliates in the
ordinary course of business. In addition, the trustee and its affiliates may in
the future provide banking and other services to us in the ordinary course of
their business.
If the trustee becomes one of our creditors, the indenture and the Trust
Indenture Act of 1939 may limit the right of the trustee to obtain payment on or
realize on security for its claims. If the trustee develops any conflicting
interest with the holders of notes or us, it must eliminate the conflict or
resign.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists 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 December 31, 1999, there were 31,642,728 shares of common stock
outstanding and held of record by approximately 120 stockholders. 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 in the concurrent offering
of common stock, assuming no exercise of the underwriters' over-allotment option
in that offering, there will be 33,684,728 shares of common stock outstanding
upon the closing of the common stock 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. There
are presently 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, 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 have demand
registration rights with respect to those shares under the Securities Act as of
the date of this prospectus. We granted such
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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, which was the result of conversion
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. 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.
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 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
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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.
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.
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UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
This section summarizes the material United States federal income tax
consequences of purchasing, owning, and disposing of the notes and the common
stock into which you may convert the notes. This summary is not a complete
analysis of all the potential tax consequences that you may need to consider
before investing based on your particular circumstances.
This summary is based on the Internal Revenue Code, the applicable Treasury
regulations promulgated or proposed under the Internal Revenue Code, judicial
authority and administrative rulings as of the date hereof. Any of these may
change, possibly on a retroactive basis.
This summary deals only with beneficial owners of notes and common stock who
hold the notes and common stock as "capital assets." It does not address tax
consequences under any special tax rules. Special rules may apply, for example,
to banks, tax-exempt organizations, pension funds, insurance companies, dealers
in securities or foreign currencies, persons participating in a hedging
transaction or a "straddle" a constructive sale transaction or "conversion
transaction," or persons that have a "functional currency" other than the U.S.
dollar. In addition, this discussion does not address the tax consequences to
non-U.S. holders. This summary discusses the tax consequences to holders who
purchase of the notes at their "issue price" and generally does not discuss the
tax consequences to subsequent purchasers of the notes. The "issue price" is the
first price at which a substantial portion of the notes is sold to the public.
We have not sought any ruling from the IRS with respect to the statements and
conclusions in this summary. We cannot guarantee that the IRS will agree with
these statements and conclusions.
Before you invest in the notes, you should consult your own tax advisor to
determine how the United States federal income tax laws apply to your particular
situation and for information about any tax consequences arising under other tax
laws, such as United States federal estate tax laws and the laws of any state,
local or foreign taxing jurisdiction or under any applicable tax treaty.
This summary applies to you if you are a U.S. holder. For purposes of this
discussion, the term "U.S. holder" means a beneficial owner of a note or common
stock that is for U.S. federal income tax purposes:
- a citizen or resident of the United States,
- a corporation or other entity created or organized in or under the laws of
the United States or any political subdivision thereof;
- an estate, the income of which is subject to United States federal income
taxation regardless of its source; or
- a trust if a United States court is able to exercise primary supervision
over the administration thereof and if one or more United States persons
has the authority, to control all substantial decisions thereof.
If a partnership holds notes, the tax treatment of a partner will generally
depend upon the status of the partner and upon the activities of the
partnership. Partners of partnerships holding notes or common stock should
consult their tax advisors.
Although the treatment of the notes and, in particular, the additional
payment that we may be required to make upon a provisional redemption of the
notes, is not entirely clear, we intend to take the position that the note will
be treated as described below.
PAYMENT OF INTEREST
You generally must include interest on notes in your income as ordinary
income at the time you receive or accrue the interest based on your method of
accounting for United States federal income tax
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purposes. We must pay a premium to you on certain redemptions or repurchases of
the notes. According to Treasury regulations, the possibility of a premium being
paid to you will not affect the amount of interest income you recognize, in
advance of the payment of any premium, if there is only a remote chance as of
the date the notes were issued that you will receive a premium.
We intend to take the position that the possibility that you will be paid a
premium in connection with a redemption of your notes is a remote or incidental
contingency as of the issue date of the notes, within the meaning of Treasury
Regulations Sections 1.1275-2(h) and 1.1275-4(a)(5). Our determination that the
payment of a premium is a remote or incidental contingency is binding upon you,
unless you properly disclose to the IRS that you are taking a contrary position.
Although the matter is not free from doubt, any premium we pay should be taxable
to you as ordinary income at the time it accrues or is received in accordance
with your regular method of tax accounting. It is possible, however, that the
IRS might take a different position, in which case you might be required to
include such premium in income as it accrues or becomes fixed (regardless of
your regular method of tax accounting). You are urged to consult your own tax
advisor regarding the foregoing.
If our position is mistaken, and the option to redeem any note is determined
not be "remote", the notes would be treated as issued with original issue
discount. In such event, interest income on the notes, as computed taking into
account the contingent payment and regardless of actual cash payments, would
have to be included in income on a noncontingent bond method as described in
applicable treasury regulations. This inclusion would occur before the receipt
of the cash attributable to such income, regardless of your method of tax
accounting, and actual distributions of stated interest would not be reported as
taxable income. Consequently, you would be required to include amounts in your
gross income even though we might not make any actual cash payments, or may make
only different cash payments, during the period.
SALE, EXCHANGE OR REDEMPTION OF NOTES
You generally will recognize gain or loss on the sale, exchange (other than
a conversion) or redemption of notes equal to the difference between (1) the
amount of cash proceeds and the fair market value of any property you receive on
the sale, exchange or redemption (except any portion that is accrued interest
income, which is taxable as ordinary income) and (2) your adjusted tax basis in
the notes. Your adjusted tax basis generally will equal the cost of the notes to
you. Your gain or loss generally will be capital gain or loss. Capital gain or
loss will be long-term if you have held the notes for more than one year and
will be short-term if you have held the notes for one year or less. For federal
income tax purposes long-term capital gains for noncorporate taxpayers,
including individuals, are taxed at a maximum rate of 20%, and short-term
capital gains at a maximum rate of 39.6%. If you recognize capital loss, your
deduction for the loss may be limited. Corporate taxpayers pay a maximum regular
federal income tax rate of 35% on all net capital gains and ordinary income.
CONVERSION OF NOTES
You generally will not recognize any income, gain or loss on conversion of
notes into common stock, except for (i) common stock you receive with respect to
interest that has accrued but not been included in income, (ii) any cash you
receive instead of a fractional share of common stock as described below,
(iii) to the extent described below, cash received as an additional payment if
you convert your notes after receiving notice of a provisional redemption. Upon
your conversion of a note into common stock, interest that has accrued but not
been included in income will be taxable to you as ordinary interest income.
Although the treatment of the additional payment that we will be required to
make to you if you convert your notes after receiving notice of a provisional
redemption in unclear, it is likely that you will be required to recognize gain,
if any, that you realize to the extent not in excess of such cash payment. Any
gain so recognized will generally be capital gain. Your tax basis in the common
stock will be the same as your adjusted tax basis in the notes at the time of
conversion,
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reduced by any basis attributable to fractional shares. For capital gains
purposes, your holding period for the common stock will generally include your
holding period for the notes you converted except that the holding period of the
common stock allocable to interest that has accrued but not been included in
income may commence with the conversion.
You should treat cash you receive instead of a fractional share of common
stock as a payment in exchange for the fractional share of common stock. This
will result in capital gain or loss (measured by the difference between the cash
you receive for the fractional share and your adjusted tax basis in the
fractional share after taking into account any increase in basis attributable to
gain recognized as a result of the receipt of a cash payment from us in
connection with a provisional redemption of notes).
DIVIDENDS ON COMMON STOCK
If we make a distribution on common stock, the distribution generally will
be treated as a dividend and taxed as ordinary income to the extent of our
current and/or accumulated earnings and profits. A distribution in excess of
earnings and profits is treated as a tax-free return of capital to the extent of
your tax basis in the common stock, on a share-by-share basis, and then as gain
from the sale or exchange of such stock.
A dividend to a corporate holder may qualify for a deduction of 70% of the
dividend received, subject to limitations in certain cases, if the holder owns
less than 20% of the voting power value of our stock (disregarding certain
nonvoting, nonconvertible, nonparticipating preferred stock). A corporate holder
that owns 20% or more of the voting power and value of our stock (similarly
disregarding such preferred stock) generally will qualify for an 80% dividends
received deduction.
ADJUSTMENTS TO CONVERSION PRICE
The conversion price of the notes may change under certain circumstances. In
such a case, you may be treated as having received a constructive distribution
whether or not your notes are ever converted. Such a distribution will generally
be deemed to occur if, and to the extent that, the adjustment in the conversion
price increases your proportionate interest in our assets or earnings and
profits. The constructive distribution may be taxed as ordinary income, subject
to a possible dividends received deduction if you are a corporate holder, to the
extent of our current and/or accumulated earnings and profits. For example, an
adjustment to reflect a taxable dividend to holders of common stock will result
in a constructive dividend. Common stockholders will generally be treated as
having received a constructive distribution if there is not a full adjustment to
the conversion price of the notes to reflect a stock dividend or other event
that would (absent such adjustment) increase the proportionate interest of the
common stockholders in our assets or earnings and profits. In such an event, the
constructive distribution will be taxable as ordinary income, subject to a
possible dividends received deduction if you are a corporate holder, to the
extent of our current and/or accumulated earnings and profits.
SALE OF COMMON STOCK
On the sale or exchange of common stock, you generally will recognize
capital gain or loss equal to the difference between (1) the amount of cash and
the fair market value of any property you receive on the sale or exchange and
(2) your adjusted tax basis in the common stock. This capital gain or loss will
be long-term if you have held the stock for more than one year and will be
short-term if you have held the stock for one year or less. For federal income
tax purposes long-term capital gains of noncorporate taxpayers, including
individuals, are taxed at a maximum stated rate of 20%, and short-term capital
gains at a maximum stated rate of 39.6%. A holder's basis and holding period in
common stock received upon conversion of notes are determined as discussed above
under "--Conversion of
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notes." If you recognize capital loss, your deduction for the loss may be
limited. Corporate taxpayers pay a maximum regular federal income tax rate of
35% on all net capital gains and ordinary income.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
In general, a broker or we must report to the IRS payments of principal,
premium and interest on notes, payments of dividends on common stock, payments
of the proceeds of the sale or exchange of notes, and payments of the proceeds
of the sale or exchange of common stock. The payer or broker must backup
withhold at the rate of 31% if:
- you fail to furnish a taxpayer identification number to the payer or
broker or establish an exemption from backup withholding,
- the IRS notifies the payer or broker that the number you furnished is
incorrect,
- you have underreported interest or dividends, or
- you have failed to certify under penalties of perjury that you are not
subject to backup withholding under the Internal Revenue Code.
Some holders, including all corporations, are exempt from backup
withholding. You may credit any amounts withheld under the backup withholding
rules against your United States federal income tax liability, or receive a
refund, if you properly furnish the required information to the IRS.
Treasury regulations that apply to payments made after December 31, 2000
will modify current information reporting and backup withholding procedures and
requirements. These regulations provide certain presumptions regarding the
status of holders when payments to the holders cannot be reliably associated
with appropriate documentation provided to the payer. For payments made after
December 31, 2000, holders must provide certification, if applicable, that
conforms to the requirements of the regulations, subject to certain transitional
rules permitting certification in accordance with current Treasury regulations
until December 31, 2000. Because the application of these regulations may depend
on your particular circumstances, we urge you to consult your tax adviser
regarding the application of these regulations.
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SHARES ELIGIBLE FOR FUTURE SALE
As of December 31, 1999, we had outstanding 31,700,853 shares of common
stock assuming the exercise of all outstanding stock purchase warrants but no
exercise of outstanding options under our stock incentive plans or other
agreements. In addition, 1,741,351 shares of common stock will initially be
issuable upon conversion of the notes sold in this offering and we are currently
conducting a separate public offering of 3,500,000 shares of common stock of
which 2,026,637 shares will be issued by iBasis. Of these shares, the shares
issuable upon the conversion of the notes sold in this offering, the 3,500,000
shares issued or sold in the concurrent stock offering and the 7,820,000 shares
issued in our initial public 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 22,407,499 shares are
"restricted shares" as defined in Rule 144.
In addition, substantially all of our option holders, warrant holders and
affiliates, and all of our officers and directors, have agreed under written
"lock-up" agreements not to sell any shares of common stock for defined periods
of time after the date of this prospectus without the prior written consent of
FleetBoston Robertson Stephens Inc. See "Underwriting."
RULE 144
In general, under Rule 144 as currently in effect, 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 317,008 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 our initial public 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 our initial public offering, 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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SALES OF RESTRICTED SHARES
As a result of the foregoing regulations, we expect that:
- 2,951,226 shares of common stock are eligible for resale without
restriction under Rule 144(k) or Rule 701, of which 2,766,222 shares are
subject to lock-up agreements;
- upon the expiration of the several lock-up agreements, but in no event
later than 90 days after the date of this prospectus, an additional
15,127,399 shares of common stock, including 14,895,999 shares of common
stock held by affiliates of ours, will be 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; and
- 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 90 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."
The holders of 16,056,603 shares of common stock or their transferees have
rights 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, on February 17, 2000, we filed a registration statement under
the Securities Act covering the 5,700,000 shares of common stock covered by the
1997 Stock Incentive Plan and the 500,000 shares of common stock covered by the
1999 Employee Stock Purchase Plan. See "Management--1997 Stock Incentive Plan;
- --1999 Employee Stock Purchase Plan." The registration statement automatically
became effective upon filing. Following the filing, shares registered under
these registration statements will, subject to the 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. As of December 31,
1999, options to purchase an aggregate of 2,947,725 shares were issued and
outstanding under the 1997 Stock Incentive Plan and no purchases had been made
under the 1999 Employee Stock Purchase Plan.
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UNDERWRITING
The underwriters named below, acting through their representatives,
FleetBoston Robertson Stephens Inc., Chase Securities Inc., U.S. Bancorp Piper
Jaffray Inc. and Dain Rauscher Incorporated, have severally agreed with us,
subject to the terms and conditions set forth in the underwriting agreement, to
purchase from us the aggregate principal amount of notes set forth opposite
their names below. The underwriters are committed to purchase and pay for all
notes if any are purchased.
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITER AMOUNT OF NOTES
- ----------- ---------------
<S> <C>
FleetBoston Robertson Stephens Inc.......................... $ 96,375,000
Chase Securities Inc........................................ 21,375,000
U.S. Bancorp Piper Jaffray Inc.............................. 21,375,000
Dain Rauscher Incorporated.................................. 10,875,000
------------
Total................................................... $150,000,000
============
</TABLE>
The representatives have advised us that the underwriters propose to offer
the notes to the public at the 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 1.8% of the principal amount of the notes 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 notes are 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.
OVERALLOTMENT 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 an additional $22.5 million aggregate principal amount of notes.
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 notes that the number of notes to be
purchased by it shown in the above table bears to the aggregate principal amount
of notes offered in this offering. If purchased, such additional notes will be
sold by the underwriters on the same terms as those on which the aggregate
principal amount of notes offered in this offering are being sold. We will be
obligated, pursuant to the option, to sell notes 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 notes 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 $172.5
million, $5.2 million and $167.3 million, 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 $0.6 million.
INDEMNITY. The underwriting agreement contains covenants of indemnity among
the underwriters, the selling stockholders 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
specified periods of time 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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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 FleetBoston Robertson
Stephens Inc. FleetBoston 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. The lock-up period with
respect to approximately 425,000 of the shares held by these stockholders
expires May 8, 2000, and the lock-up period with respect to the remaining
22,904,798 shares held by these stockholders expires 90 days after the date of
this prospectus. 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.
NO TRADING MARKET. The notes are a new issue of securities with no
established trading market. We have been advised by the underwriters that the
underwriters intend to make a market in the notes, but they are not obligated to
do so and may discontinue market making at any time without notice. We cannot
assure you as to the liquidity of the trading market for the notes.
FUTURE SALES. In addition, we have agreed that during the 90 days after the
date of this prospectus we will not, subject to certain exceptions, without the
prior written consent of FleetBoston 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."
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 notes
or 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 notes or the
common stock on behalf of the underwriters for the purpose of fixing or
maintaining the price of the notes or the common stock. A "syndicate covering
transaction" is the bid for or the purchase of the notes or 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 notes or 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 in the over-the-counter market or otherwise and, if commenced, may
be discontinued at any time.
SHARES ACQUIRED BY EMPLOYEES AND AFFILIATES OF FLEETBOSTON ROBERTSON
STEPHENS INC., CHASE SECURITIES INC. AND U.S. BANCORP PIPER JAFFRAY
INC. Certain employees and other affiliates of FleetBoston Robertson Stephens
Inc., Chase Securities Inc. 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.
85
<PAGE>
LEGAL MATTERS
Bingham Dana LLP, Boston, Massachusetts will pass upon the validity of notes
and the common stock issuable upon conversion of the notes 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,
Alston & Bird LLP, Atlanta, Georgia will pass upon certain legal matters in
connection with this offering for the underwriters. Five attorneys at Bingham
Dana LLP own, in the aggregate, 15,379 shares of our common stock.
EXPERTS
Our consolidated balance sheets as of December 31, 1998 and 1999, and the
related consolidated statements of operations, redeemable convertible preferred
stock and stockholders (deficit) equity and cash flows and for the years ended
December 31, 1997, 1998 and 1999 included in this prospectus and registration
statement and the consolidated statements of operations data for the period from
inception (August 2, 1996) to December 31, 1996 derived from financial
statements not included in this prospectus 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 notes
to be sold in this offering and the shares of common stock to be issued upon
conversion of the notes. 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 iBasis, the notes to be sold in this
offering and the shares of common stock to be issued upon conversion of the
notes, 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).
86
<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, 1998 and
1999...................................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1998 and 1999.......................... F-4
Consolidated Statements of Redeemable Convertible Preferred
Stock and Stockholders' Equity (Deficit) for the Years
Ended December 31, 1997, 1998 and 1999.................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 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, 1998 and 1999, and the related consolidated statements of
operations, redeemable convertible preferred stock and stockholders' equity
(deficit) and cash flows for the three years ended December 31, 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, 1998 and 1999, and the results of their
operations and their cash flows for the three years ended December 31, 1999, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
February 2, 2000
F-2
<PAGE>
IBASIS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
ASSETS ----------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 7,399,451 $123,665,961
Accounts receivable, net of allowance for doubtful
accounts of approximately $127,000 and $633,000,
respectively............................................ 1,084,623 5,404,338
Prepaid expenses and other current assets................. 245,644 964,675
----------- ------------
Total current assets.................................. 8,729,718 130,034,974
----------- ------------
Property and equipment, at cost:
Network equipment......................................... 3,113,885 6,544,913
Equipment under capital lease............................. 343,990 16,430,153
Leasehold improvements.................................... 311,792 1,696,755
Computer software......................................... 145,626 782,244
Furniture and fixtures.................................... 44,555 154,970
----------- ------------
3,959,848 25,609,035
Less--Accumulated depreciation and amortization........... (239,637) (3,218,920)
----------- ------------
3,720,211 22,390,115
Other assets................................................ 321,932 1,048,000
----------- ------------
$12,771,861 $153,473,089
----------- ------------
</TABLE>
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT)
<TABLE>
<S> <C> <C>
Current liabilities:
Accounts payable.......................................... $ 3,752,974 $ 6,112,938
Accrued expenses.......................................... 483,539 4,391,296
Capital lease obligations, current portion................ 251,890 4,376,280
----------- ------------
Total current liabilities............................. 4,488,403 14,880,514
----------- ------------
Capital lease obligations, net of current portion........... 212,679 11,688,843
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 and no shares at
December 31, 1998 and 1999, respectively (stated at
redemption value)..................................... 10,719,205 --
Stockholders' equity (deficit):
Series A convertible preferred stock, $.001 par value-
Authorized--1,256,875 shares
Issued and outstanding--1,250,000 and no shares at
December 31, 1998 and 1999, respectively.............. 1,250 --
Common stock, $.001 par value-
Authorized--no shares and 85,000,000 shares at December
31, 1998 and 1999, respectively
Issued and outstanding--none and 31,642,728 at December
31, 1998 and 1999, respectively....................... -- 31,642
Class A common stock, $.001 par value-
Authorized--30,000,000 shares
Issued and outstanding--6,060,000 and no shares at
December 31, 1998 and 1999, respectively.............. 6,060 --
Class B common stock, $.001 par value-
Authorized--1,500,000 shares
Issued and outstanding--1,500,000 and no shares at
December 31, 1998 and 1999, respectively.............. 1,500 --
Additional paid-in capital................................ 4,022,059 156,887,447
Deferred compensation..................................... -- (2,200,547)
Accumulated deficit....................................... (6,728,295) (27,814,810)
----------- ------------
Total stockholders' (deficit) equity.................. (2,697,426) 126,903,732
----------- ------------
$12,771,861 $153,473,089
----------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
IBASIS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
---------- ----------- ------------
<S> <C> <C> <C>
Net revenue............................................ $ 127,425 $ 1,978,430 $ 19,417,102
Operating expenses:
Data communications and telecommunications........... 186,587 2,729,980 21,006,774
Research and development............................. 317,992 1,673,884 6,183,391
Selling and marketing................................ 97,463 1,160,448 5,568,399
General and administrative........................... 453,617 1,365,132 5,308,465
Depreciation and amortization........................ 18,554 363,821 2,997,355
Loss (gain) on disposal of property and equipment.... -- 531,129 (15,297)
---------- ----------- ------------
Total operating expenses............................... 1,074,213 7,824,394 41,049,087
---------- ----------- ------------
Loss from operations................................... (946,788) (5,845,964) (21,631,985)
Interest income........................................ 17,490 179,270 1,329,237
Interest expense....................................... (4,171) (52,983) (835,593)
Other income (expense), net............................ 7,829 (6,826) 2,826
Minority interest in loss of joint venture............. -- -- 49,000
---------- ----------- ------------
Net loss............................................. (925,640) (5,726,503) (21,086,515)
Accretion of dividends on redeemable convertible
preferred stock...................................... -- (219,205) (1,020,366)
---------- ----------- ------------
Net loss applicable to common stockholders........... $ (925,640) $(5,945,708) $(22,106,881)
========== =========== ============
Net loss per share (Note 1(d)):
Basic and diluted net loss per share................. $ (0.15) $ (0.99) $ (2.29)
========== =========== ============
Basic and diluted weighted average common shares
outstanding........................................ 6,005,877 6,022,551 9,655,253
========== =========== ============
</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 PREFERRED CONVERTIBLE PREFERRED SERIES A CONVERTIBLE
STOCK STOCK PREFERRED STOCK COMMON STOCK
------------------------- ------------------------- ---------------------- ----------
NUMBER REDEMPTION NUMBER REDEMPTION NUMBER $.001 PAR NUMBER
OF SHARES VALUE OF SHARES VALUE OF SHARES VALUE OF SHARES
---------- ------------ ---------- ------------ ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
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 $59,900........... -- -- 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................. -- 541,541 -- -- -- -- --
Accretion of dividends on Series
C redeemable convertible
preferred stock................. -- -- -- 478,825 -- -- --
Deferred compensation related to
stock options................... -- -- -- -- -- -- --
Amortization of deferred
compensation.................... -- -- -- -- -- -- --
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) --
Conversion of Class A common
stock to common stock........... -- -- -- -- -- -- 23,738,353
Reclassification of dividends on
Series B and Series C redeemable
convertible preferred stock..... -- (760,746) -- (478,825) -- -- --
Exercise of common stock
options......................... -- -- -- -- -- -- 84,375
Sale of common stock under
initial public offering, net of
issuance costs of approximately
$10,420,000..................... -- -- -- -- -- -- 7,820,000
Net loss......................... -- -- -- -- -- -- --
---------- ------------ ---------- ------------ ---------- ------- ----------
Balance, December 31, 1999....... -- $ -- -- $ -- -- $ -- 31,642,728
========== ============ ========== ============ ========== ======= ==========
<CAPTION>
CLASS A COMMON CLASS B COMMON
MMON STOCK
----------- ----------------------- ---------------------- ADDITIONAL
$.001 PAR NUMBER $.001 PAR NUMBER $.001 PAR PAID-IN DEFERRED
VALUE OF SHARES VALUE OF SHARES VALUE CAPITAL COMPENSATION
--------- ----------- --------- ---------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
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 $59,900........... -- -- -- -- -- (59,892) --
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................. -- -- -- -- -- (541,541) --
Accretion of dividends on Series
C redeemable convertible
preferred stock................. -- -- -- -- -- (478,825) --
Deferred compensation related to
stock options................... -- -- -- -- -- 2,384,340 (2,384,340)
Amortization of deferred
compensation.................... -- -- -- -- -- -- 183,793
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 --
Conversion of Class A common
stock to common stock........... 23,738 (23,738,353) (23,738) -- -- -- --
Reclassification of dividends on
Series B and Series C redeemable
convertible preferred stock..... -- -- -- -- -- 1,239,571 --
Exercise of common stock
options......................... 84 -- -- -- -- 2,726 --
Sale of common stock under
initial public offering, net of
issuance costs of approximately
$10,420,000..................... 7,820 -- -- -- -- 114,692,597 --
Net loss......................... -- -- -- -- -- -- --
------- ----------- -------- ---------- ------- ------------- -----------
Balance, December 31, 1999....... $31,642 -- $ -- -- $ -- $ 156,887,447 $(2,200,547)
======= =========== ======== ========== ======= ============= ===========
<CAPTION>
TOTAL
STOCKHOLDERS'
ACCUMULATED EQUITY
DEFICIT (DEFICIT)
------------ -------------
<S> <C> <C>
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 $59,900........... -- (59,892)
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................. -- (541,541)
Accretion of dividends on Series
C redeemable convertible
preferred stock................. -- (478,825)
Deferred compensation related to
stock options................... -- --
Amortization of deferred
compensation.................... -- 183,793
Conversion of preferred stock and
Class B common stock to Class A
common stock.................... -- 35,601,740
Conversion of Class A common
stock to common stock........... -- --
Reclassification of dividends on
Series B and Series C redeemable
convertible preferred stock..... -- 1,239,571
Exercise of common stock
options......................... -- 2,810
Sale of common stock under
initial public offering, net of
issuance costs of approximately
$10,420,000..................... -- 114,700,417
Net loss......................... (21,086,515) (21,086,515)
------------ ------------
Balance, December 31, 1999....... $(27,814,810) $126,903,732
============ ============
</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>
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
---------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (925,640) $(5,726,503) $(21,086,515)
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization........................... 18,554 363,821 2,997,355
Loss (gain) 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................... -- -- 183,793
Changes in current assets and liabilities--
Accounts receivable................................... (29,820) (1,054,803) (4,319,715)
Prepaid expenses and other current assets............. (73,382) (172,262) (719,031)
Accounts payable...................................... 240,142 3,501,268 2,359,962
Accrued expenses...................................... 103,976 379,563 3,907,757
---------- ----------- ------------
Net cash used in operating activities............... (666,170) (2,128,787) (16,726,941)
---------- ----------- ------------
Cash flows from investing activities:
Purchases of property and equipment....................... (438,835) (3,522,070) (5,245,055)
Increase in other assets.................................. (71,972) (249,960) (726,068)
---------- ----------- ------------
Net cash used in investing activities............... (510,807) (3,772,030) (5,971,123)
---------- ----------- ------------
Cash flows from financing activities:
Net proceeds from issuance of Series A convertible
preferred stock......................................... 2,380,754 1,334,251 --
Net proceeds from issuance of Series B redeemable
convertible preferred stock............................. -- 10,443,069 --
Net proceeds from issuance of Series C redeemable
convertible preferred stock............................. -- -- 25,041,848
Net proceeds from issuance of Class A common stock........ 2,000 -- --
Net proceeds from issuance of Class B common stock........ 490,000 -- --
Net proceeds from initial public offering................. -- -- 114,700,417
Proceeds from exercise of stock options................... -- -- 28,660
Payments on capital lease obligations..................... (8,352) (166,045) (806,351)
---------- ----------- ------------
Net cash provided by financing activities............. 2,864,402 11,611,275 138,964,574
---------- ----------- ------------
Net increase in cash and cash equivalents................... 1,687,425 5,710,458 116,266,510
Cash and cash equivalents, beginning of year................ 1,568 1,688,993 7,399,451
========== =========== ============
Cash and cash equivalents, end of year...................... $1,688,993 $ 7,399,451 $123,665,961
========== =========== ============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest................ $ 4,114 $ 55,274 $ 599,878
========== =========== ============
Supplemental disclosure of noncash investing and financing
activities:
Equipment acquired under capital lease obligations.... $ 199,696 $ 439,270 $ 16,404,132
========== =========== ============
Accretion of dividends on Series B redeemable
convertible preferred stock......................... $ -- $ 219,205 $ 541,541
========== =========== ============
Accretion of dividends on Series C redeemable
convertible preferred stock......................... $ -- $ -- $ 478,825
========== =========== ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-6
<PAGE>
IBASIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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, Africa and Australia.
In November 1999, the Company completed its initial public offering and
issued 7,820,000 shares of $.001 par value Common Stock which resulted in total
net proceeds to the Company of $114.7 million.
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) 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.
(C) 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-7
<PAGE>
IBASIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(D) NET LOSS PER SHARE
Basic and diluted net loss per common share were 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 the outstanding common stock
options, common stock warrants, 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 114,441,
and 310,404 of Class A common shares have been excluded from the computation of
diluted weighted average common shares outstanding for the year ended
December 31, 1997 and 1998, respectively. Options and warrants to purchase a
weighted average total of 1,973,282 common shares have been excluded from the
computation of diluted weighted average common shares outstanding for the year
ended December 31, 1999.
The following table reconciles the weighted average common shares
outstanding to the shares used in the computation of basic and diluted weighted
average common shares outstanding:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Weighted average common shares outstanding.................. 6,036,082 6,060,000 9,681,482
Less--Weighted average unvested common shares outstanding... 30,205 37,449 26,229
--------- --------- ---------
Basic and diluted weighted average common shares
outstanding............................................... 6,005,877 6,022,551 9,655,253
========= ========= =========
</TABLE>
(E) 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, 1998 and 1999, cash equivalents included money market accounts and
commercial paper that are readily convertible into cash. Under SFAS 115,
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, the Company
classifies its investments as held-to-maturity, and therefore has recorded them
at amortized cost in the accompanying balance sheet.
(F) PROPERTY AND EQUIPMENT
The Company provides for depreciation and amortization 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>
F-8
<PAGE>
IBASIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(G) RESEARCH AND DEVELOPMENT EXPENSES
The Company charges research and development expenses to operations as
incurred.
(H) 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 42% and 32% of
total accounts receivable at December 31, 1998 and 1999, respectively. The
following table represents customers that account for more than 10% of net
revenue in any of the periods reported:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Customer A.................................................. -- 7% 12%
Customer B.................................................. -- 18% 7%
Customer C.................................................. -- 15% --
Customer D.................................................. -- 11% 2%
Customer E.................................................. 78% -- --
Customer F.................................................. 18% -- --
Customer G.................................................. -- -- 10%
</TABLE>
(I) FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments consist principally of cash and cash equivalents,
accounts receivable, accounts payable and redeemable convertible preferred
stock. The estimated fair value of these instruments approximates their carrying
value.
(J) 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.
(K) 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.
F-9
<PAGE>
IBASIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(L) 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.
(M) RECENT ACCOUNTING PRONOUNCEMENTS
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.
(N) RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 and 1998 financial
statements to conform to the 1999 presentation.
(O) OTHER ASSETS
Other assets at December 31, 1999 consisted primarily of deposits.
(2) ACCRUED EXPENSES
Accrued expenses at December 31, 1998 and 1999 consisted of the following:
<TABLE>
<CAPTION>
1998 1999
-------- ----------
<S> <C> <C>
Accrued professional fees............................. $ 72,500 $ 144,750
Accrued other......................................... $411,039 $4,246,546
-------- ----------
$483,539 $4,391,296
======== ==========
</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 Decmber
31, 1999, the Company has net operating loss carryforwards of approximately
$25,658,000 available to reduce future federal and state income taxes, if
F-10
<PAGE>
IBASIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) INCOME TAXES (CONTINUED)
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.
The approximate income tax effects of each type of temporary difference and
carryforward are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
----------- ------------
<S> <C> <C>
Net operating loss carryforwards.................. $ 2,636,000 $ 10,263,000
Other temporary differences....................... 38,000 578,000
Valuation allowance............................... (2,674,000) (10,841,000)
----------- ------------
$ -- $ --
=========== ============
</TABLE>
The Company has recorded a 100% valuation allowance against the net deferred
tax asset as of December 31, 1998 and 1999, because the future realizability of
such asset is uncertain. The increase in the valuation allowance during these
years primarily relates to the Company's net losses recorded in each year.
(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 during 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).
F-11
<PAGE>
IBASIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) LINE OF CREDIT (CONTINUED)
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 (8.5% at December 31, 1999) plus 1% per annum.
The Agreement requires the Company to maintain certain financial covenants
including a minimum quick ratio, tangible net worth and liquidity, as defined.
The Agreement also prohibits the payment of dividends. At December 31, 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 (8.5% at December 31, 1999) plus 1.5% and are
payable in 36 equal monthly installments of principal and interest through
August 2002. At December 31, 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 December 31,
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 were as
follows:
VOTING
The holders of Series B and Series C were entitled to the number of votes
equal to the number of common shares into which the preferred shares were
convertible. The preferred shareholders voted together with the holders of
common stock as a single class, except where a separate class vote was otherwise
required by applicable law or the Certificate of Incorporation or bylaws.
DIVIDENDS
The holders of Series B and Series C were 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. The Board of Directors never declared dividends on
shares of Series B or Series C.
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 were 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 were insufficient to pay the full preferential
amounts to the preferred stockholders, the assets were to be distributed ratably
among the outstanding shares of Series B and Series C in proportion to its
aggregate liquidation preference amounts.
F-12
<PAGE>
IBASIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
CONVERSION
Upon the closing of the Company's initial public offering, all of the
outstanding shares of Series B and Series C automatically converted into
6,562,500 and 5,744,103 shares of Class A common shares, respectively.
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 the closing of the initial public offering,
cumulative dividends on Series B and Series C totaled $1,239,571. These
dividends are not included for purposes of conversion. Upon the initial public
offering the Series B and Series C converted into Class A common stock and,
therefore, these dividends have been reclassified to additional paid-in capital
in the consolidated balance sheet as of December 31, 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.
In connection with the Company's initial public offering, 85,000,000 shares
of common stock, $0.001 par value per share (Common Stock) and 15,000,000 shares
of preferred stock, $0.001 par value per share (Preferred Stock) were
authorized.
Upon the completion of the initial public offering, all outstanding shares
of preferred stock, as well as Class B common stock, were converted into the
following number of shares of Class A common stock:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
CLASS A COMMON STOCK
--------------------
<S> <C>
Series A preferred stock................................. 3,750,000
Series B preferred stock................................. 6,562,500
Series C preferred stock................................. 5,744,103
Class B common stock..................................... 1,500,000
</TABLE>
Subsequently, all outstanding shares of Class A common stock were converted
into 23,738,353 shares of $.001 par value Common Stock.
F-13
<PAGE>
IBASIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
(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 were as follows:
VOTING
The holders of Series A were entitled to the number of votes equal to the
number of common shares into which the preferred shares were convertible. The
preferred shareholders voted together with the holders of common stock as a
single class, except where a separate class vote was otherwise required by
applicable law or the Certificate of Incorporation or bylaws.
DIVIDENDS
The holders of Series A were 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. The Board of Directors never declared dividends on shares of
Series A.
LIQUIDATION PREFERENCE
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of Series A were 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 have
been distributed to each preferred stockholder if all shares of Series A were
converted to Class A common shares. If the assets of the Company were
insufficient to pay the full preferential amounts to the preferred stockholders,
the assets were to be distributed ratably among the outstanding shares of,
first, Series B, and second, Series A, in proportion to their aggregate
liquidation preference amounts.
CONVERSION
In connection with the initial public offering, each outstanding share of
Series A was converted into three shares of common stock.
(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 were as
follows:
VOTING
The holders of Class A and Class B voted for each share of stock owned. The
common shareholders voted as a single class, together with the holders of
Series A and Series B, except where a
F-14
<PAGE>
IBASIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
separate class vote was otherwise required by applicable law or the Certificate
of Incorporation or bylaws.
DIVIDENDS
Holders of Class B were 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 was not entitled to any priority dividend. After the
Priority Dividend has been paid, holders of Class A and Class B were entitled to
receive equal dividends, when and if declared by the Board of Directors.
Dividends were never declared on shares of Class A or Class B.
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 had a liquidation preference over the
holders of Class A of $.33 per share less any Priority Dividend previously paid.
The holders of Class A were then entitled to a distribution amount of $.33 per
share. Any remaining assets of the Company were to be distributed ratably among
the holders of Class A and Class B. If assets of the Company were insufficient
to pay the full amount to the common stockholders, the assets were to be
distributed ratably among the common stockholders in proportion to, and in order
of their rights to, their aggregate liquidation amounts.
CONVERSION
Upon the completion of the Company's initial public offering, all 6,060,000
shares of Class A common stock and all 1,500,000 shares of Class B common stock
were converted into 6,060,000 and 1,500,000 shares of common stock,
respectively.
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 December 31,
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 shares of Class A Common Stock 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 Common Stock shares
were vested immediately, with 5.625% vesting every three months. At
December 31, 1999, there were 938,250 unvested shares under this agreement.
F-15
<PAGE>
IBASIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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 Common Stock 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 16 equal installments on each of the first 16 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, 1998 and 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................................... 2,028,600 1.00-37.94 6.13
Exercised................................. (206,125) .03-.50 .14
Terminated................................ (203,650) .50-37.94 1.27
--------- ----------- -----
Outstanding, December 31, 1999.............. 2,947,725 $.03-$37.94 $4.37
--------- ----------- -----
Exercisable, December 31, 1999.............. 400,869 $ .03-$5.00 $ .93
--------- ----------- -----
</TABLE>
F-16
<PAGE>
IBASIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
The following table summarizes information relating to currently outstanding
and exercisable stock options as of December 31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
----------------------------------- --------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF CONTRACTUAL AVERAGE AVERAGE
EXERCISE NUMBER OF LIFE (YEARS) EXERCISE NUMBER OF EXERCISE
PRICES SHARES OUTSTANDING PRICE SHARES PRICE
- ---------- --------- ------------ -------- --------- --------
<S> <C> <C> <C> <C> <C>
$ .03 182,925 7.61 $ .03 98,794 $ .03
.50-.65 425,800 8.59 .54 139,600 .53
1.00-1.10 475,800 8.96 1.03 113,250 1.03
1.50 195,000 9.31 1.50 6,913 1.50
4.00 649,300 9.44 4.00 42,187 4.00
5.00 481,600 9.69 5.00 125 5.00
11.00 491,500 9.85 11.00 -- --
28.75 30,000 10.00 28.75 -- --
37.94 15,800 9.92 37.94 -- --
--------- -------
2,947,725 400,869
--------- -------
</TABLE>
At December 31, 1999, options to purchase 2,531,150 common shares 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 year ended December 31, 1999, and is being amortized over the vesting period
of the options, generally over four years. Amortization of deferred compensation
of approximately $184,000 has been recognized as an expense in the year ended
December 31, 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
offering periods under the Purchase Plan start on January 1 and July 1 of each
year and end on June 30 and December 31 of each year, unless otherwise
determined by the board of directors. During each offering period, an eligible
employee may select a rate of payroll deduction 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-17
<PAGE>
IBASIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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 December 31, 1998, 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. Upon conversion of
the Company's preferred stock (see note 7(a)), these warrants converted into
common stock warrants for 20,625 and 37,500 shares, respectively. At
December 31, 1999, 20,625 and 37,500 warrants were exercisable for common stock,
respectively. The value of these warrants at the date of grant 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,
------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Risk-free interest rate.................... 6.16% 4.99% 5.77%
Expected dividend yield.................... -- -- --
Expected lives............................. 5 years 5 years 5 years
Volatility................................. 60% 60% 61%
Weighted average remaining contractual
life..................................... 9.62 years 9.49 years 9.20 years
Weighted average fair value of options
granted.................................. $0.02 $0.39 $4.90
</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,
----------------------------------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Net loss applicable to common
stockholders--
As reported......................... $ (925,640) $(5,945,708) $(22,106,881)
Pro forma........................... (926,282) (5,979,305) (22,667,437)
Basic and diluted net loss per share--
As reported......................... $ (0.15) $ (0.99) $ (2.29)
Pro forma........................... (0.15) (0.99) (2.35)
</TABLE>
F-18
<PAGE>
IBASIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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 December 31, 1999, the Company had approximately $1,000,000
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% to 13.0% and has a term ranging from 24 to
36 months. As of December 31, 1999, the Company had approximately $1,426,000
outstanding under these lease agreements.
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 December 31, 1999 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR LEASES LEASES
- ---- ---------- -----------
<S> <C> <C>
2000................................................ $1,041,983 $ 8,015,988
2001................................................ 1,088,406 7,861,264
2002................................................ 1,135,729 5,012,663
2003................................................ 1,106,287 68,177
2004................................................ 1,129,848 --
Thereafter.......................................... 1,938,734 --
---------- -----------
Total future minimum lease payments................. $7,440,987 20,958,092
==========
Less--Amounts representing interest................. 4,892,969
-----------
Present value of obligations........................ 16,065,123
Less--Current portion............................... 4,376,280
-----------
$11,688,843
===========
</TABLE>
Rent expense included in the consolidated statements of operations was
approximately $83,000, $69,000, $640,000 for the years ended December 31, 1997,
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 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
F-19
<PAGE>
IBASIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
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>
YEAR ENDED
DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
US.................................................... --% 86% 95%
Hong Kong............................................. 17 -- --
Japan................................................. 79 -- --
Other................................................. 4 14 5
---- ---- ----
100% 100% 100%
---- ---- ----
</TABLE>
The following table represents percentage of minute revenue for traffic sent
to the specified geographic destinations:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Asia.................................................. 100% 56% 49%
Latin America......................................... -- 14 22
Middle East........................................... -- 14 18
United States......................................... -- 12 1
Europe................................................ -- -- 7
Other................................................. -- 4 3
---- ---- ----
100% 100% 100%
---- ---- ----
</TABLE>
As of December 31, 1999, there was approximately $669,000 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 years ended December 31, 1998 and 1999, the Company paid
approximately $415,000 and $289,000, respectively, to a related party,
Microworld Limited (see Note 4) for services rendered. These fees paid to this
related party are included in data communications and telecommunications costs
in the accompanying consolidated financial statements.
F-20
<PAGE>
IBASIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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>
Year ended December 31, 1997.... $ -- $ -- $ -- $ --
-------- -------- ------- --------
Year ended December 31, 1998.... $ -- $126,741 $ -- $126,741
-------- -------- ------- --------
Year ended December 31, 1999.... $126,741 $510,380 $(4,000) $633,121
======== ======== ======= ========
</TABLE>
F-21
<PAGE>
[Inside Back Cover]
(Stylized logo of iBasis)
<PAGE>
[LOGO]
<PAGE>
$150,000,000
[LOGO]
5 3/4% CONVERTIBLE SUBORDINATED NOTES DUE 2005
The notes are convertible at any time prior to maturity into common stock at
a conversion price of $86.14 per share, subject to adjustment upon certain
events.
Interest is payable on each March 15 and September 15, beginning
September 15, 2000. The notes mature on March 15, 2005. The notes are
subordinated to our senior indebtedness.
We may redeem some or all of the notes on or after March 20, 2003 at the
redemption prices listed in this prospectus, plus accrued interest. Prior to
that date, we may redeem some or all of the notes if the price of our common
stock has exceeded 150% of the conversion price for at least 20 out of 30
consecutive trading days prior to redemption. If we redeem some or all of the
notes prior to March 20, 2003 we will also make an additional payment on the
redeemed notes. You may require us to repurchase your notes upon a repurchase
event in cash or, at our option, common stock, at 105% of the principal amount
of the notes, plus accrued interest.
Our common stock is quoted on the Nasdaq National Market under the symbol
"IBAS." The last reported sales price of our common stock on the Nasdaq National
Market on March 9, 2000 was $73.078 per share.
------------------------
INVESTING IN OUR CONVERTIBLE NOTES INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
------------------------
<TABLE>
<CAPTION>
PER NOTE TOTAL
-------- -----
<S> <C> <C>
Public Offering Price....................................... 100.0% $150,000,000
Underwriting Discounts...................................... 3.0% $ 4,500,000
Proceeds to iBasis ......................................... 97.0% $145,500,000
</TABLE>
The initial public offering price set forth above does not include accrued
interest, if any. Interest on the notes will accrue from March 15, 2000 and must
be paid by the purchaser if the notes are purchased after March 15, 2000.
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 $22,500,000 aggregate principal amount of notes. The underwriters
expect to deliver the notes in book-entry form only through the facilities of
the Depository Trust Company against payment in New York, New York on March 15,
2000.
Concurrently with this note offering, we are offering 3,500,000 shares of
our common stock, under a separate prospectus, consisting of 2,026,637 shares to
be sold by us and 1,473,363 shares to be sold by selling stockholders. Neither
completion of this note offering nor completion of the concurrent common stock
offering is contingent upon completion of the other.
------------------------
ROBERTSON STEPHENS INTERNATIONAL
CHASE H&Q
U.S. BANCORP PIPER JAFFRAY
DAIN RAUSCHER WESSELS
THE DATE OF THIS PROSPECTUS IS MARCH 9, 2000.
<PAGE>
UNDERWRITING
The underwriters named below, acting through their representatives,
FleetBoston Robertson Stephens Inc., Chase Securities Inc., U.S. Bancorp Piper
Jaffray Inc. and Dain Rauscher Incorporated, have severally agreed with us,
subject to the terms and conditions set forth in the underwriting agreement, to
purchase from us the aggregate principal amount of notes set forth opposite
their names below. The underwriters are committed to purchase and pay for all
notes if any are purchased.
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITER AMOUNT OF NOTES
- ----------- ---------------
<S> <C>
FleetBoston Robertson Stephens International Inc............ $ 96,375,000
Chase Securities Inc........................................ 21,375,000
U.S. Bancorp Piper Jaffray Inc.............................. 21,375,000
Dain Rauscher Incorporated.................................. 10,875,000
------------
Total................................................... $150,000,000
============
</TABLE>
The representatives have advised us that the underwriters propose to offer
the notes to the public at the 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 1.8% of the principal amount of the notes 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 notes are 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.
OVERALLOTMENT 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 an additional $22.5 million aggregate principal amount of notes.
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 notes that the number of notes to be
purchased by it shown in the above table bears to the aggregate principal amount
of notes offered in this offering. If purchased, such additional notes will be
sold by the underwriters on the same terms as those on which the aggregate
principal amount of notes offered in this offering are being sold. We will be
obligated, pursuant to the option, to sell notes 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 notes 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 $172.5
million, $5.2 million and $167.3 million, 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 $0.6 million.
INDEMNITY. The underwriting agreement contains covenants of indemnity among
the underwriters, the selling stockholders 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 90 days after the date of this prospectus, subject to certain
exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose
84
