TELEGLOBE INTERNATIONAL HOLDINGS LTD - S-4/A - 20040329 - LEGAL_PROCEEDINGS
Legal Proceedings
We are not a party to any material litigation, and no material litigation is known to us to be threatened against us or with respect to any of our properties. See
"Risk Factors—Risks Related to New Teleglobe After the Merger" on page 24. For a discussion on the recently concluded litigation relating to the termination of our joint venture
agreement with Comfone, see "Risk Factors—Certain Matters with our former Mobile Global Roaming business partner have been in dispute" on page 30.
116
INFORMATION ABOUT ITXC
ITXC is a leading global provider of high-quality wholesale voice and fax telecommunications services. ITXC primarily uses the Internet for transport of these
calls. ITXC estimates that it currently ranks in the top 15 carriers in the world based on minutes of international calling and carries approximately 15.0% of all international calls transported on
the Internet. ITXC's services allow carriers and telephony resellers to benefit from the low capital and operating costs of using the Internet for transport. ITXC believes that its scale, reputation
for high quality and ability to rapidly implement new services for its carrier customers will permit ITXC to effectively compete for the substantial opportunities that arise from the reach and
economics of the Internet.
ITXC
has developed and deployed ITXC.net®, an actively-managed network that works in conjunction with the public Internet, to deliver high quality voice and fax
communications while providing its customers with the cost savings and global reach of the Internet. ITXC believes that the rapid growth of commercial traffic on ITXC.net demonstrates that it has
successfully used its patented and proprietary BestValue Routing to address the quality problems encountered with earlier attempts at voice transport on the Internet.
To
date, ITXC has concentrated its efforts on rapidly deploying ITXC.net worldwide. ITXC has established ITXC-owned facilities in the U.S., UK, Hong Kong, Germany and several
Eastern European countries and has arranged call termination and origination services with affiliates throughout the world. ITXC has used its affiliate structure to achieve broad worldwide presence.
As of December 31, 2003, ITXC had arrangements to originate and/or terminate traffic in 232 countries and territories. On a typical day, ITXC carries traffic to and from more than 100
countries. By using the Internet for transport and ITXC's affiliates' local infrastructure for terminating voice traffic, ITXC believes it has developed a reliable and expandable network, at
substantially lower capital expense than traditional carrier networks.
For a detailed description of the business and legal proceedings of ITXC, see "Item 1. Business of the Company" and "Item 3. Legal Proceedings," respectively, contained in
ITXC's Annual Report on Form 10-K for the fiscal year ended December 31, 2003 which report is incorporated herein in its entirety. See "Where You Can Find More Information"
on page 185.
117
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
This section presents two sets of unaudited pro forma condensed financial information for the periods indicated. The first set of information reflects Teleglobe's
acquisition of the Acquired Businesses from Consolidated Old Teleglobe, and we refer to this set of information as Teleglobe Pro Forma Consolidated. The second set of information reflects Teleglobe's
proposed acquisition of ITXC and other related transactions pursuant to the merger and we refer to this set of information as Teleglobe Pro Forma for the merger.
Teleglobe's Acquisition of the Acquired Businesses from Consolidated Old Teleglobe
As more fully explained in "Management's Discussion and Analysis of Financial Condition and Results of Operations of Teleglobe—Presentation," pursuant
to the Purchase Agreement between Consolidated Old Teleglobe and TLGB, an affiliate of Cerberus, dated September 18, 2002, we acquired only a portion of the assets and liabilities of
Consolidated Old Teleglobe.
The Predecessor's businesses consisted of the voice, data and mobile roaming businesses, the same lines of business as our company. The Predecessor businesses included:
•
operations
in 47 countries around the world through interconnection points and sales offices;
•
Internet
Data Centers that consisted of significant facilities used for hosting content and service providers; and
•
minority
ownership interest in Intelsat, a satellite provider.
Of
the businesses included in the Predecessor Financial Statements, we did not acquire the operations of the Internet Data Centers, any of the material voice, data and mobile roaming
operations outside of the U.S., Canada, United Kingdom, Australia, Hong Kong and Spain or any of the minority equity investments in other companies. The Successor Financial Statements include only the
assets, liabilities and results of operations of the Acquired Businesses.
The
following unaudited pro forma condensed financial information gives effect to our acquisition of the assets and liabilities that we purchased from Consolidated Old Teleglobe, and
have been prepared from the financial statements of the Predecessor and the Successor. This pro forma information is presented for illustrative purposes only and should be read in conjunction with the
Successor Financial Statements, the Predecessor Financial Statements, the "Selected Historical Consolidated Financial Information of Teleglobe" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Teleglobe", each of which are included elsewhere in this proxy statement/prospectus.
The unaudited pro forma condensed consolidated statements of operations for the year ended December 31, 2003 were prepared using the audited statement of operations for the seven
months ended December 31, 2003 contained in the Successor Financial Statements and the audited statement of operations for the five months ended May 30, 2003 contained in the Predecessor
Financial Statements. The unaudited pro forma condensed consolidated statements of operations give effect to the acquisition of the Acquired Businesses as though such acquisition had occurred on
January 1, 2003. For a more complete explanation of certain differences between the Predecessor Financial Statements and the Successor Financial Statements, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations of Teleglobe."
The pro forma adjustments are based upon available information and assumptions that we believe are reasonable. The pro forma condensed consolidated financial information does not purport
to represent what the consolidated results of operations of Teleglobe would actually have been for the periods ended on or before December 31, 2003, if the acquisition of the Acquired
Businesses had in fact occurred on January 1, 2003, nor do they purport to project the results of operations of the Successor for any future period.
For
more detailed information regarding the treatment of our acquisition of certain assets and assumption of certain liabilities of the Predecessor under the purchase method, see
Footnote 3 of the Successor Financial Statements.
118
Unaudited Condensed Consolidated Pro Forma Statement of Operations
For the Year Ended December 31, 2003
Seven Months Ended
December 31,
2003
Five Months Ended
May 30,
2003
Pro Forma
Adjustments
Teleglobe
Pro Forma
Consolidated
Successor
Predecessor
(amounts in thousands, except share and per share amounts)
Total operating revenues
$
496,317
$
361,368
$
(1,247
)(1)
$
856,438
Operating expenses
Telecommunication
344,190
251,445
—
595,635
Network, exclusive of amortization and depreciation shown below
62,912
55,096
—
118,008
Selling, general and administrative, exclusive of stock based compensation, professional fees incurred in connection with the carve-out financial statements, bad debt expense and depreciation shown below
57,666
40,948
—
98,614
Stock-based compensation expense
7,475
—
—
7,475
Professional fees incurred in connection with the carve-out financial statements
3,621
—
—
3,621
Bad debt expense
687
3,656
—
4,343
Foreign exchange loss (gain)
4,216
(9,478
)
—
(5,262
)
Amortization of intangible assets
1,072
—
765
(2)
1,837
Depreciation
10,031
15,037
(8,093
)(2)
16,975
Total operating expenses
491,870
356,704
(7,328
)
841,246
Interest expense
1,156
501
1,563
(3)
3,220
Interest, other income and other expense
(526
)
—
—
(526
)
Total expenses
492,500
357,205
(5,765
)
843,940
Income before reorganization items and income taxes
3,817
4,163
4,518
12,498
Reorganization items, net
—
34,155
(34,155
)(4)
—
Income (loss) before income taxes
3,817
(29,992
)
38,673
12,498
Income taxes
3,492
—
—
3,492
Net income (loss)
325
(29,992
)
38,673
9,006
Preferred stock dividends
5,542
—
3,958
(5)
9,500
Net (loss) income available/attributable to common stockholders
$
(5,217
)
$
(29,992
)
$
34,715
$
(494
)
Net (loss) income available/attributable per common share
(0.19
)
(0.02
)
Number of common shares used for calculation
28,106,757
28,106,757
(1)
Reduce
the amount of revenue recognized from deferred revenue balances related to IRUs acquired as part of the Acquired Businesses, the carrying value of which was reduced to fair
value as a result of the application of purchase accounting.
119
(2)
Eliminate
historical depreciation of $15.037 million and amortization expense of nil of the Predecessor and record the depreciation of $6.944 million and amortization
expense of $765,000 of the acquired intangible assets and property and equipment based on the allocation of a portion of the purchase price as set forth in Footnote 3 to the Successor Financial
Statements and the rates of depreciation and amortization in Footnotes 2 to the Successor Financial Statements. A final allocation of the purchase price has not yet been finalized due to
certain open pre-acquisition contingencies. We estimate that the resolution of these open preacquisition contingencies will not change by more than $5 million. Amortization and depreciation
expense will increase or decrease on an annual basis by approximately $0.2 million for every $1.0 million change in the allocation to such intangibles, property and equipment.
(3)
Record
the interest expense on the Successor's $25 million loan from Cerberus borrowed to fund the purchase of the Acquired Businesses at 15% per annum as if the acquisition of
the Acquired Businesses had occurred on January 1, 2003. The Successor repaid this loan on June 27, 2003. The balance of the historical interest expense relates primarily to bank fees,
and accretion of interest on the unfavorable acquired contract obligation.
(4)
Eliminate
items related to Consolidated Old Teleglobe's bankruptcy reorganization.
(5)
Record
preferred stock dividends as if the acquisition of the Acquired Businesses had occurred on January 1, 2003.
120
Teleglobe's Acquisition of ITXC Pursuant to the Merger
The following unaudited pro forma condensed consolidated financial information gives effect to:
•
our
merger with ITXC under purchase accounting; and
•
the
Contribution, the Exchange, the Refinancing and the incurrence of the $100.0 million Cerberus loan,
and have been prepared from the unaudited pro forma condensed consolidated financial information of Teleglobe and from the consolidated financial statements of ITXC. This pro forma information is
presented for illustrative purposes only and should be read in conjunction with the unaudited Teleglobe Pro Forma Consolidated information, the Predecessor Financial Statements, the Successor
Financial Statements, the "Selected Historical Consolidated Financial Information of Teleglobe" and "Management's Discussion and Analysis of Financial Condition and Results of Operations of
Teleglobe", each included elsewhere in this proxy statement/prospectus, as well as the audited financial statements of ITXC, ITXC's "Selected Historical Financial Information" and ITXC's "Management's
Discussion and Analysis of Financial Condition and Results of Operations," each incorporated by reference herein. See "Where You Can Find More Information."
The following unaudited pro forma condensed consolidated financial information was prepared, in the case of the statement of operations, by combining the unaudited pro forma condensed
consolidated statements of operations of Teleglobe giving effect to the acquisition of the Acquired Businesses with the audited financial statements for ITXC as if the merger, Contribution, Exchange,
the Cerberus loan and the Refinancing had occurred on January 1, 2003 and, in the case of the balance sheet, by combining the audited consolidated balance sheet of Teleglobe as of
December 31, 2003 with the audited consolidated balance sheet of ITXC as of December 31, 2003 as if the merger, Contribution, Exchange Refinancing and the Cerberus loan had occurred on
December 31, 2003.
This unaudited pro forma condensed consolidated financial information does not give effect to any synergies that could result from the merger. Our management estimates that costs for
severance, systems integration and conversion expenses, retention and stay bonuses and other related costs may amount to approximately $11.0 million.
The pro forma adjustments are based upon available information and assumptions that we believe are reasonable. The pro forma condensed consolidated financial statements do not purport to
represent what the consolidated results of operations or financial position of Teleglobe would actually have been if the merger had in fact occurred on January 1, 2003 or December 31,
2003, nor do they purport to project the results of operations or financial position of our company for any future period or as of any date, respectively.
Prior
to the merger, our assets and liabilities will be transferred from Teleglobe to New Teleglobe. This transaction will be between entities under common control and will be accounted
for in a manner similar to a pooling of interests. Accordingly, no change in the carrying value of such assets and liabilities will result.
Under
purchase accounting, identifiable tangible and intangible assets acquired and liabilities assumed are recorded at their estimated fair values. The excess of the purchase price, if
any, including estimated fees and expenses related to the merger, over the net identifiable tangible and intangible assets acquired is allocated to goodwill on the accompanying unaudited pro forma
condensed consolidated balance sheet. We intend to complete a formal valuation of the acquired tangible and intangible assets and liabilities assumed in order to finalize the allocation of the total
purchase price to the various assets acquired and the liabilities assumed and to determine the amortization period of definite-lived intangible assets.
121
The column contained in the following tables entitled "Teleglobe Pro Forma for the Merger" reflects the financial information incorporating the ITXC acquisition adjustments. The column
contained in the following table entitled "Refinancing Adjustments" sets forth adjustments to the financial information presented that would result from the issuance of a $100 million Cerberus
loan in replacement of the $95 million of Preferred Shares, and the column contained in the following table entitled "Teleglobe Pro Forma for the Transactions" reflects the financial
information presented giving effect to such Cerberus loan. The annual interest rate on the senior notes issued pursuant to the Cerberus loan will be fixed at 10% payable quarterly in arrears. In
addition, Cerberus will be entitled to receive a fee equal to 1% of the principal amount of the loan outstanding payable on the first anniversary of the closing date and 2% of the principal amount of
the loan outstanding payable on the second anniversary of the closing date. Amortization of deferred financing costs for the Cerberus loan are estimated to be $250,000 over a period of four years. The
pro forma financial information was prepared on this basis.
122
Unaudited Pro Forma Condensed Consolidated Balance Sheet
As of December 31, 2003
ITXC Acquisition
Adjustments
Refinancing
Adjustments
Teleglobe
Pro Forma
for the
Transactions
Teleglobe
Consolidated
ITXC
Debits
Credits
Debits
Credits
(amounts in thousands)
Current assets
Cash and cash equivalents
$
35,279
$
16,070
$
—
$
3,000
(2)
$
100,000
(4)
$
95,000
(4)
$
46,557
1,000
(3)
$
250
(4)
$
5,542
(4)
Marketable securities
—
30,402
—
—
—
—
30,402
Accounts receivable, net
163,804
41,266
—
—
—
—
205,070
Prepaid and other current assets
8,391
5,404
—
—
—
—
13,795
Restricted cash
—
6,294
—
—
—
—
6,294
Total current assets
207,474
99,436
—
4,000
100,000
100,792
302,118
Property and equipment
121,839
27,751
—
—
—
—
149,590
Deferred financing costs
—
—
—
—
250
(4)
—
250
Prepaid pension assets
19,838
—
—
—
—
—
19,838
Other assets
4,254
259
—
—
—
—
4,513
Intangible assets and goodwill
10,352
8,093
102,546
(2)
—
—
—
120,991
Total assets
$
363,757
$
135,539
$
102,546
$
4,000
$
100,250
$
100,792
$
597,300
Current liabilities
Accounts payable and accrued liabilities
$
244,765
$
48,138
$
—
$
5,500
(2)
$
5,542
(4)
$
—
$
292,861
Other current liabilities
3,214
769
—
—
—
—
3,983
Current portion of capital lease obligation
—
1,038
—
—
—
—
1,038
Total current liabilities
247,979
49,945
—
5,500
5,542
—
297,882
Long-term debt
—
—
—
—
—
100,000
(4)
100,000
Capital lease obligation, less current portion
—
761
—
—
—
—
761
Deferred revenue
10,298
—
—
—
—
—
10,298
Deferred income tax liability
766
—
—
—
—
—
766
Other liabilities
2,456
—
—
—
—
—
2,456
Total liabilities
261,499
50,706
—
5,500
5,542
100,000
412,163
Redeemable preferred stock
95,000
—
—
—
95,000
(4)
—
—
Stockholders' equity
Common stock
281
47
47
(1)
108
(2)
—
—
389
Additional paid-in capital
12,194
460,463
460,463
(1)
179,879
(2)
—
—
191,073
1,000
(3)
Accumulated deficit
(5,217
)
(365,743
)
—
365,743
(1)
—
—
(5,217
)
Deferred compensation cost
—
—
1,108
(2)
—
—
—
(1,108
)
Treasury stock
—
(9,814
)
—
9,814
(1)
—
—
—
Accumulated other comprehensive income
—
(120
)
—
120
(1)
—
—
—
Total stockholders' equity
7,258
84,833
462,618
555,664
—
—
185,137
Total liabilities and stockholders' equity
$
363,757
$
135,539
$
462,618
$
561,164
$
100,542
$
100,000
$
597,300
(1)
This
adjustment reflects the elimination of ITXC's stockholders' equity accounts.
123
(2)
Reflects
the merger with ITXC. The preliminary cost of purchase is calculated as follows:
(amounts in thousands)
Approximate Fair Value of common shares to be issued to ITXC stockholders(a)
$
156,817
Fair Value of options to be issued to ITXC stockholders(b)
20,362
Fair Value of warrants to be issued to ITXC stockholders(b)
2,808
Estimated direct acquisition costs(c)
3,000
$
182,987
The total purchase price is preliminarily allocated as follows:
Carrying value of net assets excluding goodwill of $7,913 at 12/31/03(d)
71,420
Additional Intangible assets—technology(d)
25,000
Goodwill
85,459
Deferred stock based compensation(b)
1,108
$
182,987
The following assumptions were used:
(a)
The
fair value for purchase accounting purposes of New Teleglobe shares issued to ITXC shareholders is $14.48 per share. This value has been determined using the average closing price
of ITXC's common stock for the 2 days after and 2 days prior to November 4, 2003, the announcement date. The actual number of shares issued will vary based on the number of ITXC shares
outstanding at the effective time of the merger based on a 0.25-to-1 exchange ratio.
(b)
The
fair value of options and warrants was estimated using the Black Scholes valuation methodology. The actual valuation as of the effective time of the merger will vary based on the
actual number of warrants and options outstanding as of the effective time of the merger.
(c)
The
transaction costs of $3.0 million are an initial estimate of the costs that will be incurred in connection with the acquisition which are primarily legal, accounting and
other professional fees.
(d)
A
valuation of assets acquired and liabilities assumed has not yet been completed. The carrying value of the net assets includes the carrying value of ITXC's assets and liabilities as
at December 31, 2003, less goodwill of $7.913 million and the following amounts which are payable only if and when the merger is consummated.
•
$2 million
fee payable to Morgan Stanley by ITXC for services rendered in its role as financial advisor which is contingently payable upon the consummation of the
merger.
•
$3.5 million
for ITXC headcount reductions.
We
have made a preliminary estimate of additional intangible assets in the amount of $25 million, which primarily represents the value of ITXC's
technology. The life of the technology could be as long as 20 years for the more recently issued patents or as little as 5 years for patents with more likely technological obsolecense.
The remaining excess purchase price has been preliminarily allocated to goodwill. A detailed analysis of ITXC's technology, customer relationships, systems technology and other potential intangibles
may have a material impact on the final valuation of intangible assets in the final purchase price allocation.
(3)
Professional
fees related to the issuance of the common shares.
(4)
Reflects
the retirement of $95.0 million of Teleglobe Preferred Shares and the payment of the related accrued dividends as of December 31, 2003 of $5.5 million.
Concurrent to the retirement, a loan of $100 million shall be provided by lenders with a maturity period of 4 years. An approximate one-time financing fee in the amount of
$250 thousand will be amortized over the term of the loan.
124
Unaudited Pro Forma Condensed Statement of Operations
For the Year ended December 31, 2003
Teleglobe
Pro Forma
Consolidated
ITXC
Pro Forma
Adjustments
Refinancing
Adjustments
Teleglobe
Pro Forma
for the
Transactions
(amounts in thousands, except share and per share amounts)
Total operating revenues
$
856,438
$
338,426
$
(13,545)
(1)
$
—
$
1,181,319
Operating expenses
Telecommunication
595,635
307,967
(13,545)
(1)
—
879,943
(10,114)
(2)
Network, exclusive of amortization and depreciation shown below
118,008
9,251
8,679
(2)
—
135,938
Selling, general and administrative, exclusive of stock based compensation, professional fees incurred in connection with the carve-out financial statements, bad debt expense and depreciation shown below
98,614
37,950
1,435
(2)
—
137,999
Stock-based compensation expense
7,475
66
1,108
(3)
—
8,649
Professional fees incurred in connection with the carve-out financial statements
3,621
—
—
—
3,621
Bad debt expense
4,343
9,989
—
—
14,332
Foreign exchange gain
(5,262
)
(77
)
—
—
(5,339
)
Asset impairment and restructuring charges
—
625
—
—
625
Amortization and impairment of intangible assets
1,837
2,510
5,000
(4)
—
9,347
Depreciation
16,975
20,914
(5,217)
(5)
—
32,672
Total operating expenses
841,246
389,195
(12,654
)
—
1,217,787
Loss associated with investments
—
500
—
—
500
Interest expense
3,220
245
—
10,750
(6)
14,278
63
(6)
Interest income, other income and other expense
(526
)
(1,079
)
—
—
(1,605
)
Total Expenses
843,940
388,861
(12,654
)
10,813
1,230,960
Income (loss) before income taxes
12,498
(50,435
)
(891
)
(10,813
)
(49,641
)
Income taxes
3,492
108
—
—
3,600
Net income (loss)
9,006
(50,543
)
(891
)
(10,813
)
(53,241
)
Preferred stock dividends
9,500
—
—
(9,500
)(6)
—
Net loss available/attributable to common stockholders
$
(494
)
$
(50,543
)
$
(891
)
$
(1,313
)
$
(53,241
)
Net loss available/attributable per common share
$
(0.02
)
$
(1.18
)
$
(1.37
)
Number of common shares used for calculation
28,106,757
43,009,130
38,936,665
125
Notes To Unaudited Pro Forma Condensed Consolidated Financial Information—The Merger, for the Year Ended December 31, 2003
(1)
Eliminate
intercompany revenues between Teleglobe and ITXC.
(2)
To
re-classify certain of ITXC's expenses to conform to Teleglobe's grouping of such expenses.
(3)
Amortization
of the intrinsic value applicable to the future vesting period for unvested ITXC options at the date of acquisition.
(4)
Reflects
the amortization of the excess value attributed to other intangible assets over a five year period. Changing the amortization period by one year increases or decreases
amortization expenses by approximately $1 million per year.
(5)
Adjusts
estimated lives of ITXC's property and equipment to reflect the expected use of certain assets by Teleglobe.
(6)
Eliminate
dividends on the Teleglobe Preferred Shares which are assumed to be retired as of the transaction date. Concurrently with such retirement, $100 millon of New
Teleglobe notes shall be purchased by lenders with a maturity period of four years. The interest expense relating to this loan will be 10% per annum plus 1% of the outstanding balance at the end of
the first year and 2% of the outstanding balance at the end of the second year. The bonus interest expense of 3%, or $3 million, will be amortized over the four-year term of the loan, resulting
in an additional $750,000 interest expense per year. An approximate one-time financing fee in the amount of $250,000 will be amortized over the term of the loan.
An
increase or decrease in intangibles or depreciable assets may occur when a final valuation of assets acquired and liabilities assumed is completed. Accordingly, the
approximate amount of $85.5 million which has been preliminarily allocated to goodwill, may be all reallocated to amortizable intangible or depreciating assets resulting in a depreciation or
amortization charge in the statement of operation. For every $1 million increase or decrease, amortization or depreciation expense may increase or decrease by approximately $0.2 million
based on lives of assets from 5 to 8 years.
126
Non-GAAP Financial Data (Unaudited)
EBITDA
represents net income (loss) before interest, taxes, depreciation and amortization, based on the unaudited condensed consolidated pro forma statements of operations for Teleglobe and ITXC. We
are presenting EBITDA because management considers it an important supplemental measure of our performance and believes that it is frequently used by interested parties in the evaluation of companies
in our industry. However, EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of
these limitations are:
•
EBITDA
does not reflect cash expenditures, future requirements for capital expenditures, or contractual commitments;
•
EBITDA
does not reflect changes in, or cash requirements for, working capital needs;
•
EBITDA
does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on debt;
•
Although
depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA does not
reflect any cash requirements for such replacements;
•
EBITDA
reflects the impact on earnings of charges resulting from matters we consider not to be indicative of each of ITXC's and our ongoing operations, as discussed below
under "Adjusted Combined Pro Forma EBITDA"; and
•
Other
companies in our industry may calculate EBITDA differently than we do, limiting its usefulness as a comparative measure.
Because
of these limitations, EBITDA should not be considered as a measure of discretionary cash available to our company to invest in its business. We compensate for these limitations by relying
primarily on the GAAP results and using EBITDA and Adjusted EBITDA only supplementally.
Adjusted EBITDA is a further supplemental measure of our performance. We compute Adjusted EBITDA by adjusting EBITDA to eliminate the impact of a number of items that management does not consider
indicative of our ongoing operating performance. You are encouraged to evaluate each adjustment and the reasons we consider it appropriate for supplemental analysis. In particular, we use Adjusted
EBITDA because management considers it an important supplemental measure of our performance and believes that it is frequently used by interested parties in the evaluation of companies in our
industry, because Adjusted EBITDA is, among other things, unaffected by non-cash expense items such as compensation expense associated with stock purchase rights granted by our majority shareholder.
As an analytical tool, Adjusted EBITDA is subject to all of the limitations applicable to EBITDA. In addition, in evaluating Adjusted EBITDA, you should be aware that in the future we may incur
expenses similar to the adjustments in this presentation. The presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or
nonrecurring items.
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Teleglobe Pro Forma EBITDA and Pro Forma Adjusted EBITDA Reconciliation
For the Year Ended
December 31, 2003
(in thousands)
Teleglobe pro forma net income
$
9,006
Add:
Interest, net
2,694
Income taxes
3,492
Depreciation
16,975
Amortization expense
1,837
Teleglobe pro forma EBITDA
34,004
Non-cash employee stock compensation charge (a)
7,475
Professional fees incurred in connection with the carve-out financial statements (b)
3,621
Teleglobe pro forma Adjusted EBITDA
$
45,100
(a)
Represents
non-cash stock-based employee compensation expense resulting from a grant of stock purchase rights to senior employees of Teleglobe by TLGB. See
Footnote 15 to the Successor Financial Statements for additional information.
(b)
An
amount of $3.6 million was recorded in the seven months ended December 31, 2003. These costs relate to professional services required to prepare and audit the
carve-out financial statements included in the SEC filing for the ITXC proposed merger.
ITXC EBITDA and Adjusted EBITDA Reconciliation
For the Year Ended
December 31, 2003
(amounts in thousands)
ITXC net loss
$
(50,543
)
Add (deduct):
Interest, net
(834
)
Income taxes
108
Depreciation
20,914
Amortization and impairment of intangible assets
2,510
ITXC EBITDA
(27,845
)
Add:
Other unusual items (a)
7,250
ITXC Adjusted EBITDA
$
(20,595
)
(a)
Unusual
items were comprised of the following:
•
$6.5 million
consisting of a write off of an account receivable from a prepaid calling card company (IMT) and its subsequent bankruptcy in the first quarter of 2003
of $8.7 million offset by $2.2 million of related margin earned during the year ended December 31, 2003. ITXC has revised its business strategy regarding the prepaid calling card
customer segment and believes it is unlikely that a loss or adjustment of this size would occur in the future; and
128
•
$0.75 million
of fees to an investment banking firm to consult on strategic alternatives for the business and assist in the sale of the business.
Adjusted Combined Pro Forma EBITDA
For the Year Ended
December 31, 2003
(amount in thousands)
Adjusted Teleglobe Pro Forma EBITDA
$
45,100
Adjusted ITXC EBITDA
(20,595
)
Adjusted Combined Pro Forma EBITDA
$
24,505
Teleglobe Historical Costs Not Expected To Recur
For the Year Ended
December 31, 2003
(in thousands)
Revenues excluded from the Acquired Businesses (a)
$
(693
)
Network agreements excluded from the Acquired Businesses (b)
3,441
Employees, facilities and other administrative operations excluded from the Acquired Businesses (c)
2,501
Share of profit to Comfone (d)
4,179
Total historical costs not expected to recur
$
9,428
(a)
In
connection with the acquisition of the Acquired Businesses, certain customer agreements of the Predecessor were excluded from the Acquired Businesses. This adjustment removes
revenues related to customer agreements that are included in entities not party to the Purchase Agreement.
(b)
During
the five month period ended May 30, 2003, certain network circuit agreements and cable operation and maintenance agreements of the Predecessor were rejected as of
various dates in bankruptcy proceedings and excluded from the Acquired Businesses. The costs that were incurred prior to the date of rejection were calculated on a circuit by circuit, contract by
contract basis. This adjustment removes such costs.
(c)
Removes
expenses related to certain employees, facilities and other administrative operations that were excluded from the Acquired Businesses. Detailed schedules included as part of
the Purchase Agreement itemized acquired employees, leases, maintenance agreements, professional services and other selling, general and administrative expenses. After entering into the Interim
Management Agreement, current Teleglobe management kept detailed records of all selling, general and administrative expenses for the Acquired Businesses separate from those of the remaining businesses
of the Predecessor.
(d)
Represents
the portion of the distributable cash derived from our wireless mobile global roaming business paid to our former joint venture partner, Comfone, during the five months
ended May 30, 2003 pursuant to our joint venture agreement. Our joint venture agreement with Comfone was terminated by Teleglobe on January 10, 2004. As at the delivery of the
termination notice on July 10, 2003, the amounts owing subsequent to such termination notice delivery have been accounted for as an unfavorable contract in the purchase price allocation. Until
January 10, 2005, we will be required to continue to pay Comfone 50% of the distributable cash derived from our wireless mobile global roaming business that Comfone would have been entitled to
pursuant to the joint venture agreement provided that Comfone does not breach its non-compete obligations contained in the joint venture agreement. After January 10, 2005, we will no longer be
required to
129
make
any payments to Comfone. For a description of the risk related to matters that were in dispute with respect to our termination of the joint venture agreement, see "Risk
Factors—Certain matters with our former Mobile Global Roaming business partner have been in dispute."
Estimated Merger Expenditures and Benefits
In addition to the adjustments reflected in Adjusted EBITDA, we estimate that there are annual post-merger cost savings that will materialize over an
18 month period after closing. To achieve these post-merger benefits, however, we estimate that the combined company will have one-time cash expenditures of
approximately $17.8 million (exclusive of amounts, previously expensed, incurred in connection with the preparation of carve-out financial statements) for employee severance,
information technology system integration, closure expenses of certain facilities and professional fees associated with the merger and related transactions. We expect to generate cost savings through
the following:
•
ITXC
access to Teleglobe IP network
ITXC
on a stand-alone basis currently purchases IP access services from Teleglobe as well as other competitive wholesale IP service carriers. The anticipated savings will be achieved by
eliminating a portion of purchased IP access costs by migrating IP access needs to Teleglobe's IP network with minimal incremental costs to provide the service.
•
Teleglobe
connectivity
Teleglobe
on a stand alone basis leases traditional fixed access circuits to interconnect to local carriers and voice termination vendors. With ITXC's VoIP platform, access costs are
substantially lower than traditional fixed circuit lease costs. In many regions, Teleglobe expects to be able to leverage excess IP access capacity already in place with ITXC. This adjustment is an
estimate of the annualized savings of leveraging existing ITXC capacity in specific developing countries.
•
Facilities
and headcount reductions
This
adjustment is for the planned shut-down of certain ITXC facilities and migration to nearby Teleglobe facilities, as well as for anticipated future headcount reductions
due to staff redundancies in several functions including finance, executive management, information technology, customer service and operations.
•
Termination
cost savings
From the combination, the combined company will have approximately 11.8 billion minutes of wholesale international voice traffic versus 7.7 billion minutes for Teleglobe on a
stand alone basis. Due to the nature of the international wholesale voice industry, this increase in volume from the combination is expected to result in substantial termination cost savings for the
combined company with other carriers. The planned integration of the combined company least cost routing capabilities will allow the combined company to route traffic using the lowest cost available
in any of the combined company's routes. The amount reflects estimated savings based on current combined volumes and termination rates.
We
anticipate that the aggregate cost savings to be derived will be between approximately $20-30 million on an annualized basis.
Additional Potential Merger Benefits
ITXC has developed important technology and obtained patents for managing routing to maximize the quality and margin of voice calls over the Internet. We believe
this technology is not only valuable for a VoIP provider, but when combined with Teleglobe's value added services portfolio and IP network, we believe this proprietary technology and know-how creates
multiple opportunities for new
130
products
and service enhancements that could create substantial future growth opportunities for the combined company. However, there is no assurance that these benefits will be material or realized at
all. See "Risk Factors—We will face challenges in integrating New Teleglobe and, as a result, may not realize any or all of the expected benefits of the merger."
One-Time Expenditures of the Merger
One-Time Expenditures
(amounts in millions)
Transaction costs (1)
Professional fees (included in purchase cost) (2)
$
3.0
Fees associated with the loan pursuant to Cerberus commitment letter (3)
0.3
Severance costs associated with ITXC headcount reductions (4)
3.5
6.8
Other integration expenses
Expenses for professional fees, system conversion and other costs (5)
11.0
Total one-time estimated merger related expenses
$
17.8
(1)
Included
in pro forma adjustments.
(2)
Professional
fees include primarily audit, legal, financial consulting and valuation fees and regulatory filing fees associated with the preparation of this proxy
statement/prospectus, as well as legal fees associated with the negotiation of the merger agreement. See Footnote 2 in the pro forma condensed balance sheet as of December 31, 2003 on
page 124.
(3)
Represents
primarily legal fees related to the $100 million loan pursuant to the Cerberus commitment letter.
(4)
Represents
an initial estimate for employees affected within six months after the closing of the merger. This cost is included in the preliminary allocation of the purchase
cost as a liability assumed on acquisition. See Footnote 2 of the pro forma consolidated balance sheet as of December 31, 2003 on page 124.
(5)
Includes
costs for information systems integration consultants, system and data conversion expenses, retention and stay bonuses for ITXC employees retained by New Teleglobe for a
period of time after the closing of the merger and other miscellaneous travel, training and other employee related expenses.
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