Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2005

or

For the transition period from                     to                     .

Commission File Number: 000-50780

TELEGLOBE INTERNATIONAL HOLDINGS LTD

(Exact name of registrant as specified in its charter)

P.O. Box HM 1154, 10 Queen Street

Hamilton HM EX, Bermuda

(Address of principal executive office, including zip code)

(441) 296-4856

(Registrant’s telephone number, including area code)

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.)    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

At May 2, 2005, there were 39,106,821 shares of Common Stock, par value $.01 per share, outstanding.

Table of Contents

TELEGLOBE INTERNATIONAL HOLDINGS LTD

INDEX

2

Table of Contents

PART I—Financial Information

Item 1. Financial Statements

TELEGLOBE INTERNATIONAL HOLDINGS LTD

Consolidated Balance Sheets

(amounts in thousands of United States Dollars, except share and per-share data)

(Unaudited)

The accompanying notes are an integral part of these financial statements.

3

Table of Contents

TELEGLOBE INTERNATIONAL HOLDINGS LTD

Consolidated Statements of Operations

(amounts in thousands of United States Dollars, except share and per-share data)

(Unaudited)

The accompanying notes are an integral part of these financial statements.

4

Table of Contents

TELEGLOBE INTERNATIONAL HOLDINGS LTD

Consolidated Statements of Cash Flows

(amounts in thousands of United States Dollars)

(Unaudited)

The accompanying notes are an integral part of these financial statements.

5

Table of Contents

TELEGLOBE INTERNATIONAL HOLDINGS LTD

Consolidated Statement of Stockholders’ Equity

(amounts in thousands of United States Dollars)

(Unaudited)

The accompanying notes are an integral part of these financial statements.

6

Table of Contents

TELEGLOBE INTERNATIONAL HOLDINGS LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The consolidated financial statements include the accounts of Teleglobe International Holdings Ltd and its subsidiaries (the “Company” or “TIH”). The Company’s controlling shareholder is Cerberus Capital Management, L.P (“Cerberus”). All significant intercompany balances and transactions have been eliminated in consolidation.

The financial statements for the three months ended March 31, 2005 include the assets, liabilities and results of ITXC Corp. (“ITXC”). The merger with ITXC was consummated on May 31, 2004 and thus the financial statements for the three months ended March 31, 2004 do not include the assets, liabilities and results of ITXC.

The March 31, 2005 and 2004 financial statements have been prepared by management of TIH and are unaudited. In the opinion of the Company’s management, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the consolidated financial position, results of operations and cash flows for the three months ended March 31, 2005 and 2004 have been made. Certain information and footnote disclosures required for annual financial statements under accounting principles generally accepted in the United States have been omitted from the consolidated financial statements and notes thereto presented herein pursuant to the rules and regulations of the Securities and Exchange Commission. The consolidated financial statements and notes thereto presented herein should be read in conjunction with the Consolidated Financial Statements of the Successor and the Combined Financial Statements of the Predecessor and notes thereto included in the Company’s annual Form 10-K filed on March 17, 2005. The results of operations of the Company for the three months ended March 31, 2005 are not necessarily indicative of the results to be expected for any other interim period or the entire fiscal year.

Certain comparative figures have been reclassified in order to conform with the presentation adopted in the current period. Among the reclassified items, is the reclassification of software from property and equipment to intangible assets.

The accounting policies used in preparation of these financial statements are consistent with those reported in the Consolidated Financial Statements of the Successor in its annual Form 10-K.

2. Acquisition

On May 31, 2004, the merger with ITXC was completed. The merger has been accounted for using the purchase method and the purchase price was allocated to the acquired assets and liabilities based on the estimated fair values determined using management’s best estimates and independent valuations as at the acquisition date. The allocation of the purchase price was finalized during the quarter without change to the amounts reported in the year-end Consolidated Financial Statements. The excess of the purchase consideration over the estimated fair value of net assets acquired, in the amount of $96.9 million has been accounted for as goodwill.

7

Table of Contents

TELEGLOBE INTERNATIONAL HOLDINGS LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The final allocation of the purchase consideration to the estimated fair value of the net assets acquired is as follows:

The results of operations of ITXC are included in the consolidated statement of operations of TIH from June 1, 2004.

3. Restricted Cash

In conjunction with its letters of credit for its leased premises, the Company has $2.1 million in restricted cash as of March 31, 2005 that represents the collateral supporting the letters of credit. The majority of the $2.1 million relates to a letter of credit for the leased premises in Princeton, New Jersey. The letters of credit related to the leased premises expire through July 2005.

The remaining amount of $1.5 million in restricted cash at March 31, 2005 relates to collateral provided for various commercial letters of credit expiring through September 2005.

4. Investment

During the three month period ended March 31, 2005, the Company purchased 2,207,202 shares of Wmode Inc. (“Wmode”), representing approximately 5% of the outstanding equity, and exclusive distribution rights to Wmode’s proprietary technology for $2.0 million Canadian dollars. The exclusivity to the distribution rights are subject to attaining certain revenue levels. Wmode is a Canadian based, privately held leading provider of mobile content distribution services for content providers, mobile operators and media and brand companies. Teleglobe has agreed to purchase up to 4,415,402 shares of Wmode for total consideration of $4.0 million Canadian dollars in tranches upon the achievement of certain development and operational milestones throughout 2005. As at March 31, 2005, the remaining commitment to purchase shares of Wmode is $2.0 million Canadian dollars. The

8

Table of Contents

TELEGLOBE INTERNATIONAL HOLDINGS LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

total amount of shares to be issued to Teleglobe under this agreement would total approximately 10% of the total shares outstanding of Wmode. The Company is currently finalizing the accounting of this investment including an allocation of the purchase consideration.

5. Comprehensive Income (Loss)

The components of comprehensive income (loss) for the periods indicated are as follows:

6. Stock-Based Compensation Plans

The Company accounts for stock-based awards to employees and directors using the intrinsic value method of accounting in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”). Under the intrinsic value method, when the market price of the underlying stock on the date of grant exceeds the exercise price of the Company’s employee stock award, compensation expense is recognized over the vesting period. The Company is required under SFAS No. 123 to disclose pro forma information regarding stock-based award grants made to its employees based on specified valuation techniques that produce estimated compensation charges.

Fair Value Assumptions

The Company granted 120,000 stock options on January 31, 2005 at an exercise price of $4.02 per share and 190,000 stock options on March 2, 2005 at an exercise price of $5.00 per share. The exercise prices equal the NASDAQ closing price on the date of grants. The options vest at a rate of one third per year from the date of grant and terminate no later than seven years after the grant date. The weighted-average fair value of the options granted on January 31, 2005 is $3.23 per stock option and $4.03 per stock option granted on March 2, 2005. The fair value was estimated using the Black-Scholes model with the following weighted average assumptions:

9

Table of Contents

TELEGLOBE INTERNATIONAL HOLDINGS LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following table summarizes relevant information as to reported results under the Company’s intrinsic value method of accounting for stock options, with supplemental pro-forma information as if the fair value recognition provisions of SFAS No. 123 had been applied for the periods indicated:

7. Common Stock and Earnings per Share

During the first quarter of 2005, stock options in respect of 20,093 common shares were exercised for cash consideration of $49,558.

Basic earnings per share is calculated by dividing net income attributable to common stockholders by the weighted average number of common shares outstanding during the period.

Diluted earnings per share is determined in the same manner as basic earnings per share except that the number of shares is increased assuming exercise of dilutive stock options and warrants using the treasury stock method. The diluted earnings per share amount equals basic earnings per share because the Company had a net loss and the impact of the assumed exercise of the stock options and warrants is not dilutive.

Basic Earnings per share calculation is as follows (in thousands, except per share amounts):

8. Retention Bonuses

Prior to the consummation of the merger with ITXC, certain ITXC employees contractually agreed to complete a predetermined service period in order to obtain agreed upon retention bonuses. Receipt of these

10

Table of Contents

TELEGLOBE INTERNATIONAL HOLDINGS LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

amounts is fully conditional upon completion of the entire service period. No other amounts are payable to these employees at the end of the service period. During the first quarter of 2005, some employees terminated their employment before the agreed upon service period and other changes were made to the original terms of the contractual agreement of some employees. The Company is recognizing the total estimated liability of $3.3 million associated with this obligation on a pro-rata basis as services are provided. These amounts are included in accrued liabilities and selling, general and administrative expenses. The remaining liability is expected to be recognized and paid by the end of the third quarter of 2005.

The following table displays the activity and balances of the retention bonus liability from December 31, 2004 to March 31, 2005.

9. Employee Benefit Plans

The following table presents the components of net periodic benefit cost for pension benefits and other post-retirement health care and life insurance benefits:

The Company did not contribute to its pension plans during the three months ended March 31, 2005 and does not expect to contribute to its pension plans during the remainder of 2005 because the plans are in a surplus position. The Company contributed approximately $35,000 to its post-retirement health care and life insurance plan in the first quarter of 2005 and expects to contribute similar amounts in the remaining three quarters of 2005.

10. Interest Expense

Interest expense includes an amount of $1.5 million for the three months ended March 31, 2005 and $2.2 million for the three months ended March 31, 2004, representing the accretion of the Comfone AG liability to the amounts expected to be paid. The joint venture agreement, acquired as part of the acquisition of Old Teleglobe on May 30, 2003 as described in the Company’s annual Form 10-K, was terminated on January 2003, requiring the Company to pay Comfone AG its share of any cash derived from the mobile global roaming business until the end of fiscal 2004. At the time of the acquisition, management recorded its best estimate of the fair value of the termination payment as an unfavorable contract in the purchase price allocation.

The three months ended March 31, 2005 include $2.4 million (net of $0.3 million interest capitalized) of interest expense relating to senior notes, with a related party, issued in the second quarter of 2004. No such amounts were included during the three month period ended March 31, 2004 since the senior notes were not outstanding during that time.

11

Table of Contents

TELEGLOBE INTERNATIONAL HOLDINGS LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

11. Intangible Assets

The following table summarizes the intangible assets at the dates indicated:

The software acquired during the first quarter of 2005 is being amortized over its estimated useful life of three to five years. The weighted average amortization period for acquired intangibles in the first quarter of 2005 equals approximately 3.5 years.

Amortization expense for intangible assets totaled approximately $2.5 million for the three months ended March 31, 2005 and $1.4 million for the three months ended March 31, 2004. Aggregate amortization expense for intangible assets is estimated to be:

12

Table of Contents

TELEGLOBE INTERNATIONAL HOLDINGS LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

12. Property and Equipment

The components of property and equipment are as follows:

13. Related Party

The Company concluded the following transactions at exchange value with related parties in the normal course of business.

Amounts payable to related parties at March 31, 2005 total $100.8 million and $100.5 million at December 31, 2004.

14. Contingencies

As previously reported, as part of its normal ongoing review of ITXC’s operations in connection with the post-merger integration of Teleglobe and ITXC, Teleglobe had identified potential instances of noncompliance

13

Table of Contents

TELEGLOBE INTERNATIONAL HOLDINGS LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

with the United States Foreign Corrupt Practices Act (“FCPA”) relating to ITXC’s operations in certain African countries prior to its merger with Teleglobe, consummated on May 31, 2004. Teleglobe voluntarily notified the Securities and Exchange Commission (the “SEC”) and the U.S. Department of Justice (the “DOJ”) of the matter, and has been cooperating fully with the SEC and the DOJ. The SEC had previously advised Teleglobe that it was conducting an informal inquiry into the matter. Teleglobe has been informed that, the SEC issued a formal order of investigation on February 15, 2005 concerning ITXC’s possible violations of the FCPA and possible related violations of the securities laws. Teleglobe intends to continue to cooperate fully with the SEC and DOJ in the investigation. The Audit Committee has, as previously disclosed, completed internal investigations concerning ITXC’s and Teleglobe’s foreign agency agreements and FCPA compliance. Teleglobe has begun implementation of recommendations stemming from these internal investigations that are intended to ensure compliance with the FCPA. Teleglobe cannot predict the extent to which the SEC, the DOJ or any other governmental authorities will pursue administrative, civil or criminal proceedings, the imposition of fines or penalties or other remedies or sanctions. Teleglobe has not identified, and does not believe it is likely that, any material adjustment to its financial statements is or will be required in connection with the results of this investigation, although it is possible that a monetary penalty, if any, may be material to its results of operations in the period in which it is imposed.

On April 14, 2004, Acceris Communications Technologies, Inc. commenced a patent infringement suit in the United States District Court of the District of New Jersey, against ITXC Corp., alleging that ITXC’s VoIP services and systems infringe Acceris’ U.S. Patent No. 6,243,373, entitled “Method and Apparatus for Implementing a Computer Network/Internet Telephone System.” On May 7, 2004, ITXC filed a lawsuit against Acceris for infringement of a number of ITXC’s VoIP patents. The suit alleged infringement of five of ITXC’s United States Patents, numbers 5,889,774, 6,026,087, 6,404,864, 6,628,760 and 6,661,878, directed generally to the transmission of telephone calls over the Internet and the completion of telephone calls by switching them off the Internet and onto a public switched telephone network (PSTN). On July 6, 2004, the Court rejected Acceris’ initial motion to dismiss ITXC’s case based upon alleged failure to conduct an adequate pre-complaint investigation. The Company intends to vigorously defend against the allegations of infringement in that case and believes it has substantial defenses to them. However, an adverse result in this litigation could either result in injunctive relief precluding all or a portion of ITXC’s VoIP activity or materially impact the Company’s revenue and profitability. Litigation of such matters may require significant management and financial resources of the Company and adverse outcomes in such lawsuits could materially adversely affect our financial condition or operating results.

ITXC and certain of its former officers/directors were named as defendants in several purported shareholder class action lawsuits commenced in 2001. The lawsuits allege, among other things, that, in connection with ITXC’s public offerings of securities, its Prospectus did not disclose certain alleged practices involving its underwriters and their customers. These actions seek compensatory and other damages, and costs and expenses associated with the litigation. No discovery has taken place with respect to ITXC and the other issuer defendants. ITXC is one of hundreds of issuers named as defendants in substantially identical lawsuits. Management believes that ITXC and its officers/directors did not engage in any improper or illegal conduct. All of these cases have been consolidated for pretrial purposes before Judge Scheindlin in the Southern District of New York, who refused to dismiss the cases in an opinion issued in February 2003. All of the individual defendants who had been named as defendants in the Company’s case have now been dismissed from the proceeding without prejudice, pursuant to a stipulation with the plaintiffs. Neither the individual defendants nor the Company nor its insurers paid any consideration for these dismissals. The issuer defendants, their insurance carriers and the plaintiffs have negotiated a settlement pursuant to which the insurance carriers would fund any monetary consideration, and it is anticipated that this proposed settlement will be submitted to the Court for approval in the near future. This settlement was approved by the court on February 15, 2005 on a preliminary basis. Under the terms of the

14

Table of Contents

TELEGLOBE INTERNATIONAL HOLDINGS LTD

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

proposed settlement, the Company would be dismissed from the litigation with prejudice and should neither have future liability to plaintiffs nor any significant expenses in connection with the litigation, except for a limited obligation to cooperate in discovery in the plaintiffs’ continuing cases against the underwriters.

We are routinely party to suits for collection, commercial disputes, claims from customers and/or suppliers over reconciliation of payments for voice minutes, circuits, Internet bandwidth and/or access to the public switched telephone network, leased equipment, and claims from estates of bankrupt companies alleging that we received preferential payments from such companies prior to their bankruptcy filings. While management currently believes that resolving such suits and claims, individually or in aggregate, will not have a material adverse impact on our financial position, the FCPA investigation and other litigation proceedings noted above are subject to inherent uncertainties and management’s view of these matters may change in the future. Were an unfavorable final outcome to occur, such an outcome could have a material adverse impact on our financial position and results of operations for the period in which the effect becomes reasonably estimable.

15. Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS 153, Exchanges of Nonmonetary Assets, an amendment of APB No. 29, Accounting for Nonmonetary Transactions. SFAS 153 requires exchanges of productive assets to be accounted for at fair value, rather than at carryover basis, unless (1) neither the asset received nor the asset surrendered has a fair value that is determinable within reasonable limits or (2) the transactions lack commercial substance. SFAS 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company is currently evaluating the potential impact this may have on its financial position, results of operations or cash flows.

In December 2004, the FASB released its final revised standard, SFAS No. 123R, Share-Based Payment. SFAS 123R requires that a public entity measure the cost of equity based service awards based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award or the vesting period. A public entity will initially measure the cost of liability based service awards based on its current fair value; the fair value of that award will be remeasured subsequently at each reporting date through the settlement date. Changes in fair value during the requisite service period will be recognized as compensation cost over that period. Adoption of SFAS 123R is required for the fiscal year beginning after June 15, 2005. The Company is evaluating SFAS 123R and believes the impact on the financial statements should be consistent with the FAS 123 pro forma disclosure contained in Note 6 of the Consolidated Financial Statements.

15

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the Consolidated and Combined Financial Statements, the related Notes to Consolidated and Combined Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s annual Form 10-K filed with the Securities and Exchange Commission on March 17, 2005 and the Unaudited Consolidated Financial Statements and related Notes to Consolidated Financial Statements included in Item 1 of Part I of this Quarterly Report on Form 10-Q.

The Company has included in this Quarterly Report certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 concerning TIH’s business, operations and financial condition. “Forward-looking statements” consist of all non-historical information, and the analysis of historical information, including any references in this Quarterly Report to future revenue growth, future expense growth, future credit exposure, future profitability, anticipated cash resources, anticipated capital expenditures, capital requirements, and the Company’s plans for future periods. In addition, the words “could”, “expects”, “anticipates”, “objective”, “plan”, “may affect”, “may depend”, “believes”, “estimates”, “projects” and similar words and phrases are also intended to identify such forward-looking statements.

Actual results could differ materially from those projected in the Company’s forward-looking statements due to numerous known and unknown risks and uncertainties (see discussion on Risk Factors on page 48 of the Company’s annual Form 10-K). All such forward-looking statements are current only as of the date on which such statements were made. The Company does not undertake any obligation to publicly update any forward-looking statement to reflect events or circumstances after the date on which any such statement is made or to reflect the occurrence of unanticipated events.

The results of operations contained in the unaudited financial statements for the three months ended March 31, 2005 and 2004 are results of operations for such interim periods and are not necessarily indicative of the results to be expected for an entire year or for any other period.

Recently Issued Accounting Standards

In December 2004, the FASB issued SFAS 153, Exchanges of Nonmonetary Assets, an amendment of APB No. 29, Accounting for Nonmonetary Transactions. SFAS 153 requires exchanges of productive assets to be accounted for at fair value, rather than at carryover basis, unless (1) neither the asset received nor the asset surrendered has a fair value that is determinable within reasonable limits or (2) the transactions lack commercial substance. SFAS 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company is currently evaluating the potential impact this may have on its financial position, results of operations or cash flows.

In December 2004, the FASB released its final revised standard, SFAS No. 123R, Share-Based Payment. SFAS 123R requires that a public entity measure the cost of equity based service awards based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award or the vesting period. A public entity will initially measure the cost of liability based service awards based on its current fair value; the fair value of that award will be remeasured subsequently at each reporting date through the settlement date. Changes in fair value during the requisite service period will be recognized as compensation cost over that period. Adoption of SFAS 123R is required for the fiscal year beginning after June 15, 2005. The Company is evaluating SFAS 123R and believes the impact on the financial statements should be consistent with the FAS 123 pro forma disclosure contained in Note 6 of the Consolidated Financial Statements.

16

Table of Contents

Merger Expenditures and Benefits

The following is an update on the Company’s ITXC integration plan:

The Company’s ITXC merger integration plan to achieve annual post-merger benefits of approximately $25 to $30 million is expected to be completed by the end of the second quarter 2005. The integration plan centers around facility and headcount reductions, termination cost savings and consolidation of the Teleglobe and ITXC networks resulting in reduced capital expenditures. The original completion date was set for the first quarter of 2005, however there was a delay of one quarter from the original plan exclusively related to planned integration of routing capabilities. Selling, general and administration expense (SG&A) savings were partially impacted and the majority of termination cost savings will be delayed until completion of the unified routing capabilities. Integration costs, including consultant fees, retention bonuses and other costs directly related to the integration of ITXC, of approximately $1.3 million, are included in the consolidated results of operations for the quarter ended March 31, 2005.

ITXC access to Teleglobe IP network and Teleglobe connectivity:

The combination of Teleglobe and ITXC provided opportunities to lower the operating expenses of our network, resulting in a decrease in network expenses. IP access charges are a significant example. ITXC on a stand-alone basis purchased IP access services from Teleglobe as well as other competitive wholesale IP service carriers. We have cancelled many of these third-party services, replacing access via Teleglobe’s network. The marginal cost of doing so is very low, yielding operating expense reductions.

We have also realized network savings in the short-term by migrating some common customers from two interconnects to one, improving utilization rates. This provides us growth capacity with lower investment requirements for a period of time. In the longer term we anticipate benefits from network growth via VoIP, an inherently more cost effective medium than TDM. To date, the Company has achieved its integration goal related to network consolidation. The benefits of our completed network consolidation will be reflected in our network expenses.

Facilities and headcount reductions:

To date the Company has achieved its integration goal related to closures of overlapping facilities. Further savings may be achieved from the sublet of excess floor space. The first quarter of 2005 has not been significantly impacted by savings from headcount reductions mainly because the results include estimated retention bonus to be paid in the near term. However, SG&A for the third quarter of 2005 and onwards is expected to reflect net benefits from these reductions.

Termination cost savings:

In the future, due to the nature of the international wholesale voice industry, the increase in volume from the merger with ITXC will result in 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. While our benefits to date are limited, we anticipate the synergies to occur after we have completed integrated routing towards the end of the second quarter of 2005.

Results of Operations—Comparison of the Three Months Ended March 31, 2005 and 2004

Set forth below is a description of the results of operations for the three months ended March 31, 2005 and March 31, 2004. The results of ITXC are included in the consolidated results of operations from June 1, 2004. Thus, the results of ITXC are included in the three months ended March 31, 2005 but not in the three months ended March 31, 2004.

17

Table of Contents

Non-GAAP Financial Data (Unaudited)

We are presenting EBITDA (earnings before interest, taxes, depreciation and amortization) 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, in particular in connection with offerings of debt securities. 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:

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 only supplementally.

EBITDA (earnings before interest, taxes, depreciation and amortization)

18

Table of Contents

Revenues

The following table presents revenues derived from each product group and other relevant revenue-related information for the periods indicated. The results of ITXC are included from June 1, 2004.

Total revenues, excluding revenues from Bell Canada, increased by $36.1 million or 18.8% in the current quarter as compared to the first quarter of 2004. The increase in revenues, excluding the Bell revenue, mainly results from the inclusion of ITXC revenue from June 1, 2004. Revenues from Bell Canada increased by $4.7 in the first quarter of 2005 as compared to the first quarter of 2004 mainly due to abnormally low volume in the first quarter of 2004. The number of customers at current quarter-end represents an increase of 392, including customers obtained through the merger with ITXC, as compared to the comparable period in 2004.

Revenue generated from voice transport services increased by approximately $40.4 million or 24.3% during the quarter ended March 31, 2005 as compared to the three months ended March 31, 2004. The increase is mainly due to the inclusion of ITXC revenue from June 1, 2004 and from an increase in minutes of traffic carried. Minutes of traffic carried in the current quarter versus the same quarter in 2004 increased by 64.0%. The increase is mainly due to the inclusion of ITXC related minutes from June 1, 2004 while excluding such amounts in the first quarter of 2004. The increase in revenue was partially offset by the current competitive pricing trends in the telecommunication industry.

During the quarter ended March 31, 2005, the average voice revenue per minute was approximately $0.060 per minute, as compared with $0.079 per minute during the quarter ended March 31, 2004. The decrease in average revenue per minute is primarily attributable to changes in our route destination mix and to an overall decline in rates experienced in telecommunications.

19

Table of Contents

Data service revenue decreased by approximately $2.2 million or 7.9% in the three months ended March 31, 2005 as compared to the three months ended March 31, 2004. The Company experienced a healthy growth in new customers and doubled traffic volume in the first quarter of 2005, however, these benefits were offset by price erosion.

Revenue generated from value added services increased by $2.6 million or 12.9% in the current quarter from the first quarter of 2004. We experienced increases in signaling services and a volume increase in our international toll free service (ITFS) in the current period.

Operating Expenses

The following table outlines operating costs as a percentage of revenue for the periods indicated. The results of ITXC are included from June 1, 2004.

Telecommunication expense

Telecommunication expense during the three months ended March 31, 2005 increased by approximately $35.2 million or 22.8% from the same period in 2004 primarily as a result of the increase in revenues due to the inclusion of ITXC’s results from June 1, 2004. The quarter-to-date results include favorable settlements with certain carriers. The increase was partially offset by lower voice termination costs reflecting benefits from price deflation. As a percentage of revenue, telecommunication expense increased during the three months ended March 31, 2005 as compared to the prior year period mainly due to an unfavorable mix of voice transport destinations with lower average margin per minute and delays in the unification of networks with ITXC.

Network expense

Network expense decreased by approximately $1.0 million or 4.0% in the first quarter of 2005 compared to the first quarter of 2004. The decrease is mainly due to the ongoing contract renegotiations with our suppliers and cancellations of unprofitable circuits. The decrease was partially offset by the inclusion of ITXC’s network expenses from June 1, 2004.

20

Table of Contents

Network expense as a percentage of revenue decreased in the current quarter as compared to the same quarter in 2004. The percentage decrease is a function of the decrease in expenses while revenues increased for the same comparative periods.

Selling, General and Administrative expenses

Selling, general and administrative (SG&A) expense has increased by approximately $12.3 million or 48.0% in the first quarter of 2005 compared to the first quarter of 2004. The increase is mainly due to the inclusion of ITXC’s SG&A expense from June 1, 2004. Furthermore, SG&A expense was adversely affected by the decline in value of the US dollar as compared to the Canadian dollar from the 2004 period to the 2005 period, resulting in an increase in our expenses. The three months ended March 31, 2005 also include professional fees incurred in connection with the Foreign Corrupt Practices Act investigation in the amount of $0.7 million and ITXC integration costs related mostly to consultant services and employee retention, in the approximate amount of $1.3 million. The integration of ITXC is almost completed and is expected to provide significant synergies resulting in a decreased cost base. See update on ITXC integration in “Merger Expenditures and Benefits” included herein.

Bad debt recovery

Bad debt recovery in the first quarter of 2005 is $0.9 million versus a recovery of $1.1 million in the first quarter of 2004. During the first quarter of 2004, the Company’s collection efforts resulted in the collection of accounts which were previously identified as doubtful accounts. Since then, the Company has gained insight in the collectibility of accounts and implemented more stringent credit review practices. The recovery in the first quarter of 2005 reflects the revision of certain estimates resulting in a reduction in the allowance for doubtful accounts of approximately $0.8 million. This amount which is not related to the collection of previously identified doubtful accounts increased operating income in the current quarter.

Depreciation expense

Depreciation expense increased by $2.1 million or 51.3% in the current quarter versus the comparable quarter in 2004 mainly due to the inclusion of ITXC’s depreciation from June 1, 2004.

Amortization of intangible assets

Amortization expense in the current quarter increased by $1.0 million or approximately 75% from the same quarter in 2004. The increase is mostly due to intangible assets recorded in connection with the merger with ITXC.

Restructuring charges

During the three months ended March 31, 2004, the Company reduced its workforce by 15 people. As a consequence, the Company incurred restructuring costs in the amount of $893,000 consisting of severance.

The retention bonuses that are being paid to ITXC employees upon their departure are being amortized over such employees agreed upon service period and are included in SG&A expenses. See Note 8 to the Consolidated Financial Statements included herein for more details.

Foreign exchange loss

The foreign exchange loss of $1.9 million for the three months ended March 31, 2005 and $0.5 million for the three months ended March 31, 2004 are a function of the effect of fluctuations in the Canadian dollar, Euro, British Pound and other currencies versus US Dollar on certain assets and liabilities of the Company. The Company’s reporting currency is the US dollar, however, the Company transacts business in several different currencies.

21

Table of Contents

Other expenses

Interest expense

Interest expense in the current quarter increased by approximately $1.7 million from the first quarter of 2004. The increase is mainly due to the inclusion of interest expense in the first quarter of 2005 in the amount of $2.4 million (net of amounts capitalized) related to the senior notes issued in May 2004. The increase is partially offset by a decrease in the first quarter of 2005 for the accretion related to the Comfone liability. The final payment related to the termination of the Comfone agreement is expected in the second quarter of 2005.

Income taxes

Income tax recovery in the first quarter of 2005 of $0.3 million consists of $0.1 million current income tax, mostly due to the prior year’s US state taxes and current income tax for a few offshore entities, offset by deferred income tax recoveries of $0.4 million due mostly to a reduction in deferred tax liabilities caused by unrealized foreign exchange losses incurred by a Luxembourg entity during the quarter.

Income tax expense for the first quarter of 2004 of $0.2 million consists mostly of current income taxes, mostly due to taxes payable by a few European entities.

Liquidity and capital resources

Cash flow from operations

In the first quarter of 2005, the Company’s cash flows from operating activities are $15.3 million made-up of a net loss of $8.5 million, reduced by adjustments of $8.3 million for non-cash items and $15.5 million related to changes in operating assets and liabilities. The majority of the non-cash items relate to depreciation and amortization. The changes in operating assets and liabilities stem mostly from timing of receipts and payments and PTT settlements related to accounts receivable and accounts payable. The positive working capital timing differences are unusual and are not expected to continue. Once the PTT and other items are settled in the next few quarters, the timing differences will reverse resulting in cash outflows.

Investing Activities

Cashflows used in investing activities of $5.4 million in the first quarter of 2005 are mostly a result of capital expenditures and an increase in investments, partially offset by changes in marketable securities and restricted cash. The purchase of property and equipment in the amount of $3.4 million for the three months ended March 31, 2005, consists mostly of information technology upgrades and network equipment. The addition of intangible assets of $2.1 million relates to software purchases. The $1.6 million increase in investments is for the purchase of shares in Wmode Inc. as discussed in Note 4 of the Consolidated Financial Statements included herein. Together with its equity investment in Wmode Inc., the Company will have exclusive distribution rights to Wmode Inc’s proprietary technology, assuming revenue targets are attained. This will contribute to the Company’s plan to increase value-added service revenues. Cashflows for investing activities were provided by the decrease in a commercial letter of credit affecting restricted cash and the sale of marketable securities.

Financing Activities

The cashflows used in financing activities of $0.4 million relates mostly to the repayment of capital lease obligations.

Liquidity

We believe that our current liquidity and anticipated future cash flows from operations will be sufficient to fund our operations in the next twelve months and to fund the first principal repayment of $25 million, under our

22

Table of Contents

senior notes, due in the second quarter of 2006. Our expenditures in 2005 will be primarily attributable to operating expenses, capital expenditures, integration costs associated with the ITXC merger, Comfone payments and interest payments. We cannot be certain, however, that additional cash will not be required, particularly if we make significant acquisitions or other investments.

Our working capital at March 31, 2005 is in a negative position of $33.9 million versus a negative position of $26.9 million at December 31, 2004. The change in working capital is mostly due to timing of PTT settlements. The settlement process in bilateral operating agreements has permitted the Company to operate successfully with negative working capital. We cannot be certain that these conditions will not change in future periods.

Current economic conditions of the telecommunications and information services industry, combined with our financial position and liquidity, have created potential opportunities for our company to acquire companies or portions of companies. We continuously evaluate these opportunities and could make additional investments in the near term.

The following summarizes the Company’s contractual obligations as of March 31, 2005, and the effect such obligations are expected to have on the Company’s liquidity and cash flow in future periods.