UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
Quarterly
Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934.
|
For
the quarterly period ended June 30, 2008
¨
|
Transition
Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934.
|
For
the transition period from
to
Commission
File Number 0-51063
ARBINET-THEXCHANGE,
INC.
(Exact
Name of Registrant as Specified in Its Charter)
|
|
Delaware
|
13-3930916
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
(I.R.S.
Employer
Identification
No.)
|
|
|
120
Albany Street, Tower II, New Brunswick, New
Jersey
|
08901
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code (732) 509-9100
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90
days. Yes
x
No:
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
|
|
Large
accelerated filer
¨
|
Accelerated
filer
x
|
Non-accelerated
filer
¨
(
Do
not check if a smaller reporting company)
|
Smaller
reporting company
¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
¨
No:
x
Indicate
the number of shares outstanding of each of the issuer’s class of common stock,
as of August 1, 2008:
|
|
|
Class
|
|
Number
of Shares
|
Common
Stock, par value $0.001 per share
|
|
23,993,773
|
ARBINET-THEXCHANGE,
INC.
TABLE
OF CONTENTS
|
|
|
|
Page
|
PART
I. FINANCIAL INFORMATION
|
|
Item 1.
|
Consolidated
Financial Statements (Unaudited)
|
|
|
Consolidated
Balance Sheets (Unaudited) as of December 31, 2007 and June 30,
2008
|
1
|
|
Consolidated
Statements of Operations (Unaudited) for the Three and Six Months
Ended
June 30, 2007 and 2008
|
2
|
|
Consolidated
Statements of Cash Flows (Unaudited) for the Six Months Ended
June 30, 2007 and 2008
|
3
|
|
Notes
to Consolidated Financial Statements (Unaudited)
|
4
|
Item 2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
10
|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
20
|
Item 4.
|
Controls
and Procedures
|
20
|
PART
II. OTHER INFORMATION
|
|
Item 1.
|
Legal
Proceedings
|
21
|
Item 1A.
|
Risk
Factors
|
21
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
21
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
22
|
Item 6.
|
Exhibits
|
23
|
SIGNATURES
|
24
|
This
Quarterly Report on Form 10-Q contains forward-looking statements, including
but
not limited to statements about Arbinet’s growth, strategic and business plans,
product development and service offerings, and future operating results. Such
forward-looking statements may be identified by, among other things, the use
of
forward-looking terminology such as “believes,” “expects,” “may,” “will,”
“should” or “anticipates” or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy that involve risks and
uncertainties. Various important risks and uncertainties may cause Arbinet’s
actual results to differ materially from the results indicated by these
forward-looking statements, including, without limitation: the ability to
complete
the sale of
Broad Street Digital Limited; members (in particular,
significant trading members) not trading on our exchange or utilizing our new
and additional services (including data on thexchange
SM
,
DirectAxcess
SM
,
PrivateExchange
SM
,
AssuredAxcess
SM
,
and
PeeringSolutions
SM
);
continued volatility in the volume and mix of trading activity (including the
average call duration and the mix of geographic markets traded); our uncertain
and long member enrollment cycle; the failure to manage our credit risk; failure
to manage our growth; pricing pressure; investment in our management team and
our personnel; system failures, human error and security breaches that could
cause us to lose members and expose us to liability; regulatory uncertainty;
and
our ability to obtain and enforce patent protection for our methods and
technologies. For a further list and description of the risks and uncertainties
Arbinet faces, please refer to Part I, Item 1A of the Annual Report on Form
10-K, filed with the Securities and Exchange Commission on March 17, 2008,
and other filings, which have been filed with the Securities and Exchange
Commission. Arbinet assumes no obligation to update any forward-looking
statements, whether as a result of new information, future events or otherwise
and such statements are current only as of the date they are made.
PART
I. FINANCIAL INFORMATION
ARBINET-THEXCHANGE,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(Unaudited)
|
|
|
|
|
|
|
|
December 31,
2007
|
|
June
30,
2008
|
|
|
|
($ in thousands, except per share data)
|
|
ASSETS
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
28,556
|
|
$
|
20,385
|
|
Marketable
securities
|
|
|
20,344
|
|
|
9,501
|
|
Trade
accounts receivable (net of allowance of $1,481 and $1,758 at
December 31, 2007 and June 30, 2008, respectively)
|
|
|
28,451
|
|
|
24,178
|
|
Prepaids
and other current assets
|
|
|
2,421
|
|
|
5,442
|
|
Total
current assets
|
|
|
79,772
|
|
|
59,506
|
|
Property
and equipment, net
|
|
|
23,002
|
|
|
22,880
|
|
Security
deposits
|
|
|
2,430
|
|
|
2,287
|
|
Intangible
assets, net
|
|
|
2,018
|
|
|
1,879
|
|
Goodwill
|
|
|
2,196
|
|
|
2,201
|
|
Other
assets
|
|
|
76
|
|
|
34
|
|
Long
term assets of discontinued operations
|
|
|
440
|
|
|
461
|
|
Total
Assets
|
|
$
|
109,934
|
|
$
|
89,248
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Capital
lease obligation
|
|
$
|
7
|
|
$
|
-
|
|
Notes
payable
|
|
|
493
|
|
|
20
|
|
Due
to Silicon Valley Bank
|
|
|
285
|
|
|
1,296
|
|
Accounts
payable
|
|
|
16,123
|
|
|
11,701
|
|
Deferred
revenue
|
|
|
2,499
|
|
|
2,184
|
|
Accrued
and other current liabilities
|
|
|
8,250
|
|
|
7,607
|
|
Current
liabilities of discontinued operations
|
|
|
334
|
|
|
101
|
|
Total
current liabilities
|
|
|
27,991
|
|
|
22,909
|
|
Other
long-term liabilities
|
|
|
2,282
|
|
|
1,779
|
|
Total
liabilities
|
|
|
30,273
|
|
|
24,688
|
|
Commitments
and Contingencies
|
|
|
—
|
|
|
—
|
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
Preferred
Stock, 5,000,000 shares authorized
|
|
|
—
|
|
|
—
|
|
Common
Stock, $0.001 par value, 60,000,000 shares authorized, 26,355,641
and
26,613,581 shares issued and outstanding, respectively
|
|
|
26
|
|
|
27
|
|
Additional
paid-in-capital
|
|
|
181,644
|
|
|
173,378
|
|
Treasury
stock, 674,233 and 2,132,084 shares, respectively
|
|
|
(4,613
|
)
|
|
(10,340
|
)
|
Accumulated
other comprehensive loss
|
|
|
(455
|
)
|
|
(462
|
)
|
Accumulated
deficit
|
|
|
(96,941
|
)
|
|
(98,043
|
)
|
Total
Stockholders’ Equity
|
|
|
79,661
|
|
|
64,560
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$
|
109,934
|
|
$
|
89,248
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
ARBINET-THEXCHANGE,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE THREE MONTHS AND THE SIX MONTHS ENDED JUNE 30, 2007 AND
2008
(Unaudited)
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
|
|
($
in thousands except per share data)
|
|
Trading
revenues
|
|
$
|
122,109
|
|
$
|
123,002
|
|
$
|
251,628
|
|
$
|
235,443
|
|
Fee
revenues
|
|
|
12,503
|
|
|
13,571
|
|
|
25,146
|
|
|
26,301
|
|
Total
revenues
|
|
|
134,612
|
|
|
136,573
|
|
|
276,774
|
|
|
261,744
|
|
Cost
of trading revenues
|
|
|
122,212
|
|
|
123,114
|
|
|
251,772
|
|
|
235,584
|
|
Net
revenues
|
|
|
12,400
|
|
|
13,459
|
|
|
25,002
|
|
|
26,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
and development
|
|
|
5,074
|
|
|
5,139
|
|
|
10,080
|
|
|
10,418
|
|
Sales
and marketing
|
|
|
2,500
|
|
|
3,155
|
|
|
4,854
|
|
|
5,791
|
|
General
and administrative
|
|
|
3,548
|
|
|
3,197
|
|
|
7,373
|
|
|
6,130
|
|
Depreciation
and amortization
|
|
|
1,925
|
|
|
1,886
|
|
|
3,978
|
|
|
3,716
|
|
Severance
charges
|
|
|
1,021
|
|
|
-
|
|
|
1,021
|
|
|
-
|
|
Reserve
for litigation
|
|
|
790
|
|
|
-
|
|
|
1,940
|
|
|
-
|
|
Total
costs and expenses
|
|
|
14,858
|
|
|
13,377
|
|
|
29,246
|
|
|
26,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
(2,458
|
)
|
|
82
|
|
|
(4,244
|
)
|
|
105
|
|
Interest
income
|
|
|
683
|
|
|
225
|
|
|
1,475
|
|
|
642
|
|
Interest
expense
|
|
|
(239
|
)
|
|
(142
|
)
|
|
(571
|
)
|
|
(307
|
)
|
Other
income (expense), net
|
|
|
416
|
|
|
66
|
|
|
680
|
|
|
95
|
|
Income
(loss) from continuing operations before income taxes
|
|
|
(1,598
|
)
|
|
231
|
|
|
(2,660
|
)
|
|
535
|
|
Provision
for income taxes
|
|
|
76
|
|
|
99
|
|
|
162
|
|
|
180
|
|
Income
(loss) from continuing operations
|
|
|
(1,674
|
)
|
|
132
|
|
|
(2,822
|
)
|
|
355
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
from discontinued operations,
net
of income tax of $0 in 2007 and
$0
and $11 for the three and six months ended June 30, 2008,
respectively
|
|
|
(799
|
)
|
|
(784
|
)
|
|
(1,528
|
)
|
|
(1,456
|
)
|
Net
(loss)
|
|
|
(2,473
|
)
|
|
(652
|
)
|
|
(4,350
|
)
|
|
(1,101
|
)
|
Net
(loss) attributable to common stockholders
|
|
$
|
(2,473
|
)
|
$
|
(652
|
)
|
$
|
(4,350
|
)
|
$
|
(1,101
|
)
|
Basic
net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
(0.07
|
)
|
$
|
0.01
|
|
$
|
(0.11
|
)
|
$
|
0.01
|
|
Discontinued
operations
|
|
$
|
(0.03
|
)
|
$
|
(0.03
|
)
|
$
|
(0.06
|
)
|
$
|
(0.06
|
)
|
Net
(loss)
|
|
$
|
(0.10
|
)
|
$
|
(0.02
|
)
|
$
|
(0.17
|
)
|
$
|
(0.05
|
)
|
Diluted
net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing
operations
|
|
$
|
(0.07
|
)
|
$
|
0.01
|
|
$
|
(0.11
|
)
|
$
|
0.01
|
|
Discontinued
operations
|
|
$
|
(0.03
|
)
|
$
|
(0.03
|
)
|
$
|
(0.06
|
)
|
$
|
(0.06
|
)
|
Net
(loss)
|
|
$
|
(0.10
|
)
|
$
|
(0.02
|
)
|
$
|
(0.17
|
)
|
$
|
(0.05
|
)
|
Dividends
declared per common share
|
|
$
|
-
|
|
$
|
(0.40
|
)
|
$
|
-
|
|
$
|
(0.40
|
)
|
Shares
used in computing basic net income (loss) per share
|
|
|
25,478,294
|
|
|
24,921,380
|
|
|
25,468,272
|
|
|
24,755,953
|
|
Shares
used in computing diluted net
income
(loss) per share
|
|
|
25,478,294
|
|
|
25,399,547
|
|
|
25,468,272
|
|
|
25,430,552
|
|
Other
comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
unrealized (loss) in available-for-sale securities
|
|
|
(5
|
)
|
|
(21
|
)
|
|
(6
|
)
|
|
(8
|
)
|
Foreign
currency translation adjustment
|
|
|
62
|
|
|
(11
|
)
|
|
68
|
|
|
(147
|
)
|
Comprehensive
(loss)
|
|
$
|
(2,416
|
)
|
$
|
(684
|
)
|
$
|
(4,288
|
)
|
$
|
(1,256
|
)
|
The
accompanying notes are an integral part of these consolidated financial
statements.
ARBINET-THEXCHANGE,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2008
(Unaudited)
|
|
|
|
|
|
|
|
Six Months Ended June
30,
|
|
|
|
2007
|
|
2008
|
|
|
|
($ in thousands)
|
|
Income
(loss) from continuing operations
|
|
$
|
(2,822
|
)
|
$
|
355
|
|
Loss
from discontinued operations
|
|
|
(1,528
|
)
|
|
(1,456
|
)
|
Net
loss
|
|
|
(4,350
|
)
|
|
(1,101
|
)
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net loss to net cash (used in) provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
3,977
|
|
|
3,716
|
|
Stock-based
compensation expense
|
|
|
980
|
|
|
1,590
|
|
Impairment
charge
|
|
|
-
|
|
|
250
|
|
Foreign
currency exchange (gain)
|
|
|
(275
|
)
|
|
(22
|
)
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Trade
accounts receivable, net
|
|
|
4,980
|
|
|
4,284
|
|
Other
current assets, security deposits and other assets
|
|
|
(1,357
|
)
|
|
(3,250
|
)
|
Accounts
payable
|
|
|
(5,037
|
)
|
|
(4,710
|
)
|
Deferred
revenue, accrued expenses and other current liabilities
|
|
|
(127
|
)
|
|
(737
|
)
|
Other
long-term liabilities
|
|
|
(327
|
)
|
|
(504
|
)
|
Net
cash (used in) operating activities
|
|
|
(1,536
|
)
|
|
(484
|
)
|
Net
cash provided by discontinued operations
|
|
|
85
|
|
|
44
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(2,722
|
)
|
|
(3,423
|
)
|
Purchases
of marketable securities
|
|
|
(25,389
|
)
|
|
(11,164
|
)
|
Proceeds
from sales and maturities of marketable securities
|
|
|
28,229
|
|
|
22,000
|
|
Net
cash provided by investing activities
|
|
|
118
|
|
|
7,413
|
|
Net
cash (used in) provided by discontinued investing
activities
|
|
|
(747
|
)
|
|
21
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Special
cash distribution
|
|
|
—
|
|
|
(10,016
|
)
|
Repayment
of indebtedness
|
|
|
(90
|
)
|
|
—
|
|
(Payments
to) advances from Silicon Valley Bank
|
|
|
(5,520
|
)
|
|
1,011
|
|
Proceeds
from exercise of stock options
|
|
|
6
|
|
|
63
|
|
Purchase
of treasury shares
|
|
|
(860
|
)
|
|
(5,727
|
)
|
Notes
payable
|
|
|
—
|
|
|
(473
|
)
|
Payments
on obligations under capital leases
|
|
|
(9
|
)
|
|
(7
|
)
|
Net
cash used in financing activities
|
|
|
(6,473
|
)
|
|
(15,149
|
)
|
Effect
of foreign exchange rate changes on cash
|
|
|
129
|
|
|
(16
|
)
|
Net
(decrease) in cash and cash equivalents
|
|
|
(8,424
|
)
|
|
(8,171
|
)
|
Cash
and cash equivalents, beginning of year
|
|
|
32,986
|
|
|
28,556
|
|
Cash
and cash equivalents of discontinued operations, end of
period
|
|
|
(27
|
)
|
|
-
|
|
Cash
and cash equivalents, end of period
|
|
$
|
24,535
|
|
$
|
20,385
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
ARBINET-THEXCHANGE,
INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES
|
Basis
of Presentation
The
accompanying interim consolidated financial statements include the accounts
of
Arbinet-thexchange, Inc. (“Arbinet” or the “Company”) and its wholly-owned
subsidiaries. All material intercompany accounts and transactions have been
eliminated in consolidation. The accompanying interim consolidated financial
statements of the Company have been prepared in conformity with U.S. generally
accepted accounting principles (“GAAP”), consistent in all material respects
with those applied in the Company’s Annual Report on Form 10-K for the year
ended December 31, 2007. Interim financial reporting does not include all
of the information and footnotes required by GAAP for complete financial
statements. The interim financial information is unaudited, but reflects all
adjustments (consisting of normal, recurring adjustments) that are, in the
opinion of management, necessary to provide a fair statement of results for
the
interim periods presented. Operating results for the three and six months ended
June 30, 2008 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2008.
Reclassifications
Certain
amounts in the comparative periods have been reclassified to conform to the
current period’s presentation in the consolidated statements of operations. In
addition, costs related to the Company’s third party credit arrangements were
reclassified from “Other income (expense)” to “Interest expense” in the
accompanying statements of operations
.
Effects
of Recently Issued Accounting Pronouncements
Fair
Value Measurements
In
September 2006, the Financial Accounting Standards Board (
“
FASB
”
)
issued
Statement of Financial Accounting Standards No. 157, Fair Value
Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value,
establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. This statement does not require any new fair value
measurements; rather, it applies to other accounting pronouncements that require
or permit fair value measurements. The provisions of SFAS No. 157, as
issued, were effective January 1, 2008. However, the FASB issued FASB Staff
Position No. SFAS 157-2,
Effective
Date of FASB Statement No. 157
,
which
allows entities to defer the effective date of SFAS No. 157 for one year
for certain non-financial assets and non-financial liabilities, except those
that are recognized or disclosed at fair value in the financial statements
on a
recurring basis (i.e., at least annually). The Company adopted SFAS No. 157
as of January 1, 2008 and elected the deferral for non-financial assets and
liabilities. The effect of adopting this standard was not significant.
Fair
value is defined under SFAS No. 157 as the price that would be received to
sell an asset or paid to transfer a liability in the principal or most
advantageous market in an orderly transaction between market participants on
the
measurement date. SFAS No. 157 also establishes a three-level hierarchy,
which requires an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value.
The
valuation hierarchy is based upon the transparency of inputs to the valuation
of
an asset or liability on the measurement date. The three levels are defined
as
follows:
|
•
|
Level
1 - inputs to the valuation methodology are quoted prices (unadjusted)
for
an identical asset or liability in an active market
|
|
•
|
Level
2 - inputs to the valuation methodology include quoted prices for
a
similar asset or liability in an active market or model-derived
valuations
in which all significant inputs are observable for substantially
the full
term of the asset or liability
|
|
•
|
Level
3 - inputs to the valuation methodology are unobservable and significant
to the fair value measurement of the asset or liability
|
The
following table presents assets measured at fair value on a recurring basis
as
of June 30, 2008 by SFAS No. 157 valuation hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Carrying
Value
|
|
Cash
and cash equivalents (1)
|
|
$
|
12,021
|
|
|
—
|
|
|
—
|
|
$
|
12,021
|
|
Marketable
securities (2)
|
|
$
|
9,501
|
|
|
—
|
|
|
—
|
|
$
|
9,501
|
|
(1)
Cash and cash equivalents consist of commercial paper, money market funds
and
agency notes.
(2)
Marketable securities primarily consist of commercial paper, corporate
bonds,
and US government securities.
Basic
earnings per share are computed by dividing net income (loss) available for
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share are calculated based on the weighted
average number of outstanding common shares plus the dilutive effect of stock
options and warrants as if they were exercised. During a loss period, the effect
of the potential exercise of stock options and warrants are not considered
in
the diluted earnings per share calculation since it would be antidilutive.
The
following is a reconciliation of the basic weighted average number of common
shares outstanding to diluted weighted average number of common and common
share
equivalent shares outstanding:
|
|
For
the three months ended
|
|
For
the six months ended
|
|
|
|
June
30,
|
|
June
30,
|
|
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
Basic
number of common shares outstanding
|
|
|
25,478,294
|
|
|
24,921,380
|
|
|
25,468,272
|
|
|
24,755,953
|
|
Dilutive
effect of unvested restricted stock, restricted
stock
units, stock options and warrants
|
|
|
—
|
|
|
478,167
|
|
|
—
|
|
|
674,599
|
|
Dilutive
number of common and common share equivalents
|
|
|
25,478,294
|
|
|
25,399,547
|
|
|
25,468,272
|
|
|
25,430,552
|
|
For
the
six months ended June 30, 2007 and 2008 outstanding stock options of 3,272,716
and 2,588,818, respectively, have been excluded from the above calculations
because the effect on net income (loss) per share would have been
antidilutive
.
For the
six months ended June 30, 2007 and 2008, warrants of 1,439 have been excluded
from the above calculations because the effect on net income per share would
have been antidilutive.
The
Company recorded an income tax provision of approximately $162 and $180 for
the
six months ended June 30, 2007 and 2008, respectively. The income tax provision
in 2007 represented the statutory requirements for state taxes. The income
tax
provision in 2008 is based upon the Company’s 2008 estimated effective annual
domestic tax rate of approximately 5.0%. The difference between the federal
statutory tax rate and the estimated effective tax rate in 2008 is primarily
related to the expected utilization of certain of the Company’s net operating
loss carryforwards and the impact of state taxes and losses in the United
Kingdom for which the Company is unable to recognize a tax benefit.
In
2006,
the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes—an Interpretation of FASB Statement No. 109, Accounting for
Income Taxes” (“FIN 48”). FIN 48 addresses the determination of whether tax
benefits claimed or expected to be claimed on a tax return should be recorded
in
the financial statements. Under FIN 48, the Company may recognize the tax
benefit from an uncertain tax position only if it is more likely than not that
the tax position will be sustained on examination by the taxing authorities,
based on the technical merits of the position. The tax benefits recognized
in
the financial statements from such a position should be measured based on the
largest benefit that has a greater than 50% likelihood of being realized upon
ultimate settlement. FIN 48 also provides guidance on derecognition,
classification, interest and penalties on income taxes, accounting in interim
periods and requires increased disclosures.
The
Company adopted the provisions of FIN 48 effective January 1, 2007. As a
result of the implementation of FIN 48, the Company identified an aggregate
of
$625 of unrecognized tax benefits, including related estimated interest and
penalties, due to uncertain tax positions. Approximately $589 of these uncertain
tax positions resulted in a reduction of deferred tax assets against which
the
Company had recorded a full tax valuation allowance on its balance sheet. The
balance of the unrecognized tax benefits, amounting to $36, which includes
interest and penalties, was recorded as an increase to accumulated deficit
and
an increase of $36 to “other long-term liabilities.”
As
of
January 1, 2008, the amount of unrecognized tax benefits is $628, including
interest and penalties, of which recognition of $39 would impact the Company’s
effective tax rate. While the Company believes that it has identified all
reasonably identifiable exposures and that the reserve it has established for
such exposures is appropriate under the circumstances, it is possible that
additional exposures exist and that exposures will be settled at amounts
different than the amounts reserved. It is also possible that changes in facts
and circumstances could cause the Company to either materially increase or
reduce the amount of its tax reserve.
The
Company's U.S. subsidiaries join in the filing of a U.S. federal consolidated
income tax return. The U.S. federal statute of limitations remains open for
the
years 2004 onward. The Company is no longer subject to federal, state or foreign
income tax assessments for years prior to 2004. The Company is not currently
under examination by the Internal Revenue Service. State income tax returns
are
generally subject to examination for a period of three to five years after
filing of the respective return. The state impact of any federal changes remains
subject to examination by various states for a period of up to one year after
formal notification to the states.
Foreign
income tax returns are generally subject to examination for a period of three
to
nine years after filing of the respective return. The Company is currently
under
examination in the United Kingdom for its 2004 and 2005 tax years. In the event
that the Company’s income tax examination in the United Kingdom concludes within
the next twelve months, the Company’s total amounts of unrecognized tax
benefits, excluding related estimated interest and penalties, may change.
However, the Company has recorded a full tax valuation allowance on its balance
sheet and this item will have no impact on the statement of operations.
During
the fourth quarter of 2007, the Company completed a formal study of changes
in
its ownership since the prior testing date, which occurred in 2004. Management
has concluded that an ownership change occurred during 2007. However, based
on
the market value of the Company at such date, the Company believes that this
ownership change will not significantly impact its ability to use net operating
losses in the future to offset taxable income.
4.
DISCONTINUED OPERATIONS
Bell
Fax,
Inc.
In
October 1999, the Company ceased the operations of Bell Fax, Inc., (
“
Bellfax
”
),
a wholly-owned
subsidiary. Bellfax was engaged in the sale and rental of telecommunication
equipment and operating international routes. Accordingly, $296, net of income
tax of $20, was recognized as income from discontinued operations in 2005.
In
2006, management reevaluated the liability related to Bellfax and determined
that approximately $225 was needed at December 31, 2006. Accordingly, $125,
net of income tax of $4, was recognized as income from discontinued operations
in 2006. In the first quarter of 2008, management determined that the remaining
Bellfax liability, of $226, was no longer required. This amount has been
recorded as income from discontinued operations, net of income tax of $11,
in
the first quarter of 2008.
Broad
Street Digital Limited
In
the
first quarter of 2008, the Company announced that it was exploring strategic
alternatives for Broad Street Digital Limited and expected to divest the
business in 2008. As a result of this decision, the operating activities, assets
and liabilities and cash flows related to Broad Street Digital Limited have
been
presented as a discontinued operation in the accompanying financial statements
for all periods presented.
On
August
5, 2008, we entered into an agreement to sell substantially all of the assets
of
Broad Street Digital.
The
agreement contains certain closing conditions, and we expect to complete the
sale in the third quarter
. In connection with the sale, the Company
recorded a write down of $250, to adjust the carrying value of the Broad Street
Digital assets to the estimated net proceeds from the transaction
.
During
the second quarter of 2008, the Company ceased all activities related to the
digital media market. As a result, the digital media segment has been presented
as a discontinued operation in the accompanying financial statements for all
periods presented.
Summarized
financial information for discontinued operations is shown below.
L
|
|
Three Months Ended June
30,
|
|
Six Months Ended June
30,
|
|
|
|
2007
|
|
2008
|
|
2007
|
|
2008
|
|
Total
revenues
|
|
$
|
(3
|
)
|
$
|
274
|
|
$
|
4111
|
|
$
|
560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
from discontinued operations, before income tax
|
|
|
(799
|
)
|
|
(784
|
)
|
|
(1,528
|
)
|
|
(1,467
|
)
|
Income
tax expense
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11
|
|
(Loss)
from discontinued operations, net of taxes
|
|
$
|
(799
|
)
|
$
|
(784
|
)
|
$
|
(1,528
|
)
|
$
|
(1,456
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31,
2007
|
|
|
At
June
30,
2008
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
current assets of discontinued operations
|
|
$
|
440
|
|
$
|
461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
272
|
|
$
|
12
|
|
|
|
|
|
|
|
Accrued
and other current liabilities
|
|
|
62
|
|
|
89
|
|
|
|
|
|
|
|
Current
liabilities of discontinued operations
|
|
$
|
334
|
|
$
|
101
|
|
|
|
|
|
|
|
The
table
below summarizes the issued share activity for the Company’s common stock since
December 31, 2007. Treasury shares held by the Company are included in
these balances:
Balance
as of December 31, 2007
|
|
|
26,355,641
|
|
Retirement
of restricted stock
|
|
|
(29,313
|
)
|
Grants
of restricted stock
|
|
|
228,894
|
|
Exercise
of options
|
|
|
58,359
|
|
Balance
as of June 30, 2008
|
|
|
26,613,581
|
|
|
|
|
|
|
On
June 11, 2007, the Board of Directors of Arbinet authorized the repurchase
of up to $15.0 million of the Company’s common stock at anytime and from time to
time (the “2007 Repurchase Plan”). On February 26, 2008 the Company’s Board
of Directors terminated the 2007 Repurchase Plan, under which an aggregate
of
836,997 shares had been purchased.
On
February 28, 2008, the Company announced that its Board of Directors had
approved a special one-time cash distribution of $0.40 per share. The aggregate
total distribution of approximately $10.1 million was paid on March 28,
2008 to record holders of our common stock as of the close of business on
March 12, 2008. Adjustments were made to certain stock options and
restrictive stock grants to restore the respective holders to their position
before the issuance of the distribution. These modifications were treated as
adjustments in connection with an equity restructuring in accordance with
applicable accounting standards.
On
May 22,
2008, the Board of Directors authorized the repurchase of up to $8.0 million
of
the Company’s common stock (the “2008 Repurchase Plan”). Stock repurchases will
be made from time to time in open market or privately negotiated transactions
as
market conditions warrant. The 2008 Repurchase Plan became effective May 27,
2008, and may be suspended or terminated at any time without prior notice and
will terminate no later than August 27, 2008. A total of 1,096,261 shares of
the
Company’s common stock have been repurchased under the 2008 Repurchase Plan
through June 30, 2008.
6.
|
RESTRUCTURING
AND SEVERANCE CHARGES
|
Restructuring
Charges:
During
2001 and 2002, the Company exited two separate facilities and accordingly
recorded charges for the future lease obligations, net of estimated sub-lease
income. During the fourth quarter of 2005, the Company renegotiated the lease
terms for a leased property that was exited in 2001, under a lease termination
agreement that requires the Company to make scheduled payments through
December 31, 2009. Accordingly, the Company recorded an adjustment of
approximately $0.9 million to reduce the liability for future estimated lease
payments.
In
August
2007, the Company decommissioned certain fixed assets at 611 West 6
th
Street
in Los Angeles and relocated its Los Angeles switch operations to one of the
sites which had been exited in December 2002. As a result, the Company
recognized a gain of $1.0 million representing the reversal of the remaining
liability related to the abandoned space placed back into service. In addition,
the Company recognized a charge of $0.3 million representing the present value
of the future lease obligations remaining on the West 6
th
Street
site.
The
table
below shows the cash payments related to the Company’s restructuring
liabilities.
|
|
($
in thousands)
|
|
Balance
as of December 31, 2007
|
|
$
|
533
|
|
Cash
payments
|
|
|
(256
|
)
|
Balance
as of June 30, 2008
|
|
$
|
277
|
|
|
|
|
|
|
As
of June
30, 2008, a balance of $206 is recorded in “accrued and other current
liabilities” and $71 is recorded in “other long-term liabilities” in the
accompanying balance sheet..
Severance
Charges:
In June 2007, the Company recorded severance charges related to a resignation
agreement entered into with our former Chief Executive Officer and a workforce
reduction of certain employees. In accordance with SFAS No. 112,
“Employers’ Accounting for Post-employment Benefits”, an amendment of FASB
Statements No. 5 and 43, benefits were provided pursuant to a severance
plan which used a standard formula of paying benefits based upon tenure with
the
Company. The accounting for these severance costs has met the four requirements
of SFAS 112, which are: (i) the Company’s obligation relating to employees’
rights to receive compensation for future absences is attributable to employees’
services already rendered; (ii) the obligation relates to rights that vest
or accumulate; (iii) payment of the compensation is probable; and
(iv) the amount can be reasonably estimated. All severance related
obligations have been paid.
7.
|
PROPERTY
AND EQUIPMENT
|
During
2006
and 2007, the Company decommissioned certain fixed assets located at its
exchange delivery points (“EDP”) in New York City, Los Angeles and London,
England. Management is committed to selling this equipment and has engaged
a
third party to facilitate the sale. The carrying value of this equipment is
approximately $0.5 million, and is included in “prepaids and other current
assets” in the accompanying balance sheets as of December 31, 2007 and June
30, 2008,
respectively.
The Company has sold a nominal amount of these assets beginning in the
second quarter of 2008.
8.
|
COMMITMENTS
AND CONTINGENCIES
|
Legal
Proceedings
The
litigation process is inherently uncertain, and we cannot guarantee that the
outcomes of the following proceedings and lawsuits will be favorable for us
or
that they will not be material to our business, results of operations or
financial position. However, the Company does not currently believe that these
matters will have a material adverse effect on our business, results of
operations or financial position.
World
Access Proceeding
On
March 18, 2003, World Access, Inc. f/k/a WAXS, Inc., WA Telcom Products
Co., Inc., WorldxChange Communications, Inc., Facilicom International LLC and
World Access Telecommunications Group, Inc. f/k/a Cherry Communications
Incorporated d/b/a Resurgens Communications Group (collectively “the Debtors”),
filed a lawsuit against the Company in the United States Bankruptcy Court for
the Northern District of Illinois, Eastern Division. The Debtors had previously
filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code.
The
Debtors seek recovery of certain payments they made to us as a buyer on our
exchange, which total approximately $855. The Debtors claim that such payments
were preferential transfers under the Bankruptcy Code. The Debtors also seek
costs and expenses, including attorneys’ fees and interest. The Company filed an
answer to the complaint on April 18, 2003, denying the Debtors’ claims for
relief and asserting several affirmative defenses. On August 12, 2003, the
Company served discovery on the attorneys for World Access and its related
entities. Shortly after the Company served discovery, the bankruptcy judge
entered an order stating that the cases of World Access and its related
entities, which had been jointly administered, could not be substantively
consolidated. Since then the majority of Debtors’ preference complaints in the
case have been continued. In September 2004, the Debtors confirmed a Plan of
Liquidation that created a trust to proceed with liquidating avoidance actions.
The Trustee has been substituted as the Plaintiff in all avoidance actions.
The
next status hearing in the case is scheduled for September 9, 2008. No
trial date has been set.
9.
|
RELATED
PARTY TRANSACTIONS
|
The
Company entered into two Non-Qualified Stock Option Agreements dated July 31,
2007 and February 7, 2008 with a member of its Board of Directors, Alex
Mashinsky, in connection with consulting services beyond the scope of his
services rendered as a member of Board of Directors. The Company recognized
a
total of $25 and $125 in stock based compensation expense pursuant to these
agreements during the three and six month periods ended June 30, 2008,
respectively. All expenses recognized pursuant to these compensation related
agreements have been included in operations and development expenses in the
Consolidated Statements of Operations.
The
Chief
Financial Officer is also a Partner in Tatum LLC
(“Tatum”)
,
an executive services and consulting firm.
The
company entered into an agreement with Tatum to hire a Controller
on
an
interim basis. The Company recognized a total of $0 and $69 in compensation
related expense pursuant to this agreement during the three month periods ended
June 30, 2007 and 2008, and $0 and $139 during the six month periods ended
June
30, 2007 and 2008, respectively.
On
July
30, 2008, the Company entered into a separation and release agreement with
the
Chief Operating Officer of Arbinet Digital Media. In addition, the Company
is in
the process of finalizing separation agreements with certain U.K. employees
of
Broad Street Digital. The Company expects to recognize a pre-tax charge of
approximately $0.5 million for these matters in the third quarter. Such amounts
will be reflected as a loss from discontinued operations in the Company’s
Consolidated Statement of Operations.
Item
2.
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
Overview
We
are a
leading solutions provider for the telecommunication industry, based primarily
upon an electronic market for trading, routing and settling communications
capacity. Members of our exchange, consisting primarily of communications
services providers, buy and sell voice minutes and Internet capacity through
our
centralized, efficient and liquid marketplace. Communications services providers
that do not use our exchange generally individually negotiate and buy access
to
the networks of other communications services providers to send voice calls
and
Internet capacity outside of their networks. We believe that we provide a
cost-effective and efficient alternative to these direct connections. With
a
single interconnection to our exchange, members have access to all of our other
members’ networks. Members directly or indirectly place orders through our
web-based interface. Sellers on the exchange post sell orders to offer voice
calls and Internet capacity for specific destinations, or routes, at various
prices. We independently assess the quality of these routes and include that
information in the sell order. Buyers enter buy orders based on route quality
and price and are matched to sell orders by our fully automated trading platform
and our proprietary software. When a buyer’s order is matched to a seller’s
order, the voice calls or Internet capacity are then routed through our
state-of-the-art facilities. We invoice and process payments for our members’
transactions and manage the credit risk of buyers primarily through our credit
management programs with third parties.
Revenue
We
generate revenues from both the trading that members conduct on our exchange,
which we refer to as trading revenues, and the fees we charge members for the
ability to trade on our exchange, which we refer to as fee revenues. Our trading
revenue represents the aggregate dollar value of the calls that are routed
through our switches at the price agreed to by the buyer and seller of the
capacity. For example, if a 10-minute call is originated in France and routed
through our facilities to a destination in India for $0.11 per minute, we record
$1.10 of trading revenue for the call. Under our AssuredAxcess product, our
members contract to buy minutes to specific markets at fixed rates. We may
generate profit or incur losses associated with trading revenue on AssuredAxcess
and other transactions executed on the exchange. Historically, such losses
have
not been material to our operating results. Our system automatically records
all
traffic terminated through our switches.
We
record
trading revenues because:
|
•
|
all
traffic traded on our exchange is routed through one of our switches;
and
|
|
•
|
we
are obligated to pay sellers for the minutes they sell on our exchange
regardless of whether we ultimately collect from buyers.
|
Our
fee
revenues represent the amounts we charge buyers and sellers for the following:
|
•
|
a
monthly minimum fee based on the amount of capacity that members
have
connected to our switches and overage fees for the number of minutes
or
megabytes that are routed through our switches in excess of amounts
allowed under the monthly minimum, or collectively referred to
as access
fees, which comprised approximately 80% and 78% of fee revenues
for the
six months ended June 30, 2007 and June 30, 2008, respectively;
|
|
•
|
a
credit risk management fee, which is a charge for the credit management,
clearing and settlement services we provide;
|
|
•
|
a
membership fee to join our exchange; and
|
|
•
|
additional
services as utilized by our members for items such as premium service
offerings and accelerated payment terms.
|
Costs
and Expenses
Our
cost
of trading revenues consists of the cost of calls, which are routed through
our
switches at the price agreed to by both the buyer and seller of the capacity.
Using the example above in the caption “Revenues”, we would record cost of
trading revenues equal to $1.10, an amount that we would pay to the seller.
Operations
and development expense consists of costs related to supporting our exchange,
such as salaries, benefits, and related costs of engineering, technical support,
product and software development, and system support personnel, as well as
facilities and interconnect costs. Sales and marketing consists of salaries,
benefits, commissions, and related costs of sales and marketing personnel,
trade
shows and other marketing activities. General and administrative costs consist
of salaries, benefits, and related costs of corporate, finance, and
administrative personnel, facilities costs, bad debt expense and outside service
costs, such as legal and accounting fees.
Digital
Media
In
August
2006, we established a new subsidiary, Arbinet Digital Media Corporation, to
explore and develop products and services to address the large and growing
market opportunity presented by the exchange of digital media. As part of our
digital media strategy, in December 2006, the Company, through its wholly-owned
subsidiary, Broad Street Digital Inc., acquired all of the outstanding common
stock of Flowphonics Limited (now known as Broad Street Digital Limited (“Broad
Street Digital”)), a license management platform for intellectual property
rights and digital content distribution. The purchase price was approximately
$2.1 million, including transaction costs.
To
increase resources available for our core businesses, in the first quarter
of 2008, we announced a decision to explore strategic alternatives for Broad
Street Digital Limited. As a result of this decision, we recognized an
impairment charge of approximately $2.3 million, in the fourth quarter of 2007,
to write down the intangible and long lived assets of Broad Street Digital
Limited to their estimated fair value. On August 5, 2008, we entered into an
agreement to sell substantially all of the assets of Broad Street Digital.
Th
e
agreement contains certain closing conditions, and we expect to complete the
sale in the third quarter.
In
connection with the sale, we recorded a write down of $250, to adjust the
carrying value of the Broad Street Digital assets to the estimated net proceeds
from the transaction. In addition, during the second quarter of 2008, we made
a
decision to cease all activities related to the digital media market. As a
result, the digital media segment has been presented as a discontinued operation
in the accompanying financial statements for all periods presented.
Critical
Accounting Policies and Estimates
Our
management’s discussion and analysis of our financial condition and results of
our operations are based on our consolidated financial statements, which have
been prepared in accordance with U.S. generally accepted accounting principals.
The preparation of these financial statements requires management to make
estimates and judgments that affect the amounts reported for assets,
liabilities, revenues, expenses and the disclosure of contingent liabilities.
Our significant accounting policies are more fully described in Note 1 to our
consolidated financial statements included in our Annual Report on Form 10-K
for
the year ended December 31, 2007.
Our
critical accounting policies are those that we believe are both important to
the
portrayal of our financial condition and results of operations and often involve
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain.
Management evaluates these estimates, including those related to bad debts,
income taxes, long-lived assets, restructuring, contingencies and litigation
on
an ongoing basis. The estimates are based on historical experience and on
various assumptions about the ultimate outcome of future events. Our actual
results may differ from these estimates because we did not estimate correctly.
We
believe the following critical accounting policies affect our more significant
judgments and estimates used in the preparation of our consolidated financial
statements:
•
Long-lived
assets.
We
assess the impairment of long-lived assets whenever events or changes in
circumstances indicate that the carrying value may not be recoverable, in
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets” or (
“
SFAS No.
144
”
). Factors
we
consider important, which could trigger an impairment review, include the
following:
|
•
|
significant
underperformance relative to historical or projected future operating
results;
|
|
•
|
significant
changes in the manner of or use of the acquired assets or the strategy
for
our overall business; and
|
|
•
|
significant
industry, economic or competitive trends.
|
|
•
|
Income
taxes.
We
have net deferred tax assets, reflecting net operating loss (
“
NOL”),
carryforwards and other deductible differences, which may reduce
our
taxable income in future years. These net deferred tax assets are
offset
by a valuation allowance resulting in no tax benefit being recognized
related to these net deferred tax assets. We are required to periodically
assess the realization of our deferred tax assets and changes in
circumstances may require adjustments in future periods. The amount
of net
deferred tax assets actually realized could vary if there are differences
in the timing or amount of future reversals of existing deferred
tax
liabilities or changes in the amounts of future taxable income.
If it
becomes more likely than not that we will recognize a future tax
benefit
from the deferred tax assets, we may need to reverse some or all
of our
valuation allowance. When evaluating our ability we were to record
a net
deferred tax asset, SFAS No. 109, “Accounting for Income Taxes,”
requires us to consider all sources of taxable income as well as
all
available evidence to determine that it is more likely than not
that we
will be able to utilize this asset. At December 31, 2007, a full
valuation allowance in the amount of $41.6 million has been recorded
against net deferred tax assets since at that date, the Company
was unable
to conclude that it was more likely than not that it would realize
those
assets. We will continue to refine and monitor all available evidence
during future periods in order to more fully evaluate the recoverability
of the Company’s deferred tax assets.
|
On
January 1, 2007 we adopted FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109,
Accounting for Income Taxes” (“FIN 48”) to account for uncertain tax positions.
FIN 48 requires that we recognize in our financial statements the impact
of a
tax position, if that position is more likely than not of being sustained
on
audit, based on the technical merits of the position. Included in our
Consolidated Balance Sheet at June 30, 2008 is approximately $39 of other
long-term liabilities associated with uncertain tax positions in the various
jurisdictions in which we conduct business.
The
application of income tax law is inherently complex. Tax laws and regulations
are voluminous and at times ambiguous, and interpretations of and guidance
regarding income tax laws and regulations change over time. This requires
us to
make many subjective assumptions and judgments regarding our income tax
exposures. Changes in our assumptions and judgments can materially affect
our
financial position, results of operations and cash flows.
|
•
|
Allowance
for doubtful accounts.
We
maintain an allowance for doubtful accounts for estimated losses
resulting
from the failure of members on our exchange to make required payments.
The
amount of our allowance is based on our historical experience and
an
analysis of our outstanding accounts receivable balances. If the
financial
condition of our members deteriorates, resulting in additional
risk in
their ability to make payments to us, then additional allowances
may be
required which would result in an additional expense in the period
that
this determination is made. While credit losses have historically
been
within our range of expectations and our reserves, we cannot guarantee
that we will continue to experience the same level of doubtful
accounts
that we have in the past.
|
|
•
|
Goodwill
and Other Intangible Assets.
We
follow the guidance of SFAS No. 142, “Goodwill and Other Intangible
Assets,” which requires that purchased goodwill and certain
indefinite-lived intangibles no longer be amortized but, instead,
goodwill
is subject to an annual assessment for impairment by applying a
fair value
approach. In assessing the recoverability of our goodwill and other
intangibles, we must make assumptions regarding estimated future
cash
flows. If such assumptions change in the future, we may be required
to
record impairment charges for these assets.
|
|
•
|
Litigation
reserves.
The
establishment of litigation reserves requires judgments concerning
the
ultimate outcome of pending litigation against the Company and
its
subsidiaries. These reserves are based on the application of
SFAS No. 5, “Accounting for Contingencies
,”
(“SFAS No. 5”) which requires us to record a reserve if we believe an
adverse outcome is probable and the amount of the probable loss
is capable
of reasonable estimation. In applying judgment, management utilizes
among
other things, opinions and estimates obtained from outside legal
counsel
to apply the standards of SFAS No. 5. Accordingly, estimated amounts
relating to certain litigation have met the criteria for the recognition
of a liability under SFAS No. 5. Litigation by its nature is
uncertain and the determination of whether any particular case
involves a
probable loss or the amount thereof requires the exercise of considerable
judgment, which is applied as of a certain date. The required reserves
may
change in the future due to new matters, developments in existing
matters
or if we determine to change our strategy with respect to any particular
matter.
|
|
•
|
Share-Based
Compensation.
Effective January 1, 2006, the Company adopted SFAS No. 123R,
“Share-Based Payment” (“SFAS No. 123R”). SFAS No. 123R requires
all share-based payments to employees, including grants of stock
options,
to be expensed over the requisite service period based on the grant-date
fair value of the awards and requires that the unvested portion
of all
outstanding awards upon adoption be recognized using the same fair
value
and attribution methodologies previously determined under SFAS
No. 123, “Accounting for Stock-Based Compensation.” The Company uses
the Black-Scholes valuation method.
|
Results
of Operations
Comparison
of Six Months Ended June 30, 2007 and 2008
Trading
revenues and cost of trading revenues
Trading
revenues decreased 6.4% from $251.6 million for the six months ended June
30, 2007 to $235.4 million for the six months ended June 30, 2008. The
decrease in trading revenues was due to a decrease in the volume traded by
our
members and a lower average trade rate for minutes bought and sold on the
exchange. Specifically, the factors affecting trading revenues included:
A
total
of 7.0 billion minutes were bought and sold on Arbinet’s exchange in the six
months ended June 30, 2008, a decrease of 1% from the 7.1 billion minutes for
the six months ended June 30, 2007. There were 956 million completed calls
in the six months ended June 30, 2008, representing a 5% increase over the
907 million completed calls for the six months ended June 30, 2007. This
was offset by a decrease in the average call duration from 3.9 minutes per
call
on our exchange for the six months ended June 30, 2007 to
3.7 minutes per call for the six months ended June 30, 2008. The lower
average call duration was primarily a result of a change in the mix of
geographic markets and the mix of fixed versus mobile minutes traded on our
exchange. The volatility in average call duration and mix of geographic markets
is expected to continue in the future.
As
a
result of the decrease in trading revenues, cost of trading revenues decreased
6.4% from $251.8 million for the six months ended June 30, 2007 to
$235.6 million for the six months ended June 30, 2008.
Fee
revenues
Fee
revenues increased 4.6% from $25.1 million for the six months ended June 30,
2007 to $26.3 million for the six months ended June 30, 2008. On a per minute
basis, fee revenues increased from $0.0035 in the six months ended June 30,
2007
to $0.0038 in the six months ended June 30, 2008. Average fee revenue per minute
increased primarily as a result of changes in the mix of both geographic markets
and members trading activity on the exchange. In addition, we experienced
increased sales of certain premium service offerings
and
increased rapid clear fees related to accelerated payments to members.
In
the future, we may provide incentives to improve liquidity in our exchange
and
that, along with members continuing to achieve higher volume levels, may lead
to
a decline in average fee revenue per minute.
Operations
and development
Operations
and development costs increased 3.4% from $10.1 million for the six months
ended June 30, 2007 to $10.4 million for the six months ended June 30,
2008. This increase was primarily due to higher interconnection costs of $0.4
million, $0.4 million of moving costs relating to the relocation of our London
switch to a co-location facility, which was offset by a decrease in utilities
of
$0.1 million for the London premises that were exited. In addition, compensation
related expenses decreased $0.2 million and certain hardware and software
maintenance expenses decreased $0.1 million.
Sales
and marketing
Sales
and
marketing expenses increased 19.3% from $4.9 million for the six months
ended June 30, 2007 to $5.8 million for the six months ended June 30, 2008.
This increase is mainly due to $0.9 million of compensation related expenses.
General
and administrative
General
and administrative expenses decreased 16.9% from $7.4 million for the six
months ended June 30, 2007 to $6.1 million for the six months ended June
30, 2008. This decrease was primarily related to a reduction in professional
fees of $1.8 million and increased employee compensation related costs of $0.5
million. .
Depreciation
and amortization
Depreciation
and amortization decreased 6.6% from $4.0 million for the six months ended
June
30, 2007 to $3.7 million for the six months ended June 30, 2008. This decrease
is primarily attributable to certain assets which are fully depreciated.
Severance
charge
During
the six months ended June 30, 2007, we recognized a charge of approximately
$1.0
million, representing
severance
charges related to a resignation agreement entered into with our former Chief
Executive Officer and President and to a workforce reduction of certain
employees
.
There
were no such charges for the six months ended June 30,
2008.
Reserve
for Litigation
During
the six months ended June 30, 2007, we recognized a charge of $1.9 million
representing management’s estimate of potential loss exposure in certain
litigation matters.
Interest
and other income/expense
Interest
income decreased 56.5% from $1.5 million for the six months ended June 30,
2007
to $0.6 million for the six months ended June 30, 2008. This decrease was
primarily due to lower average invested amounts of cash, cash equivalents and
marketable securities in 2008 versus 2007, coupled with lower interest rates.
Interest expense principally reflects fees paid by the Company under its third
party credit arrangements. Other income (expense), net decreased $0.6 million
for the six months ended June 30, 2008 compared to June 30, 2007, reflecting
a
decrease of $0.2 million in net gains on foreign currency translation and a
reduction of $0.4 million in late fees charged to our members.
Provision
for income taxes
The
Company recorded an income tax provision of approximately $162 and $180, for
the
six months ended June 30, 2007 and 2008, respectively. The income tax provision
in 2007 represented the statutory requirements for state taxes. The income
tax
provision in 2008 is based upon the Company’s 2008 estimated effective annual
tax rate of approximately 5.0%.
On
January 1, 2007, we adopted the provisions of FIN 48, which requires that
we recognize in our financial statements the impact of a tax position, if that
position is more likely than not of being sustained on audit, based on the
technical merits of the position. Approximately $200 of interest relating to
uncertain tax positions has been included in the income tax provision for the
six months ended June 30, 2008.
Discontinued
operations
Bell
Fax,
Inc.
In
October 1999, the Company ceased the operations of Bell Fax, Inc. (
“
Bellfax”), a
wholly-owned subsidiary. Bellfax was engaged in the sale and rental of
telecommunication equipment and operating international routes. In the first
quarter of 2008, management determined that the remaining liabilities of Bellfax
were no longer required. Accordingly, $226, net of income tax of $11, has been
recorded as income from discontinued operations for the six months ended June
30, 2008.
Broad
Street Digital Limited
In
the
first quarter of 2008, the Company announced that it was exploring strategic
alternatives for Broad Street Digital Limited and expected to divest the
business in 2008. As a result of this decision, the operating activities, assets
and liabilities and cash flows related to Broad Street Digital Limited have
been
presented as a discontinued operation in the accompanying financial statements
for all periods presented.
On
August
5, 2008, we entered into an agreement to sell substantially all of the assets
of
Broad Street Digital. T
he
agreement contains certain closing conditions, and we expect to complete the
sale in the third quarter.
In connection with the sale, the Company
recorded a write down of $250, to adjust the carrying value of the Broad Street
Digital assets to the estimated fair value of net proceeds from the transaction.
During
the second quarter of 2008, the Company ceased all activities related to the
digital media market. As a result, the digital media segment has been presented
as a discontinued operation in the accompanying financial statements for all
periods presented.
Comparison
of
Three Months Ended June 30, 2007 and 2008
Trading
revenues and cost of trading revenues
Trading
revenues
increased
0.7% from $122.1 million for the three months ended June 30, 2007 to $123.0
million for the three months ended June 30, 2008. The slight increase in trading
revenues was due to an increase in the volume of minutes traded on our exchange
principally due to an increase in the number of members on our exchange from
908
on June 30, 2007 to 1,091 on June 30, 2008. This increase in volume was
partially offset by a lower average trade rate per minute. A total of 3.55
billion minutes were bought and sold on Arbinet’s exchange in the three months
ended June 30, 2008, an increase of 2.1% from the 3.48 billion minutes for
the three months ended June 30, 2007. This increase was due to
502.9 million completed calls in the three months ended June 30, 2008,
representing an 8.1% increase over the 465.4 million completed calls for
the three months ended June 30, 2007. These gains were partially offset by
a
decrease in the average call duration from 3.7 minutes per call on our exchange
for the three months ended June 30, 2007 to 3.5 minutes per call for
the three months ended June 30, 2008. The lower average call duration was
primarily a result of a change in the mix of geographic markets and the mix
of
fixed versus mobile minutes traded on our exchange. The volatility in average
call duration and mix of geographic markets is expected to continue in the
future.
As
a result
of increases in trading revenues, cost of trading revenues increased 0.7% from
$122.2 million for the three months ended June 30, 2007 to $123.1 million
for the three months ended June 30, 2008.
Fee
revenues
Fee
revenues
increased 8.5% from $12.5 million for the three months ended June 30, 2007
to $13.6 million for the three months ended June 30, 2008. Fee revenues
increased as a result of increased trading activities on the exchange and
favorable pricing. Average fee revenue per minute was $0.0039 in the three
months ended June 30, 2008 compared to $0.0036 in the three months ended
June
30, 2007. Average fee revenue per minute increased primarily as a result
of
changes in the mix of geographic markets traded, and members trading activity
on
the exchange. In addition, we experienced increased sales of premium service
offerings and increased rapid clear fees related to accelerated payments
to
members. In the future, we may provide incentives to improve liquidity in
our
exchange and that, along with members continuing to achieve higher volume
levels, may lead to a decline in average fee revenue per
minute.
Operations
and development
Operations
and development costs increased 1.3% for the three months ended June 30, 2007
compared to the three months ended June 30, 2008. These net costs remained
flat
over the two periods being compared.
Sales
and
marketing
Sales
and
marketing expenses increased 26.2% from $2.5 million for the three months ended
June 30, 2007 to $3.2 million for the three months ended June 30, 2008 primarily
due to higher compensation related expenses.
General
and administrative
General
and administrative expenses
decreased
9.9% from $3.5 million for the three months ended June 30, 2007 to $3.2 million
for the three months ended June 30, 2008.
This
decrease was principally attributable to a reduction of professional fees of
$0.6 million, offset by higher employee related compensation expense of $0.3
million.
Depreciation
and amortization
Depreciation
and amortization remained flat for the three months ended June 30, 2007 compared
to the three months ended June 30, 2008.
Severance
charges
During
the three months ended June 30, 2007, we recognized a charge of approximately
$1.0 million, representing
severance
charges related to a resignation agreement entered into with our former Chief
Executive Officer and President and to a workforce reduction of certain
employees.
There
were no such charges for the three months ended June 30,
2008.
Reserve
for Litigation
During
the three months ended June 30, 2007, we recognized a charge of $0.8 million
representing management’s estimate of potential loss exposure in certain
litigation matters.
Interest
and other income/expense
Interest
income decreased from $0.7 million for the three months ended June 30, 2007
to
$0.2 million for the three months ended June 30, 2008.
This
decrease was primarily due to lower average balances in 2008 versus 2007 of
invested cash and marketable securities.
Interest
expense decreased from $0.2 million for the three months ended June 30, 2007
to
$0.1 million for the three months ended June 30, 2008. This decrease is
principally due to lower fees paid by the company under its third party credit
arrangements.
Other
income (expense), net decreased $0.4 million for the three months ended June
30,
2008 compared to June 30, 2007. The decrease principally reflects a $0.1 million
reduction in net gains on foreign currency translation and a $0.2 million
reduction in late fees charged to our members.
Provision
for income taxes
The
Company recorded an income tax provision of approximately $76 and $99 for the
three months ended June 30, 2007 and 2008, respectively. The income tax
provision in 2007 represented the statutory requirements for state taxes. The
income tax provision in 2008 is based upon the Company’s 2008 estimated
effective annual tax rate of approximately 5.0%.
On
January 1, 2007, we adopted the provisions of FIN 48, which requires that
we recognize in our financial statements the impact of a tax position, if that
position is more likely than not of being sustained on audit, based on the
technical merits of the position.
Discontinued
operations
Bell
Fax,
Inc.
In
October 1999, the Company ceased the operations of Bell Fax, Inc., or
(“Bellfax”)
,
a wholly-owned subsidiary. Bellfax was engaged in the sale and rental of
telecommunication equipment and operating international routes. In the first
quarter of 2008, management determined that the remaining liabilities of Bellfax
were no longer required. Accordingly, $226, net of income tax of $11, has been
recorded as income from discontinued operations in the first quarter of 2008.
Broad
Street Digital Limited
In
the
first quarter of 2008, the Company announced that it was exploring strategic
alternatives for Broad Street Digital Limited and expected to divest the
business in 2008. As a result of this decision, the operating activities, assets
and liabilities and cash flows related to Broad Street Digital Limited have
been
presented as a discontinued operation in the accompanying financial statements
for all periods presented.
On
August
5, 2008, we entered into an agreement to sell substantially all of the assets
of
Broad Street Digital. T
he
agreement contains certain closing conditions, and we expect to complete the
sale in the third quarter.
In connection with the sale, the Company
recorded a write down of $250, to adjust the carrying value of the Broad Street
Digital assets to the estimated fair value of net proceeds from the transaction.
During
the second quarter of 2008, the Company ceased all activities related to the
digital media market. As a result, the digital media segment has been presented
as a discontinued operation in the accompanying financial statements for all
periods presented.
Liquidity
and Capital Resources
Until
2005 our primary source of liquidity had been cash received through the sale
and
issuance of equity and debt securities. We received equity investments between
April 1999 and May 2003 in an aggregate amount of approximately $125.0 million.
Our principal liquidity requirements have been for working capital, capital
expenditures and general corporate purposes. On December 21, 2004, we
completed our initial public offering and raised net proceeds of approximately
$66.6 million.
During
the six months ended June 30, 2008, capital expenditures for continuing
operations were $3.4 million related primarily to amounts paid for software
development, the purchase of telecommunications switching equipment and computer
equipment. At June 30, 2008 we had cash and cash equivalents of $20.4 million
and marketable securities of $9.5 million. We also are party to a $25.0 million
lending facility with Silicon Valley Bank (“SVB”), under which we can borrow
against our accounts receivable and general corporate assets. As of June 30,
2008, the full $25.0 million was available to us as no amounts were outstanding
under this facility. Our current credit facility with SVB expires on
November 28, 2008. We expect to extend the expiration date on this
facility.
On
February 28, 2008 the Company announced that its Board of Directors had
approved a special one-time cash distribution of $0.40 per share. The aggregate
total distribution of approximately $10.1 million was paid on March 28,
2008 to record holders of our common stock as of the close of business on
March 12, 2008. The special cash distribution replaced the Company’s
existing $15.0 million 2007 Repurchase Plan, previously announced on
June 11, 2007, under which the Company repurchased 836,997 shares. Other
than this one-time cash distribution, we do not currently anticipate paying
any
cash dividends in the foreseeable future.
On
May
22, 2008, the Board of Directors authorized the repurchase of up to $8.0 million
of the Company’s common stock (the “2008 Repurchase Plan”). Stock repurchases
will be made from time to time in open market or privately negotiated
transactions as market conditions warrant. The 2008 Repurchase Plan became
effective May 27, 2008, and may be suspended or terminated at any time without
prior notice and will terminate no later than August 27, 2008. A total of
1,096,261 shares of the Company’s common stock have been repurchased under the
2008 Repurchase Plan through June 30, 2008, for an aggregate of approximately
$3.9 million. These shares are included as a component of treasury stock in
the
accompanying balance sheet.
We
believe that our current cash balances and cash flows from operating activities
should be sufficient for us to fund our current operations for the foreseeable
future. To the extent we require additional capital to fund our working capital
or capital expenditure; we intend to seek additional financing in the credit
or
capital markets, although we may be unsuccessful in obtaining financing on
acceptable terms, if at all.
The
following table sets forth components of our cash flows for the following
periods:
|
|
Six Months Ended June 30,
|
|
|
|
2007
|
|
2008
|
|
Net
cash (used in) operating activities - continuing
operations
|
|
$
|
(1,536
|
)
|
$
|
(484
|
)
|
Net
cash provided by operating activities for discontinued
operations
|
|
|
85
|
|
|
44
|
|
Net
cash provided by investing activities - continuing
operations
|
|
|
118
|
|
|
7,413
|
|
Net
cash (used in) provided by investing activities for discontinued
operations
|
|
|
(747
|
)
|
|
21
|
|
Net
cash used in financing activities
|
|
|
(6,473
|
)
|
|
(15,149
|
)
|
Cash
(used in) by operating activities - continuing operations
Cash
used in
operating activities - continuing operations for the six months ended
June 30, 2008 of $0.5 million was comprised of net income of $0.4 million,
and adjustments for non-cash charges including depreciation and amortization
of
$3.7 million, non-cash compensation of $1.6 million, an impairment charge
of $0.3 million and a net change in operating assets and liabilities of ($4.9)
million. The net change in operating assets and liabilities includes a reduction
in accounts receivable and accounts payable due to a decline in volume, coupled
with decreased average revenues per minute. Accounts payable also decreased
due
to payments made in 2008 for legal and capital spending that were incurred
during 2007. The net change in operating assets and liabilities also reflects
prepayments for insurance and certain hardware and software contracts during
2008 and a VAT receivable for our UK Subsidiary.
Cash
used in
operating activities - continuing operations for the six months ended
June 30, 2007 of $1.5 million was principally attributed to a net loss of
($2.8) million, adjusted for non-cash charges including depreciation and
amortization of $4.0 million, non-cash compensation of $1.0 million, foreign
currency exchange gain of $0.3 million and net change in operating assets
and
liabilities of ($1.9) million. The net change in operating assets and
liabilities of ($1.9) million includes a reduction in accounts receivable
due to
more timely collections and a reduction of accounts payable due to payments
made
in 2007 for legal and capital spending that occurred during 2006. Net operating
assets and liabilities also reflect prepayments for insurance and certain
hardware and software contracts during 2007 and the decommission of certain
fixed assets located at the Company’s Exchange Delivery Point in London, which
were classified as assets held for sale.
Cash
provided by (used in) investing activities continuing operations and
discontinued operations
Total
capital expenditures for the six months ended June 30, 2008 were
$3.4 million related primarily to the purchase of capitalized software and
telecommunications switching equipment. Total purchases of marketable securities
and total proceeds from sales and maturities of marketable securities for the
six months ended June 30, 2008 were $11.2 million and $22.0 million,
respectively. Total capital expenditures for the six months ended June 30,
2007
were $2.7 million related primarily to the purchase of computer equipment
and telecommunications switching equipment. Total purchases of marketable
securities and total proceeds from sales and maturities of marketable securities
for the six months ended June 30, 2007 were $25.4 million and $28.2 million,
respectively. Cash provided by investing activities for discontinued
operations was $21 thousand for the six months ended June 30, 2008 and cash
used
in investing activities for discontinued operations was $0.7 million for the
six
months ended June 30, 2007.
Cash
used in financing activities
Cash
used
in financing activities for the six months ended June 30, 2008 was primarily
attributable to the one time special cash distribution of approximately $10.1
million. The special cash distribution was paid on March 28, 2008 to record
holders of our common stock as of the close of business on March 12, 2008.
In addition, $1.8 million was utilized for the acquisition of treasury stock
in
accordance with the 2007 Repurchase Plan, which was adopted and announced on
June 11, 2007 and $3.9 million was utilized for the acquisition of treasury
stock in accordance with the 2008 Repurchase Plan, which was adopted and
announced on May 22, 2008. We also paid $0.5 million in notes payable and
received an advance from SVB under the Non-Recourse Receivable Purchase
Agreement of $1.0 million.
Cash
used
in financing activities for the six months ended June 30, 2007 was primarily
attributable to the repayment of $5.5 million in advances from SVB under the
Non-Recourse Receivable Purchase Agreement and the repayment of approximately
$0.1 million in debt and the acquisition of treasury stock of $0.9 million.
Off-Balance
Sheet Arrangements
We
do not
have any off-balance sheet arrangements or relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as
special purpose entities, which are typically established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes.
Credit
Risk Management
We
manage the
invoicing, credit risk and settlement of all traffic traded on our exchange.
Since we are obligated to pay the seller regardless of whether we ultimately
collect from the buyer, we assume the credit risk associated with all traffic
traded on our exchange. As part of managing the credit risk associated with
buyers on our exchange, we have an integrated credit risk management program
under which the following arrangements assist in the mitigation of this credit
risk:
|
•
|
Netting
.
We net our members’ buying and selling activity. This enables us to extend
credit to members up to the amount they have sold in a given period.
The
netting also reduces the working capital requirements for our members
and
for us. For the six months ended June 30, 2008, 26% of our trading
revenues were offset by selling activity.
|
|
•
|
Credit
risk assessment and underwriting
.
GMAC and SVB provide us with credit risk assessment and credit
underwriting services. Under the terms of our agreements with GMAC
and
SVB, GMAC and SVB assume the credit risk of selected members so
that they
may purchase voice calls or Internet capacity on our exchange.
|
|
•
|
Self
underwriting
.
Members can self-finance a credit line with us by prepaying, posting
a
cash deposit or letter of credit or by placing money in escrow.
|
|
•
|
CreditWatch
system
.
We enter a credit line for each member into our CreditWatch system.
This
credit line is the sum of the GMAC financial services credit line,
SVB
credit line, selling activity, other cash collateral and internal
credit.
The CreditWatch system regularly monitors a member’s net trading balance
and sends email alerts to each member who surpasses 50%, 75% and
90% of
its available credit limit and is able to automatically suspend
a member’s
ability to buy as its net balance reaches its total credit line.
|
|
•
|
Frequent
settlement
.
We have two trading periods per month. Payments from buyers are
due
typically fifteen days after the end of each trading period. This
frequent
settlement reduces the amount outstanding from our buyers. The
frequent
clearing of trading balances, together with the ability to net
buy and
sell transactions, allows our members to trade large dollar volumes
while
minimizing the outstanding balance that needs to be underwritten
by
additional sources of credit.
|
We
occasionally issue internal credit lines to our members based on our review
of a
member’s financial statements and payment history with us. These internal credit
lines may be in excess of the credit lines issued by our third party
underwriters. We evaluate the credit risk, on a case-by-case basis, of each
member who is not covered by our third-party credit arrangements, our netting
policy, prepayments or other cash collateral. While there are no written
procedures regarding the extension of credit lines, we have adopted written
procedures to determine authority levels for certain of our officers to grant
internal credit lines. In 2008, approximately 83% of our trading revenues were
covered by our third party underwriters, netting, prepayments or other cash
collateral, of which our third party underwriters covered 36%. However, our
credit evaluations cannot fully determine whether buyers can or will pay us
for
capacity they purchase through our exchange. In the event that the
creditworthiness of our buyers deteriorates, our credit providers and we may
elect not to extend credit and consequently we may forego potential revenues
which could materially affect our results of operations.
We
have
certain minimum annual commissions due pursuant to the terms of our agreements
with each of GMAC and SVB. Pursuant to the terms of our agreement with GMAC,
which has been extended until April 30, 2009, and pursuant to the terms of
our agreement with SVB, which terminates on November 28, 2008, we are
required to pay aggregate minimum annual commissions of $370,000.
SUBSEQUENT
EVENTS
On
July
30, 2008, the Company entered into a separation and release agreement with
the
Chief Operating Officer of Arbinet Digital Media. In addition, the Company
is in
the process of finalizing separation agreements with certain U.K. employees
of
Broad Street Digital. The Company expects to recognize a pre-tax charge of
approximately $0.5 million for these matters in the third quarter. Such amounts
will be reflected as a loss from discontinued operations in the Company’s
consolidated statement of operations.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Foreign
currency exposure
The
financial position and results of operations of our U.K. subsidiary are measured
using GBP as the functional currency. The foreign currency fluctuations have
not
had a material effect on our operating results or financial condition. Our
exposure is mitigated, in part, by the fact that we incur certain operating
costs in the same foreign currencies in which fee revenues are denominated.
The
percentage of fee revenues denominated in GBP was approximately 11% for the
year
ended December 31, 2007 and 9% for the six months ended June 30, 2008.
Interest
rate exposure
We
are
exposed to interest rate fluctuations. We invest our cash in short-term interest
bearing securities. Although our investments are available for sale, we
generally hold such investments to maturity. Our investments are stated at
fair
value, with net unrealized gains or losses on the securities recorded as
accumulated other comprehensive income (loss) in shareholders’ equity. Net
unrealized gains and losses were not material at June 30, 2007 or June 30,
2008.
The fair market value of our marketable securities could be adversely impacted
due to a rise in interest rates, but we do not believe such impact would be
material. Securities with longer maturities are subject to a greater interest
rate risk than those with shorter maturities and at June 30, 2008 our portfolio
maturity was relatively short. Assuming an average investment level in
short-term interest bearing securities of $30.0 million, a one-percentage
point decrease in the applicable interest rate would result in a $300,000
decrease in interest income.
Under
the
terms of our credit agreement with SVB, our borrowings bear interest at the
prime rate. Therefore, a one-percentage point increase in the prime rate would
result in additional annualized interest expense of $10,000 assuming $1 million
of borrowings. At June 30, 2008, we had no outstanding borrowings under this
agreement.
Item
4.
Controls
and Procedures.
Our
management, with the participation of our principal executive officer and
principal financial officer, evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of June 30,
2008. In designing and evaluating our disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving their
objectives and management necessarily applied its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. Based on this
evaluation, our principal executive officer and principal financial officer
concluded that, as of June 30, 2008, our disclosure controls and procedures
were
(1) designed to ensure that material information relating to us, including
our
consolidated subsidiaries, is made known to our principal executive officer
and
principal financial officer by others within those entities, particularly during
the period in which this report was being prepared, and (2) effective, in that
they provide that information required to be disclosed by us in our reports
that
we file or submit under the Exchange Act is recorded, processed, summarized
and
reported within the time periods specified in the Security and Exchange
Commission’s rules and forms.
No
change
in our internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended
June 30, 2008 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART
1.
OTHER
INFORMATION
Item
1.
Legal
Proceedings.
The
litigation process is inherently uncertain, and we cannot guarantee that the
outcomes of the following proceedings and lawsuits will be favorable for us
or
that they will not be material to our business, results of operations or
financial position. However, the Company does not currently believe that these
matters will have a material adverse effect on our business, results of
operations or financial position.
World
Access Proceeding
On
March 18, 2003, World Access, Inc. f/k/a WAXS, Inc., WA Telcom Products
Co., Inc., WorldxChange Communications, Inc., Facilicom International LLC and
World Access Telecommunications Group, Inc. f/k/a Cherry Communications
Incorporated d/b/a Resurgens Communications Group (collectively “the Debtors”),
filed a lawsuit against the Company in the United States Bankruptcy Court for
the Northern District of Illinois, Eastern Division. The Debtors had previously
filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code.
The
Debtors seek recovery of certain payments they made to us as a buyer on our
exchange, which total approximately $855. The Debtors claim that such payments
were preferential transfers under the Bankruptcy Code. The Debtors also seek
costs and expenses, including attorneys’ fees and interest. The Company filed an
answer to the complaint on April 18, 2003, denying the Debtors’ claims for
relief and asserting several affirmative defenses. On August 12, 2003, the
Company served discovery on the attorneys for World Access and its related
entities. Shortly after the Company served discovery, the bankruptcy judge
entered an order stating that the cases of World Access and its related
entities, which had been jointly administered, could not be substantively
consolidated. Since then the majority of Debtors’ preference complaints in the
case have been continued. In September 2004, the Debtors confirmed a Plan of
Liquidation that created a trust to proceed with liquidating avoidance actions.
The Trustee has been substituted as the Plaintiff in all avoidance actions.
The
next status hearing in the case is scheduled for September 9, 2008. No
trial date has been set.
Item
1A
Risk
Factors
There
have been no material changes in the risk factors described in Item 1A of
the Company’s Annual Report on Form 10-K for the year ended
December 31, 2007.
Item
2.
Unregistered
Sales of Equity Securities and Use of Proceeds.
(b)
Use of Proceeds from Registered Securities
On
December 21, 2004, we sold 4,233,849 shares of our common stock in
connection with the closing of our initial public offering. The Registration
Statement on Form S-1 (Reg. No. 333-117278) we filed to register our common
stock in the offering was declared effective by the Securities and Exchange
Commission on December 16, 2004.
After
deducting expenses of the offering, we received net offering proceeds of
approximately $66.6 million. We used approximately $15.2 million of our net
proceeds to redeem the outstanding shares of our Series B and Series B-1
preferred stock and approximately $10.0 million to repay principal and interest
outstanding under our credit facility with SVB. Approximately $40.0 million
of
the net proceeds of the offering were invested in investment-grade marketable
securities within the guidelines defined in our investment policy.
The
following table provides information as of and for the quarter ended June 30,
2008 regarding shares of the Company’s common stock that were repurchased under
the Company’s Repurchase Program.
|
|
|
|
|
|
|
|
|
|
Period
|
|
Total
Number
of
Shares
Purchased
|
|
Average
Price
Paid
per
Share
|
|
Total
Number of
Shares
Purchased
as
Part of Publicly
Announced
Plans
or
Programs
|
|
Approximate
Dollar Value of Shares that May Yet Be Purchased
Under
the Plans
or
Programs
|
|
Repurchase
Plans (1) and (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
|
836,997
|
|
$
|
5.58
|
|
|
836,997
|
|
$
|
-
|
|
4/1/08
- 4/30/0
8
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
5/1/08
- 5/31/0
8
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
6/1/08
- 6/30/0
8
|
|
|
1,096,261
|
|
|
3.60
|
|
|
1,096,261
|
|
|
4,054,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,933,258
|
|
$
|
4.46
|
|
|
1,933,258
|
|
$
|
4,054,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
The
2007
Repurchase Plan was adopted and announced on June 11, 2007. The 2007
Repurchase Plan authorized the repurchase of up to $15.0 million of our common
stock at any time and from time to time. The share repurchases may be made
at
management’s discretion in the open market in compliance with applicable
securities laws and other legal requirements and are subject to market
conditions, share price, and other factors. We hold the repurchased shares
as
treasury stock. The Repurchase Plan was terminated on February 26, 2008.
(2)
On
May 22,
2008, the Board of Directors authorized the Company to repurchase up to $8.0
million of shares of its common stock (the
“
2008 Repurchase
Plan
”
). Stock
repurchases will be made from time to time in open market or privately
negotiated transactions as market conditions warrant. The 2008
Repurchase Plan is effective May 27, 2008, and may be suspended or
terminated at any time without prior notice. It will terminate no later than
August 27, 2008.
Dividends
On
February 28, 2008, the Company announced that its Board of Directors had
approved a special one-time cash distribution of $0.40 per share. The aggregate
total distribution of approximately $10.1 million was paid on March 28,
2008 to record holders of our common stock as of the close of business on
March 12, 2008. Other than this one-time cash distribution, we do not
currently anticipate paying any cash dividends in the foreseeable future.
Item
4. Submission of Matters to a Vote of Security Holders
Our
2008
Annual Meeting of Stockholders was held on June 19, 2008.
There
were present at our Annual Meeting in person or by proxy stockholders holding
an
aggregate of 20,256,752 shares of our common stock out of a total number
of
25,820,400 shares of common stock issued and outstanding and entitled to
vote at
the meeting.
The
only
matter that was voted on at our Annual Meeting was the election of two
Class I
Directors to serve until the 2011 Annual Meeting of Stockholders and until
their
respective successors have been duly elected and qualified.
The
following
persons were elected as Class I Directors at our Annual Meeting:
|
|
Number
of Shares of Common Stock
|
|
Nominee
|
|
Votes
For
|
|
Votes
Withheld
|
|
William
M. Freeman
|
|
|
19,966,631
|
|
|
290,121
|
|
|
|
|
|
|
|
|
|
John
B. Penney
|
|
|
20,194,851
|
|
|
61,901
|
|
The
following
persons are the Class II and Class III directors whose terms of office
continued
after the Annual Meeting: Michael J. Donahue, Stanley Kreitman, Alex Mashinsky
(each Class II, with terms expiring in 2009) and Shawn F. O’Donnell, Michael J.
Ruane, and Jill Thoerle (each Class III, with terms expiring in
2010).
Item
6.
Exhibits.
|
|
|
Exhibit
No.
|
|
Description
of Exhibit
|
|
|
|
10.1
|
|
Stock
Ownership Agreement dated as of May 30, 2008 by and among
Arbinet-thexchange, Inc., the Singer Children’s Management Trust, Gary
Singer, and Karen Singer (Exhibit 10.1 to Form 8-K filed as of
June 10,
2008)
|
|
|
|
10.2
|
|
Amendment
No. 1, dated as of April 24, 2008, to Offer Letter, dated as of
October
16, 2006, by and between Arbinet-thexchange, Inc. and John B. Wynne,
Jr.
(Exhibit 10.1 to Form 8-K filed as of April 29, 2008)
|
|
|
|
10.3
|
|
Amendment
No. 1, dated as of April 23, 2008, to Offer Letter, dated as of
September
20, 2006, by and between Arbinet-thexchange, Inc. and W. Terrell
Wingfield, Jr. (Exhibit 10.2 to Form 8-K filed as of April 29,
2008)
|
|
|
|
10.4
|
|
Amendment
No. 2, dated as of April 23, 2008, to Offer Letter, dated as of
July 5,
2001, by and between Arbinet-thexchange, Inc. and Peter P. Sach,
as
amended March 16, 2007 (Exhibit 10.3 to Form 8-K filed as of April
29,
2008)
|
|
|
|
31.1*
|
|
Certification
Pursuant to Rule 13a-14(a) and 15d-14(a) of the Exchange Act, as
Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Principal
Executive Officer).
|
|
|
|
31.2*
|
|
Certification
Pursuant to Rule 13a-14(a) and 15d-14(a) of the Exchange Act, as
Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Principal
Financial Officer).
|
|
|
|
32.1*
|
|
Certification
Pursuant to 18 U.S.C. Section 1350 (Principal Executive
Officer).
|
|
|
|
32.2*
|
|
Certification
Pursuant to 18 U.S.C. Section 1350 (Principal Financial
Officer).
|
|
|
* Filed
herewith
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
ARBINET-THEXCHANGE,
INC.
|
|
|
|
Date:
August 11, 2008
|
|
/s/
William M. Freeman
|
|
|
William
M. Freeman
President
and Chief Executive Officer
(Principal
Executive Officer)
|
|
|
|
|
|
/s/
John B. Wynne, Jr.
|
Date:
August 11, 2008
|
|
John
B. Wynne, Jr.
Chief
Financial Officer
(Principal
Financial Officer)
|
|
|
|
|
|
|
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