EX-99.(A)(25) 2 a09-32854_1ex99da25.htm EX-99.(A)(25)

Exhibit 99.(a)(25)





































4774 - VCS
















































Counterclaim Plaintiffs,



























































Counterclaim Defendants.



















Courtroom No. 12B
New Castle County Courthouse
Wilmington, Delaware
Wednesday, October 28, 2009
9:10 a.m.






BEFORE: HON. LEO E. STRINE, JR., Vice Chancellor.






500 North King Street - Suite 11400
Wilmington, Delaware 19801-3759
(302) 255-0525







Richards, Layton & Finger, P.A.







of the New York Bar

Gibson, Dunn & Crutcher LLP



Proctor Heyman LLP

for the Plaintiff and Counterclaim Defendant iBasis, Inc. and Counterclaim Defendants Robert H. Brumley, Charles N. Corfield, Ofer Gneezy, W. Frank King and Gordon J. VanderBrug



Morris, Nichols, Arsht & Tunnell LLP







of the New York Bar

Cravath, Swaine & Moore LLP

for Defendants and Counterclaim Plaintiffs Koninklijke KPN N.V. and KPN B.V and Defendants Celtic ICS Inc., Eelco Blok, Joost Farwerck, Ad Scheepbouwer, Stan Miller, Baptiest Coopmans, A.H.J. Risseeuw, M. Bischoff, C.A. Colijn-Hooijmans, D.I. Jager, M.E. Van Lier Lels, J.B.M. Streppel, R. J. Routs, D.J. Haank, W.T.J. Hageman, M. E. Hoekstra and M.N.A.J. Vogt





THE COURT: Good morning, everyone. Good morning, Mr. Teklits.


MR. TEKLITS: Good morning, Your Honor. I wanted to take a minute to introduce Your Honor to some of the Cravath attorneys that Your Honor will be hearing from today. Darin McAtee, Yonatan Even and Douglas Broadwater.


THE COURT: Good morning, Mr. DiCamillo.


MR. DiCAMILLO: Good morning, Your Honor. I would like to introduce some of my colleagues seated with me at counsel table. From Gibson, Dunn & Crutcher, David Kerstein, Adam Offenhartz and Nancy Hart.


And with that, I will turn it over to Mr. Offenhartz to call our first witness.


MR. OFFENHARTZ: Good morning, Your Honor. IBasis calls as its first witness, Ofer Gneezy.


Your Honor, we have previously provided the Court with joint exhibits. We have a smaller subset of exhibits that I intend to use with the witness. With leave of the Court, I would like to —






OFER GNEEZY, having been duly sworn, was examined and testified as follows.






Q         Could you please state your name and title for the record, please?


A         Ofer Gneezy, President, CEO and Chairman of the Board of iBasis.


Q         Can you explain how iBasis was founded?


A         I founded iBasis with one cofounder, Gordon VanderBrug. We found it in the basement of my house just outside of Boston. As soon as we finalized or business plan, we started meeting with investors to raise money. We started flying around the world to develop business partnerships, finding equipment suppliers, developing software, and meeting with customers to start routing international traffic across our network. We then grew that network throughout the years.


We lived through the telecom boom and bust, and here we are today, one of the largest carriers of international voice traffic in the world.




O.        Gneezy - Direct


We carry about the same volume of international traffic today as AT&T.


Q         What year was iBasis founded?


A         1996.


Q         And where, actually, was iBasis’ first office?


A         Initially, we were at the basement of my house in Winchester, Massachusetts. As soon as we raised some money, we moved to real offices in Burlington. We are still, today, in Burlington.


Q         Could you please explain, in terms that perhaps even I could understand, the products and services that iBasis offers?


A         Yes. IBasis is in the business of doing international long distance calls. We develop business relationships around the world. We have, today, such relationships in more than 100 countries, that allows us to terminate international voice traffic in those various networks. And in turn, we sell the services to local operators, phone companies, around the world, that originate international calls.


So, for example, if you make an international call from your cell phone or your office or your home, your service provider, might it be AT&T




or Verizon — your cable company may route some of those calls through the iBasis network, where we interconnect it to the terminating network in the country you called.


Q         Okay.  Mr. Gneezy, can you read that?


A         Yes.


Q         Is that an accurate overall description?


A         Yes.  It depicts how we are getting calls from various domestic telecom operators, and carry those calls, and terminating them throughout the world in the various regions.


Q         What are iBasis’ main revenue streams?


A         We have three main revenue streams. The main one, the biggest one, is what we call trading wholesale.  Second one, is our outsourcing business. And the third one, is our retail business.


Q         Can you explain the differences between trading and outsourcing, please?


A         Yes.  In the trading business, we serve many phone companies, over a thousand, that call-by-call may choose to route some of their international traffic through our network.  So they have the capability to route some international




traffic, and make the choice on how to route that traffic.  We charge them on a price-per-destination-per-minute.  We monitor the amount of traffic we get from them, and we charge them for that traffic.  And then we terminate it in the destination country.


In our outsourcing business, we work with companies that decided that they don’t want to run the whole operation throughout the international calls.  They effectively outsource the whole operation to us.  They typically get rid of all the operating expenses associated with doing this business, and then we effectively manage all of the international traffic on their behalf, or all of the international traffic to some specific regions in the world.


Q         And can you describe the retail aspect of your business, please?


A         In our retail operation, we sell services directly to consumers.  Unlike our other services, we sell to service providers and phone companies.  In our retail business, we issue prepaid calling cards, and through distribution, we sell them in various retail outlets.  Consumers buy those cards and use them to get into the iBasis network to make international calls.




Q         Can you explain the difference between outsourcing and M&A?


A         Yes. Carriers that do international calls, they have their captive traffic, international calls that comes from their customer base.  In cases that they decide to stop doing this themselves, they outsource it to us.  That is an outsourcing transaction.  It’s typically a regular business transaction.  It’s typically longer term, five years or ten years, but it’s a straight business transaction.


M&A typically occurs when we talk to a wholesale carrier that also does carrier services, or a company that has bought captive traffic and wholesale traffic.  In that case, in addition to the outsourcing, they may also want to sell us their international wholesale operation.  That becomes an M&A transaction.  That would require some type of consideration, cash or stock, to acquire that business.


Q         Mr. Gneezy, is the demonstrative we put up on the big screen and on the screen to your right — is that accurate?


A         Yes. That is accurate.




Q         Mr. Gneezy, can you explain how revenue is generated on each of these — on each of these streams?


A         Yes.  In our trading business —


Q         Who pays whom, and for what?


A         Yes.  In our trading business, we provide, periodically, a price list to our customers. That price list has a price per destination for many, many destinations around the world, perhaps up to 900 to 1,000 different destinations.  That is a price per minute.  And when they route a call that comes from the customer over our network, they pay us that price per minute for carrying the traffic and connecting it to the destination country.


On our side, we have developed, already, business relationships with various local operators around the countries, around the world.  And we take those calls in to the destination country that was called, and we have an agreement with that phone company on the destination country, and they charge us a price per minute for every minute that we bring into that country.


So our margin is the difference between what we are charged to terminate the call and




what we charge to — the customer to originate the call.


In our outsource business, the dynamic is similar, in the sense that there is a price per minute and we measure all the minutes, and we take them and we pay the terminating partners.  But the contracts are typically long term, five or ten years, as opposed to the trading business, when customers, carriers, decide call by call if they want to route it to us in our outsource business.  It’s a committed relationship, with some formal managed pricing, and then we issue the bills, collect the prices and pay the terminating partners.


Q         Can you describe the revenue stream for the retail operations, please?


A         Yes.  In the retail business, we issue various prepaid cards.  Those are typically cards that have a pin number.  Typically, they are designed for particular ethnic groups to call a particular destination overseas, typically their home country. Those cards come in different denominations, typically $2 or 5-dollar cards.


Using independent distributors, we sell those cards.  The distributors bring them to




retail outlets, and then consumers buy those cards, and then they issue those cards to call an access number to get into our network, and then they call the destination country and the $2 or $5 on the cards get depleted.


Q         What financial metrics does iBasis use to track its profitability on its various revenue streams?


A         We have many metrics that we track throughout the business. The most important ones are the ones that show aspects of cash generation. We most focus on adjusted EBITDA, on free cash flow. In order to get to those metrics, we also track the various parameters for the margin, the gross margin that we generate, and the amount of traffic that we carry over the network.


Q         Are there any — what types of margins do you track?


A         We track different aspects of margin. We track the gross margin percent. We track the average margin per minute. We look at it individually for particular traffic streams, for customers, for countries, for products. It’s a quite complicated business. There are many, many numbers in the




business. We track — we have different people in the organization that track the various traffic streams.


Q         Do different margins move in lock-step?


A         Not typically. You can have situations that your margin per minute moves in one direction and the margin percent moves in another direction.


So just as an example, if — let’s say you have a price to a European mobile destination that costs, say, 20 cents a minute, and it costs you maybe 2 cents a minute to terminate that call. You make a certain margin per minute and a certain margin percent. If the price per minute goes down to 10 cents but you still make the same margin per minute, the margin per minute stays the same but your gross margin percent would be much higher.


Q         Mr. Gneezy, what has the company’s strategy been with respect to growth prior to the KPN transaction?


A         From inception, our key growth strategy was to expand this network. We rolled out a network for international voice traffic that was very innovative, was using a new technology, voiceover IP,




that was completely new at the time. We expanded that network in getting it to more countries, expanding the capacity in each country, going to various cities around the world and selling that capacity, or that ability to do co-termination to various customers.


So we were growing by increasing the footprint, increasing the number of customers, the percent of their traffic that they give to us, and continuing to increase that throughout the years.


Q         Mr. Gneezy, what is VOIP?


A         VOIP is voiceover IP. It’s typically taking voice traffic and streaming it through an IP network. The most prominent is the internet, but it may also be a private IP network.


Q         Can you describe the main focuses for growth for iBasis, please?


A         The trading business, the key growth strategy throughout the years has been this organic growth. We also looked from time to time at acquisitions. We bought, for example, a small network in Peru that expanded our network. So the key was doing the organic growth. And then as we started looking at outsourcing, we also did the transaction with KPN, subsequently with TDC. That added to our






Q         Over the years, since its founding, what sort of growth has iBasis experienced?


A         We had tremendous growth throughout the years. We — thinking back, we had, in our first year, 2 million in revenue. The next year we had 20 million in revenue. The next year we had $60 million in revenue. Then we had $110 million in revenue. We were recognized many years as the fastest growing technology company in New England. One year we were recognized as the eighth fastest technology company in North America. And we had this outstanding growth that took us essentially from zero business, in the basement of my house, to about a billion dollars in revenue. In ten years or so, that is a shorter time period than it took Microsoft to get to its first billion dollars in revenue.


Q         Mr. Gneezy, what were the main sources for that growth, briefly?


A         Before the KPN transaction, the main sources of growth was organic growth, developing more of the international traffic, from more carriers and more footprint. And then through the M&A and outsourcing transactions that we did, we more than




doubled the size of the business.


Q         Mr. Gneezy, you mentioned that you have completed two outsourcing transactions. Correct?


A         Yes. We completed two outsourcing transactions and one smaller M&A transaction.


Q         And who were those two outsourcing transactions with?


A         The bigger one is with KPN. And a smaller one that we did, subsequently to closing the KPN transaction, is with TDC. TDC is the incumbent operator in Denmark.


Q         Are there any other outsourcing transactions in the pipeline?


A         There are many outsourcing transactions in the pipeline. There is one that we have notified that we have won, but we are not routing traffic. That is a big mobile operator in the Middle East. We also are working on numerous transactions in which we are bidding for an outsourcing transaction, including one of the large mobile operators here in the U.S., one of the largest internet properties that is launching voice product and is looking for us to manage that international traffic, and various other carriers in different regions in the world.




Q         I would like to shift gears, now, to the financial performance of iBasis after the KPN transaction.


What was iBasis’ approximate annual revenue for 2008?


A         In 2008, our revenue was about $1.3 billion.


Q         And what was the approximate EBITDA profit in 2008?


A         In 2008, our adjusted EBITDA was around 40 million, perhaps 42 million, in adjusted EBITDA.


Q         What is EBITDA?


A         EBITDA is earnings before interest, tax, amortization and depreciation.


Q         Why do you focus on EBITDA?


A         EBITDA is a useful metric in our business, to judge the profitability of the business. It shows kind of cash generation capability. It excludes some of the noncash aspects, like depreciation, amortization. It’s typically used by companies that have a fair bit of infrastructure that is being depreciated. Telecom operators often look at adjusted EBITDA as an indicative metric of success.




Q         How did revenues and EBITDA in 2008 compare to prior years?


A         If we compare 2008 to 2007, obviously, those numbers were much larger than iBasis stand-alone. But if you look at 2007 on a pro forma basis, combined with the KPN entity that we bought, then our revenue was essentially flat, and our adjusted EBITDA was down by perhaps 20 percent.


Q         To what do you attribute the drop in performance in 2008?


A         One major contributor to it is, of  course, the worldwide downturn in the economy that  weighed on our business. But in addition to this, we had compression on various margin streams from KPN. We also focused a lot of energy on the integration of the company that we just bought. It essentially doubled the size of the company. That integration activity cost us, perhaps, $10 million during that year. So the combination of those three factors reduced our profitability for the year.


Q         Did traffic loss play a role regarding those numbers?


A         Of course, we — we lost traffic during that period from — one aspect is because of




the downturn in the economy. Many of the consumers that buy prepaid cards lost their jobs. They went back to the home country. They left the U.S. Many people left Spain. Many people that worked in the Emirates left and went back to the Philippines. Overall, there was reduction in voice traffic manifested itself in our retail business, and then later on in our wholesale business, where we serve many of those providers of prepaid cards.


And then in addition to this, we also implemented the strategy to weed out the least profitable track from our network. So we took specific action to make sure that we make enough margin on every minute that we carry, and we effectively waived the least profitable traffic from the network.


Q         Mr. Gneezy, did you experience traffic loss on the KPN business?


A         On the KPN business — there are different streams we get from the KPN business. One stream that is coming from the fixed network, that is referred to sometimes as IDD out, or international direct dial, that is coming from the KPN fixed network. That business has been under decline, I




suppose, since the regulation in the Netherlands. So as that traffic declined, we got what there was, but it was on a declining scale.


At the same time, the traffic from the mobile operators was growing as the mobile business of KPN in the various countries is growing.


One aspect of our traffic loss in that period is that immediately after we closed the transaction, KPN raised the price that we had to pay them to terminate traffic into their domestic network, and that, in turn, caused us to lose some traffic from other carriers that were selling the Netherlands termination, and had some negative impact on our trading business.


Q         How has iBasis performed in the first three quarters of 2009?


A         In 2009, we performed much better. We — year to date, we are ahead of our internal plan in total gross profit, adjusted EBITDA, free cash flow. So we are tracking well to our plan, especially in the third quarter that we just finished. We had good growth throughout the P&L from the minutes and the revenue and the gross profit and adjusted EBITDA. So sequentially, going from Q2 to Q3, we feel that there




is some inflexion point, and we experienced good growth in Q3.


Q         How is iBasis situated for the future?


A         I think we are in a great place. Looking at the future of the international voice traffic, many carriers are realizing that this is not core business for them. They have other businesses that are more central to their operations, serving enterprise and consumers, and doing domestic services and new IP based services. Many carriers around the world are realizing that doing the international interconnect network is not core business. There are companies like iBasis that specialize in this, and they don’t need to do in the back office what other experts like us do in the front office.


So many companies are looking, now, to outsource that business. I think we are one of the most prominent carriers of international voice traffic.


Of course, we are known to carriers. We are not known to consumers, as most of our activity is with carriers. But we are invited to, I would say, every, or almost every, opportunity when carriers are considering outsourcing their international traffic.




We get the chance to bid on it. We believe that we are in a very good place to participate in that consolidation of the marketplace, and continue our organic growth, as well.


Q         Mr. Gneezy, could you comment on the status of the integration between iBasis and the units of KPN that joined iBasis following the KPN transaction?


A         Yes. We closed the KPN transaction in October of ‘07. That transaction essentially doubled the size of our business. So in terms of integration, we had quite a bit of work to do, because the size of the transaction was double the size of the company. And furthermore, the systems and the processes and the network that we acquired were based on the older technology, not VOIP technology. Many of the systems were used for the core businesses of KPN, so were not particularly optimized to doing international voice traffic. And that, in fact, was part of the reason KPN told us that they did the transaction with us, because our systems were new and IP based. So we have done all that integration.


We finished all that activity in Q1 of this year. This was quite a big effort for us, at




times taking as many as 100 people working on the integration. But it’s all done. It’s all behind us. All the traffic is running on the new systems. All the financial systems moved to a consolidated system. The sales organization is integrated. The product lineup is rationalized, and now we can shift our resources again to the outside and growth.


Q         Mr. Gneezy, let’s shift gears to the KPN/iBasis transaction. What was iBasis’ motivation for making a deal with KPN?


A         The international voice industry, we perceived, is ready for consolidation. And to be a consolidator in that business, you just want to have large scale, so you benefit from the economies of scale. Even though on a stand-alone basis, we already became one of the larger carriers of international voice traffic in the world, we still had the scale of about 10 or 12 billion minutes a year, where the biggest players had maybe 20 or 24 billion.


That transaction, in doubling the size of the business, elevated us into that top tier of international voice carriers. It put us in the center of consolidating the industry. It also added to our product lineup a product that was specifically




designed by KPN to carry voice traffic on behalf of mobile operators. It also added a good number of customers, especially mobile operators that were not customers of iBasis before.


So overall, it helped in growing the scale and improving the product lineup and getting more strength in the mobile business.


Q         When did you first begin negotiating the deal with KPN?


A         We probably started in 2005, or thereabouts.


Q         How long, approximately, did these negotiations last?


A         This was a long process. Was two years, maybe three years.


Q         Over that time, approximately how many people on the KPN side did you negotiate or speak with?


A         I would say half a dozen, maybe a few more.


Q         What were the general terms of the transaction you ultimately closed with KPN in October, 2007?


A         In that transaction, we bought KPN’s




international voice operation. So we got the whole business in which they were doing third-party services, selling to our carriers. We also, as part of that transaction, got commitments to carry all of KPN’s international traffic, inbound and outbound, for the fixed traffic, meaning traffic coming from the KPN fixed network.


KPN negotiated to give us a very high margin at the beginning, so that the business that we buy has a higher EBITDA, to minimize the amount of cash that they have to put in the transaction, and then a declining scale that will bring this down over some time period. We got the — all the international traffic from the mobile entities at essentially the same profitability arrangements that KPN or KGCS offered those entities before.


And then just to make the economics work, KPN wanted to get 51 percent of the combined iBasis after the transaction. But that business that they sold us was not sufficient to provide the economics to give them 51 percent. So they agreed to also add $55 million in cash payment. And this was still not enough to get the economics, so they agreed that we can dividend that 55 million, all the excess




cash on our balance sheet, for a total of 113 million, to pretransaction stockholders.


So with that, we did the transaction and KPN became 51 percent stockholder in iBasis.


Q         How much was the consideration that iBasis gave to KPN in the deal worth, approximately?


A         It’s not a straightforward computation because of all those elements that come in and out, and the special dividend, but you know, my estimate is that we essentially paid $300 million for buying that business.


A simple way to arrive at that is that KPN ended up with 40 million shares of iBasis post-transaction. Ex dividend, after all the cash flows associated with the transaction went out, that stock was trading north of $7, maybe 7.50. I don’t remember the exact price. So that, essentially, is $300 million.


Q         What was the name of the entity that iBasis actually acquired from KPN?


A         We bought KPN Global Carrier Services, or KPN GCS, or it’s sometimes KGCS, and we also bought their U.S. entity that was called INS, but was much smaller. The bulk of the business was KGCS.




Q         What was the primary business of KGCS?


A         KGCS had two main aspects to its business. One, of course, was serving KPN and all of the KPN entities, carrying international traffic, inbound and outbound, from all those various entities. The second half of the business was serving third-party carriers, like we do in our trading business.


Q         What — who were KGCS’s primary customers at the time of the transaction?


A         So they — the biggest customer, of course, is KPN and its entities. On a more granular level, there is the KPN fixed business, there is —KGCS had traffic from the KPN mobile operation in the Netherlands called KPN Mobile. And they had traffic from the KPN Mobile entity in Germany called E-Plus, and traffic from the KPN mobile entity in Belgium called Base.


Third-party customers, or non-KPN affiliated customers, included many carriers, mobile operators like Vodafone, many of the European incumbents, France Telecom, Deutsch Telecom, British Telecom, Belgacom, and various other mobile and fixed operators in the Middle East and elsewhere.


Q         Mr. Gneezy, what promises were made to




you by KPN regarding what iBasis would receive in the KPN/iBasis deal?


A         We were promised all of KPN’s inbound and outbound traffic on a contract that is a ten-year contract. KPN, because — as I mentioned before, wanted to give us a high margin on the traffic from the fixed network on a declining scale, prenegotiated, the decline in markup, or in margin, for a number of years on that traffic. And then they promise me that the mobile business comes essentially as they were running it before, on the same arrangements that KGCS had with the mobile operators.


Q         When you say it was the same arrangements as before, what do you mean?


A         I mean the same type of profitability, same type of markups, and we will get all of the traffic at, essentially, the same methodology for generating price lists and generating margin.


Q         What was the basis for your understanding regarding these assurances?


A         We had, as I said before, a long, protracted negotiation. Initially, when we started the negotiation, KPN only wanted to sell us the third-party carrier business, but we insisted that that was




not acceptable to us as a basis for the transaction. So then, over time, the discussion progressed into KPN committing to give us all of the mobile international traffic in and out. And as that left only the management of the bilateral relationships —typically, carriers have a relationship between two incumbent operators to exchange traffic, that is used for the fixed traffic. So getting the mobile traffic was a key element of our transaction.


I don’t remember a specific situation, when a specific person told me, “You are going to get exactly that kind of markup,” but the whole discussion about making sure that we get all of the mobile business, and we get the mobile business with the same profitability, was — was just a crucial part of the transaction that we did with KPN.


Q         Approximately what date did you enter into the KPN transaction?


A         We signed the transaction, if I recall, in June of 2006.


Q         And when did the transaction close?


A         The transaction closed October 1, 2007.


Q         And you had received the assurances




you spoke of regarding mobile traffic prior to entering the transaction. Correct?


A         Yes. Along the negotiation — before we actually signed the transaction.


Q         Let’s look at Exhibit JX 28. JX 028.


A         Okay. I got it.


Q         What is this document, Mr. Gneezy?


It’s the first tab in the binder that I handed you.


A         This document is an outlook, a forecast, from KPN, sent to us before closing the transaction in 2007, forecasting the business through 2011, essentially, used for fairness opinion and closing the transaction.


Q         When did you receive this document, Mr. Gneezy? Do you recall?


A         Just shortly before closing the transaction. We closed it in October ‘07, so just a month or two months before.


Q         What was the meaning of this document to you at the time?


A         That document, to me, is reaffirmation of how the business was running. I can see in this document that the markup on the fixed line traffic is stepping down, as we agreed. I see that the traffic




from the international network is continuing the same way, with ten percent margin. So it was used, as I said before, in many parts of the organization to close down the deal. But for me, look, it seems like it’s confirming the promises that had been made, or that were made, to me.


Q         And what page are you looking at right now?


A         I’m looking at page five, that breaks out the various traffic streams.


Q         What is your present understanding of what the row showing the ten percent margin is?


A         Initially, when I looked at that document, a quick view shows continuing margin at the ten percent, so it confirmed my understanding of the promises made to me.


Very recently, when I focused on that document again, I realized that doing derivative computation for it, for average margin per minute, shows a decline in average margin per minute.


I should probably have done that computation myself before, but I didn’t.


Q         Was this document significant to you in your decision to enter into the transaction with




KPN in June of 2006?


A        Well, this document is almost a year after we signed the transaction. So it was not part of our decision to do the transaction with KPN.


Q         Mr. Gneezy, does your new understanding of the meaning of that row on page five of this document change your view of KPN’s actions post-closing regarding the margin squeeze and loss of traffic?


A        No. It doesn’t. I would have had — I would have been more on my toes if I did this computation before, but this document, even with the understanding now, it shows that the margin per minute would decline. But it appears to me to be forecasting market forces, and not specific action taken by KPN to suck margin out of the business. Maybe it would have alerted me to be more vigilant about that traffic. But — I should have done that computation before, but I didn’t.


Q         Thank you.


THE COURT: You are saying that you thought this document was binding somehow?


THE WITNESS: This document is the basis for a fairness opinion. It shows the EBITDA.




We are essentially paying for the transaction as a multiple of EBITDA. Of course, there are many other metrics to value the deal, but the past performance of the business that then manifest itself in the proxy statement, in our forecast going forward, and then that forecast is part of us valuing the transaction and making the transaction.




Q         Mr. Gneezy, you were relying on the EBITDA provided in this document. Correct?


A        Well, just for verification at the time of closing, right, and for the fairness opinion. But we had — at the time we signed the transaction, we looked at the EBITDA streams, also. And when we negotiated the price — there was no price renegotiation from the time we signed the transaction to the time we closed the transaction.


Q         And you were not relying on the row with the margin percent at that time, were you?


A        Not at the time we signed the transaction. The document is a year later, helping us close the transaction.


Q         Let’s talk a little bit more about the squeeze. Following the close of the KPN transaction,




how did the — how did the new iBasis’ performance in late 2007 and 2008 compare with your expectations?


A        As soon as we closed the transaction, we started experiencing squeeze on our profitability from the KPN side. We closed the transaction, as I said, on October 1 of ‘07. Immediately in the fourth quarter, KPN raised our price for terminating international traffic into the Netherlands. That had a detrimental effect on our business and some relationships with other carriers that we have.


In time, through our discussions with KPN, they agreed to give us back compensation for part of that increase in cost. But that was kind of the first significant, big, action, just a quarter later. So we barely passed the transaction where in Q1 of ‘08, KPN Mobile International demanded a reduction in the margin that we charged them on the business. And they demanded a reduction from, if I remember correctly, maybe 15 percent to 11 percent. So almost a quarter of the profitability went out.


A couple of quarters later, E-Plus, the mobile entity in Germany, demanded, also, that we reduce our markup on the traffic. That reduced from 12 percent to eight percent. So four percent on 12 —




this is like a third reduction in profitability on that stream.


Subsequently, Base demanded the same reduction. So it seemed to me that there is a kind of a relentless effort to just push the margins from our business, and essentially, moving it into other KPN entities.


Q         And when did iBasis first receive pricing pressure from the KPN Mobile affiliates?


A        In Q1, ‘08.


Q         Within weeks of closing?


A        Yeah, within a few weeks of closing.


Q         And did you receive all the traffic you were promised?


A        No. We were promised all the traffic from KPN and its affiliates. KPN has a mobile operation in Belgium called Base, and we have never received the total traffic from Base. My understanding is that from the beginning, and through now, despite all of our efforts to get all this traffic, we are still only getting 75 percent of the traffic from Base.


I also believe that there is another entity called KPN Belgium that also is not giving us




all of the traffic. And not only that, they also engaged in wholesale operations that is directly competitive with our business.


Q         In your opinion, was KPN in compliance with its promises and obligations at this time?


A        KPN was complying with some of the obligations, and it was not complying with some of the other obligations.


Q         How were they not in compliance?


A        Well, they are not giving us 100 percent of the traffic from the mobile entities. Forcing us to reduce our markup on traffic is not in line with the promises that the business would run with the same type of profitability that it had before the transaction.


THE COURT: Can I — it would be helpful to me if you focus in on whether these are oral assurances, if I — if I’m saying — if I’m hearing these as promises, are these basically assurances that were made during the negotiations? If they were, who specifically said them?


MR. OFFENHARTZ: Certainly, Your Honor.


THE COURT: As contrasted with




something that is in writing.


MR. OFFENHARTZ: Certainly, Your Honor.




Q         Mr. Gneezy, the promises and assurances that you have been discussing, were those oral assurances?


A        They were oral assurances. I got more comfort, as I said, looking at forecasts. And also, in particular, when we jointly filed our proxy statement in closing the transaction, KPN specifically identified traffic streams that were — what they called “not market conformed,” meaning IDD-out was at the high margin. We performed that profitability out of our proxy.


And at no time did KPN say the mobile traffic is not market conformed and we need to perform it out, because it’s running, somehow, at excessive margin. That also confirmed to me my understanding of the oral promises.


I don’t have a promise in the contract. That was a long negotiation. I cannot identify the specific person in KPN. But we were negotiating with executives at KPN. It’s not that




some underling at some lower level made assurances to me.


Q         Mr. Gneezy, the obligation regarding 99 percent of the traffic flowing to iBasis, that is in the framework services agreement, isn’t it?


A        Yes. That is both in the description of the business that we buy — it says this business carries 99 percent of the traffic from the mobile entities. And also, in the discussion of that traffic further in the service agreement, it says that we will get 99 percent of the traffic. And there is some close associated with this that allows for some last bid process for some, I think, extraordinary situations that are not really described in the contract. So 99 percent is definitely part of the contract.


Q         Indeed, Mr. Gneezy, when KPN expected and wanted to have price reductions, it knew how to draft that and put that in a contract?


A        They definitely did. On the IDD out, since they wanted a reduction in that markup going over time, they specifically negotiated it in the contract, to say at what year, at what percent. So they definitely know exactly how to negotiate




reduction in markup going forward. So they did it on the traffic of IDD out, and they didn’t do it on the traffic — on the mobile traffic.


THE COURT: Did you have an objection?


MR. McATEE: I thought it was leading, Your Honor.


THE COURT: It was. It was clearly leading. We will allow it, but let’s —


MR. OFFENHARTZ: Certainly, Your Honor.


THE COURT: A direct format.


MR. OFFENHARTZ: Certainly, Your Honor.




Q         Mr. Gneezy, please, let’s look at JX 212. Do you recognize this e-mail, Mr. Gneezy?


A        Yes, I do. This is an e-mail from me to Gert-Jan Huizer, one of our employees.


Q         What is this e-mail discussing?


A        This e-mail is after I found out that Gert-Jan Huizer, who was one of my employees that came to me through the transaction with KPN, used to work with KGCS before, has granted KPN Mobile that price reduction in the first quarter of ‘08. That decision,




to grant them that reduction, did not come to my approval, and this message tells him that that has a big impact on the profitability that we make on this business, about $2 million a year, and that I would like to bring it up to Eelco and Joost, who are two of my directors sitting on the iBasis board, and to the whole iBasis board, in trying to reverse that situation.


Q         Let’s also take a look at JX 183. Do you recognize this e-mail, Mr. Gneezy?


A        Yes, I do.


Q         What is being discussed here?


A        This is discussing the pressure that we get from E-Plus to reduce the markup on the traffic that we get from them.


Q         And who did you send this e-mail to?


A        I sent this e-mail to Eelco Blok and Joost Farwerck. They are my two directors on the iBasis board representing KPN, and copying Gordon VanderBrug, who is the cofounder of the company, executive VP, and a board member of iBasis.


Q         What were you hoping to achieve by sending this e-mail?


A        I was hoping that my KPN directors




will intervene inside KPN on our behalf, and make sure that we continue to get the traffic from the mobile entities at the same type of business arrangements that we had before, and not reduce that margin flow going forward.


Q         Okay. Mr. Gneezy, let’s shift gears to October. Did there come a time when the KPN board of management got involved in the pricing and traffic disputes between iBasis and the KPN Mobile affiliates?


A        Yes. The KPN management board met to decide on the pricing that we give E-Plus.


Q         Can you please turn to JX 188, Mr. Gneezy? What is this document?


A        This document is from the chief financial officer of KPN, and a member of the board of management of KPN, informing me and others that the KPN board ruled that we have to reduce our price on the KPN Mobile — on E-Plus, from 12 percent to eight percent, retroactive to October 1, ruling that as of the beginning of the following year, we have to further reduce it to seven percent, which is unprofitable for us to do; further ruling that we have to give E-Plus a most-favored-nation status, meaning that we have to give them the best price we give to




any third-party entity that is using a similar volume of traffic.


So, you know, this was really a shock to me, that — the KPN board has no authority to rule on iBasis. We are not a wholly-owned subsidiary of KPN. We have minority stockholders. It’s inconceivable that the KPN board will meet to rule on what prices we have to give KPN entities.


Q         And how else did — how did iBasis respond to the KPN board of management’s decision to arbitrate these disputes and issue this ruling?


A         We obviously supported their investigation and provide them their input, to do their investigation on the board.


You know, I asked for a meeting with Stan Miller, that runs the KPN Mobile entities. We eventually acquiesced to the eight percent reduction, retroactive to October 1, but we refused further reduction to seven percent, and we refused giving them MFN status.


Q         What did the KPN board of management ultimately do?


A         The KPN management board left the situation at the eight percent margin, so essentially




taking a quarter of the profitability out of what we did before. But they did not enforce those other provisions. They also did not force Base to give us the balance of the traffic.


Eventually, when we offered them the eight percent, the price list represented eight percent margin, we conditioned it on getting all the traffic from Base, but we never got the traffic from Base.


Q         Mr. Gneezy, I just want to hit a note of perhaps translation. You mentioned that you supported the investigation. Is that the word you meant?


A         We provided documentation as we were asked for it, the documentation. We provided the documentation.


KPN gets other information from us. They are a majority stockholder. They consolidate our financial results. When the board asks for internal information, we give them all the information.


Q         Let’s look at Exhibit — strike that.


Mr. Gneezy, did iBasis agree to implement all aspects of the KPN board of management’s decision?




A         No. IBasis did not agree to reduce the markup to seven percent. And we did not agree to give the most favorable nation status. We agreed, for corporate benchmarking arrangements, that we can look at data available from industry groups, to determine that our costs are in line, but we did not agree to the seven percent and the MFN.


Q         Thank you. Let’s look at JX 132. Mr. Gneezy, what is this document?


A         Sorry. I haven’t found it yet.


Q         The fourth tab in.


A         This is a presentation that essentially, with minor modifications, I used twice, once as a presentation to the iBasis board, and once at my meeting with Ad Scheepbouwer.


Q         What was your goal in making this presentation?


A         In presenting this to Ad Scheepbouwer, my goal was to make sure that he understands the margin squeeze that his underlings are putting on iBasis, that it has very detrimental effects on iBasis and no, really, benefit at the overall KPN level.


So my objective was to elevate the awareness of those issues that we have, and get him to




intervene with his company to resolve the situation.


Q         Starting on page 17, is a presentation that is titled, “iBasis & KPN, A Win-Win Strategy.” Do you see that?


A         Yes, I do.


Q         And do you see on page 19 that you included a slide on page 19. Do you see that?


A         Yes.


Q         What is the first bullet point highlighting?


A         The first bullet point is highlighting specific action that KPN undertook to reduce our margin. The first line is actually a contractual agreement on the fixed traffic, but the other two highlight the reduction from — demand by KPN Mobile from 15 to 11 percent, the E-Plus reduction from 12 to eight percent, and making sure that he understands that for us to do more traffic means that we do more work. So to do more traffic and get less margin is — is not a sustainable business approach for us.


So I’m really just trying to make sure that he is aware of those actions by parts of his organization against iBasis that are not in line with our promises from before we did the transaction.




Q         And how did Mr. Scheepbouwer respond?


A         As far as I could tell, Mr. Scheepbouwer was very angry with me. I don’t think that very often he has underlings coming to his office and telling him that his organization is doing things that it shouldn’t do. He did not seem sympathetic to my plea, but that is how I read his reaction.


Q         Did you attempt to meet with any other senior KPN officials to discuss your concerns?


A         Yes. I attempted to meet with Stan Miller. Stan Miller is also on the KPN management board. He is, I believe, the CEO of KPN Mobile International, that runs E-Plus and Base. And much of the pressure the mobile entities, as I perceived it, was coming from him. I was hoping to meet with him, to try to find an amicable resolution for us serving his business.


Q         Did you schedule a meeting with Mr. Miller?


A         Yes. I scheduled a meeting with him. I flew from Boston to Brussels, to his office, with two of my senior executives. The three of us showed up for the meeting with Stan Miller that morning in




his office, but he refused to meet with me.


Q         He simply refused to meet with you?


A         I was livid. I have never had this in my whole professional career. I come across the ocean for a prearranged meeting, and he just wouldn’t meet with me.


Q         Mr. Gneezy, let’s turn to Exhibit JX 1272.


Strike that.


Let’s please turn now to JX 067. Do you recognize this document?


A         Yes. This is our current board-approved financial plan for 2009.


Q       Is outsourcing included in this 2009 plan?


A       In the 2009 plan, the existing outsourcing business is included, meaning our business with KPN and TDC. As has been our practice, those transactions that are bigger outsourcing transactions or M&A transactions, whose timing is hard to call, is — is not included in a one-year plan. Typically what we do is we close such a transaction, and we redo the plan based on the actual timing in the business we close, much like we did when we closed the TDC




transaction. The original plan for that year excluded TDC. That was in process. And then as we got it in and finalized, we did the plan.


Q         Mr. Gneezy, do you recall — do you recall that at some point KPN made a tender offer for the remaining shares of iBasis that it did not already own?


A         Yes.


Q         What was your reaction to the tender offer?


A         Well, I was very surprised. We had a close working relationship and a lot of interaction with many of the execs there. I was in the Hague, meeting with my KPN directors, just the Friday before they subsequently, on Monday, announced that they were going to launch a tender offer. So I was very surprised. I also felt that this was specifically catching us at a low point, as, you know, we just finished the integration. We were just getting ready to start growing again. We incurred all the costs of integration. We fixed up all the systems that we got from KPN. We got our footing going again. And this was really catching us at the very low point, and I was very surprised by that approach, overall.




Q         What did the company do in response to the tender offer?


THE COURT: Just so I understand. You didn’t receive any prior letter about an intention to make a tender offer? You just received the tender offer?


THE WITNESS: I got a call on Sunday, telling me that they are going to do a press release to announce that they are going to do a tender offer on Monday.


THE COURT: Thank you.




Q         Mr. Gneezy, did you receive — did iBasis receive a letter in advance of the formal SEC filing, indicating that a tender offer would be forthcoming?


A         I’m not really sure. The notification I got was in a phone call on Sunday. And subsequently, KPN put the press release out, that they intend to do a tender offer. I don’t remember if there was a specific letter.


Q         You don’t recall receiving — you don’t recall iBasis receiving a letter in advance of that, do you?




A         In advance of that phone call, we never received anything.


Q         What did the company do in response to notification that a tender offer was in the offing?


A         We put together a special committee of the board of directors, with independent directors. The special committee hired independent advisors, both bankers and legal. And the special committee started doing the work on evaluating the offer and formulating a response.


Q         What role did you play, if any, in evaluating the tender offer?


A         I supported the special committee in their operations. So we provided business data for them. We provided an updated five-year plan. They asked me to participate in some of their meetings. But the bulk of the effort they did in executive session, that I was not part of.


Q         Mr. Gneezy, did there come a point in time where iBasis prepared a five-year plan?


A         Yes. We did the five-year plan previously, in 2008, for example, for a full-day strategy board meeting. But we also, after the tender offer was announced — we got together with the




executive team to update and do a new five-year plan.


Q         Would you please turn to page four of the 2009 plan, which is titled, “Key P&L Assumptions.”


A         In the 2009 plan?


Q         Yes.


A         You mean the five-year plan?


Q         JX 171, the five-year plan.


A         Yes.


Q         Are you on page four, Mr. Gneezy?


A         I am.


Q         What are the bases for the assumptions that you make relating to trading? Do you see — can we pull that up, please?


There are three bullet points under “Trading.” Do you see that?


A         I do.


Q         What are the bases for the assumptions relating to trading?


A         If you look at the performance of international voice traffic, as compiled by experts like Telegeography, that tracks that business and publishes results, the volume of international voice traffic, or minutes, has historically grown at 14 percent compounded annual growth rate over more




than a decade, perhaps 15 years. Also, that study says that the average decline in average revenue per minute for the same time period has been seven percent.


So in making our assumption for the trading business, we took a slightly more conservative approach than the historical growth rate of the minutes, and we forecasted 12 percent compared to the 14 percent historical market growth. But we took the decline in average revenue per minute at full force, at seven percent.


So that is essentially based on historical numbers in the business overall, in the market overall. Our own business prior to the KPN transaction, of course, grew at a much, much faster rate than 12 percent per year.


The third bullet is based on our performance for the last 10 quarters or 12 quarters, in which our average — our average margin per minute stayed flat, even as the average revenue per minute went down.


So we figured that it’s reflecting our past performance in pricing traffic and margin per minute, full force on decline of the revenue per




minute, and a slightly lesser minute growth rate than the historical market.


Q         I now direct your attention to the retail portion of this document. Do you see that?


A         Yes.


Q         What are the bases for your assumptions related to retail?


A         In — the retail is perhaps ten percent of the business. It’s not the biggest part. Overall, through the forecast period, our retail business is forecasted to be flat in gross profit.


We arrived at that by having a much more conservative view on the minute growth. The average revenue per minute decline is following a different dynamic, the international traffic overall, because we sell those $2 or 5-dollar cards. So we have more leeway on how we price that traffic. And in that business, we assume that the margin percent will stay flat through the forecast period, as it has been in Q2 ‘09.


Q           I now direct your attention to the column, “Existing Outsourced (KPN Fixed).”


What are the bases for the following




assumptions relating to existing outsourcing KPN fixed?


A         We forecast here the business from KPN in two sections. One is the existing outsource KPN fixed. This one, we believe that the decline in fixed line traffic that KPN experienced is moderating, and we will now have flat performance for the remaining of the period. On the margin, we follow the negotiated stepdown to 35 and 30 percent. After that time period, the contract does not specify the exact margin. It said it will be agreed on. In some of the KPN forecasts, they had the thing staying at 30 percent for another year.


So to be more conservative, we brought it down to 25 percent, which is below the final negotiated price, and then kept it at 25 percent for the remaining period.


Q         The next item is, “Existing Outsourced (KPN Mobile entities).” Do you see that? What are the bases for the assumptions relating to existing outsourced KPN Mobile entities?


A         The KPN Mobile entities have experienced a good growth in the last few years, and we believe that they will continue to grow. We




forecasted a four percent growth in the international traffic they generate, and that we will then stabilize on the existing margin percent of the business from them.


Q         The next item is “New Outsourced.” Do you see that?


A         Yes.


Q         What are the bases for the assumptions related to the new outsourced?


A         The new outsourced is a bit more complicated to forecast, because it could end up with specific transactions, the time of which is hard to determine. As I mentioned before, we believe that the market now is ready for outsourcing. In addition to our own transactions in ‘08, there were two other transactions, big transactions in the market. We know that we have a good pipeline. So with — the approach that we took here is rather than try to forecast some very big transactions, we forecasted a series of small transactions, essentially one-and-a-half billion minutes a year, every six months.


Just for comparison, the TDC transaction that we did was about 2 billion minutes a year, and we integrated it in six months. For further




reference, one of the transactions that we bid on in 2008 was for 20 billion minutes a year. So one transaction like this would exceed all of the new outsourced business forecasted here for all of the five years.


Another transaction we bid on in 2008 was for 8 billion minutes. So it was like three years of that forecast. So I feel that the forecast is reasonably conservative. It’s just hard to call the exact timing. On average revenue per minute, we assumed a similar decline to the historical decline in average revenue per minute in the market overall.


The same assumption we did in trading. And we also assumed that the margin per minute would stay flat, at a slightly lower rate, again, just to be conservative on the contribution from that new outsourced business.


Q         The last bullet point there relates to margin minutes flat. What was the assumption behind that?


A         Much like our experience in the business overall, our average margin per minute has been flat; small fluctuations, but essentially flat for several quarters. And we believe that we can




continue to maintain that kind of performance, with flat average margin per minute, but the actual number that we put here is lower than we put in trading.


Q         So that is a conservative number?


A         More conservative approach, yeah.


Q         Mr. Gneezy, iBasis was recently awarded an outsourcing deal, wasn’t it?


A         Yes. We were awarded a preferred supplier from a big mobile operator in the Middle East. We haven’t finalized all the negotiations, so we don’t know exactly how much traffic we are going to get from them. Overall, they have, if I remember correctly, about 3 billion minutes a year. So we expect that they will award us some portion of that 3 billion minutes a year. But we are in negotiation for the contract. We have been notified that we have been selected, and we are negotiating the contract.


Q         How does that award make you feel regarding the assumptions behind new outsourced in your five-year plan?


A         I feel very good about the five-year plan overall, and the new outsourced in particular. We have that transaction, essentially, just going through final negotiation. We have many transactions




in the pipeline. They continue to show up. As I mentioned before, recently we were invited by one of the large mobile networks in the U.S. to offer them an outsource solution, and a major internet company that is launching voice services. So I think that the market trend support is — the specific transactions we are engaged with, or have been engaged with, support this; this recent award that we got supports it. I feel very good about that forecast.


Q         Could you briefly discuss the assumptions behind “Opex & other,” that is listed on the five-year plan?


A         Yes. We have a lot of automation in our system. We have a lot of systems and business intelligence and routing systems and a lot of automation. Our operating expenses do not have to grow at the same pace as the gross profit is growing. But nonetheless, as we get bigger and bigger, we need to put some additional operating expenses.


So for the forecast year here, we layer an additional $10 million in operating expenses a year. I think it’s a little heavy on the early years and more in line for the out years. So I think it’s a more conservative approach on the increase in




operating expenses.


The second line is just showing that the operating expenses per minute is experiencing a decline as we are layering up operating expenses slower than the minute and the gross profit is growing.


The third line has to be with — has to do with how we recognize profits in our two main entities and in the U.S. and in the Netherlands.


Part of the rationale of the transaction with KPN was that we will take the network that we bought from KPN, that is based on this older technology, and move it up to the new IP-based technology. In so doing, we are using more and more of the original iBasis technology that was developed here in the U.S. We feel it is appropriate for us to start charging, internally, a technology royalty fee of two-and-a-half percent on our Netherlands operation. This is the business rationale for it.


The impact, as you see in the last set of assumptions, is on tax. We are paying tax in the Netherlands at the tax rates. We assume that we are continuing to pay it at the same tax rate. And then the profits that we generate in the U.S. will not




require tax payment, as we have net operating loss carry-forward on the U.S. entity. So that will shield our tax in the U.S.


Overall, those assumptions help us then flow how much tax we are going to layer in the plan for the various years.


Q         Okay. We are going to shift gears now, briefly, to JX 1200. Would you please turn to that exhibit?


A         Yes.


Q         What is this document?


A         This is the tender offer.


Q         Would you turn to pages 25 and 26 of the tender offer, please? First to page 25. Do you see the paragraph entitled “Parent Projections”? You do see that, don’t you, toward the bottom?


A         Yes. Yes.


Q         On page 26, provides a series of assumptions for the parent projections. Do you see that, as well, please, a series of bullet points?


A         Yes, I do.


Q         Could you please give me your views on the assumptions behind the parent projections relating to outsourcing?




A         Yes. I think that the first bullet, that says we will do no new outsourcing deals, is completely unrealistic. It’s not in line with market trends. It’s not in line with the strategy that KPN and iBasis agreed on before we started the transaction and through the transaction. I don’t know where this assumption is coming from. It’s not consistent with anything that I have ever discussed with my KPN directors, and — I don’t know. I think it’s a completely unmerited assumption.


Q         Okay. Could you provide — I’m sorry. Please continue.


A         If I look at the next set of assumptions, on traffic and price per minute, and all that, I am — I am completely mystified by this set of numbers. That set of numbers doesn’t seem to relate to any third-party market study that I have ever seen.


This rate of decline in growth rate perhaps assumed that the downturn in the world economy is indefinite and nothing will ever recover. The assumptions on aggregate price and cost, I just don’t understand them. They don’t even seem to be self-consistent between them, as they switch around. And I think if — if I look at the resulting numbers




that are on page 25, it seems to me ultrapessimistic. It’s like the-sky-is-falling kind of projection. So you know, I don’t —  I don’t really understand what leads to that set of assumptions.


Q         So in conclusion, what is your view of the parent projections?


A        I think that they are ultra-low-ball projections that are not taking into account any dynamics that I think is indicating how that business area is operating, the industry, and our own performance.


MR. OFFENHARTZ: Okay. Thank you, Mr. Gneezy.


I will now turn you over to my adversary.


THE COURT: You hit the break pretty much right on the money. It’s 10:45. We will come back at 11:00 o’clock.


MR. OFFENHARTZ: Thank you, Your Honor.


(Recess at 10:44 a.m.)




O.        Gneezy - Cross


(The proceedings resumed at 11:03 a.m.)


THE COURT: You may proceed.


MR. McATEE: Your Honor, we have a witness book, if that would help the Court.






Q.        Mr. Gneezy, I want to start with your testimony on direct about — I think you said iBasis is in a great place; right?


A.       Yes, I did.


Q.        And that’s what you generally believed; true?


A.       Yes.


Q.        And I wrote down a number of things you said. You mentioned that there are outsourcing deals in the pipeline and that you had good quarterly results this year and that integration was behind you and you had a real positive outlook for the future; true?


A.       True.


Q.        And I’m also right, sir, that that entire story, you’ve been out telling your shareholders about this tender offer; right?




A.       We’ve been communicating to the stockholders, yes.


Q.        And in press releases and 14D-9s and conference calls and private meetings with investors and PowerPoints you showed them, you’ve been doing your best to communicate your story that you’re in a great place; right?


A.       I’ve been doing my best to show them that — the shape of the business and the potential future of the business, yes.


Q.        And in those communications, your criticisms of the parent projections used in the tender offer, you made those criticisms; right?


A.       Yes. I present them. I didn’t compile them all, but I present them.


Q.        Let me switch to your claim of oral assurances during the contract negotiations in 2006 and 2007.


Am I right, sir, that your assertion is that during the negotiation somebody from KPN at some meeting during the negotiation said to you orally that the profitability of the traffic from KPN Mobile affiliates would be similar to the historical performance; is that your claim, sir?




A.       That’s my understanding, that all the discussion, not the particular meeting, but — was the premise of us getting the mobile business.


Q.        And your claims that KPN has guaranteed this similar profitability for this aspect of the business is regardless of what happens in the economy or what happens in market prices; right?


A.       Similar dynamic. We didn’t have any discussion of what happens in the economy. That was not — it was not — we weren’t negotiating that for a contractual thing. They told me this is how the business is going to run.


Q.        But in any event, is your understanding of the promise of similar profitability that there can be Lehman bankruptcies, there can be worldwide recessions. Doesn’t matter. You’re going to get a similar profitability for that aspect of the business. Is that what was promised to you, sir?


A.       Similar profitability, yes.


Q.        And it has no expiration date, does it? You get that forever.


A.       For 10 years.


Q.        Someone — when they were making the promises, whoever said it said 10 years?




A.       No. The contract is for 10 years.


Q.        And even though both KPN and iBasis were assisted by a lot of lawyers and negotiated for two years, executed a series of written agreements, you never papered that particular commitment in writing, did you?


A.       Not in the merger agreement, no.


Q.        Well, not any agreement; right? You didn’t get it in writing.


A.       I got historical numbers that weren’t mark to market. We filed a proxy together. We looked at forecasts. Everything that I looked at that is part of making a business decision was consistent with that. I didn’t get it in a particular contract, but I think that historic numbers were — the nonmarket conform things on mark to market means that everything that is not mark to market is mark to market. It’s competitive pricing and they will continue like that.


Q.        Over these many years of negotiations with a bunch of lawyers, meeting after meeting, no one ever said “We might want to put that in the contract”; right?


A.       Right.


Q.        You can’t identify a specific meeting




at which the promise was made; right?


A.       That’s correct.


Q.        You don’t have any notes documenting the promise from any meeting where a KPN representative supposedly said something about similar profitability; right?


A.       I don’t — I’m sure that the process of getting from just selling us the third-party business to including the mobile business and then the — the IDD out, I’m sure there’s — that there’s track record of that.


Q.        Do you have any notes from any meeting that people wrote down “KPN representative said similar profitability”? Do you have any of those notes?


A.       No, I don’t.


Q.        Your lawyers brought a bunch of boxes with them. Is there any document in any of those boxes where you’re going to get similar profitability is written down contemporaneous to the deal?


A.       No, I don’t.


Q.        And you can’t name a specific person who said it; true?


A.       I did say that, yes.




Q.        And you can’t recall the exact words; right?


A.       Right.


Q.        And at the time of the deal you didn’t send your board or CFO or anyone else at iBasis some kind of memo we got a promise about similar profitability; right?


A.       Right, I did not.


Q.        All we have for that promise is your word; isn’t that right?


A.       I think it — it wasn’t just my understanding that we were getting all the mobile business. The mobile business is papered in the deal. We didn’t get the mobile business just to suck up the margin from it immediately. I don’t have a paper proof that — that this was said, but I think it was part of the premise of our transaction.


Q.        And you’re the only witness from the iBasis side who’s going to come here and testify that that kind of an oral promise was made at the time of the deal; right?


A.       I — I don’t know that.


Q.        You mentioned on your direct, Mr. Gneezy, a — a framework services agreement, and




that’s the written contract that governs the relationship between the KPN Mobile affiliates and iBasis; true?


A.       We have — we have two agreements. The SPSA, the stock purchase and sales agreement, and the framework agreement.


Q.        The framework agreement was negotiated specifically to govern the relationship between KPN Mobile affiliates and iBasis; right?


A.       And — and many other things.


Q.        And, in fact, in 2009, March, you personally executed a new framework agreement that governed that relationship; right?


A.       Right.


Q.        And once again, in that contract there’s no mention whatsoever of any similar profitability promise; right?


A.       Yes.


Q.        And at the time you executed it in March of 2009, you already knew that some kind of price squeeze was going on because you had been living with it for a year; right?


A.       Right.


Q.        And in that March 2009 contract you




agree to and executed language that expressly extinguished any allegation of a prior representation made back at the time of the original deal, didn’t you?


A.       Probably. I don’t recall every clause in that contract.


Q.        Let me show you —


A.       I wasn’t the chief negotiator on this.


Q.        Let me — let me call up to the screen JX-1138, page 9. This is the March 2009 FSA that you signed. I’m focusing on Section 13.5.


A.       Sir, what page again?


Q.        Page 9.


A.       Yes, I see that.


Q.        When you signed this contract, you understood the purpose of that clause was to make sure that no one would come back in court later and say there was an oral assurance from several years ago; right?


A.       I don’t know. I’m — I’m not a lawyer opining on the legality of what that clause says.


Q.        In this contract, sir, it’s true that — that for the KPN Mobile traffic, iBasis is only a preferred supplier; right?




A.       What do you mean “only”?


Q.        The contract says there is a preferred supplier relationship between the KPN Mobile affiliates on the one hand and iBasis on the other.


A.       Right. We are a preferred supplier.


Q.        And in contrast to that for the fixed business, the landline business, this contract says for that, you’re exclusive; right?


A.       Right.


Q.        And that means if you’re just preferred, you’re not going to get a hundred percent. You’re not the exclusive.


A.       We get 99 percent.


Q.        And you mentioned on your direct that this contract contains a — a — a last bid mechanism. I’ll show it to you. It’s JX-1007, Section 3.2 on page 4.


MR. McATEE: Matt, can you blow up the whole — the prior section, also, so it starts with “preferred”? Yes.


Q.        And this is the section, is it not, Mr. Gneezy, that lays out the preferred suppliership between the KPN Mobile affiliates and what at the time was KGCS; right?




A.       Yes.


Q.        And the same language is used for the iBasis contract that got executed in March of 2009; right?


A.       Yes.


Q.        And this establishes in Section 3.2 a last bid process pursuant to which KPN — I’m sorry; KGCS and later iBasis must match the best bid in all qualitative and all quantitative aspects in order to win the business; right?


A.       For new mobile services.


Q.        You agree with me for new mobile services, that’s the operative term —


A.       Yeah.


Q.        — for this contract; true?


A.       Yes, for new mobile services.


Q.        And, therefore, under the express terms of this agreement that you personally signed, KPN has the ability to shop for better prices and take its traffic elsewhere; true?


A.       The — the disclosure you’re showing me is for new mobile services. I don’t think they have — that doesn’t mean that for existing mobile services they have the right to shop.




Q.        Under — under the agreement between the parties, KPN Mobile and iBasis, KPN has the ability and right to shop for better prices and take its traffic elsewhere if you don’t match the price; isn’t that true, sir?


A.       Well, this is not what this paragraph says. It says for new mobile services they have the right. You’re imputing that right to all existing services.


Q.        Let me take you to the plaintiff’s opening brief in this case at page 9. Is this something you saw, the opening brief, before it went in?


MR. McATEE: Can you blow up that language at the top, Matt?


A.       Where are we looking?


Q.        At the very top of page 9 of the — maybe it’s easier if you looked on the screen.


“KPN had the ability, in effect, to shop for better prices and take its traffic elsewhere ....”


Do you see that?


A.       I see that, yes.


Q.        Is that a true statement, sir?




A.       I — I think that’s true. I’m — I’m not a hundred percent clear if that’s really only applying to new services or that applies to all the existing services; but in any case, the process has never been followed up.


Q.        Yeah. The next clause, “KGCS was provided a ‘first bid/last call’ option to retain such traffic if it matched any better bids.”


Your lawyers are saying that there’s a right to shop; right?


A.       I — I’m not sure that they have the right to shop existing business; but in any case, that process has never been invoked. They’ve never given us full details or an RFQ that they sent another party, the full details of what quality demands they — they ask for, the full quote that they got. And if they have that right, that clause was never invoked.


Q.        I want to put that all to one side. Let’s assume they gave you all the process you wanted, gave you all the bids you wanted, gave you all the prices that they got from competitors so that you were perfectly happy with the process, they go through that process. KPN has the right to shop, and they can take




their business elsewhere if you don’t match the price. That’s what this says; right?


A.       I — I’ll repeat what I said before. It’s the thing that we looked at, said for new services. So, you know, I’m not sure if they really have that right or they have this right just for new services.


Q.        And if I have a right to shop, I haven’t promised you a hundred percent of my business; right?


A.       The description of the business that they’re selling us and the process says that they’ll give us 99 percent of the mobile traffic.


Q.        Do you recall — I think you testified that you learned in September of 2008 that E-Plus, one of the KPN Mobile affiliates, had — had notified iBasis about moving some of its traffic away; right?


A.       Yes.


Q.        And in connection with that process, you were given a chance for a final reasonable and competitive bid to keep the E-Plus traffic; true?


A.       Not true. I was not given all the process and all the information to make that final bid.




Q.        You — you were given a chance to make a final bid; true?


A.       I was given a chance to make a bid, but it did not follow any of the process. I didn’t —I didn’t get any of the information on what was I bidding and what — what is the competitive bid.


Q.        Did you make a bid? Did you put in a bid, sir?


A.       We, under intense pressure from KPN, gave a new price list that took away a big chunk of our profit in trying to retain that traffic.


Q.        And that was your offer, wasn’t it? You made an offer?


A.       I made an offer under duress.


Q.        And that offer was accepted by the KPN board; right? Your own offer got accepted?


A.       Not accepted. They — where is the hundred percent of the base traffic that is associated with our proposal? They — they accept the — the part that is good for them, that reduces the price, without giving me the other part that I need for them to comply with the contract and give me a hundred percent of the traffic.


Q.        Did you — did you make an offer of




eight percent margin? Was that part of the offer?


A.       Depending on getting the full traffic from Base.


Q.        Was the eight percent part of offer accepted by the KPN board?


A.       Yes.


Q.        And one of the things that the KPN Mobile affiliate asked for in connection with that whole process was retroactivity all the way back to the first quarter of ‘09; true?


A.       Yes.


Q.        And the KPN board rejected that and ruled in favor of iBasis on the retroactivity point; right?


A.       I don’t know what you mean by in favor. I mean, they — they — Stan Miller is asking them to cut my arm off, and the board just decided to cut my hand off. This is not favorable. This is just less disastrous. They rule on me to lower the price and to rule it retroactive to October 1.


Q.        You asked E-Plus to remove their demand for retroactive correction on prices, and on that point the KPN board agreed with iBasis; right?


A.       Yes.




Q.        And then there’s an aspect of that ruling that beginning in 2009, iBasis would offer E-Plus a competitive price that reflects a seven percent margin; right?


A.       Yes.


Q.        And you immediately raise your objection to that to Mr. Blok; right?


A.       I did.


Q.        And that part of the ruling, the seven percent ruling, it was never implemented; right?


A.       Right, never rescinded and never implemented.


Q.        Never applied in any KPN traffic; true?


A.       True.


Q.        And is it also a true fact that in — in the complaint that you personally verified in this case there’s no mention of the fact that the seven percent ruling was never applied to any traffic; right?


A.       It’s irrelevant. They’re trying to completely destroy my business, and then they — so they reduce 25 percent of my profitability and they don’t apply the — the other last coup de grace and




that I should say is a concession that they’re giving me? That’s not the concession. This is just — they didn’t beat us as hard as some of them wanted to beat us. This is not the concession. It’s not in our favor.


Q.        You left out the fact that the seven percent was never implemented because you wanted to leave the impression on a PI motion, an injunction motion —


A.       I don’t know what is a PI motion. I left it out because it’s not relevant. They have no authority to rule on me. The result of the whole process was a disastrous reduction in profitability. And the fact that some of the items were not eventually implemented is not a concession to me.


Q.        It’s also true, is it not, sir, the eight percent part of the ruling of your offer was accepted even though that eight percent didn’t match how low E-Plus had from a competitor; right?


A.       So they said.


Q.        And a few days after this KPN board ruling, you — you were angry enough that you raised it to your three independent directors; right?


A.       Right.




Q.        You wrote them an e-mail and you attached the ruling.


A.       Right. The — the whole process of the ruling is outrageous. They — they — I’m not a wholly-owned subsidiary of KPN. How can its board issue rulings on what I should do and — and take the profitability on this stream of traffic down to eight percent?


Q.        I just asked if you sent them an e-mail.


A.       I did.


Q.        Okay. And in that e-mail you explained to your — the seller committee, the three independent directors, that even though you didn’t like this price pressure and it was costing money, that it was permissible under the contract; right?


A.       There’s — yes, I did say that. There’s some uncertainty about what is really permissible, but that process was not followed. Even if it’s permissible, it was not followed. We did not get full information to let us do a competitive bid. We didn’t get the RFQ that they sent. We didn’t get the proposal that they got back. We — we — this —this process, even if permissible, was not followed.




Q.        You told your board after this ruling that you didn’t like the price pressure from E-Plus, but the price pressure was permissible under the contract; isn’t that true, sir?


A.       Not the process; that they — maybe I said that they could get a competitive price. I — I don’t think that putting pressure on me to take the traffic out is — is — is right.


Q.        Let me — let me show you the demonstrative exhibit I created to facilitate this. This is from that e-mail. The actual e-mail is JX-1108. And this is Demonstrative-21. It’s on the screen.


You write, “We have been under pressure from E-Plus, KPN’s mobile operation in Germany, to meet prices offered to them by a 3rd party carrier or lose their traffic.


“Even though this is permissible by the SPA, we felt that this is too onerous and will significantly diminish the value of the business we bought from KPN.”


Those are the words you wrote; right?


A.       Right, but that process was not followed.




Q.        Those are the words you wrote.


A.        Yes.


Q.        Right?


A.        Yes.


Q.        And the “this” in the clause “this is permissible,” refers to being under pressure from E-Plus to meet prices offered to them or lose their traffic; right?


A.        There are many ways to meet the price. They could give me time to go reduce our costs so I can meet the price. This doesn’t mean that like they automatically just give me some word that they have a better price and take the traffic. There was no process here. They didn’t follow a process.


Q.        When you’re describing what is too onerous, “this is too onerous and [this] will significantly diminish the value of the business we bought,” the “this” in all of those places is referring to the price pressure that’s being put on you; isn’t that right?


A.        “this is too onerous,” I don’t know. It could refer to losing 25 percent of the traffic.


Q.        That’s the price pressure. Match my price or you lose the traffic; right? That’s what was




too onerous.


A.        Yes, but I was not given the opportunity to match that price in any reasonable process.


Q.        And — and the “this is too onerous” is the same “this” that is permissible. That’s the way that sentence reads, isn’t it?


A.        Losing the traffic would be too onerous.


Q.        And in your — in your entire e-mail, which is JX-1108, if you want to refer to it, when you raised this price pressure with the board right after this ruling, there’s not one word in the e-mail about any oral assurance you received back in 2006 or 2007, is there?


A.        No, it’s not stated in the contract and — in the e-mail.


Q.        And it’s not —


I’m sorry. Were you done?


A.        Yep.


Q.        And there’s not a word in this e-mail about being promised a hundred percent of the traffic; right?


A.        Right.




Q.        So when you raised this issue to your board at the very time and place where you would be expected to tell them “I got a promise back then for a hundred percent. I got a promise back then that it would be” — “they wouldn’t squeeze me,” in the very communication where you’d be expected to raise that, you said nothing about it; true?


A.        At that time I’m not ready to assert violation of contract, breach of contract, legal accusations. I’m — I’m working with my biggest customer, the — the company that sits on my board owns 51 percent of my stock. I’m not trying to turn it into a legal dispute. The last thing I want this relationship to end is right here. I’m a business person. I’m trying to resolve things in — in a business way. Why would I start alleging legal allegations in — in an e-mail?


Q.        This e-mail wasn’t sent to KPN, was it? This is your independent board, the three directors. Right?


A.        Here we are, looking at an e-mail.


Q.        Yes, JX-1108.


A.        I know. So —


Q.        You don’t — you don’t cite any — any




animosity with KPN to tell your independent directors that you had a promise back in 2006, if that was true. Would it?


A.        I don’t assert legal allegations in — in e-mail if I’m not ready to raise those allegations.


Q.        And you showed a couple of exhibits on direct examination where you learned about an issue from one of your employees and you learned about the E-Plus issue. And I don’t have time to point them to you, but you didn’t — in those e-mails you didn’t say anything about an oral assurance, either, did you?


A.        No. I just said it was completely inappropriate for him to take this action.


Q.        And on your — on your direct you showed a page from a board presentation you gave in February of 2009.


MR. McATEE: If I could get JX-132 on the screen, page — let me start with page 19.


Q.        Now, this is the page you testified about on direct; right?


A.        Yes.


Q.        And what you didn’t say anything about is the prior page, which is page 18. If I could go to that. And this is — this is a slide you prepared;




right? You write your own slides.


A.        I prepared some of this. For example, better than plan is from direct requirement from my KPN directors to say that. I’m preparing this, my own slides, but it’s within the context of working with people.


Q.        And this is a historical comparison of KPN and outsourcing, including mobile traffic between results in ‘07 versus ‘08; right?


A.        Right.


Q.        And you write at the bottom, “In compliance with SPA & Framework Agreement.” Do you see — do you see those words?


A.        I see those words.


Q.        And when you wrote those words that — “In compliance with SPA & Framework Agreement,” when you wrote them, you knew full well that there was a squeeze on; right?


A.        There was a squeeze. We weren’t getting all the traffic. So I was just not trying to make legal allegations at this point. I’m trying to resolve issues with my biggest customer and — and my biggest stockholder in an amicable business relationship. I’m not trying to elevate this to a




legal dispute.


I use this presentation to go to the CEO of KPN. I think very bold activity to go and — and put all this in front of him. I wasn’t ready to just tell him that he’s in legal violation of the contract.


Q.        And what you told him instead was that he was in compliance with the share purchase agreement and the framework agreement; right?


A.        I — I have this line on page 18, but on page 19 I clearly go through all the details of what is not appropriate.


Q.        I’m done with that exhibit, sir. Thank you.


Is part of your job responsibilities, Mr. Gneezy, to keep shareholders informed of risks and problems at iBasis?


A.        Yes.


Q.        That’s part of your job?


A.        Yes.


Q.        And do you recall that in March of 2009 a significant shareholder wrote to you specifically about whether iBasis’ transactions with KPN might be having a negative effect on iBasis?




A.        Yes.


Q.        And you recall writing him a response letter in April?


A.        Yes.


Q.        And you recall that that response letter written to this large shareholder was — was glowing about KPN, wasn’t it?


A.        I wouldn’t say it was glowing. It was highlighting from publicly-available information, filed information the parts about the transaction that were providing benefits.


MR. McATEE: Can I have Demonstrative-16 on the screen, please?


Q.        This is from that letter, which is JX-1141. One of the things you told Mr. Lloyd Miller in this letter was that “the $43 million in gross profit from Outsourcing as a percentage of revenue compares favorably with the margins generated by our other revenue streams”; right?


A.        It’s true, but I also paid 33 — $300 million for that privilege. I’m highlighting here all the beneficial aspects of the KPN transaction. I never alleged that none of the transaction were beneficial. It just do not — it




doesn’t generate all the benefits that it should have generated and — and were promised.


Q.        My point is, sir, that this was a shareholder who was specifically seeking negative information about KPN; right? He sent you a letter asking you specifically “Has KPN done things that has hurt iBasis?” Right?


A.        Yes.


Q.        And in responding to that letter, you point out these favorable things, and you don’t say one word about any squeeze being on or them being not in compliance with any contracts; right?


A.        Right. I respond with publicly-available information, and I wasn’t about to give him selective disclosure. And I’m just telling him here are all the aspects that are beneficial to our business.


Q.        And, in fact, prior to the tender offer being announced, you never alerted any iBasis shareholders that KPN was not in compliance with any contracts or had been putting on a price squeeze; right?


A.        Right. I never alleged legal allegations against the KPN before they launched the




tender offer, that’s right.


MR. McATEE: I’m done with that exhibit. Thanks, Matt.


Q.        Does — does iBasis report its results and profitability to KPN on a monthly basis in something called monthly management letters?


A.        Yes, it does.


Q.        And in that analysis you break out fixed traffic versus mobile traffic; right?


A.        Yes. We break various streams there.


MR. McATEE: Can I have Demonstrative-19 on the screen, please?


Q.        I believe the bottom graph is from the September 2009 management letter. And it refers to in the middle of that bottom graph a KPN outsource, other. Do you see that, sir?


A.        I see that block, yes.


Q.        And that’s the KPN Mobile traffic from — from E-Plus and Base and KPN Mobile is within that breakout?


A.        Yes, but I think this breakout also includes other streams of traffic, like mobile data, which is not traffic, any transit, 50 percent margin. So it does include the mobile voice traffic, but it




also includes what we call a mobile matrix set of data services.


Q.        Those data services are tiny, aren’t they, sir?


A.        But they’re at 50 percent margin. I think that the actual margin on the traffic for that time period would be lower.


Q.        I asked if it was — if it was a — in terms of traffic, a small, modest amount of traffic.


A.        It’s not traffic. It’s big in terms of gross profit contribution to that — that block.


Q.        This says that for 2008, bottom right, the gross margin percentage for KPN outsource to other is 12.7 percent. Is that accurate, sir?


A.        For — for that breakout, that’s right.


Q.        For that breakout, the margin was 12.7 percent for all of ‘08. Yes?


A.        Yes.


Q.        Did you do any analysis of what that percentage would be if you took out that mobile matrix that you talked about?


A.        I — I have this in some other report. It’s not here. I don’t know what it will probably be.




I don’t know. Some points lower than that.


Q.        Do you know one way or the other whether it would go below 10 percent?


A.        I’m not — I’m not sure without looking at specific information on the traffic flows.


Q.        I think you showed the top part of this demonstrative in your direct exam, and that’s from the projections that got exchanged in 2007 that shows the 10 percent line; do you see that?


A.         Yes.


Q.         And those are annual projections; right?


A.         Yes.


Q.         And the gross margin percentage is 10 percent that’s shown for ‘08; true?


A.        True.


Q.        Do you know one way or the other whether or not in — for 2008 the — on an overall combined basis KPN’s mobile traffic gross margin percentage ever went below 10 percent?


A.        I — I am not sure. I think that — I think that the mobile traffic went down to perhaps 8 percent in one quarter. I don’t remember which quarter.




Q.        I’m talking annually. An annual — for 2008 on an annual basis, do you know if — if you take out the mobile matrix and you only do the Base and E-Plus and the KPN Mobile traffic whether or not it’s below 10 percent on a gross margin basis? Do you know?


A.        It — it — I don’t know for sure, but it could be slightly higher, perhaps.


Q.        And so you don’t know one way or the other if these — if these 10 percent numbers in the projections, even if they were promises, you don’t even know if — if they were ever broken; right?


A.        I don’t know about the projection, but I know about specific direct action that is forcing me to reduce the margin by a huge amount. Those are aggregate numbers. They include traffic from different entities. There’s a shift in mix between those entities. There’s a shift of mix of traffic to different designations. You can’t see everything in looking at — at one number on an aggregate thing for a whole year.


It’s clear that when I’m demanded to reduce the markup on my price list from 15 percent to 11, that that is squeezing my margin.




Q.        Before filing the complaint in this case and verifying it, did you do anything to determine whether or not, in fact, the KPN Mobile gross margin percentage for 2008 was above or below 10 percent?


A.        No, I didn’t do that analysis.


Q.        Thank you.


And I think you testified on direct that you now recognize that at the time of the deal, if you run the math, you were told that in terms of margin per minute, that the profitability of this business would go down over time; right?


A.        That’s — that’s true. I recognize that now.


MR. McATEE: Can I see the Demonstrative …20?


Q.        You said — you said on your direct you — you had a new awareness of that; right?


A.        Right.


Q.        You got that new awareness after you looked at this graph, didn’t you?


A.        Yes.


Q.        And this graph is from the projections. And — and you’ve had the numbers






A.        This graph is derived from the projections, yes. It’s not explicitly called out in the projections.


Q.        But, anyway, if you had done the math at the time, you would have recognized that on a margin per minute basis, the projections for this business over time would — would decline.


A.        Yes, that’s right.


Q.        Okay.?


MR. McATEE: I’m done with that exhibit, too. Thanks.


Q.        One of the things you didn’t talk about on direct is a friend of yours at Silver Lake, Mr. David Roux. He’s a friend of yours; right?


A.        Yes.


Q.        He’s at Silver Lake?


A.        Yes.


Q.        And he was an investor in iBasis at one time, a personal investor?


A.        Yes.


Q.        And back in 2008 you met him in connection with securing financing for a possible outsourcing deal?




A.        Yes.


Q.        And one of the possibilities that was discussed then was if he decided to invest, maybe he would take iBasis private?


A.        He mentioned that, yes.


Q.        And then March of 2009 you again had discussions with Mr. Roux about the possibility of Silver Lake putting a big chunk of money in this company; right?


A.        Yes.


Q.        And, in fact, the — the proposal on the table was to buy KPN’s shares; right?


A.        I haven’t seen their exact proposal, but I think they were ready to buy part or all of KPN or — or any part that was available. Maybe everything.


Q.        But you knew that Silver Lake was considering buying all the shares of KPN that they held in iBasis; true?


A.        Yes.


Q.        And that was a strategy as of April 2009 that you supported; right?


A.        Yes.


Q.        And you provided them with a




nondisclosure agreement and access to your internal records; true?


A.       Yes.


Q.       And they diligenced the company; right?


A.       Yes.


Q.       And this is a friend of yours and he’s a sophisticated investor, isn’t he?


A.        He is.


Q.        And after doing all his diligence, his offer price for KPN shares was $1.75; right?


A.        So I saw in the — in — in your tender offer. I — I believe, although I’m not privy to all the discussion there, that they were trying to get a foot in the door to discuss with KPN so that it can negotiate the price. So this obviously wasn’t their highest offer, take it or leave it. This was a come talk to me.


Q.        I think I just asked if you were aware that the form of the offer they made was $1.75.


A.        I saw it in the tender offer.


Q.        Okay. And there wasn’t anything preventing you, prior to the tender offer, from asking your friend, Mr. Roux, what he had offered, was there?




A.        He wasn’t making the offer to the company. He wasn’t putting the company in play. They — they are sophisticated enough to know what to say and not to say, and they didn’t discuss with me the — the — the price they were going to offer.


Q.        It wasn’t an iBasis opportunity, was it? It was a KPN opportunity. True?


A.        I don’t know what you mean by that.


Q.        The $1.75 was offered to KPN for their shares; right?


A.        Yes.


Q.        And you thought, in considering the tender offer in this case, that the $1.75 price was a relevant data point, didn’t you?


A.        I — I — yes, it’s relevant that KPN, after, in retrospect I know now, received an offer for 1.75 and it offered iBasis 1.55 even though it already had an offer; just an opening bid, come talk to me higher than 1.55.


Q.        And if it was relevant then, it’s relevant now, isn’t it?


A.        It was a relevant price to come talk to them. It was not a final best bid. And I didn’t produce that price. I didn’t work on that price.




Q.        And if Mr. Roux had — Mr. Roux had been successful and had worked it out with KPN and taken control of the company, you would — you would have loved that, wouldn’t you?


A.        If it was good for the stockholders, it was good for me. It’s okay for me if KPN takes over the company if they just paid the right price. I’m not objecting to selling the company. When we first negotiated the deal, I asked KPN “Why are you buying only 51 percent? Buy the whole company. I’m fine with selling the company.”


Q.        I think I just asked if you would like to have your friend in control of this company; right?


A.        Sure.


Q.        Talk a little bit about the five-year plan that you worked in response to the tender offer. You talked about that on your direct.


That was prepared because Jefferies had asked for it?


A.        Yes.


Q.        And you worked on that with your CFO, Mr. Tennant?


A.        I worked on it with my whole executive team and some other support people from the company.




Q.        And your view is that putting that plan together in connection with this tender offer, you were being conservative.


A.        Yes.


MR. McATEE: Let me have Demonstrative-17 up, please.


Q.        And these are projected numbers from the five-year plan that you put together. And the projections are from — for revenues, going from 1 billion to 1.8 billion; right?


A.        Yes.


Q.        For minutes, you’re going to go from just short of 20 billion minutes to 46 billion minutes; right?


A.        Yes.


MR. McATEE: Let me have Demonstrative Exhibit 18, please.


Q.        This is net income. After a small loss in 2009, you’re projecting making money every year thereafter up to nearly 90 million in 2014; true?


A.        Yes.


Q.        And if all of that comes true, we’re talking making more than $227 million over that period; right?




A.        If — if I computed that.


Q.        And that’s after an ‘08 performance where iBasis took an impairment of 200 million; right?


A.        Impairment is a one-time, noncash charge. And ‘08 was the year that the whole world economy fell apart. I don’t think it’s a good metric to compare it to our future performance.


Q.        Fair enough.


Is — my main question is: Seeing all those graphs go straight up like the lines from the phone company, you’re not willing to admit that that’s slightly optimistic?


A.        I think if you look at our past performance before the KPN deal, our lines looked like this, maybe more of a hockey stick. And now we have this opportunity for outsourcing. So half of the growth here in this projected period in gross profit is from the normal business. Only half of that growth. The other half is from those new outsourcing deals.


Q.        You’re not — you’re not aware of a single set of projections in this case from iBasis, from KPN, from Jefferies, from any third party, Silver Lake, whoever, who is more optimistic than the charts




I just showed you; right?


A.       Our five-year plan we did the year before was much more optimistic than that. That was actually toned down by — by a lot, maybe 30 percent.


Q.        Okay. Let me rephrase the question, then. Other than the projections prepared by you and your management team, you’re not aware of any other projections that are more bullish on this company; right?


A.       I think that the KPN projections that include outsourcing are — are very similar to those numbers.


Q.        But yours are even more bullish than those; right?


A.       Barely.


Q.        You put out a chart to your investors. You went on a roadshow. You put up a chart, it’s a fan chart. The line for the iBasis management plan was the top line, wasn’t it?


A.       Barely higher than — than the KPN scenario that included outsourcing transactions.


Q.        My — my point is, sir, that — that whether it’s slightly higher — my point is that whatever it is, the most optimistic projections for




this company over the next five years has — have been published now to the minority shareholders; true?


A.       That — that projection has been published, yes.


Q.        And all the KPN projections about —that were on that fan chart, the — the outsourcing scenarios and the other ones, you put all those on the chart and showed the investors; right?


A.       Yes.


Q.        When you worked on this five-year plan, you had already decided that the tender offer was too low; right?


A.       We haven’t decided anything. We — we had the bankers waiting for this, among other things, to do their evaluation. We didn’t decide anything at this point.


Q.        The very first day you heard about the $1.55, you thought it was too low. You called your board and said it was too low; right?


A.       Yeah, I thought it was low; but I haven’t decided. Just compared to the fact that we just did stock buybacks with authorization of KPN directors at $4 a share, a buck 55 is — it seems very low.




Q.        And you told Mr. King and Mr. Brumley on the very first day you heard about it that the offer was unfair; right?


A.       It was, in my opinion, at the time and still is now, that that offer was very low and — and was just taking advantage of us in terms of — of timing.


Q.        And that was your mindset when you were working on the five-year plan; right?


A.       This — that this is not what I was thinking when I was working on the five-year plan. You are taking two separate facts and putting them together. I worked on the five-year plan with my head of sales, my — my head of operation, my — my CFO, my cofounder. We looked at a lot of factors. We put together the best we could on a five-year plan.


Q.        You — you prepared that plan being opposed to the tender offer, and you did it because you knew it was going to go to Jefferies and you knew that they would use that for an inadequacy opinion; right?


A.       Yes, but that doesn’t mean that I cooked the plan. It is more conservative than the previous five-year plan. And this fact is not what




drove me in my consideration of the various assumptions, nor any one of my executive team. I think that we were all doing the best we can to update our five-year plan.


Q.        When you were working on this plan, you were thinking “This is my company. I’m the founder. I did it in my basement. I” — “I put my blood, sweat, and tears in it and I’m not going to be overthrown by this offer.” That was what your mindset was when you were working on this plan, wasn’t it?


A.       Never, not even once. When I negotiated with KPN the first time, I told them, “Buy the whole company out.” They can fire me anytime. They don’t need to do this tender offer to fire me. This is completely irrelevant.


Q.        And then you — and at the same time you were doing the — working on the five-year plan, you were working with a consultant called Pearl Meyer to increase the executives’ golden parachutes, weren’t you?


A.       At the direction of the special committee to evaluate our severance payments, we hired an independent consultant to do an analysis of how our severance compares to our peers in the industry so the




special committee can take it into consideration.


Q.        And the idea was to change the definition of “change in control” to include the — the tender offer by KPN if it succeeds; right?


A.       There — there was a proposal that was never adopted that was attempting to put the severance amount in line with our peers.


Q.        This was being done right at the same time you were considering the tender offer; right? Whoever asked for it, whoever — whoever did it, for whatever reason, my point is that it’s contemporaneous with my client’s tender offer; right?


A.       Yes.


MR. McATEE: Put up JX-1262, please.


I’m sorry. 22. Demonstrative-22. I’m sorry.


Q.        Mr. Gneezy, if these changes that are being considered are adopted, is this what the golden parachutes are going to look like?


A.       The severance would look like this and would be in line with the average of our peer group.


Q.        Your — yours would go from 3 million to 8 million?


A.       Yes. That just reflects that our




current compensation is at the 25th percentile of my peer group.


Q.        And this — isn’t it a fact that this is being done as another strategy to take more of my client’s money and to line management’s pockets? This is why this is being done.


A.       No. I think it was evaluated to assess whether the management has enough incentives to work for the best interest of the minority stockholders and is not going to be worried about their own future. And in any case, it was never enacted.


Q.        You supported this lawsuit in Delaware; right?


A.       Yes.


Q.        You supported the lawsuit in New York that got filed.


A.       I did.


Q.        You voted for the poison pill.


A.       I did.


Q.        You at least had knowledge of this golden parachute increase; right?


A.       Yes.


Q.        You authorized the $7 1/2 million that




your client is spending to oppose this offer; right?


A.       My company, yes.


Q.        And the — and the point is that time and again you’ve demonstrated that you’ll do whatever it takes to stop this tender offer.


A.       And do whatever it takes to get KPN to offer a fair price to the minority stockholders.


Q.        The fact is that you never had the oral promise. You just — you never had an oral promise. You just — you just gave that to the lawyers so they could file a lawsuit.


A.       Not true.


Q.        Isn’t that right?


A.       No.


Q.        And the explanations for your “this is permissible” e-mail and your — and that “in compliance” slide, you’re doing whatever you can because you know that those documents hurt your case.


A.       No. I’m a reasonable business person, I believe. And my inclination is not to start throwing contractual and legal allegations at my big business partners. This is not a good way to work a relationship.


Q.        You don’t — you don’t like the idea




of KPN owning this company, the whole thing.


A.       I love the idea if they just paid a reasonable price.


MR. McATEE: That’s all I have. I pass the witness. Thank you.






Q.        Mr. Gneezy, you just testified that you — you would be willing to sell your shares, you would be willing for iBasis to be sold to KPN at an appropriate price; correct?


A.       Absolutely.


Q.        That has been disclosed in a press release, hasn’t it?


A.       Yes, it has.


Q.        That has been disclosed to the public, that iBasis is willing to negotiate an appropriate price; correct?


A.       Yes.


Q.        Mr. Gneezy, there was some time spent on your cross regarding Pearl Meyer; correct?


A.       Yes.


Q.        Just so there’s no confusion, the — there has been no adoption or change in anyone’s




O.        Gneezy - Redirect


contractual retirement or golden parachute rights based on any work done by Pearl Meyer; correct?


A.       Correct. No changes.


Q.        Mr. Gneezy, you also referred — you were also asked many questions regarding the five-year plan that was done post tender offer; correct?


A.       Yes.


Q.        Can you please tell us about the five-year plan that was done prior to the tender offer?


A.       About the year before, in preparation for a full-day board meeting to look at the strategy of the company and our longer-term plan, we prepared another five-year plan. That five-year plan also included outsourcing and M and A. And I — I — I remember that the numbers at that time were much higher. But given that in ‘08 we’re starting from —‘09 we’re starting from a lower point after the whole economic work pressure in ‘08, this plan ended up lower than that previous plan.


Q.        So I recall that you testified that the earlier five-year plan was 30 percent more aggressive; is that correct?


A.       I don’t remember the exact numbers,




but the — the — my recollection is that the total EBITDA generated was much higher.


Q.        And that much higher EBITDA estimate was made prior to the tender offer; correct?


A.       Yeah, about the year before.


Q.        Let’s look at document JX-1128, please. It’s in both binders before you. And I think we’re also calling it up.


On direct you’ll recall that we discussed lines on page 19 detailing the squeeze; correct?


A.       Yes.


Q.        On cross you’ll recall there was a focus on page 18?


MR. OFFENHARTZ: Can we call up page 18, please?


Q.        There was a discussion of the phrase “In compliance with SPA & Framework Agreement.”


A.       Yes.


Q.        Can you tell us about the circumstances by which that phrase came to be inserted into the slides?


A.       We — we were not ready to start legal process against KPN. We are trying to resolve this




on — this dispute. I’m setting up a presentation for my board in — in preparation to go talk to the CEO of KPN. My KPN directors are not pleased with me wanting to go to the KPN CEO and air all of those issues that we have. So there’s a lot of pressure on me to — to be diplomatic in my presentation to him.


You notice that in — in the presentation I did for Ad Scheepbouwer, there’s a line there that says that it’s above the plan that I was specifically instructed by my KPN directors to put in.


So I — I think that the context here is, I’m trying to be more diplomatic going to the CEO of my controlling company. I’m still I think quite bold in presenting all of those issues and raising it to his level. And I’m — I’m — I — I didn’t think at the time it was productive to start accusing him of — of contract violation, legal threats. I believe in trying to resolve business issues in a business way.


Q.                      What was the role of Joost Farwerck and Eelco Blok in the preparation of Slide 18?


A.                      They essentially instructed me to add this — this line about being above plan.


Q.                      Okay. Thank you.




Can you turn to slide — I’m sorry; Exhibit JX-1128, please? Actually, that’s what we were just looking at.


A.                      This one?


Q.                      JX-1108. There was much discussion in your cross regarding whether or not you gave notice of the squeeze; do you recall that?


A.                      Yes.


Q.                      Would you look at the second to last paragraph of this e-mail?


A.                      Yes.


Q.                      It says, “This email is a heads up on the issue.”


Would you look at the last paragraph of this e-mail? It reads, “I feel that much has been done since we closed the transaction to compress our margin on KPN’s business and we need KPN to stop squeezing us.”


Did I read that correctly?


A.                      Yes.


Q.                      Thank you.


MR. OFFENHARTZ: I’d now like to pull up Exhibit JX-1225 on the screen.


Q.                      It’s the Form 8-K filed by iBasis. On




page 17, as you can see on your slide in front of you, was this the fantail chart you were referring to in your cross?


A.                      Yes, it was.


Q.                      Is this the document that you were referring to — strike that.


Can you describe the connection between the iBasis management case and the outsourcing case, KPN — prepared by KPN?


A.                      Yes. The — the line that says “including outsourcing” or “outsourcing case” is a KPN projection that takes into account us doing outsourcing transactions in line with our strategy, agreed with KPN; and it shows that those lines are very, very close to each other. I think actually in the first year, the KPN projection is higher than ours. Then it’s almost identical for two years, and then there’s a small divergence in the last year that they forecasted. Our forecast just goes out further by two years. But it’s essentially — for considering, you know, a multiyear range, I — I think that those numbers are almost identical.


Q.                      Now, you were asked during your cross that all of the — all of the projections on this




chart have been disclosed; is that correct?


A.                      Yes.


Q.                      This chart does not include, does it, all of the projections and disclosures at issue in this case, does it?


A.                      No.


Q.                      Okay.


MR. OFFENHARTZ: No further questions.


MR. McATEE: I don’t have anything, Your Honor.


THE COURT: Thank you, sir. You may step down.


(Witness excused)


THE COURT: Next witness.


MR. KERSTEIN: Your Honor, David Kerstein for iBasis. I’d like to call Paul Floyd to the stand. I also have some binders to hand up, if I may.




PAUL FLOYD, after having been first duly sworn, was examined and testified as follows:






Q.                      Good afternoon, sir. Please state




P. Floyd - Direct


your name for the record.


A.                      Paul Floyd.


Q.                      Mr. Floyd, could you please briefly describe your educational background?


A.                      I have a bachelor’s of engineering degree and a master’s of engineering degree from Stevens Institute of Technology and an MBA from the University of South Florida.


Q.                      How long have you been at iBasis, sir?


A.                      Since 2001.


Q.                      What position do you now hold?


A.                      Senior vice president of products, network, and systems.


Q.                      What is the group of six or G6 at iBasis?


A.                      It’s the executive team.


Q.                      Are you a member of that group?


A.                      Yes.


Q.                      Sir, did there —










Q.                      Did there come a point in time, sir,




when you learned that KPN had made a tender offer for KPN’s remaining shares that it did not own?


A.                      Yes.


Q.                      And do you recall the price that the offer was initially made at?


A.                      $1.55.


Q.                      Were you surprised by that price?


A.                      Yes.


Q.                      Why were you surprised?


A.                      I thought it was — I was surprised at the timing, and I also thought it was very opportunistic.


Q.                      Were you aware, sir, that the KPN tender offer was based on a certain set of projections?


A.                      Not — not at that time.


Q.                      After — after you came to view the tender offer, did you see that they were based on a set of projections that KPN had prepared?


A.                      Yes, it was in the tender offer.


Q.                      Okay. If we call those the parent projections, you’ll understand what I’m referring to?


A.                      Yes.


Q.                      Were you aware of other internal KPN




projections for iBasis aside from the parent projections?


A.                      Yes.


Q.                      And were those projections more or less favorable to iBasis than the parent projections?


A.                      Overall they were significantly more favorable.


Q.                      Had you been shown those more favorable projections?


A.                      Yes. I’d been at the KPN at — in mid-June. I traveled often to KPN. And so I was in KPN in mid-June and participated in several meetings about those projections.


Q.                      Why or in what context were they shown to you?


A.                      They were — I was — I was visiting for the week while I was there, and a meeting had been set up by — by the head of the KPN office, Paul van der Schot. And so I met — met on two different days with regard to those projections.


Q.                      Let’s start with the first day of meetings. Who attended that meeting, those meetings on behalf of what entities?


A.                      From iBasis, it was myself and




Edwin van Ierland. From the iBasis office, it was Paul van der Schot and Johannes van Dijk; and then Huib Costermans, who is the CFO for the wholesale and operations organization, and he reports to Joost Farwerck.


Q.                      You mentioned that Mr. van der Schot and Mr. van Dijk were from KPN’s iBasis office. Can you briefly explain for us your understanding of what that is?


A.       The iBasis office is a team, organization that reports into Joost Farwerck; and they work with iBasis on a day-to-day basis and — working on planning, strategy issues that come up between iBasis and KPN entities.


Q.                      Were the favorable projections presented in this first day of meetings?


A.                      Yes.


Q.                      How were they presented?


A.                      We were — Paul had brought them in to the meeting with him. He handed it out to us. So we had them on — on the table in front of us, and then we went page by page through the projections and talked about the — each page.


Q.                      Approximately how long do you think




the discussion about these favorable projections lasted?


A.                      The meeting was scheduled to be an hour, and we spent most of the meeting on it, probably spent, you know, 45 minutes on — on the favorable projections.


Q.                      Mr. Floyd, if I could direct your attention to Joint Exhibit 114 in the binder in front of you.


MR. KERSTEIN: And if we can call it up to the screen, please.


Q.                      What is this document?


A.                      This is — this — this document is the one that was shown to us.


Q.                      The favorable projections?


A.                      The favorable projections.


Q.                      From what the KPN representatives told you about them at your meetings, what is your understanding of what these projections represented?


A.                      It was their — their best consideration of the — of the, you know, future potential for the iBasis business.


Q.                      What, if any, was the focus of the discussion with KPN about these projections in your






A.                      So we went page by page through the projections. I’d say we spent the bulk of the time talking about the outsourcing scenario and about the potential for outsourcing with iBasis because that’s the area that I think people were the most excited about.


Q.                      Can you turn to the next page of the document, please? Was that the Scenario 4 on the bottom?


A.                      Yes. Scenario 4 is the outsourcing scenario.


Q.                      Okay. Thank you.


What did KPN say about outsourcing to you in these meetings?


A.                      It was — it was — they were very — they were very excited about the potential of outsourcing in terms of really, you know, being the major catalyst for growing the iBasis business as — as we moved forward. And we spent time talking about, you know, some current deals and potential deals. And, also, they wanted to, of course, get our — our view on those — on that potential.


Q.                      Was there any discussion about the




level of support KPN would or would not give to iBasis’ outsourcing efforts going forward?


A.                      Well, I had at one point during the meeting, because, you know — of course, I was very — very interested in the outsourcing because that’s key to our strategy. And I said to Huib Costermans that one of the concerns is that we’d gotten — from my perspective, I’d gotten some mixed support from KPN on outsourcing and that that would, of course, have to change because it’s important that KPN supports that, also, to be really successful with it.


And Huib said that — that he — he understood that, he recognized that, and — and that it was going to change, that there was a lot of support now.


Q.                      Did you get the impression, sir, at all that KPN presented this information to you in order to motivate you or iBasis?


A.                      No.


Q.                      Did KPN instruct you to share these projections with anyone else at iBasis?


A.                      Nothing specific was said about that.


Q.                      Did they tell you or insinuate to you that iBasis had to do better?




A.                      No.


Q.                      That iBasis needed to try harder?


A.                      No.


Q.                      Did they tell you that iBasis needed to change its focus?


A.                      No.


Q.                      Did they tell you it needed to change its strategy?


A.                      No. I mean, other than we talked about the scenarios.


Q.                      Mr. Floyd, as a member of senior management at iBasis and one of the G6, did you think that any of the particular scenarios or projections in this document were realistic projections for iBasis?


A.                      Well, we — we had just finished — we were just finishing our integration effort and, in fact, we had just launched a series of growth initiatives. And the outsourcing initiative we — we clearly viewed as — as one of our most strategic key initiatives that we were launching. And so — and we spent most of our time talking about that initiative during this meeting. So it seemed very aligned with — with what we were doing and the direction we were headed.




Q.                      So Scenario 4 to you is the —


A.                      Yes.


Q.                      — one —


A.                      Yes.


Q.                      — that you agree with?


A.                      Yes.


Q.                      Were the favorable projections discussed in this second day’s worth of meetings?


A.                      Yes.


MR. BROADWATER: Objection, Your Honor. Counsel misstates the record in a leading way that I think is inappropriate.


MR. KERSTEIN: He testified that there were two days’ worth of meetings.


MR. BROADWATER: Two days’ worth of meetings? 45 minutes’ worth of meeting. Not two days.


THE COURT: Why don’t you be more precise?


MR. KERSTEIN: I’m sorry?


THE COURT: Why don’t you be more precise.




Q.                      Mr. Floyd, did you have two days’




worth of meetings at KPN in the middle of June?


A.                      Well, to be precise, the first day was an hour-long meeting which, from my perspective, was plenty of time to — to do a thorough walk-through. The second day was — was also — was over an hour that we — that we spent with — with Joost Farwerck. On that day we covered a number of topics.


Q.                      On that second day — who was in the meetings on the second day of meetings you attended with KPN?


A.                      Joost Farwerck; and from iBasis, myself and Edwin van Ierland came; and then also from iBasis office, Paul van der Schot and Johannes van Dijk came.


Q.                      Were the favorable projections discussed on this second day?


A.                      Yes. It was — as I said, it had been, I think, a few months since Edwin and I had had a chance to see Joost, and we usually always try to see — at least I always try to see Joost when I got back to the Hague.


And — and so we covered — we talked about a number of different things. And we got to the favorable projections, and overall Paul gave a — just




a snapshot or a capsule of what happened the day before with Huib Costermans at that meeting. And — and then we — and then we spent actually a fair amount of time also talking about outsourcing with — with Joost.


Q.                      Did Mr. Farwerck ask about iBasis outsourcing plans specifically?


A.                      Yes. Yes.


Q.                      What did he want?


A.                      He wanted an update on the outsourcing opportunities and kind of where we were on some of the various opportunities.


Q.                      Were any new potential opportunities discussed?


A.                      Yeah. We had one that was particularly active at that time. There were two that were particularly active. One was an operator in Canada, and the other was this Middle Eastern operator that was — Middle Eastern mobile operator that does a lot of mobile traffic in the Middle East and Horn of Africa.


Q.                      What was Mr. Farwerck’s reaction to the outsourcing discussion?


A.                      Well, I think he was — he was, you




know, pleased in terms of the progress that we were making with outsourcing and, in particular, the — the — the fairly significant mobile opportunity with the operator in the Middle East. And — and he also seemed very — you know, seemed positive on that being — that being a key kind of future driver for iBasis.


Q.                      Did Mr. Farwerck seem familiar with the favorable projections?


A.                      Yes.


Q.                      Did the KPN folks with whom you spoke at the meeting seem to think that the projections and specifically the outsourcing projections were realistic?


MR. BROADWATER: Objection, Your Honor; calls for somebody else’s state of mind. We’ve had a lot of leading and speculative questions, but this takes the cake.


THE COURT: Yeah. I mean, I think it would be more helpful to me if you asked — I mean, if people said something, it’s an admission of a party opponent or something, you want to elicit some testimony about what someone actually said —


MR. KERSTEIN: Sure, Your Honor. I’ll






THE COURT: I don’t know the basis on which he would divine it unless somebody said something.


MR. KERSTEIN: I’ll rephrase the question.




Q.                      Did anyone in the meeting say anything to you that gave you the impression that the KPN persons who were speaking were — thought that the outsourcing scenarios were realistic?


MR. BROADWATER: Same objection, Your Honor.


THE COURT: It’s leading.




Q.                      What did the people at the meeting say to you about the outsourcing scenario?


A.                      Well, I — I had — I mean, it was the scenario at both meetings; that certainly on the first day, it was the scenario we spent the most time on in terms of talking about. And on the second day we — we talked about — provided a snapshot of what had happened the previous day with Huib Costermans in that meeting to Joost. And then we spent most of the time




talking about outsourcing.


I would say, too, you know, with regard to their — I can’t read anybody’s state of mind here, but I’d ask that question specifically after the meeting on the first day. I talked to — to Johannes and Paul and asked them, you know — first of all, I told them they had done a very good job on this effort, and then asked them what — you know, how they were derived.


And they said that they had been at iBasis in April, you know, just two months before that; and at the meeting at iBasis, they — they said to me that they had come away from those two days of meetings where we had talked about the iBasis business and the growth initiatives and integration, and — and outsourcing was part of it — and they told me they walked away very pleased with what they heard about iBasis.


I said to them, “That’s really good to hear.” I said, “Have you” — “did you get a chance to talk to Joost about this?”


And, of course, this is prior to the next meeting, the day ahead. And they — and they said, “Yes, we talked to Joost.”




I said, “How did Joost respond?”


And they said that Joost said he was very pleased to hear that because he felt the same way about iBasis.


And — and that was also consistent with previous conversations I’d had with Joost.


Q.                      Joost Farwerck —


A.                      With Joost Farwerck.


Q.                      — the KPN director.


A.                      Yeah. And I didn’t see anything in the — in the meeting we had — the second meeting we had with Joost and the individuals, I didn’t see anything in that meeting that was contrary to that. I mean, Joost seemed — seemed to feel very positive about — about the outsourcing efforts.


MR. KERSTEIN: Slide 4, page 4 of these — of this exhibit.


Q.                      If you could please turn to page 4, Mr. Floyd. The page is titled “Way forward.”


A.                      Yes.


Q.                      The first bullet point on this slide says, “iBasis has [the] potential to outperform the market.” Do you see that?


A.                      Yes.




Q.                      Was that something that the KPN folks at the meeting discussed with you or conveyed to you?


A.                      Yes.


Q.                      Do you agree with that statement by KPN?


A.                      Yeah, definitely.


Q.                      The next bullet point on the slide says, “Integration finished, organisation ready for ‘back-on-track’ growth initiatives.” Do you see that, sir?


A.                      Yes.


Q.                      Was that something the KPN folks at the meeting discussed with you or conveyed to you?


A.                      Yes.


Q.                      Do you agree with those statements by KPN?


A.                      Yes. I — I led the integration. So I know it was definitely finished and I also was very involved in launching of these back-to-growth initiatives. And they — by then we had launched these initiatives.


Q.                      The next bullet on the slide says, “iBasis top-3 marketplayer, market consolidation always in favor of top marketplayers.” Do you see




that, sir?


A.                     Yes.


Q.                      Was that something the KPN folks at the meeting discussed with you or conveyed to you?


A.                     Yes, yes.


Q.                      And do you agree with those statements?


A.                     Yes. We’re definitely — when you look at the players that are in — in this part of the market, we’re definitely in the top three.


Q.                      And if you could please turn back now to pages 2 and 3. If you would keep your binder out, you can look at them at the same time.


A.                     Yes.


MR. KERSTEIN: Is it possible to put both on the screen?


A.                     It’s on the screen here.


Q.                      Page 2 is entitled “KPN View on Year End Expectation” and appears to have some figures going out for a few years.


The next page, page 3 is entitled “Summary Scenario’s + YEE.” Again, the number of metrics, out to 2012, appear to be five different groups.




A.                     Yes.


Q.                      Metrics are listed. Do you see all that, sir?


A.                     Yes.


Q.                      Now, did KPN explain to you what the YEE represented?


A.                     It was — it was their — in looking at the scenarios, it was their best — best view on the outlook for iBasis.


Q.                      Please turn to JX-1280A in your binder. I’ll just note this is a translated version of a Dutch language document we received from KPN. The original Dutch document is at 1280. I think it would be possibly easiest if we follow along on 1280A.


After the certification of translation, if you look at the first page, there appears to be an e-mail, two e-mails between Mr. van Dijk and Mr. van der Schot dated June 11th.


A.                     Yes.


Q.                      The subject line of the e-mail on the bottom says “YEE SCENARIOSIBASIS_may_2009_version01 — “v01.xls.” Do you see that?


A.                     Yes. That — yes.


Q.                      Now, attached to this e-mail there




appears to be some sort of — some pages, presentation or numbers of this sort. If you flip through these pages, these charts, does this look familiar to you at all?


A.                     They seem to be a lot of charts similar to what was shown in the — in the meetings that I attended.


Q.                      Okay. Mr. Floyd, with respect to 1280, were you ever specifically shown this document by KPN?


A.                     No, no.


Q.                      Okay. If you will turn to page 3 of this document, 1280A.


A.                     Okay.


Q.                      On the second bullet point it says “Scenario 3 (‘outperforming the market’).”


And then it says, “most desirable and also seems [most] attainable.” Do you see that, sir?


A.                     Yes.


Q.                      Mr. Floyd, was that message ever conveyed to you by KPN in these meetings?


A.                     In that that’s where we spent most of the time in terms of discussing the outsourcing scenario.




Q.                      Well, under the graphic — there’s another bullet point and it says “Scenario 3 including outsourced deals every year with scope of approx. 2.5 billion minutes per year improves performance iBasis significantly.”


A.                     Yes.


Q.                      Is that what you meant the scenario you spent the most time talking?


A.                     Yes.


MR. BROADWATER: Objection, Your Honor. You know, we’re asking him to agree with a document he’s never seen and was never presented to him and asking whether that’s what he meant when he was talking about a different document.


MR. KERSTEIN: Just asking if the sentiments expressed in this document were conveyed to him.


MR. BROADWATER: I’d like factual testimony.


THE COURT: Let me just say, you’re rather aggressively leading.




THE COURT: So I’m going to sustain on that basis. To the extent you have to tell the story




rather than the witness, it’s less persuasive to me.


MR. KERSTEIN: I understand, Your Honor.


THE COURT: This is a percipient witness who was there. He should be put on the stand to be asked about what happened, what he perceived what happened, what he did, what others did in his presence.


MR. KERSTEIN: Understand, Your Honor. BY MR. KERSTEIN:


Q.                      Mr. Floyd, did — did you gain an understanding from what the KPN folks you met with told you or expressed to you how they came up with the favorable projections that you were presented at the meeting?


A.                     Well, I — I asked Paul and Johannes about that. And they said that after that April meeting that they had at iBasis that they — they were very favorably impressed and that they’d come back and they started to work on these projections. And so I think they were working on it. It came — it certainly came to me as if they were working on that after the April meeting. And so up until the meeting when I met with them in mid-June.




Q.                      Thank you.


Changing gears for a moment. Did there come a time after the iBasis-KPN transaction closed that an issue or a problem arose with respect to transmission termination costs, port changes between iBasis and KPN?


A.                     Yes, yes.


Q.                      When did that issue arise — when did you become aware of that issue?


A.                     It — it — it started just several weeks after the — after the closing of the deal.


Q.                      What is your understanding of the issue?


A.                     Well, at that point in time the — the iBasis was — was approached and said that — that KPN — we would — we would have to start paying fees for terminating traffic into the Netherlands and also transit fees to transit the KPN national network in the Netherlands. So these were fees that we’d never been aware of, you know, prior to preclose, and they certainly weren’t in the proxy — any proxy statements that were disclosed. And they have — they had significant impact.


Q.                      What kind of impact did those fees




being charged have?


A.                     Well, we had to — this — one of the — one of the key premises of the deal was that we would be able to have favorable terms for traffic into the Netherlands. I mean, that’s one of the — one of the powerful things about doing an outsourcing deal, is — is for the home country to have favorable terms. And that would allow — that allows us — and, of course, that existed prior to the deal with KGCS. And that allows us to be able to — to exchange traffic with other carriers around the world and — and have very — very strong commitment deals with other carriers.


As soon as — as soon as this was imposed, we no longer had an advantage. And it brings to question that — the deal itself. And so — so we immediately had to start changing the deals we had with other carriers. And that had — had significant impact on our 2008 revenue and traffic margins with those carriers and in particular with the mobile inbound traffic into the Netherlands.


Q.                      Can KPN do anything —


THE COURT: Let’s pause — let’s pause there. We’re at our — our break. We’ll come back at






(Adjourned for luncheon recess at 12:32 p.m.)






(Resume at 1:45 p.m.)


THE COURT: You may continue.


MR. KERSTEIN: Thank you, Your Honor.




Q                         Mr. Floyd, I believe we were discussing the effects that certain undisclosed termination fees and port charges by KPN were having on iBasis. Did iBasis suffer any loss of clients as a result of these charges?


A                        Yes. If you look at the results in 2008, because of — the cost to terminate traffic into the Netherlands was increased, we lost a significant portion of our mobile inbound traffic. It was in the 40 to 50 percent range. On the fixed traffic into the Netherlands, we just — we took a margin hit on the fixed traffic as a result of this.


Q                         Was there any effect on iBasis’ adjusted EBITDA?


A                        Yes. As a result of losing that traffic, and also as a result of lower margins on the fixed traffic.


Q                         Did KPN attempt to do anything to address the situation?




A                        Yes, eventually, but it took a long time. Eventually, there was an agreement, in April of 2008, and it partially addressed the issue.


Q                         What do you mean by partially?


A                        The agreement provided a compensation for these fees and, in some cases, 100 percent compensation, but in other cases it was 70 percent compensation. It was not full compensation.


The second thing was they would only agree to it for 2008, and then we had to renew the agreement in 2009. And we continue to have uncertainty about later years, 2010 and on, in terms of this agreement.


And then a third major factor is we did, in 2008, because of this loss of the mobile inbound traffic to the Netherlands and margin loss on the fixed traffic — we never got compensated for that, which is decrease in revenue and decrease in margins and decrease in traffic during that period of time, during 2008.


Q                         Thank you. One last set of questions, Mr. Floyd, changing gears. Did you have any understanding in early 2009 whether or not KPN intended to purchase the remaining shares of iBasis?




A                         I understood that they would not.


Q                         Why did you have that understanding?


A                         Just, as I said, whenever I went to the Netherlands, I tried to meet with Joost Farwerck. And one of our discussions, he — at that point in time, the world economy was pretty seriously impacted and the stock market was down pretty bad, and he commented to me that if KPN wanted to, they could purchase the outstanding shares of iBasis for very, very cheap.


And so I asked him at that point in time. I said, “Is that the intent of KPN?”


And he said, “No. That is not our intent.”


Based on that conversation, based on other interactions that I had, I was very surprised when the tender offer came in.


Q                         Were the issues of integration or growth discussed at that meeting with Mr. Joost?


A                         Yes. Since I was leading the integration between iBasis and KPN, which involved network systems and organizations, I was — on a regular basis when I came to the Hague, I would try to meet with Joost, and review the integration with him,




and give him an update on it.


At that point in time, we were launching the growth initiatives. This was in January. So he was very interested in hearing about the growth initiatives. I also apprised him of those.


MR. KERSTEIN: Thank you, sir. No further questions.


THE COURT: Your witness.


MR. BROADWATER: Thank you, Your Honor.






Q                         Mr. Floyd, we met at your deposition.


A                         Certainly did.


Q                         Okay. I want to start with your last answer. You said you met with Mr. Joost Farwerck in early 2009. Did you say that was in January of 2009?


A                         The one I was referring to was January, 2009. I met with him many times.


Q                         That’s the one where you got the impression they weren’t planning at that point to make a offer to buy the remaining shares?


A                         Yes.


Q                         Let’s go back to one other thing that




P.        Floyd - Cross


you mentioned. I think you just clarified it in your questions, but you said with respect to what you encountered, the first of many things you say you encountered that depressed the margin, the one that talked about the fees for transiting or servicing or terminating traffic in the Netherlands were imposed starting in early ‘08. Right?


A                         Yes.


Q                         And you said, in fact, that was something that was very important. Indeed, you said, “One of the key premises of the deal was that we would be able to have favorable terms for traffic in the Netherlands.”


You testified to that earlier today. Right?


A                         Yeah. What I’m saying is that —


Q                         Did you say that earlier today?


A                         Yes.


Q                         Okay. And did you also say that a very powerful thing about outsourcing deals is having the advantageous terms in the geographic places where you were buying the outsource —


A                         For the two we have, it’s a very powerful —




Q                         If they are very powerful, and they are fundamental premises of the deal, why didn’t you make them part of the deal?


A                         Well, they are part of the deal. Prior to the deal, KPN, internally, did not charge KGCS for these fees.


Q                         You thought you would get it for free.


A                         Absolutely not. Look, we are talking about eleven million euros a year here.


Q                         Was it in the deal?


A                         We are talking about eleven million euros a year here. Any financial statements that were released prior to the deal, these fees were not included in them. Certainly, the impact on the traffic of having these fees was not included in those financial statements prior to the deal.


Q                         Sir, let’s stop and see if I’m being bad asking questions or you are having difficulty with answering it.


Was the fundamental premise of guaranteed financial favorable terms for traffic in the Netherlands part of the deal by which the KGCS business was transferred to iBasis in return for 51 percent of the stock?




A                         It was well understood that we were going to be able to, on favorable terms, handle the inbound traffic into the Netherlands.


Q                         But it wasn’t in the deal, was it? It wasn’t in writing, was it?


A                         It’s well understood.


THE COURT: Which question do you want him to answer?




Q                         Was it in writing?


A                         It’s well understood.


THE COURT: And you are not answering the question.




Q                         Was it in writing?


A                         If you look at the framework service agreement, it clearly — there is nothing in the framework service agreement that refers to port fees or transit fees in the Netherlands. And that would be the document that it would be in, in addition to Schedule 1 associated with the framework service agreement. And if there was going to be any mention of port fees or transit fees, it would be in those documents. And that’s where it should be, and it’s




not in those documents.


Q                         You assumed you would get it for free, but you didn’t have it in the deal?


A                         Absolutely not. It would be in those documents. And KPN would be required to put it in those documents if those fees were going to get charged, because they have such a radical impact on the financials of the deal.


Q                         Let’s go to the scenarios about which you spoke in a good portion of your direct testimony.


MR. BROADWATER: This may be my first experiment with your very admirable new technology, Your Honor.


Can we put up JX 1205? Excuse me. Excuse me. That’s it. JX 1205. Have I given the Court and the others the copies of the binders? You have them. Okay. If that doesn’t work —




Q                         Take a look at that document, starting with the Exhibit (a)(10), which is at page 39 of that filing by iBasis.


A                         Which one is it?


Q                         It’s 1205. It’s the 14D-9 iBasis filed with the SEC, attaching as one of the exhibits




(a)(10), the five-page scenarios document that you brought back from the Netherlands?


A                         Yes.


Q                         Do you have that?


A                         Yes.


Q                         Okay. Now, that was something you brought back from a week of meetings in the Hague in June of ‘09. Right?


A                         Yes.


Q                         You had several meetings that week with Paul van der Schot?


A                         Yes.


Q                         And you were there all week and met with a lot of other people, too?


A                         Yes.


Q                         And you got — you described in your direct testimony the meeting with Paul van der Schot and Johannes van Dijk, at which you were given a copy of this five-page document, counting the cover sheet?


A                         Yes.


Q                         You said you went over it page by page. There are only four pages with any information on them. Right?


A                         I think there is the front page.




Q                         Which has a label on it?


A                         Label on it. There is the cover page and then there is one, two, three, four pages, and five. There is a fifth page, which has got graphs.


Q                         Which is illegible. Right?


A                         Well, it has got graphs that talk about each of the major metrics. I can read it.


Q                         Do you know who else may have been involved besides the two people that I mentioned, Paul van der Schot and Johannes van Dijk, in preparing this document?


A                         Well, I didn’t know until I saw that e-mail earlier, where there were additional names on the e-mail, that van der Schot was corresponding with. Up until then, I was aware of Johannes and Paul. But there was, I think, Haank de Nijs, who was involved, another person that is involved with finance with iBasis.


Q                         Other than the meeting you described, you said there was another meeting you asked to sit in on that had already been scheduled by Mr. Van der Schot with Joost Farwerck.


A                         Joost what?


Q                         Had already been scheduled. You asked




to sit in on it because you didn’t have a scheduled appointment with Joost. Correct?


A                         Well, I saw — when I talked to Paul the day before, I said to him usually I meet with Joost when I come to town, and I haven’t scheduled a meeting and I need to schedule a meeting with Joost. And Paul said, “Why don’t you just join me at the meeting tomorrow?”


Q                         That’s what you did.


A                         Yeah. And I said, “Great.”


Q                         How many topics do you think you ran over in your 45-minute or an hour meeting with Mr. Joost Farwerck?


A                         Well, it was — with Joost, it would be a different discussion, in terms of — because Joost has higher responsibility.


Q                         How many subjects, is all I asked.


A                         Could have been five or six.


Q                         Okay. And when the topic was raised of some alternatives for strategic scenarios, were the pieces of paper, that you now have a copy of, brought out or exhibited for the numbers on them?


A                         Paul had brought them with him, and he had them with him under his arm. He never actually




handed them out at that meeting.


Q                         So it was a discussion in the air, as opposed to based on a piece of paper?


A                         Well, it was a clear discussion. I mean, it was clear that Joost was aware of this.


Q                         Other than the two discussions you have described, the one earlier in the week and then later in the week, where the documents themselves didn’t — weren’t exhibited, did you ever have any discussions again, putting aside our deposition, with anyone from KPN about the alternative scenarios?


A                         I was with — I was with Paul van der Schot several times throughout the week, including Thursday night before I left. I had dinner with him and the team. And so I’m sure it came up again, you know, just didn’t — in informal discussions with him. Those were the two formal meetings that were held.


Q                         I see. And do you have any recall of ever seeing or preparing anything in writing, to discuss or transmit these scenarios that were amongst the papers you brought back from the Hague, to others within iBasis?


A                         When I got back, I know Edwin gave his copy to Ofer, and then I gave — I think I gave my




copy to — we made copies and gave it to Gordon. You know, so with the G6, got copies of it when we got back. We also had — we have irregular G6 calls. In fact, I think it was scheduled the day of that meeting, that we had our regular weekly call. During the G6 call, Edwin and I talked about the meeting that day. We communicated it.


Q         I see. Other than the communication in the conference call, the fact that you gave a copy to Gordon, as you say, did you do anything else with these, until the tender offer was made?


A         We had — yes. I mean, we set up a meeting. In fact, Paul van der Schot and Johannes had come in April for the two days. They set up a follow-up meeting in July, to come over for two days. That meeting had been set up, and Edwin and I worked with them to get the agenda in place. One of the agenda items was this topic, where we were going to begin continuing discussion on it.


Q         But it never happened, did it?


A         The tender offer came, and the tender offer came on Monday. The meeting had been scheduled that week. You know, it was like on a Wednesday or Thursday. And at that point, Paul — I mean, the




meeting got canceled. Just — it just — the sense was that we needed to kind of wait until we got through this tender offer period.


Q         You know, you indicated in response to one of the questions from your counsel earlier that there was nothing about strategies or approaches that was suggested to be changed by — in these scenarios. Do you recall that?


A         Yes.


Q         Okay. Would you take a look actually, sir, at the description of the scenarios; and in particular, Scenario 3 and 4, in which you concentrate. And read — this would be right there. The last item, “Margin strategy will be less strict than at present, and is brought in more balance with other KPIs,” do you know what that means?


A         I know what he was referring to here. I don’t agree with it, but I —


Q         You don’t agree with it? It’s suggesting doing something different than what you are doing right now. Right?


A         He is just — he was suggesting that in order — his view on this particular scenario is that there is a margin strategy that we have that he




was suggesting we need to get modified.


Q         Yes, in order to pursue these things. You heard your CEO testify this morning that he is quite proud of his so-called margin protection strategy, whereby you shed low-margin customers, rather than keep them, even though they are positive?


A         He should be proud of that, because it was a very effective strategy.


Q         Isn’t the fundamental premise of stratus Scenarios 3 and 4 dropping that, or at least relaxing it, so that you grow the business even if it isn’t at your preferred margins?


A         No. I think the fundamental scenario, certainly of four, is focused on outsourcing. That —


Q         Am I misunderstanding what that says, sir, when it says, “Margin strategy will be less strict than at present”?


A         If you go to the next slide, which is Slide Number 4, you know, he is trying to explain just the balance, different KPIs. He was saying when you look at the business, look at EBITDA, you look at revenue, you look at margin, margin percent, you look at minutes — so we did discuss this slide. I think it’s relative to what you are saying. I think anybody




who runs a business will agree that a business is a balance of these various metrics. And so, you know, clearly, we need to be balancing those metrics. And we discussed that we need to balance those metrics.


Running a business, we need to do those. But we certainly didn’t walk out of the meeting saying that it was fundamentally important that we change our current strategy with regard to that. One of the things that Paul van der Schot was looking for was feedback from us on this. So we gave him feedback.


Q         Did you give him any?


A         We gave him that feedback.


Q         Let me go on to a question where maybe I won’t get tutored quite so extensively.


THE COURT: That is stricken. It’s not “Law and Order.” Get over it.






Q         Do you have any reason to think these scenarios were prepared as part of a valuation analysis?


A         I had — well, at the time, I had no reason to — I didn’t know about a valuation analysis




at the time.


Q         And, sir, did you play any role in preparing the iBasis management five-year projections that are now part of the special committee’s consideration?


A         I saw them. I commented on them. I actually happened, in this particular case, to be on vacation the two weeks after the tender offer. So you know, Ofer clearly got input from a lot of different parties with regard to it, but I was on vacation those two weeks.


Q         Could we go to the very beginning of this Exhibit (a)(10), where the legend put on it by iBasis is set forward?


A         Which one are we looking at?


Q         Exhibit (a)(10), “Important Information,” there at the beginning. It’s a little hard to read, but you have read this before, have you not, Mr. Floyd?


A         Is this the one you just referred me to?


Q         It’s the same thing, but at the beginning of it, just before the cover page?


A         Yes. Schedule 14D-9.




Q         But in Exhibit (a)(10).


A         Okay.


Q         I want to ask you about the last highlighted sentence there, that was highlighted by iBasis when it filed this with its 14D-9, “The disclosure of the KPN June Projections should not be regarded as an indication that iBasis or any of its affiliates or representatives considers such projections to be a reliable prediction of future events, and the information should not be relied upon as such.”


Do you agree with that being an appropriate admonishment to the public or the shareholders that were reviewing these scenarios?


A         I think it’s — you know, as I said in my deposition, this is kind of standard legal language which usually accompanies this type of disclosure. So that is the way I interpreted that. I didn’t write this, but that’s the way I interpreted it, that that was pretty standard legal language, that you would see with any disclosure like this.


Q         Do you agree with it, that they should not be relied upon or used as a reliable prediction of future events?




A         I think the scenarios were well done. I also think that the outsourcing scenario is very similar to the iBasis scenario. It’s the one that I’m certainly working day in, day out, putting my sweat and blood into it at iBasis to make it happen.


Q         There was some discussion during the testimony earlier today by your CEO, and then references to you — by you, to a squeeze that began shortly after the consummation of the transaction in October ‘07. Do you recall that?


A         Yes.


Q         Is it in fact the case that iBasis has made reasonably consistent and increasing gross margins on the traffic that originates with KPN Mobile subsidiaries and operations throughout the last year, up through June ‘09?


A         Well, we have the fixed traffic stream and mobile traffic stream.


Q         I’m talking about the mobile here.


A         The fixed has been a declining. Mobile, in terms of volume, is an increasing traffic stream. So you know, overall, we have seen a growth in the traffic, as you would expect. Mobile is growing worldwide. What we are seeing is a




compression in the margin per minute on that traffic stream, as each of these actions get taken.


Q         Well, isn’t it in fact the case that you have maintained, on a — on all the traffic over the year, July ‘08 through June of ‘09, a gross margin in excess, for all of that mobile traffic — in excess of 10 or 11 percent?


A         What we have seen the compression on — not every quarter during that period of time you are pointing out.


Q         I said for the year, sir.


A         I mean, I tend to look quarter by quarter at what is happening.


Q         Let’s look at an exhibit that was sent to you, 1164, sent to you on June 30th — you sent it to Ajay Joseph. It has a lot of numbers on it, but if you look — second page of the attachment —


A         This is 1064?


THE COURT: 1164.






Q         Perhaps I should ask you: Do you recognize the report or the e-mail that you seem to have sent at the end of June?




A         This is a file that shows the traffic with the KPN entities.


Q         If you look at the second page, it has the consolidation of all of the traffic from the period July of ‘08 through June of ‘09 for the KPN Mobile Group, which includes all of the mobile operations. Correct?


A         I’m looking at page two. KPN Mobile — talking about the graph?


Q         No. I’m talking about the compilation that runs from Column Number 4 through Column Number 16 on the second page. The graphs are to the right. That is the wrong page, I think. There it is. Right there, the top.


A         Yeah.


Q         It says, “KPN Mobile Group.” That adds up all the numbers from the mobile group on the prior page, does it not?


A         Yes.


Q         It indicates that gross margin for that business, done by iBasis from the mobile group of KPN, runs between 9 percent and 13.2 percent, and averages, in cumulative total, well over 10 percent. Does it not?




A         This is not gross margin. This is — this is not gross margin. This is variable buy-sell margin. You need to subtract one-and-a-half to two percent from these numbers to get to the actual values.


Q         What are the components of cost that are left out of here that make this margin something other than the gross margin I was talking about?


A         Transmission cost is the major one. So we pay — we factor that into the gross profit, is the transmission cost. And that, in our business — depends on when you are looking at it. It’s anywhere from one-and-a-half to two percent. It’s a major component of our cost. When he calculate gross margin, gross profit, that has to be subtracted out.


So, you know, I think if you take one-and-a-half to two percent off of each of these numbers, you probably get there. And it’s — you know, this shows the significant compression that occurred after the E-Plus decision in October. If you look at ten, it dropped to 94. If you take one-and-a-half, two percent from that, it gives you an actual view of the compression that occurred.


The worst quarter was clearly the




fourth quarter of 2008, where we had the largest impact. That was right after the ruling occurred from the KPN board.


Q         Let me switch subjects, because I do not want to take a lot of our relatively precious time with you, because there are other witnesses —


A         Okay.


Q         — waiting.


Is it in fact the case that prior to the tender offer, you don’t know of ever saying, yourself, or of anyone else saying, that KPN was trying to drive down the iBasis stock price by squeezing the margins on iBasis’ business?


A         I think we made it very, very clear with each step of the way where margin was being impacted and where traffic was being impacted, revenue was being impacted. Every step of the way, we made it clear that this was a happening. We made it clear at multiple levels within KPN. The link to stock price, you need to — I mean, I’m not a financial analyst. Generally, when you see margins decrease or margin percent decrease or revenues decrease, it has some relationship.


Q         Did — you heard questions similar to




this asked of Mr. Gneezy. I’m asking you. Did you or, to your knowledge, anyone else within iBasis, ever say, in this long saga, starting in October and running right up through the tender offer, when these pricing discussions and demands were being made —ever say, “You can’t do that. That is inconsistent with the deal and the contract we did. You have to keep all of your traffic with us, whether or not you like our prices”? Did they ever say that?


A         There was definitely communications back to like — to entities, about 100 percent of the traffic, and getting 100 percent of the traffic. It was clearly our understanding, because it’s in the framework service agreement, that we were to get 99 percent of the traffic, which in telecom is 100 percent. You know it was very clear with regard to us.


I mean, I think the key is we had a business relationship, and we were trying to work as closely with these entities as possible, to make progress and deal with their concerns. But it was a business relationship, and you know, we weren’t to the point of pulling out contracts and threatening legal action at that point in time. We wanted to work




cooperatively with these organizations within KPN.


Q         Would it be fair to say, Mr. Floyd, that prior to the assertions that were made after the tender offer, neither you nor anybody else said, “You can’t do this. You can’t threaten to take your traffic elsewhere, particularly mobile traffic, because you have got a better price. It would be a breach of our agreement”?


Did anybody ever say that to KPN to your knowledge?


A         You are saying after the tender offer?


Q         Before.


A         Before the tender offer. You know, I — I don’t know what other people said specifically here, but you know, I certainly expressed concerns about these various actions that were being taken.


Q         Did you ever say, “You can’t do that. That would be a breach of the agreement”?


A         I don’t recall.


MR. BROADWATER: No further questions, Your Honor.


THE COURT: Redirect?


MR. KERSTEIN: No questions, Your Honor.




THE COURT: Thank you, sir. You may step down. Next witness.


MR. HALLOWELL: Your Honor, iBasis calls William Frank King.


WILLIAM FRANK KING, having been duly sworn, was examined and testified as follows:






Q         Good afternoon, Doctor King. Would you please state your name and business address for the Court?


A         William Frank King. 24 Pascal Lane Austin, Texas.


Q         What is your position at iBasis?


A         I’m on the board of directors.


Q         Are you involved with the special committee and tender offer process?


A         I am. I’m the chairman of the special committee.


Q         What do you do for a living, Doctor King?


A         I’m a private investor. I have been involved with a number of companies over the years, and now my efforts are mainly directed to company




W. F. King - Direct




Q         Could you please describe for the Court your education and any advanced degrees you hold?


A         I have a bachelor’s, electrical engineering, from the University of Florida; a master’s from Stanford in electrical engineering, also, and a Ph.D. in electrical engineering from Princeton.


Q         Please describe your professional experience before you became an iBasis board member?


A         Right out of graduate school, I went to IBM, worked in the research part of the IBM, and also product development for IBM. I was there 19 years.


I left IBM in 1988 and went to Lotus Development Corporation, ran product development for Lotus. That was a year that I joined my first external public company board.


And left Lotus in ‘91, went back to Texas, joined a startup in the software services area, and we took it public in ‘96 or ‘97. I hired my replacement in ‘98, and since then I have been doing board work for a number of companies.




Q         When did you join the iBasis board of directors?


A         In 2001.


Q         And are you one of the independent board members?


A         I am.


Q         What does it mean to be an independent board member at iBasis?


A         That I don’t have any employment role with the company, or any financial involvement with the company or any of its affiliates, including KPN.


Q         Do you understand iBasis’ business?


A         I do.


Q         Could you describe it for us, please?


A         IBasis is in the business of moving voice information around the world. In the case of iBasis, the voice communications are packetized and sent over a technology called voiceover internet protocol. So the packets — or the voice is digitized and then sent over the internet. It’s a very modern technology. It has cost advantages over the older technologies. We sell wholesale and retail. We are involved worldwide in this business.


Q         I want to discuss the work the iBasis




special committee did to evaluate the tender offer made for the minority shares of iBasis by KPN.


Who are the members of the iBasis special committee?


A         Myself, Bob Brumley and Charles Corfield.


Q         When was that special committee formed?


A         We were formed right after the tender offer. We were formed July the 15th.


Q         What was the iBasis special committee formed to do?


A         Okay. Our charter is to evaluate the tender offer, to fulfill our duties with respect to the regulatory filings, and to ensure that the shareholders, the minority shareholders, of the company get a fair deal.


Q         When did you first hear about the tender offer made for iBasis’ shares by KPN?


A         I heard on July the 12th. I got a call from Ofer Gneezy, the CEO. He told me that we were going to receive a letter saying that KPN was going to launch a hostile tender offer.


Q         What was the price per share that KPN




offered at that time?


A         $1.55.


Q         Did you have an immediate reaction to that price?


A         I did. I thought that was very low. I thought — I believe I said to Ofer that “They are just trying to buy us with our own cash.”


Q         What did you mean by that?


A         Well, we had 58 or $59 million of cash on the balance sheet at that time, and they offered 48 for the company.


Q         When did the special committee first begin to evaluate the $1.55 tender offer by KPN?


A         When it was formed on July 15th, that’s when we started our process.


Q         At the time the special committee was first formed, had you already decided what recommendation you would make to the iBasis shareholders?


A         No. You know, I have been on boards a number of years, a number of boards. I take this work very seriously. I knew that we had to follow a process. I needed to instruct myself and the committee on what that process was, hire the right




advisors, get the work going, and be sure along the way that we deliberated thoughtfully and carefully about this.


Q         What did the special committee do at the outset to evaluate?


A         First thing was to hire advisors. We hired legal advisors. We hired a financial advisor. We hired ancillary advisors around public relations and shareholder relations.


Q         Who were the legal advisors?


A         Richards, Layton & Finger and Gibson, Dunn.


Q         Okay. And after hiring the legal advisors, you hired financial advisors?


A         We interviewed a number of three financial firms, and we selected Jefferies.


Q         What was the special committee’s financial advisor hired to do?


A         The role of the financial advisors are to evaluate the price, the offering, using methodologies that they have, and to report that to the special committee.


Q         Did you ask iBasis management to provide any information in connection with the special




committee’s analysis of the tender offer?


A         I did. Early in the process, talking to Dennis Friedman, our lead legal advisor from Gibson, Dunn, we talked about how the process was going to unfold. And it was apparent that we needed a plan from management to drive the valuation that Jefferies would do. So I called Ofer and told him that we needed such a plan, and he said it was under way.


Q         Did Jefferies meet with management regarding the development of that plan?


A         I understand they did. I didn’t attend those meetings. I understand that they did, to understand the plan and, I think, in their words, to make sure that it made sense.


Q         Did iBasis’ management ultimately provide the five-year plan to the special committee and to Jefferies?


A         Yes, they did.


Q         I would like you to focus on the five-year plan now. It’s Joint Exhibit 171 in your binder.


A         Okay.


Q         Do you recognize this document?




A        Yes. This is the five-year plan.


Q         Would you describe for the Court your understanding of what this document is?


A        Okay. This is a financial plan. And so the primary elements are in the — you know, the next page is a profit-and-loss statement for the company for five years, starting 2009, going through 2014. Our business is moving minutes, voice traffic. So the first driver of the financial plan is the minutes, then times the revenue that we get per minute, yielding total revenue, minus the costs, give you gross profit, yielding EBITDA and, ultimately, a net income.


So the financial plan is expressed in terms of P&L.


Q         Could you describe the key assumptions that are reflected in the five-year plan?


A        The business — iBasis runs its business by focusing on specific segments: Trading, which is our wholesale business; retail, which is where we have — we sell calling cards to customers, and they can access the iBasis network in order to make their phone calls; and we have an outsource business with two companies, KPN and TDC. So we — as




we examined the — and developed projections for revenue, we do it by those segments.


On the — your question was about the assumptions.


Q         Yeah.


A        On the page — next page, about the assumptions, these are the key assumptions that drive the financial plan. Do you want me to step through them?


Q         Quickly, if you don’t mind.


A        All right. Half of the business in the out years and a major part of the business in the early years — the major part of the business in the early years is our trading business. This is our wholesale business. The key assumption here — the two key assumptions, one is: What is the growth and what is the margin?


In terms of growth, the industry has been growing voice traffic at about 14 percent a year. We assume 12 percent for this plan. We assumed that the revenue per minute would continue to decline, as has been traditional, that cost efficiencies would offset that decline, and therefore, flat margin.


The retail business, which is a




smaller piece of our business and has grown rapidly in the past, we assumed a modest growth, again flat margins.


The KPN outsource business is divided into the fixed line business and the mobile traffic business. We assumed for the outsource business, fixed line, that it would be flat minutes from the second quarter of 2009 result. No growth in minutes. And we assumed that the margin would step down from 35 percent in ‘09, 30 in 2010, and then flat at 25, 2011 through 14. I believe the first two years of that are fixed by the agreement and the out three are to be negotiated.


The mobile business, which is a rapidly growing business, we only assumed a four percent per minute growth, and then, flat margins.


Then the other major driver of the plan in the future is the outsource business. We have two outsource customers today. We assumed that we would, in aggregate, add three billion minutes a year to our outsourced portfolio. And the way the plan laid that out, it was a billion-and-a-half every six months. That is on average. A large deal, the size




of KPN, which was 12 billion minutes, could do most of the five years of growth. Smaller deals like TDC, we would have to do one or two of those a year in order to generate this kind of growth. We assumed, again, a flat margin per minute for that.


Those were the major drivers of the plan, and those are the things that the special committee heard from management and discussed.


Q         So the special committee discussed this plan with management at a meeting of the committee?


A        Yes, we did.


Q         Tell me about those discussions. Did you ask questions of management at that time?


A        Yes. It was a very dynamic, interactive, as our discussions tend to be, about these assumptions. You know, I would say that if you look at the five-year plan, about half of the gross margin addition from Year 1 to Year 5 comes in the trading area. So, you know, the assumption there of being less than the market growth, I think, sounded reasonable to all of us.


The other major assumption is around the outsource business. And at that meeting, and at




virtually every board meeting I can remember over the last several years, Ofer has reported where we are with potential new outsourced or acquisition partners, and we went over that again at that meeting.


Q         Based on the information provide in the five-year plan and your meeting with management, did you form a view as to whether these assumptions were appropriate for iBasis?


A        Yes, we did. It was a view of the three of us that this is a doable plan. You know, it’s not a cake walk, but it’s the kind of plan that the company ought to be able to execute.


Q         Were these — were the assumptions contained in the five-year plan something you simply accepted at face value?


A        No. I mean, our job was to — was to make sure we agreed with it, to scrub it, to test it, to examine it, not to rubber stamp it.


Q         Did you conduct your own forensic examination of these plans?


A        We did not. The three board members involved here have all been on the board awhile, are from or know this industry, so, you know, we applied our judgment, what we knew about the company in the




past and what we brought to the table in terms of industry knowledge. But we didn’t go out and develop our own five-year plan.


Q         This plan came from management?


A        Yes.


Q         Did that cause you any concerns?


A        No. You know, I have been on the board since 2001. I know how this management team operates. It’s a high-integrity management team. There is a lot of attention to detail and a lot of ability to understand at a microscopic level, really, how to get margin — how to get profit out of this low-margin business. Coming from management I think gave it a lot of credibility.


Q         What did Jefferies do to review the five-year plan?


A        What I understand — I didn’t attend those meetings, but what I understand Jefferies did was met with management, heard the plan, applied their knowledge of the industry — I mean, that is why we hired Jefferies is because they know this industry. Apply their knowledge to this plan to — I think they said to see if it made sense.


Q         Doctor King, let’s focus on the work




performed by Jefferies. Did the special committee ultimately receive an analysis from Jefferies regarding the KPN tender offer?


A        Yes, we did.


Q         Do you know what information Jefferies used to generate that analysis?


A        Well, the five-year plan was a major input. Certainly, their knowledge of the industry. That analysis also includes valuation metrics; 18 of them, I think. And it’s — that is their specialization, really, to understand how to drive those valuation metrics.


Q         I want to turn your attention to Joint Exhibit 273. Within 273, in particular, I want to direct your attention to iBasis 021-3374.


A        74, okay.


Q         Have you seen this presentation before?


A        Yes, I have.


Q         What is it?


A        This is the presentation that Jefferies made as a result of their performing the valuation analysis for the special committee.


Q         Please turn to page 14 of the




presentation, which is iBasis 0213390.


A        90. Yes.


Q         What does this page show?


A        This is the heart of the Jefferies work. This page is the summary and a graphical depiction of the various valuation analyses that Jefferies did, given the iBasis five-year plan as input.


Q         Could you briefly describe your understanding of these methodologies?


A        Yes. The first nine horizontal bars, which indicate stock prices, are for — are based on comparable companies that Jefferies chose. The first three are based on a multiple of revenue, the second multiples are based on gross profit, and the third on EBITDA, important measures for any company.


Then within each of those three ranges was the revenue based on, say, the last 12 months or the next 12 months or the projection for the second year. So that is how you get those nine bars. So they are comparable company analysis based on those various metrics.


The middle part of the chart are analyses based on comparable transactions and




comparable premiums.


If a transaction occurred, again, based on EBITDA or revenue or gross margin, applying those same factors to the iBasis stock price, what would the range of fair stock prices be?


The premiums analysis start with the premium — start with the premium based on a transaction that occurred, and then whether — and then factored by the iBasis Day 1 or Day 20 trading price. And then the bottom one, the one — the ones I have discussed now all have to do with comparable companies. The one at the bottom is discounted cash flow, which is really one that is — you know, my eye always goes to, because it’s the one that really depends on the revenue and the profit the company generates.


Q         Did the special committee discuss this analysis prepared by Jefferies at its meeting?


A        Yes, it did, in detail.


Q         What meeting was that? Do you remember the date?


A        This was the July — this was the July 29th meeting.


Q         What was the substance of the special




committee’s discussion?


A        Well, we wanted to understand from Jefferies just, you know, this chart, and sort of what these methodologies were and, you know, just the mechanics of sort of how this chart came about. Then we, at Jefferies’ suggestion — we wanted to look at this in aggregate. These are a variety of techniques. You can have your favorites, but their suggestion, and the way the committee looked at it, was to look at this in the totality. What does this say about the price, the $1.55 price, and the committee concluded that the $1.55, you know, based on these 18 analyses, was either below or at the very low end of all of these ranges.


Q         And what did that tell you about the KPN’s offer of $1.55?


A        That was one input to what we thought of the offer. The other thing, that all of us had been on boards and been in the industry, have a sense of where the economy is; and secondly, the three of us know quite well iBasis’ strategy, plan, growth scenarios, and so forth; and thirdly, we — or fourthly, we were all acutely aware that we had done a stock buy-back in 2008 at roughly four bucks a share.




All of these things came into play when we said, “Given the totality of this, is this a fair offer?” And we came to the unanimous conclusion that it was grossly unfair.


Q         Did Jefferies provide a formal written about opinion about the offer?


A        Yes, they did.


Q         What was the substance of that opinion?


A        That the offer — they would not recommend that the minority shareholders would tender at that offer, that it was unfair.


Q         Did the special committee deliberate with regard to the $1.55 offer?


A        We discussed this — it was a long meeting, yes.


Q         Did the special committee ultimately determine to make a recommendation to the iBasis minority shareholders regarding the offer?


A        Yes, we did. We decided to file the 14D-9 and submit a press release the next day.


Q         When was that decision made?


A        It was made at this meeting on the 29th.




Q         And did the special committee discuss the tender offer with its financial and legal advisors, at the meeting you mentioned?


A        Yes. It was a full three-hour meeting, where we went through all the work that had been done, all the data that was on the table, what we all brought to the table in terms of industry knowledge, and so forth, and, you know, a very complete piece of work. I think we really did our job.


Q         Okay. Doctor King, I want to direct your attention to a different exhibit, which is Joint Exhibit 1204. The joint exhibit is not in the binder, but we can display it on the board.


A        Is it here? I can’t possibly see that.


Q         Is this document — this document is the final version of the presentation to the special committee. Correct?


A        Can you flip pages so that I can see more than one?


Q         Yes.


A        I mean, I — yes. I would say it is, but — I don’t see how it’s really different from the




one we just looked at.


Q         We will give you a copy.


A        You know, just looking at it briefly here, which — this looks exactly like what Jefferies presented.


Q         Taking a look at page JEF0115016.


A        Yes.


Q         Is this the football field that you reviewed at the special committee meeting?


A        Yes, it is.


Q         And this was the basis for the conclusion that you discussed earlier?


A        This was one of the inputs to that conclusion, yes.


Q         How would you characterize the special committee’s discussions with Jefferies and Gibson, Dunn before the committee reached its conclusions?


A        We wanted to — we wanted to be sure that we had done a thorough job, that we had taken into account what Jefferies was telling us, and what we also brought to the table from other — from our industry knowledge and our knowledge of the company. You know, it was a very complete conversation. As I said earlier, it was a long conversation. We were




comfortable with it.


Q         Okay. And you mentioned that the special committee directed that a press release and a 14D-9 be issued?


A        Yes.


Q         And did those documents contain the basis for the decision — for the recommendation of the special committee with regard to the KPN offer?


A        Yes, it did.


Q         I would like to turn your attention, now, from the $1.55 offer to the shareholder rights plan.


A        Yes.


Q         In addition to the recommendation to the shareholders regarding the offer, did the special committee examine defensive actions at its meeting in July of 2009?


A        Yes, we did.


Q         At the time the committee was first formed, had you decided to recommend that the special committee adopt a shareholder rights plan?


A        No. Not at all. Actually, to the contrary. In one of the earliest conversations I had about the process, and how the special committee was




going to work with Mark Flynn, our corporate counsel — Mark said that normally a tool that special committees might have at their disposal was a rights plan, and that in our case, because of the bylaw agreement with KPN, that that wasn’t available to us. So from the start — you know, from sort of preforming of the special committee, that is how — that is what I had heard.


Q         What do you mean by “the bylaw”?


A        There is an agreement in our merger with KPN that certain actions are prohibited without the unanimous consent of the two KPN-nominated iBasis directors.


Q         That is contained within the bylaws of iBasis?


A        Yes.


Q         Is there also a shareholder agreement with KPN?


A        Yes.


Q         That contains similar provisions? And what was your understanding as to how those provisions would affect a possible shareholder rights plan?


A        Well, early on in the special committee deliberations, our counsel, Dennis Friedman,




took us through our fiduciary duties, you know, the sort of standard of loyalty and standard of care that we had to be sure we adhered to. He also told us that if the company — the minority shareholders were threatened by a tender offer, that it would be possible for the special committee to consider a rights plan. We talked a lot about sort of these two opposing requirements, the rights plan, on one hand, preventing the tender offer from continuing, and the bylaw saying that we couldn’t issue securities without the two KPN directors.


So we talked about that from early on, continued to talk about it during the process. We reached the conclusion that the duty, the fiduciary duty, that we had to the shareholders, to create a level playing field here in the environment that we were in at that time, required to us adopt this rights plan in spite of the bylaw.


Q         Was that a conclusion that you reached after receiving advice from Mr. Friedman and others?


A        Yes. Yes. Mr. Friedman discussed with us the requirement that we had to believe there was a threat to the minority shareholders of the company, that we had to develop a plan that was




appropriate to that threat, that we had to — we had to have a purpose for that plan.


In my mind, the purpose was that we had received a very woefully low, grossly inadequate, tender offer price. At that time, there were a lot of things swirling around about which set of disclosures KPN had used. So that needed to be sorted out so shareholders would really know what the appropriate information should be.


There was the possibility that there might be a third party that might come along and suggest a price, or suggest something, that would cause KPN to respond with a higher price. You know, these were the things that were in our mind that justified taking this step.


Q         The advice that you had received, how was it delivered to the special committee?


A        At special committees meetings and then a subsequent board meeting. Dennis described this to us orally.


Q         Was there also a description of the mechanics of the rights plan?


A        There was, yes. We were taken through much detail about exactly how it worked. At a special




committee meeting and then the — prior to the full board meeting, you know, the — that information was available to the other board members who were not on the special committee.


Q         At the special committee level, was this issue regarding the shareholder rights plan discussed at one meeting or several meetings?


A        No. This started early in the process, you know, the possibility of doing this. The balance between the fiduciary duty, on one hand, and the conflict with the bylaw, that was an ongoing conversation that we had. Then as we sort of saw what rolled out with respect to disclosure, you know, we continued to discuss it throughout the process.


Q         When it was discussed, was it done in an offhand or off-the-cuff manner?


A        No. We understood this was a very serious matter.


Q         Okay. Did the special committee ultimately determine that KPN’s tender offer was a threat to the shareholders of iBasis?


A        Yes, we did.


Q         What were the factors that you considered in that?




A        It begins with it being woefully low at a very inopportune time. The offer was opportunistic, given where we were with respect to just finishing the KPN integration. We spent a lot of money on that. We were just starting to realize the synergies there. It happened right before our second quarter. So they were aware of our results. All of the disclosure issues were swirling at that time. So you know, we needed a mechanism so that our — that we could communicate with our shareholders about what was going on, and to see whether we could get a better price for them, and to get clear information to them about this tender offer.


Q         Did the special committee determine that the rights plan was a reasonable response to KPN?


A        We did. It’s limited to one year. And you know, it’s — it’s been delegated to the special committee to determine if the rights plan needs to last that long.


Q         When did the special committee, as a group, resolve to recommend to the board of iBasis that it adopt a —


A        As a group, we did it unanimously on the 29th.




Q         Thereafter, was that recommendation taken up by the iBasis board?


A        It was. We had a board meeting the next day, and the special committee and Dennis made a report to the board, again discussed this area. Dennis repeated his legal advice at that meeting, about the need to realize and to believe there was a threat to the minority shareholders, and to develop something that was appropriate, an appropriate response to that threat. He went over at that meeting our fiduciary duty. We talked at that meeting about the fiduciary duty versus the bylaw. So we had a very complete conversation at the board level about that issue.


Q         Did Mr. Friedman provide additional legal advice regarding conflicts?


A        He did. He said that because of the KPN governance manual, that he — that — how did he say it? He said — I don’t know if he said, “I don’t know if they,” or, “they won’t” vote on the matter. But the implication I took was that the KPN directors could not or should not vote on the matter, because of their conflict of interest.


Q         Was the decision ultimately made by




the iBasis board to adopt the shareholder rights plan?


A        It was.


Q         I would like to turn your attention back to the $1.55 offer. Did you receive any response from shareholders regarding the $1.55 offer?


A        Yes, we did. We received two or three letter from shareholders.


Q         I would like to turn your attention Joint Exhibit 1217.


A        I have it.


Q         Is this an example of the letters you received from shareholders?


A        Yes, it is.


Q         What is the substance of this letter regarding the $1.55 offer?


A        From this shareholder, which is a shareholder that holds a substantial amount of our stock, they agreed with the special committee that the offer at that time, the $1.55, was undervalued, undervalued the company and its prospects, and was timed to take advantage of the stock price. And the letter goes on to encourage the special committee in the actions that it has taken.


Q         Did the iBasis special committee




continue to meet after its recommendation to iBasis shareholders on July 30th?


A        Yes.


Q         And in fact, did there come a time when KPN submitted a revised tender offer?


A        Yes. On October 5th.


Q         What was the substance of that revised offer?


A        KPN revised the offer to $2.25 a share, and included a couple of additional provisions that had to be fulfilled for them to proceed.


Q         After KPN announced its revised offer, what did the special committee do?


A        Well, we really went into reset. We had been through a process to evaluate the $1.55. We realized, now, that we needed to go through an additional process from the beginning, looking at the $2.25 offer. We contacted Jefferies and asked them to prepare a new valuation analysis, you know, starting from scratch.


Q         Did Jefferies do that?


A        Yes, they did.


Q         Did Jefferies meet with management in connection with that offer?




A        Yes, they did.


Q         Did Jefferies report back to the special committee with regard to that?


A        Yes, they did.


Q         Draw your attention to Joint Exhibit 1299?


A        I have it.


Q         Is this the presentation that was made by Jefferies to the special committee on October 13?


A        Yes, it is.


Q         I want to direct your attention to page 15 of this document, which is iBasis 0213488?


A        I have it.


Q         Is this a revised valuation summary prepared by Jefferies?


A        Yes. This is the new valuation summary that Jefferies did, based on the 2.25 — the dotted line here is for the 2.25 price.


Q         Could you describe, briefly, what happened at the October 13th special committee meeting?


A        Well, I had called Ofer and the CFO, Dick Tennant, prior to that meeting, to tell them that when we did — when we heard Jefferies’ valuation




analysis on the 13th, that I wanted to go back through the five-year plan, to sort of redo and to revalidate the assumptions, to make sure that they were still consistent with what I and the special committee believed were appropriate; and so that the company should be prepared, on a line item by line item basis, go through that scenario, through those assumptions.


And so at this meeting, before we ever — before Jefferies ever started, I asked the company — and we turned to the assumptions page in the five-year plan. We went through every one of those again, to be sure that they were still appropriate. We again talked about outsourcing. We talked about the pipeline for outsourcing because of that being half of the growth in the plan. We spent quite a long time going over this again, to be sure that our process was thorough and that the assumptions were still appropriate.


Q         So you not only reviewed the new analysis prepared by Jefferies, you re-reviewed the five-year plan, and the assumptions contained therein?


A        That’s correct.


Q         Looking at the valuation summary, could you describe the reactions of the special




committee to this presentation?


A        Well, the first thing we observed is that the comparable company analysis at the top, they had all shifted to the right. And that reflects a change in the valuations of the comparable companies.


You know, instead of being in the low twos or high ones, this goes from sort of the threes to the sixes or sevens. So we observed that.


We went through, looking at the comparable transaction analysis. Not much changed there. In the premium analysis, the telecom premium analysis, there is no change. And we reflected on that a bit, because if you sort of look down where the 2.25 fits on that — fits on those bar graphs, it hits it about the middle of those — of the premiums analysis.


So the special committee stopped at that point to dwell on that point, to decide whether that was telling us something. And Bob Brumley really led the charge here. What he observed, and we all agreed, is what this analysis is is starting with a price and then applying a premium to the price. If you start with a low price, a very low price, a depressed price, because of where iBasis and the




market were when the tender was initially sent over the transom, you get this kind of — you get this kind of result. We felt then, and we feel now, that that — that analysis, you know, we have to look at that with a jaundiced eye because of the starting point.


The DCF, we observed, changed a tiny bit. We wondered why. It was because of a balancing change on the part of the company. We looked through this in depth and talked with Jefferies about the changes.


Q         Did you request that any additional work be prepared?


A        At that meeting, prior to going into executive session, we discussed with Jefferies doing an additional analysis. One of the things that I wanted to be sure of was that, you know, if some catastrophic thing happened and the company missed by a Draconian amount its plan — I wanted to know what these kinds of analysis would tell us. And so I — I made up, on the spot, an additional analysis I wanted Jefferies to do. I asked them to do a DCF assuming that the company missed its gross margin for each of the five years by 20 percent and did not make any cost adjustments, so didn’t spend less but brought in




20 percent less gross margin.


Q         Did you can ask for that work because you expected that to happen?


A        No. I asked for this work because I wanted to see, under a Draconian assumption, whether the 2.25 would even start to get into the range. And —


Q         Did Jefferies prepare that analysis?


A        They did. They brought that back the next day.


Q         Take a look at Joint Exhibit 1301, please?


A        Yes. That’s it.


Q         What were the conclusions that you drew from this analysis?


A        Well, the original DCF suggests a stock price between 6 and $14 over — based on the five-year plan. This 20 percent reduction suggests somewhere between 3.32 and 7.82, so a big shift because of a big change in the gross margin, but still well above the offer.


Q         And based on these two presentations prepared by Jefferies, as well as the other information before the special committee, did the




special committee reach a conclusion about the 2.25 offer?


A        Yes, we did. We concluded that it was still woefully low.


Q         Did Jefferies provide an opinion with regard to the 2.25 offer?


A        They did.


Q         What was that opinion?


A        That opinion was that the minority shareholders should not — would not be recommended to tender, and that the price was low.


Q         And did you once again make those recommendations to the iBasis minority shareholders?


A        We did, through the filing and through a press release.


Q         Okay. Are the reasons for your recommendation set forth in those documents accurate?


A        Yes, they are.


Q         When did you first know that you would recommend against KPN’s revised offer?


A        When we reached the conclusion. I mean, we took this job very seriously. I think we executed a thorough process. We are senior people that are experienced in these things. We wanted to




make sure we did a good job. We really — the second analysis was really a reset of the first one. It was, “Let’s go back and look at this again with fresh eyes, to be sure that we are still comfortable with saying this offer is very low.”


Q         You were comfortable?


A        Very comfortable.


Q         I want to ask you about the rights plan in the context of the 2.25 revised offer. Is the shareholder rights plan still in effect?


A        It is.


Q         Did the special committee consider, at all, whether to rescind the shareholder rights plan or to recommend a rescission of the rights plan in light of the 2.25 offer?


A        Yes, we did. Prior to our meeting on the 13th, 14th, this was in the front of my mind. Should we continue with the rights plan? Was there still a need for it?


It was an open question. We discussed it thoroughly. Again, the three committee members all expressed the same view, from different viewpoints, that the reason for the rights plan initially was a woefully inadequate offer, in an environment where




there were disclosure issues — that was ongoing then, and I understand it’s ongoing now — there is a possibility of a better offer, either from KPN or a third party, or interactions there that would produce more for the shareholders; fourthly, that the special committee, using its tools and advisors that it has available to it, can do analyses and understand more fully than just the average shareholder.


So we feel like we are — we still have an important reason, and essentially the same reason, for keeping the rights plan in effect at this time, as we did when we initially adopted it.


Q         The special committee ultimately determined not to rescind?


A        That’s correct.


Q         Has the special committee received feedback from shareholders with regard to the revised 2.25 offer?


A        We got some additional letters, yes.


Q         What are the substance of those letters?


A        That the shareholders did not intend to tender at 2.25, that they agreed with the actions of the special committee, and applauded what we were






Q         Letters or no letters, are you comfortable with the work done by the special committee to date?


A        I am. We have been thorough, diligent. We have applied the process from the get-go, both times. We have examined the company’s plan. We have examined and relied on the information we got from our legal and our financial advisors. Yes, I’m comfortable with what we have done.


MR. HALLOWELL: Thank you, Doctor King no. Further questions.






Q         Good afternoon, Doctor King.


A        Hello.


Q         It is correct, sir, that the special committee in this case was able to disclose whatever facts and information it wanted to the minority shareholders about the tender offer. True?


A        We did disclose additional information to our minority shareholders about the tender offer as we knew it at that time.


Q         You did it thoroughly and diligently




W. F. King - Cross


and after a thorough evaluation of all the facts and circumstances, with the help of all your advisors. Right?


A        Yes.


Q         The committee was not precluded in any way from its ability to provide facts, data, value analysis, and the like, to the minority shareholders. True?


A        That is correct. The — you know, the one thing you are leaving out is the conversations that are ongoing with a third party that could affect whether or not this offer is the best — the best thing for our minority shareholders.


Q         And the special committee directed that numerous substantive voluminous disclosures be made. True?


A        I don’t know what you mean by numerous and substantive. Disclosures were made, yes.


Q         There has been a lot of press releases, Schedule 14Ds, things like that?


A        Yeah. Five or six press releases and two 14Ds.


Q         And all of those disclosures, the special committee asked that there be disclosures




about the price being low, and that integration has been completed, and this offer is opportunistic, and all the things you said on your direct. That is in your disclosures. Right?


A        Yes, it is.


Q         And, you know, even if — there may be some debate about whether there are other projections or other documents, but if there were such things, the special committee could order that those be disclosed tomorrow. Right?


A        I don’t think they could —


Q         They could say whatever additional projections that need to be disclosed should be disclosed. Right?


A        I don’t think we control that totally.


Q         Well —


A        If they are from KPN.


Q         Doctor King, you have been on the board from — from, you know — at least from the very first time that any discussions between iBasis and KPN occurred about a transaction dating back to 2005 and 2006. True?


A        Yes. Since 2001.


Q         And during that entire time period,




you have reached the understanding that the agreements between KPN and iBasis do not guarantee iBasis a consistent margin on the KPN Mobile traffic. True?


A        True.


Q         And you have reached the understanding that under the agreements, iBasis is not guaranteed all of the business of the KPN Mobile affiliates. Right?


A        Not guaranteed all, yes.


Q         And instead, for mobile traffic under the agreements, iBasis is a preferred supplier. True?


A        I believe that’s what it states.


Q         And your understanding is that the KPN Mobile affiliates, such as E-Plus and Base, can use other suppliers besides iBasis if the prices are not competitive. Correct?


A        Our understanding going into this with KPN was we were going to be a partnership, that certain EBITDA streams were expected, and those EBITDA streams have not materialized because of the actions of KPN.


Q         You believe that the agreement between these parties allows KPN to use others if the prices are not competitive. True?




A        True.


Q         You are aware when it happened that price pressure was being put on iBasis in 2008. Right?


A        I was certainly aware of that.


Q         E-Plus and other mobile affiliates were asking for those lower prices, and Mr. Gneezy told you about that occurring in real time. Right?


A        That, we got a ruling from the KPN board about our prices.


Q         Your view is that KPN placing price pressure on iBasis is not a violation of any of the agreements between the companies. Right?


A        Well, when I look at KPN putting pressure on iBasis, you know, I have to examine that in a sort of a total picture. It’s not good for iBasis. It’s not good for KPN. And so the aha that we came to when we received the tender offer is: Why are they doing this? I know Ofer had been over to talk to the top of their company about the impact of EBITDA on iBasis. EBITDA drives, to a large extent, our stock price. If they are driving our EBITDA down, why are they doing it, because it’s not helping them? In fact, as 56 percent owners of the company, they




should see it as hurting them. So it was that light bulb that went on that led to our actions.


Q         You believe that placing price pressure on iBasis was not in violation of any agreements between the companies. Right?


A        I’m not an expert in the framework services agreement. So, you know, whether I can say that with certainty, no. I know we were getting price pressure, and let me just pause there.


Q         Can I have page 28 of Doctor King’s deposition, lines 20 to 24? This is a deposition that my colleague, Mr. Paik took. Do you remember that?


A        Yes, I do.


Q         You were under oath at the time?


A        I was.


Q         Were you asked this question, and did you give this answer: “You stated that KPN was placing pricing pressure on iBasis. Do you believe that placing pricing pressure on iBasis was in violation of any agreements between the companies?


“Answer: No.”


Were you asked that question and did you give that answer?


A        Yes.




Q         Thank you. You were aware in November of 2008, after the board ruling by KPN — Mr. Gneezy sent you an e-mail in which he said the price pressure was permissible. Right?


A        I’m not right now recalling that e-mail.


Q         Can I have JX 1108?


A        Is all of this in this binder you gave me?


Q         It is. It is. I apologize, Doctor King, for not mentioning it.


A        Where do you want me to read?


Q         Just at the top of the e-mail. This is from Mr. Gneezy to yourself and Mr. Corfield and Mr. Brumley. It’s right after the KPN board ruling. “We have been under pressure from E-Plus, KPN’s mobile operation in Germany, to meet prices offered to them by a third party carrier or lose their traffic. Even though this is permissible by the SPA, we felt that this was too onerous and will significantly diminish the value of the business we bought from KPN.” Do you see those words, sir?


A        I do.


Q         When he was writing that the price




pressure from E-Plus was permissible by the SPA, that exactly matches your understanding that you just testified to about pricing pressure not violating any agreements. Right?


A        It does.


Q         Okay. I’m finished with that document. Thank you. Thus, to your knowledge, KPN has never not been in compliance with the terms of the agreements between iBasis and KPN?


A        That’s broader than I know.


Q         You are not aware of KPN ever being out of compliance with the terms of the agreements between iBasis and KPN. Right?


A        This was a partnership, we thought, with KPN. And during this time, we were trying to work as partners. We were trying to work things out. We were trying to get relief from these pricing actions by working with KPN. So we weren’t at the point of pointing at legal documents. We were trying to work business partner to business partner.


Q         You are not aware of KPN ever being out of compliance with any agreement with iBasis. True?


A        I can’t point to a place in the




document that I would be able to say they are out of agreement with that. It’s because I’m not an expert on those documents.


Q         Can I have page 38 of his deposition, lines 8 through 12?


At your deposition, Doctor King, were you asked this question and did you give this answer?


“Question: To your knowledge, has KPN ever not been in compliance with the terms of the agreements between iBasis and KPN?


“Answer: I’m not aware of them being out of compliance with the agreements.”


A        Which is the way I just answered your question.


Q         Just asked — were you asked that question and did you give that answer?


A        I did.


Q         Thank you. In February, 2009, Mr. Gneezy gave a PowerPoint presentation to the iBasis board where he told you that KPN was in compliance with the SPA and the framework agreement. Do you remember that?


A        Not specifically.


Q         Well, let me call up JX 132 at slide




18. It’s also on the screen for you?


A        I need to see it. What is the number?


Q         It’s JX 132.


A        I have got that.


Q         Slide Number 18?


A        Okay.


Q         This was from a PowerPoint at a meeting you attended in February, and the last bullet is, “In compliance with SPA and framework agreement.” Do you see that?


A        I do.


Q         That is exactly consistent with your recollection of you telling me a couple of answers ago that you are not aware of KPN ever being out of compliance with any agreement. Right?


A        That’s what I answered a few answers ago.


Q         And it’s consistent with the slide on this chart. Right?


A        Yes.


Q         Okay. I’m done with that one. Thank you.


Doctor King, I’m sorry. Excuse me. Doctor King, you are aware that KPN has provided




financial benefits to iBasis beyond what is required by the parties’ agreements. True?


A         Beyond what is required by the party agreements? I couldn’t point to specifics there. I know there have been concessions on some of these pricing issues.


Q         For example, there has been some testimony this morning by Mr. Floyd that after the transaction, some unexpected fees or costs arose. Do you recall that issue coming up after the transaction?


A         I recall that there were — there were unexpected costs that got partially reimbursed. You know, I think — I think another point here, that while KPN might have been in agreement with the letter of the law, they weren’t in agreement with the spirit of the law. And the whole point here is posing the question: Why were they doing things to drive down our EBITDA? It affects our stock price. They knew that. They know that. So the point here is these actions, while perhaps under the letter of the law, were, A, not in the spirit of the law and, B, not in the interests of our shareholders.


And you know, then we get the tender offer, and we say, “Why were they doing this?” Maybe




there was an intent there.


Q         I was asking about the transaction costs?


A         Thank you.


Q         Do you recall that issue coming up, where some unexpected costs or fees arose after the transaction and KPN at least partially reimbursed those? True?


A         Yes. I vaguely recall that. I couldn’t tell you the amounts, or anything like that, but I think I did hear that.


Q         That is one example of KPN helping iBasis. Right?


A         When you cause extra expenses and you don’t fully reimburse them, it doesn’t feel like a whole lot like help, but it still feels like partial hurt.


Q         You recall there was a delay in the reduction of the fixed margin percentage decline, the stepdown. There was a delay by the — by one year, that KPN agreed to?


A         I’m not aware of that.


Q         You don’t sort of remember hearing something about that?




A         No.


Q         That stepdown was supposed to be five percent a year, and because the deal got delayed because of the — certain issues at iBasis, that the schedule got pushed out by one year?


A         No.


Q         Five percent? Did you hear that KPN allowed iBasis to defer repayment of a substantial loan?


A         Yes. I believe we paid interest on that, but yes.


Q         But KPN agreed to delay the repayment schedule?


A         Yes.


Q         At your request?


A         Yes.


Q         And that helped iBasis?


A         I believe when Ofer went to see their CEO, he told them that their actions had cost us $8 million in EBITDA. I don’t think these things that you are citing begin to affect that amount.


Q         I asked whether or not delaying the loan repayment at the request of iBasis was something that iBasis wanted and it helped them?




A         I’m just trying to put it in context.


Q         Did it help them?


A         In context, in totality, you know, small help, still big hurt.


THE COURT: Let’s pause there. We will come back at 3:30.


(Recessed at 3:15 p.m.)




(The proceedings resumed at 3:28 p.m.)


THE COURT: You may continue.


MR. McATEE: Thank you, Your Honor.




Q.        Dr. King, before the break we were talking about — I had some questions about KPN’s interactions with iBasis. And is one of the things that you recall that KPN assisted iBasis in securing a transaction known as TDC?


A.        Yes, I do.


Q.        And that was a transaction that brought substantial additional minutes of traffic into iBasis?


A.        Yes, it did. And that happened early on in the relationship.


Q.        But after the merger; true?


A.        Yes.


Q.        And that was of financial benefit to iBasis.


A.        And to KPN.


Q.        And, also, did Mr. Gneezy happen to mention to you that for the current outsourcing transaction that’s kind of on the horizon, I think Mr. Gneezy called it a Middle East company, did he




explain to you how KPN had helped iBasis make inroads with respect to that company?


A.        No.


Q.        To — to sum this up, I — will you — will you agree with me that whatever the help was that KPN gave to iBasis after the merger, whatever it was, however big it was, those actions to help iBasis after the merger would be inconsistent with a scheme or a plot to drive their stock price into the ground; true?


A.        You have to look at the totality. We saw some good signs, but we saw the business relationship getting worse and worse. And — and, you know, if I just saw the good signs, I would agree with you; but when I see the other signs of actions that reduced our margin, I disagree with you. So you have to look at the totality. And in totality, you know, this was not helping our business.


Q.        You — you mentioned an — that Mr. Gneezy had told you the pressure had cost $8 million?


A.        In EBITDA, yes.


Q.        Did you ever do an analysis or ask Mr. Gneezy to do an analysis of how much money the — the good things that KPN did, how much that helped






A.        No.


Q.        Did you ever quantify?


A.        No, I didn’t.


Q.        Okay. Did — did Mr. Gneezy ever tell the special committee that the seven percent aspect of the KPN ruling, that, in fact, that never got implemented?


A.        I don’t recall exactly how that ended up. I knew it was — it was under great debate. I know that the original amount that — the size of the cut that we were to take Mr. Gneezy told KPN management that we couldn’t do it. But I’m not certain how it ended up.


Q.        Do you recall any special committee meeting where Mr. Gneezy explained that, in fact, with respect to the seven percent aspect of the ruling, Mr. Blok and Mr. Farwerck had — had helped in getting that ruling not implemented?


A.        That was not discussed at the special committee.


Q.        Let me switch gears to the tender offer. And I’ll start with the first announcement at the $1.55 price, as you did in your direct.




And what you heard from Mr. Gneezy on the very first day that that happened was $1.55 was too low and it’s unfair; right?


A.        I think what he said was “They’re trying to steal the company.”


Q.        And he was real clear that first day; right?