<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
--------------
FORM 8-K
--------------
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) June 14, 2000
-------------------
Global Crossing Ltd.
(Exact name of registrant as specified in its charter)
-------------------
Bermuda 000-24565 98-0189783
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) File Number) Identification No.)
Wessex House, 45 Reid Street
Hamilton, Bermuda HM12
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (441) 296-8600
================================================================================
<PAGE>
Item 2. Acquisition or Disposition of Assets.
On June 14, 2000, Global Crossing Ltd., a Bermuda company ("Global
Crossing"), completed its acquisition of IPC Communications, Inc. and Ixnet,
Inc. A copy of the Agreement and Plan of Merger among Global Crossing, Georgia
Merger Sub Corporation, IPC Communications, Inc., IPC Information Systems,
Inc., Idaho Merger Sub Corporation and IXnet, Inc. is incorporated by
reference herein to Annex A of the information statement contained in Global
Crossing's Registration Statement on Form S-4 (File No. 333-34592) filed on
May 12, 2000.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Businesses Acquired.
Consolidated and combined financial statements of IXnet, Inc. for the
six months ended March 31, 2000;
Consolidated and combined financial statements of IXnet, Inc. for each
of the three years ended September 30, 1999;
Consolidated financial statements of IPC Communications, Inc. for the
six months ended March 31, 2000; and
Consolidated financial statements of IPC Communications, Inc. for each
of the three years ended September 30, 1999.
(b) Pro Forma Financial Information.
Pro forma Global Crossing financial information as of and for the
three months ended March 31, 2000; and
Pro forma Global Crossing financial information for the year ended
December 31, 1999.
2
<PAGE>
IXNET, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except per share amount)
<TABLE>
<CAPTION>
March 31, September 30,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 6,583 $ 39,020
Marketable securities..................................... -- 28,357
Marketable securities, restricted......................... 3,000 20,435
Accounts receivable, net.................................. 26,374 17,824
Prepaids and other current assets.......................... 6,946 5,505
-------- --------
Total current assets..................................... 42,903 111,141
Long term marketable securities, restricted................. -- 6,065
Property and equipment, net................................. 100,316 80,170
Goodwill, net............................................... 73,809 49,773
Other assets................................................ 768 889
-------- --------
Total assets............................................. $217,796 $248,038
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... $ 28,599 $ 10,198
Accrued liabilities........................................ 30,938 22,445
Current portion of capital leases.......................... 6,727 5,636
Current portion of notes payable........................... 8,744 14,502
--------- ---------
Total current liabilities................................ 75,008 52,781
Note payable to parent...................................... 65,851 52,122
Lease obligations, less current portion..................... 18,504 15,412
Notes payable, less current portion......................... 2,403 4,854
--------- ---------
Total liabilities........................................ 161,766 125,169
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock--$0.01 par value, authorized 100,000 shares;
51,149 and 51,075 shares issued and outstanding at
March 31, 2000 and September 30, 1999, respectively..... 511 511
Paid-in capital............................................ 256,337 249,080
Accumulated deficit........................................ (180,524) (109,176)
Deferred compensation................................. (18,548) (16,797)
Accumulated other comprehensive loss....................... (1,746) (749)
--------- ---------
Total stockholders' equity............................... 56,030 122,869
--------- ---------
Total liabilities and stockholders' equity............... $ 217,796 $ 248,038
========= =========
</TABLE>
See Notes to Consolidated and Combined Financial Statements
3
<PAGE>
IXNET, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended March 31, Six Months Ended March 31,
----------- ----------- ----------- -----------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue $ 29,017 $ 19,859 $ 52,142 $ 32,611
Cost of revenue (exclusive of depreciation and
amortization shown separately below) 30,950 18,476 55,695 30,934
Sales and marketing expense 7,931 2,786 13,736 4,878
General and administrative expense 5,881 1,600 10,357 2,815
Depreciation and amortization 10,157 5,586 18,368 9,508
Stock compensation charge 1,236 - 2,599 -
Merger related costs 18,539 - 18,539 -
----------- ----------- ----------- ----------
Loss from operations (45,677) (8,589) (67,152) (15,524)
Interest expense, net (1,693) (2,493) (2,853) (4,318)
Other income, net (543) (64) (444) (18)
----------- ----------- ----------- ----------
Loss before provision for income taxes (47,913) (11,146) (70,449) (19,860)
Provision for income taxes 587 134 899 257
----------- ----------- ----------- ----------
Net loss $ (48,500) $ (11,280) $ (71,348) $ (20,117)
=========== =========== =========== ==========
Basic and diluted loss per share $ (0.95) $ (0.26) $ (1.40) $ (0.47)
=========== =========== =========== ==========
Basic and diluted weighted average number of
shares outstanding 51,128 43,100 51,101 43,100
=========== =========== =========== ==========
</TABLE>
See Notes to Consolidated and Combined Financial Statements.
4
<PAGE>
IXNET, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Six Months ended March 31,
--------------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss..................................................................... $(71,348) $(20,117)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................... 13,830 6,226
Amortization of goodwill.................................................... 4,538 3,282
Bad debt and sales credit provision......................................... 3,671 529
Stock compensation charges.................................................. 2,599 --
Changes in operating assets and liabilities:
Trade receivables.......................................................... (11,707) (2,016)
Prepaids and other assets.................................................. (851) 701
Accounts payable and accrued liabilities................................... 24,331 (212)
-------- --------
Net cash used in operating activities....................................... (34,937) (11,607)
-------- --------
Cash flows from investing activities:
Capital expenditures........................................................ (26,208) (7,683)
Acquisition of Saturn, net of cash acquired................................. -- (34,713)
Acquisition of Business Networks of New York (BNNY), net of cash
acquired................................................................... (23,571) --
Acquisition of Systems Programming & Network Computing, Inc. (SPNC), net of
cash acquired ............................................................. (293) --
Net change in investment of marketable securities........................... 52,453 --
-------- --------
Net cash provided (used by) investing activities........................... 2,381 (42,396)
-------- --------
Cash flows from financing activities:
Cash financing from parent, net............................................. 11,956 54,893
Principal payments on capital leases........................................ (3,024) (2,152)
Issuance of note in connection with SPNC
acquisition................................................................ 100 --
Capital transactions with parent............................................ 587 5,254
Repayment of notes payable.................................................. (8,503) (555)
-------- --------
Net cash provided by financing activities................................... 1,116 57,440
-------- --------
Effect of exchange rate changes on cash....................................... (997) (631)
-------- --------
Net (decrease)/increase in cash............................................... (32,437) 2,806
Cash and cash equivalents, beginning of period................................ 39,020 1,255
-------- --------
Cash and cash equivalents, end of period...................................... $ 6,583 $ 4,061
======== ========
Non-cash investing and financing activities-
Capital lease obligations entered into during the period.................... $ 7,207 $ 5,345
Deferred compensation in connection with grants of stock options............ 4,416 --------
</TABLE>
See Notes to Consolidated and Combined Financial Statements.
5
<PAGE>
IXNET, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. Background and Basis of Presentation
IXnet, Inc. ("IXnet" or the "Company") provides communications services tailored
to the specialized needs of the worldwide financial services community. The
Company has built and operates an Extranet, a global network connecting members
of the financial services community as well as multiple offices within the same
firm. The Company provides global services including managed voice and data
services, switched voice communications and content hosting and distribution of
news, research, analytics and market data.
IXnet started its business as International Exchange Networks, Ltd. ("IEXN"),
which was incorporated in Delaware on March 8, 1993. On June 23, 1995, IPC
Information Systems, Inc. ("IPC"), acquired 80% of the outstanding common stock
of IEXN and acquired the remaining 20% on April 30, 1998. On March 31, 1999,
IPC contributed $73 million of IEXN's then outstanding note payable to IPC into
IEXN's paid-in capital.
MXNet, Inc. ("MXNet") was incorporated in Delaware on May 24, 1996, as a wholly
owned subsidiary of National Discount Brokers Group, Inc. On February 13, 1998,
IPC acquired the outstanding common stock of MXNet, which was contributed to
IEXN in May 1999.
On May 4, 1999, IPC contributed 100% of the outstanding common stock of IEXN to
the Company. In addition, on May 4, 1999, the Company was incorporated in
Delaware as a wholly owned subsidiary of IPC with 2,000 shares of common stock,
par value $0.01 per share, authorized, and 1,000 shares issued to IPC.
Effective July 1, 1999, the Company amended its certificate of incorporation to
increase its authorized shares to 100,000,000. On June 30, 1999, the Company
declared a 43,100 for one stock split effective July 1, 1999, resulting in
43,100,000 shares issued and outstanding.
The Company completed an initial public offering (the "Offering") of 6,500,000
shares of common stock at $15 per share on August 12, 1999. On August 30, 1999,
the underwriters exercised their over-allotment option and purchased an
additional 975,000 shares of common stock at $15 per share.
On February 22, 2000, the Company, IPC and IPC Communications, Inc. entered into
a merger agreement with Global Crossing, Ltd. (the "Merger"). The Merger was
approved by a majority of the Company's and IPC's stockholders. Under the terms
of the Merger agreement, at the closing, Company stockholders will be entitled
to receive 1.184 shares of Global Crossing common stock for each share of
Company common stock and IPC stockholders will be entitled to receive 5.417
shares of Global Crossing common stock for each share of IPC common stock. The
Merger is expected to be completed by the end of the Company's third fiscal
quarter. For the three and six months ended March 31, 2000, the Company recorded
costs of $18.5 million related to the Merger. These costs primarily included
investment banker fees, legal fees, other professional fees, and other direct
costs.
The financial statements as of and for the three and six months ended March 31,
2000, and as of September 30, 1999, include the accounts of IXnet and its
consolidated subsidiaries. The financial statements for the three and six months
ended March 31, 1999, combine the historical financial information of IEXN and
its consolidated subsidiaries with the historical financial information of
MXNet. Intercompany balances and transactions between IEXN and MXNet have been
eliminated. Additionally, the financial statements present the issued and
outstanding shares of IXnet as if they had been in place for the quarter ended
March 31, 1999. The financial statements include certain corporate expenses
incurred by IPC that have been charged to the Company. Management believes these
allocations are reasonable.
In the opinion of management, the accompanying unaudited financial statements
include all necessary adjustments (consisting of normal recurring accruals and
appropriate inter-company elimination adjustments) for a fair presentation of
the financial position of IXnet, Inc. as of March 31, 2000, and the results of
its operations for the three and six months ended March 31, 2000 and 1999, in
conformity with generally accepted accounting principles, commonly referred to
as GAAP, for interim financial information applied on a consistent basis. The
results of operations for the three and six months ended March 31, 2000, are not
necessarily indicative of the results to be expected for the full year. Certain
information and note disclosures normally included in financial statements
prepared in accordance with GAAP have been omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. These financial
statements should be read in conjunction with IXnet's Annual Report on Form 10-K
for the year ended September 30, 1999.
6
<PAGE>
IXNET, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
(UNAUDITED)
2. Summary of Significant Accounting Policies
Accounts Receivable
Accounts receivable relate to the billing of communication services and are net
of allowance for doubtful accounts and sales credit provision of $2.9 million
and $2.1 million as of March 31, 2000 and September 30, 1999, respectively.
Earnings Per Share
Basic loss per share is computed using the weighted average number of common
shares outstanding during the year. Diluted loss per share is computed using
the weighted average number of shares of common stock adjusted for the dilutive
effect of common stock equivalent shares of common stock options. Common stock
equivalent shares are calculated using the treasury stock method. All stock
options outstanding have been excluded from the computation of diluted loss per
share as their effect would be antidilutive. Accordingly, there is no
difference between basic and diluted EPS.
3. Comprehensive Loss
Comprehensive loss includes the Company's net loss and foreign currency
translation adjustments. The tax effect and reclassifications are not
significant. The Company's total comprehensive loss for the six months ended
March 31, 2000 and 1999 was as follows (in thousands):
<TABLE>
<CAPTION>
Six Months Ended March 31,
------------------------------
2000 1999
---- ----
<S> <C> <C>
Net loss $(71,348) $(20,117)
Translation adjustment (997) (923)
------------------ --------------------
Total comprehensive loss $(72,345) $(21,040)
================== ====================
</TABLE>
4. Acquisitions and Strategic Agreement
Saturn Global Network Services Holdings Ltd.
On December 18, 1998, the Company acquired all of the issued and outstanding
common shares of Saturn Global Network Services Holdings Limited ("Saturn") from
Marshalls 106 Limited ("Marshalls"). The purchase price included the payment of
cash in the amount of $35.7 million (paid by the Company through borrowings from
IPC) and the issuance by the Company of a promissory note, guaranteed by IPC, in
the amount of $7.5 million bearing interest at the UK Sterling Base Rate, as
defined, plus three percent and payable over three years (the "Marshalls Note").
In addition, the Company assumed indebtedness of Saturn due to Marshalls in the
amount of $5 million payable over 24 months with interest at 9.25% (the "Saturn
Note"). Under this agreement, the Marshalls note is subject to a working
capital adjustment and right of offset. The working capital adjustment was
settled in June 1999 resulting in a reduction of $2 million.
Saturn, a UK holding company, owns telecommunication network operating
subsidiaries in the United Kingdom, USA, Hong Kong, Australia, Japan and
Singapore which sell managed premium grade voice and data communication services
to the financial community. The acquisition was accounted for using the purchase
method of accounting and resulted in $49.2 million of goodwill. Saturn goodwill
is being amortized over 10 years from the date of the acquisition.
7
<PAGE>
IXNET, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
(UNAUDITED)
Strategic Agreement
On September 24, 1999, IXnet entered into a strategic agreement (the "Strategic
Agreement"), including the licensing of certain software products to enhance
the intelligence of its network for a purchase price of $20.0 million
consisting of $10.0 million in cash financed from the proceeds from IXnet's IPO
and 500,000 shares of IXnet restricted common stock valued at an average closing
price prior to the agreement date. The Strategic Agreement is designed to
enhance IXnet's network capabilities with embedded intelligence, delivering
financial enterprise integration, subject-based addressing, trading turret
integration and application management.
Business Networks of New York, Inc.
Effective January 1, 2000, IXnet acquired all of the issued and outstanding
common shares of Business Networks of New York, Inc. ("BNNY"). BNNY is a leader
in providing voice and data services to the financial community, primarily in
the New York Metropolitan Area. The $26.5 million purchase price consisted of
$24.5 million in cash and 45,707 shares of IXnet common stock. The acquisition
was accounted for using the purchase method of accounting and resulted in $27.3
million of goodwill, which will be amortized over a 10 year period from the date
of the acquisition.
Systems Programming & Network Computing, Inc.
On January 25, 2000, IXnet acquired all of the issued and outstanding common
shares of Systems Programming & Network Computing, Inc. ("SPNC"). SPNC is a
leader in providing and integrating sophisticated multi-system, multi-platform
applications for the financial services community. The purchase price was
approximately $1.5 million and consisted of $300,000 in cash, a $100,000
promissory note issued by the Company and 6,080 shares of IXnet common stock.
The acquisition was accounted for using the purchase method of accounting and
resulted in $111,000 of goodwill, which will be amortized over a 5 year period
from the date of the acquisition.
5. Stock Compensation Charge
In May 1999, IXnet recorded $26.4 million in non-cash deferred stock
compensation reflecting the issuance by the Company of options to purchase
6,530,184 shares of common stock of IXnet at $13.96 per share. The deferred
stock compensation is based upon the deemed fair market value of IXnet's common
stock and the exercise price of such options issued on the date of grant. The
Company recorded an additional $2.1 million of non-cash deferred stock
compensation during the quarter and $4.4 during the six months ended March 31,
2000, which represents the charge for the issuance of options in May 1999 that
are treated as variable options for accounting purposes. Stock compensation
expense for the three and six months ended March 31, 2000 is $1.2 million and
$2.6 million respectively. The remaining deferred compensation will be amortized
over the remaining vesting period of the options. In addition, certain of these
options may be treated as variable options and may result in additional
compensation expense in future periods.
6. Property and Equipment
Property and equipment is comprised of the following (in thousands):
<TABLE>
<CAPTION>
March 31, September 30,
Useful Lives 2000 1999
------------ ---- ----
<S> <C> <C> <C>
Network equipment................................. 2 to 5 years $ 56,179 $39,700
Network equipment under capital leases............ 5 years 35,844 28,637
Indefeasible rights of use........................ IRU term 10,760 6,571
Network software.................................. 3 years 24,546 21,485
Office equipment and furniture.................... 5 years 7,964 6,227
Leasehold improvements............................ Lease term 3,827 2,524
-------- -------
Total depreciable property and equipment......... 139,120 105,144
Less accumulated depreciation and amortization... (38,804) (24,974)
-------- -------
$100,316 $ 80,170
======== ========
</TABLE>
8
<PAGE>
IXNET, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
(UNAUDITED)
Accumulated depreciation of network equipment under capital leases at March 31,
2000 and September 30, 1999, was $13.9 million and $10.8 million,
respectively.
7. Disclosures about Segments of an Enterprise and Related Information
The Company is focused on providing a seamless global network providing a
variety of voice, data, and content distribution services which has been
specifically designed to meet the specialized requirements of the financial
services industry. All of our revenue is derived from our global network. All
operating expenses and assets of the Company are combined and reviewed by the
chief operating decision makers on an enterprise wide-basis, resulting in no
additional discrete reportable segment information.
Our network connects customers in 38 countries around the world and we have
major offices in New York, London and Sydney from which we coordinate our sales
and marketing, finance and administrative functions in North America, Europe and
the Asia Pacific countries. We refer to these areas as regions. All of our
products and services are similar in each of the regions. We specifically
address the needs of the financial services industry and therefore the types and
class of customers for all products and services in each of the regions are
similar. The methods of providing services on our global network are similar.
Enterprise wide information is provided in accordance with SFAS 131
"Disclosures about Segments of an Enterprise and Related Information".
Geographic sales information is based on the currency in which the customer is
billed. Long-lived asset information is based on the physical location of the
assets. The following is revenue and long-lived asset information for geographic
areas (in thousands):
Six Months ended March 31,
----------------------------
2000 1999
---- ----
Long-Lived Long-Lived
Revenue Assets Revenue Assets
------- ------ ------- ------
North America............... $29,736 $112,844 $18,046 $ 40,467
Europe...................... 12,628 57,652 10,011 59,909
Asia/Pacific................ 9,778 4,397 4,554 2,192
------- -------- ------- --------
$52,142 $174,893 $32,611 $102,568
======= ======== ======= ========
For the six months ended March 31, 2000, revenue from the United States, United
Kingdom, and Australia represented 57.0%, 23.4%, and 9.8% of total revenue,
respectively. For the six months ended March 31, 1999, revenue from the United
States and the United Kingdom represented 54.0% and 28.0% of total revenue,
respectively.
As of March 31, 2000, long-lived assets located with the United States and the
United Kingdom represented 64.5% and 31.8% of total long-lived assets,
respectively. As of March 31, 1999, long-lived assets located within the United
States and the United Kingdom represented 39.5% and 58.3% of total long-lived
assets, respectively.
For the six months ended March 31, 2000, no individual customer represented
more than 10% of total revenue. For the six months ended March 31, 1999, two
customers accounted for 14.4% and 11.5% of total revenue.
8. Commitments and Contingencies:
Intercompany Agreement
As of July 1, 1999, the Company, IPC and IEXN entered into an intercompany
agreement which provides, among other matters, for IPC to furnish up to $50.0
million of credit, including the provision of letters of credit, guarantees and
other forms of credit enhancements limited to $6.25 million per quarter,
commencing July 1, 1999 and continuing through the quarter ending June 30, 2001.
Outstanding notes payable on July 1, 1999 and additional amounts borrowed under
the agreement bear interest at the Base Rate, as defined, plus 2%. Any and all
amounts advanced by IPC which are outstanding on June 30, 2001 shall be
immediately due and payable.
9
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
IXnet, Inc.:
In our opinion, the accompanying consolidated and combined balance sheets and
the related consolidated and combined statements of operations, stockholders'
equity and cash flows present fairly, in all material respects, the financial
position of IXnet, Inc. and its subsidiaries at September 30, 1999 and 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended September 30, 1999 in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/S/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, New York
November 30, 1999
10
<PAGE>
IXNET, INC.
CONSOLIDATED AND COMBINED BALANCE SHEETS
(Amounts in thousands, except per share amount)
<TABLE>
<CAPTION>
September 30,
-------------------
1999 1998
--------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 39,020 $ 1,255
Marketable securities................................... 28,357 --
Marketable securities, restricted....................... 20,435 --
Accounts receivable, net................................ 17,824 9,844
Prepaids and other current assets....................... 5,505 2,707
--------- --------
Total current assets.................................. 111,141 13,806
Property and equipment, net............................... 80,170 36,351
Long term marketable securities, restricted............... 6,065 --
Goodwill, net............................................. 49,773 9,023
Other assets.............................................. 889 1,152
--------- --------
Total assets.......................................... $ 248,038 $ 60,332
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable........................................ $ 10,198 $ 7,028
Accrued liabilities..................................... 22,445 9,007
Current portion of capital leases....................... 5,636 4,057
Current portion of notes payable........................ 14,502 --
--------- --------
Total current liabilities............................. 52,781 20,092
Note payable to parent.................................... 52,122 43,629
Lease obligations, less current portion................... 15,412 11,570
Notes payable, less current portion....................... 4,854 --
--------- --------
Total liabilities..................................... 125,169 75,291
--------- --------
Commitments and contingencies
Stockholders' equity (deficit):
Common stock--$0.01 par value, authorized 100,000
shares;
51,075 and 43,100 shares issued and outstanding at Sep-
tember 30, 1999 and 1998, respectively................. 511 431
Paid-in Capital......................................... 249,080 33,830
Accumulated deficit..................................... (109,176) (49,709)
Deferred compensation................................... (16,797) --
Accumulated other comprehensive (loss) income........... (749) 489
--------- --------
Total stockholders' equity (deficit).................. 122,869 (14,959)
--------- --------
Total liabilities and stockholders' equity (deficit).. $ 248,038 $ 60,332
========= ========
</TABLE>
See Notes to Consolidated and Combined Financial Statements
11
<PAGE>
IXNET, INC:
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year ended September 30,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenue......................................... $ 73,615 $ 35,853 $ 17,838
Cost of revenue (exclusive of depreciation and
amortization shown separately below)........... 73,097 35,652 19,823
Sales and marketing expense..................... 13,063 8,455 4,172
General and administrative expense.............. 8,312 5,001 3,439
Depreciation and amortization................... 21,575 9,060 3,460
Special charge.................................. -- 1,350 --
Stock compensation charge....................... 9,079 -- --
-------- -------- --------
Loss from operations.......................... (51,511) (23,665) (13,056)
Interest expense, net........................... (6,999) (3,527) (2,040)
Other income (expense), net..................... 336 26 117
-------- -------- --------
Loss before provision for income taxes........ (58,174) (27,166) (14,979)
Provision for income taxes...................... 1,293 473 229
-------- -------- --------
Net loss...................................... $(59,467) $(27,639) $(15,208)
======== ======== ========
Basic and diluted loss per share................ $ (1.35) $ (0.64) $ (0.35)
======== ======== ========
Basic and diluted weighted average number of
shares outstanding............................. 44,085 43,100 43,100
======== ======== ========
</TABLE>
See Notes to Consolidated and Combined Financial Statements.
12
<PAGE>
IXNET, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Year ended September 30,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................... $(59,467) $(27,639) $(15,208)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.................. 15,656 6,865 3,279
Amortization of goodwill....................... 5,919 2,195 181
Provision for doubtful accounts................ 1,693 1,674 325
Deferred compensation charges.................. 9,079 -- --
Changes in operating assets and liabilities:
Trade receivables............................ (6,190) (5,957) (3,178)
Prepaids and other assets.................... (1,566) (135) (2,471)
Accounts payable and accrued liabilities..... 5,762 7,904 2,403
-------- -------- --------
Net cash used in operating activities.......... (29,114) (15,093) (14,669)
-------- -------- --------
Cash flows from investing activities:
Capital expenditures......................... (24,208) (12,930) (3,495)
Acquisition of Saturn, net of cash acquired.. (34,713) -- --
Investment in marketable securities.......... (28,357) (842) --
-------- -------- --------
Net cash used in investing activities........ (87,278) (13,772) (3,495)
-------- -------- --------
Cash flows from financing activities:
Net proceeds from initial public offering.... 102,775 -- --
Financings from parent, net.................. 82,792 23,476 12,887
Capital transactions with parent............. 3,098 9,478 5,535
Principal payments on capital leases......... (5,214) (3,125) (1,818)
Repayment of notes payable................... (1,556) -- --
-------- -------- --------
Net cash provided by financing activities.... 181,895 29,829 16,604
-------- -------- --------
Effect of exchange rate changes on cash.......... (1,238) (234) 469
-------- -------- --------
Net increase (decrease) in cash.................. 64,265 730 (1,091)
Cash and cash equivalents, beginning of period... 1,255 525 1,616
-------- -------- --------
Cash and cash equivalents, end of period......... $ 65,520 $ 1,255 $ 525
======== ======== ========
Cash paid during the period for interest......... $ 6,118 $ 3,527 $ 2,040
Non-cash investing and financing activities--
Capital contributed by parent:
Acquisition of remaining 20% of International
Exchange
Networks, Ltd............................... $ -- $ 4,800 $ --
Acquisition of MXNet Inc., net of cash
acquired.................................... -- 6,660 --
Capitalization of note payable to parent..... 73,000 -- --
Installment purchase of indefeasible rights of
use........................................... -- 3,600 --
Capital lease obligations entered into during
the period.................................... 10,284 6,414 9,685
Deferred compensation in connection with grants
of stock options.............................. 26,382 -- --
Purchase of software in connection with the
strategic agreement........................... 20,000 -- --
Acquisition of Saturn:
Fair value of assets acquired.................. $ 58,456 $ -- $ --
Less: Fair value of liabilities assumed and
note issued................................... 23,743 -- --
-------- -------- --------
Acquisition of Saturn, net of cash acquired.... $ 34,713 $ -- $ --
======== ======== ========
</TABLE>
See Notes to Consolidated and Combined Financial Statements.
13
<PAGE>
IXNET, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CHANGES IN
STOCKHOLDERS' EQUITY (DEFICIT)(1)
(In thousands)
<TABLE>
<CAPTION>
Common Stock
-------------
Paid-in Accumulated Deferred
Shares Amount Capital Deficit Compensation Subtotal(1)
------ ------ -------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30,
1996................... 43,100 $431 $ 7,357 $ (6,862) $ -- $ 926
Paid-in capital....... -- -- 5,535 -- -- 5,535
Net loss.............. -- -- -- (15,208) -- (15,208)
Translation
adjustment........... -- -- -- -- -- --
------ ---- -------- --------- -------- --------
Balance, September 30,
1997................... 43,100 431 12,892 (22,070) -- (8,747)
Paid-in capital....... -- -- 20,938 -- -- 20,938
Net loss.............. -- -- -- (27,639) -- (27,639)
Translation
adjustment........... -- -- -- -- -- --
------ ---- -------- --------- -------- --------
Balance, September 30,
1998................... 43,100 431 33,830 (49,709) -- (15,448)
Issuance of common
stock in initial
public offering, net
of expenses.......... 7,475 75 102,775 -- -- 102,850
Issuance of common
stock in connection
with strategic
agreement............ 500 5 9,995 -- -- 10,000
Capitalization of note
payable to Parent.... -- -- 73,000 -- -- 73,000
Deferred stock option
compensation......... -- -- 26,382 -- (26,382) --
Amortization of
deferred
compensation......... -- -- -- -- 9,079 9,079
Other deferred
compensation
adjustments.......... -- -- (506) -- 506 --
Capital contribution
for IPC's utilization
of tax benefits...... -- -- 3,604 -- -- 3,604
Net loss............ -- -- -- (59,467) -- (59,467)
Translation
adjustment......... -- -- -- -- -- --
------ ---- -------- --------- -------- --------
Balance, September 30,
1999................... 51,075 $511 $249,080 $(109,176) $(16,797) $123,618
====== ==== ======== ========= ======== ========
</TABLE>
--------
(1) The Consolidated and Combined Statements of Changes in Stockholders' Equity
(Deficit) continues on page 15.
See Notes to Consolidated and Combined Financial Statements.
14
<PAGE>
IXNET, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands)
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Comprehensive
Subtotal(1) Income (Loss) Total Loss
----------- ------------- -------- -------------
<S> <C> <C> <C> <C>
Balance, September 30, 1996.. $ 926 $ (36) $ 890 --
Paid-in capital.......... 5,535 -- 5,535 --
Net loss................. (15,208) -- (15,208) $(15,208)
Translation adjustment... -- 202 202 202
-------- ------- -------- --------
Total comprehensive
loss.................. $(15,006)
========
Balance, September 30, 1997.. (8,747) 166 (8,581) --
Paid-in capital.......... 20,938 -- 20,938 --
Net loss................. (27,639) -- (27,639) $(27,639)
Translation adjustment... -- 323 323 323
-------- ------- -------- --------
Total comprehensive
loss.................. $(27,316)
========
Balance, September 30, 1998.. (15,448) 489 (14,959)
Issuance of common stock in
initial public offering,
net of expenses........... 102,850 -- 102,850 --
Issuance of common stock in
connection with strategic
agreement................. 10,000 -- 10,000 --
Capitalization of note
payable to Parent......... 73,000 -- 73,000 --
Deferred stock option
compensation.............. -- -- -- --
Amortization of deferred
compensation.............. 9,079 -- 9,079 --
Other deferred compensation
adjustments............... -- -- -- --
Capital contribution for
IPC's utilization of tax
benefits.................. 3,604 -- 3,604 --
Net loss................. (59,467) -- (59,467) $(59,467)
Translation adjustment... -- (1,238) (1,238) (1,238)
-------- ------- -------- --------
Total comprehensive
loss.................. $(60,705)
========
Balance, September 30, 1999.. $123,618 $ (749) $122,869
======== ======= ========
</TABLE>
--------
(1) The Consolidated and Combined Statements of Changes in Stockholders' Equity
(Deficit) is continued from page 14.
See Notes to Consolidated and Combined Financial Statements.
15
<PAGE>
IXNET, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1. Background and Basis of Presentation:
IXnet, Inc. ("IXnet" or the "Company") provides communications services
tailored to the specialized needs of the worldwide financial services
community. The Company established and operates an extranet, a global network
connecting members of the financial services community as well as multiple
offices within the same firm. The Company's services include globally available
services including managed voice and data services, switched voice
communications and content hosting and distribution of news, research,
analytics and market data.
The Company completed an initial public offering (the "Offering") of
6,500,000 shares of common stock at $15 per share on August 12, 1999. On August
30, 1999, the underwriters exercised their over-allotment option and purchased
an additional 975,000 shares of common stock at $15 per share. In connection
with the Offering, IXnet was incorporated in Delaware on May 4, 1999, as a
wholly owned subsidiary of IPC Information Systems, Inc. ("IPC") with 2,000
shares of common stock, par value $0.01 per share, authorized, and 1,000 shares
issued to IPC. Effective July 1, 1999 the Company amended its certificate of
incorporation to increase its authorized shares to 100,000,000. On June 30,
1999, the Company declared a 43,100 for one stock split effective July 1, 1999,
resulting in 43,100,000 shares issued and outstanding.
On May 4, 1999, IPC contributed 100% of the outstanding common stock of
International Exchange Networks, Ltd. ("IEXN") to the Company.
IEXN was incorporated in Delaware on March 8, 1993, with 10,000 shares of
common stock, par value $0.01 per share, authorized. On June 23, 1995, IPC
acquired 2,280 shares of IEXN (80% of the outstanding common stock after the
acquisition) and acquired the remaining 560 shares outstanding on April 30,
1998. On March 31, 1999, IPC contributed $73.0 million of IEXN's then
outstanding note payable to IPC into IEXN's paid-in capital.
MXNet Inc. ("MXNet") was incorporated in Delaware on May 24, 1996, as a
wholly owned subsidiary of National Discount Brokers Group, Inc. with 3,000
shares of common stock, par value $0.01 per share, authorized. On February 13,
1998, IPC acquired the outstanding common stock of MXNet which was contributed
to IEXN in May 1999.
The financial statements present the consolidated financial position,
results of operations, changes in stockholder's (deficit) equity and cash flows
of IEXN and its subsidiaries combined with the financial position, results of
operations, changes in stockholder's deficit and cash flows of MXNet as of and
for the periods that they were under common control. Additionally, the
financial statements present the issued and outstanding shares of IXnet as if
they had been in place for all periods presented. The financial statements
include certain corporate expenses (see Note 11) incurred by IPC that have been
charged to the Company on a direct or allocated basis. Management believes
these allocations are reasonable.
2. Summary of Significant Accounting Policies:
Principles of Consolidation and Combination
The consolidated financial statements as of and for the year ended September
30, 1999 include the accounts of IXnet and its consolidated subsidiaries. The
financial statements as of September 30, 1998 combine the historical financial
information of IEXN and its consolidated subsidiaries with the historical
financial information of MXNet from the date of its acquisition. Intercompany
balances and transactions within and between IEXN and MXNet have been
eliminated. The financial statements for the year ended September 30, 1997,
include the historical financial information of IEXN and its consolidated
subsidiaries.
16
<PAGE>
IXNET, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
Cash and Cash Equivalents
The Company places cash with high-credit quality financial institutions.
Temporary cash investments with original maturities of three months or less are
considered cash equivalents. Temporary cash investments are stated at cost,
which approximates fair value. These investments are not subject to significant
market risk.
Marketable Securities
Marketable securities consist of investments in short term government grade
commercial paper with maturities less than 1 year. Such securities are
classified as available for sale and, accordingly, are carried at fair value,
which approximates cost at September 30, 1999. The amortized cost of debt
securities is adjusted for amortization of premium and accretion of discounts
to maturity. Amortization of purchase premiums or accretion of discounts and
realized gains and losses are included in interest income.
On September 24, 1999, the Company entered into a strategic agreement
including the licensing of certain software products to enhance the
intelligence of the network. The purchase price included $10.0 million in cash
to be paid in installments over six months beginning on October 30, 1999.
Separately, the Company also entered into agreements to purchase indefeasible
rights of use ("IRU's") over the next three years in an aggregate amount of
$16.5 million. In accordance with an amendment to IPC's credit agreement
revised in connection with the strategic agreement, these amounts are invested
in marketable securities dedicated to satisfy these commitments.
Accounts Receivable
Accounts receivable relate to the billing of communication services and are
net of allowance for doubtful accounts of $2.1 million and $0.6 million for the
year ended September 30, 1999 and 1998, respectively.
Revenue Recognition
Revenues are billed and recognized monthly based on flat-rate monthly
charges. Installation revenue is deferred and recognized ratably over the
average contract term. Bandwidth and switched voice charges are billed and
recognized monthly based on customer usage.
Property and Equipment
Property and equipment are stated at cost and depreciated or amortized on a
straight-line basis over their estimated useful lives or related contract
terms, beginning in the year the asset is placed into service. Direct costs
related to the installation of network equipment are capitalized and
depreciated over the life of the asset.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of
the identifiable net assets acquired in purchase acquisitions. Goodwill is
amortized on a straight-line basis over the periods benefited. Goodwill
includes the related amounts recorded in connection with IPC's acquisitions of
IEXN and MXNet and IXnet's acquisition of Saturn. The Company assesses whether
its goodwill is impaired as required by SFAS 121, "Accounting for the
Impairment of Long Lived Assets and for Long Lived Assets to be Disposed of".
17
<PAGE>
IXNET, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
Comprehensive Loss
Effective October 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." This statement requires the Company to include within
its financial statements information on comprehensive income, which is defined
as all activity impacting equity from non-owner sources. Comprehensive loss
includes the Company's net loss and foreign currency translation adjustments.
The tax effect and reclassifications were not significant.
Income Taxes
The Company recognizes deferred income taxes for the tax consequences in
future years of differences between the tax bases of assets and liabilities and
the financial reporting amounts at each year end, based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount that is more likely than
not to be realized. The provision for income taxes is the tax payable for the
period and the change during the period in deferred tax assets and liabilities.
The Company is included in the consolidated federal income tax return of IPC
and computes its federal income tax provision on a separate return basis. Under
the tax sharing arrangement with its parent, the Company is reimbursed for the
benefit derived from inclusion of its tax losses in the consolidated federal
income tax return. Any difference between the amount of the federal income tax
provision or benefit determined on a separate return basis and the amount
received under the tax sharing arrangement is treated as a contribution to
paid-in capital.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the amounts of revenues and expenses during the period reported.
Actual results could differ from those estimates.
Segment Information
In 1999, the Company adopted Statement of Financial Accounting Standards
(SFAS) 131, "Disclosures about Segments of an Enterprise and Related
Information". SFAS 131 supersedes SFAS 14, "Financial Reporting for Segments of
a Business Enterprise", replacing the "industry" segment approach with the
"management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. SFAS
131 also requires disclosures about products and services, geographic areas and
major customers. The adoption of SFAS 131 did not effect the Company's results
of operations or financial position.
Foreign Currency Translation Adjustment
The balance sheets and statements of operations of the Company's foreign
operations are recorded using the local currency as the functional currency.
Assets and liabilities of these foreign operations are translated at the year-
end exchange rates and revenue and expense amounts are translated at the
average rates of exchange prevailing during the periods reported. Translation
adjustments arising from the use of differing exchange rates from period to
period are included in the cumulative translation adjustment account in
stockholders' equity (deficit).
18
<PAGE>
IXNET, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
Earnings Per Share
Basic loss per share is computed using the weighted average number of common
shares outstanding during the year. Diluted loss per share is computed using
the weighted average number of shares of common stock adjusted for the dilutive
effect of common stock equivalent shares of common stock options. Common stock
equivalent shares are calculated using the treasury stock method. All stock
options outstanding have been excluded from the computation of diluted loss per
share as their effect would be antidilutive. Accordingly, there is no
difference between basic and diluted EPS.
3. Effects of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivatives and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments and hedging
activities. The effective date of this standard was deferred to all fiscal
quarters of fiscal years beginning after June 15, 2000 by SFAS 137, "Accounting
for Derivative Instruments and Hedging Activities--Deferral of the Effective
Date of FASB Statement No. 133", which was issued on June 30, 1999. Management
does not believe the adoption of this standard will have a material impact on
the Company's operations.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998. The Company does
not anticipate the adoption of the standard to have a material effect on its
financial position, results of operations or cash flows.
4. Acquisitions and Strategic Agreement:
IEXN
During June 1995, IPC acquired an 80% interest in IEXN for $5.5 million in
cash. The acquisition was accounted for using the purchase method of accounting
and resulted in $1.3 million of goodwill. Under the initial acquisition
agreement, the Company is obligated to pay additional consideration to former
shareholders using a formula based upon operating results and market
capitalization through fiscal 2000. Based upon data as of September 30, 1999,
the Company's obligation calculated under this agreement is not material. On
April 30, 1998, IPC acquired the remaining 20% interest in IEXN held by two
management shareholders in exchange for 457,140 shares of IPC common stock,
valued at $4.8 million based upon the IPC closing share price on that date. The
acquisition of the remaining interest was accounted for using the purchase
method of accounting and resulted in $4.8 million of goodwill is being
amortized over seven years from the date of the original acquisition.
MXNet
In February 1998, IPC acquired, by the issuance of a promissory note in the
amount of $6.7 million, all of the issued and outstanding common stock of
MXNet, a wholly owned subsidiary of National Discount Brokers Group, Inc. The
promissory note plus accrued interest was paid on April 8, 1998. This
acquisition was accounted for using the purchase method of accounting and
resulted in $5.5 million of goodwill. MXNet goodwill is being amortized over
2.25 years from the date of acquisition.
19
<PAGE>
IXNET, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
The following unaudited pro forma statement of operations data for the years
ended September 30, 1998 and 1997, gives effect to the acquisition of MXNet as
if it had occurred on October 1, 1997 and 1996, respectively (in thousands):
<TABLE>
<CAPTION>
Year ended
September 30,
------------------
1998 1997
-------- --------
<S> <C> <C>
Revenue.............................................. $ 36,386 $ 18,663
Loss before provision for income taxes............... $(28,669) $(18,804)
</TABLE>
Pro forma adjustments include: (i) financial results of MXNet for the year
ended September 30, 1997; (ii) financial results of MXNet from October 1, 1997
to the date of acquisition; and (iii) amortization of goodwill over 2.25 years.
The pro forma financial information presented above is not necessarily
indicative of the operating results which would have been achieved had the
acquisition occurred at October 1, 1996 or 1997, or of the results to be
achieved thereafter.
Saturn Global Network Services Holdings Ltd.
On December 18, 1998, the Company acquired all of the issued and outstanding
common shares of Saturn Global Network Services Holdings Limited ("Saturn")
from Marshalls 106 Limited ("Marshalls"). The purchase price included the
payment of cash in the amount of $35.7 million (paid by the Company through
borrowings from IPC) and the issuance by the Company of a promissory note,
guaranteed by IPC, in the amount of $7.5 million bearing interest at the UK
Sterling Base Rate, as defined, plus three percent and payable over three years
(the "Marshalls Note"). In addition, the Company assumed indebtedness of Saturn
due to Marshalls in the amount of $5.0 million payable over 24 months with
interest at 9.25% (the "Saturn Note"). Under this agreement, the Marshalls note
is subject to a working capital adjustment and right of offset. The working
capital adjustment was settled in June 1999 resulting in a reduction of our
obligation by approximately $2.0 million. These notes, including interest, is
payable in the amounts of $4.7 million, $3.2 million and $2.4 million in 2000,
2001 and 2002, respectively.
Saturn, a UK holding company, owns telecommunication network operating
subsidiaries in the United Kingdom, USA, Hong Kong, Australia, Japan and
Singapore. It has an established business of selling managed premium grade
voice and data communication services to the financial community. The
acquisition was accounted for using the purchase method of accounting and
resulted in $49.2 million of goodwill. Saturn goodwill is being amortized over
10 years from the date of the original acquisition.
The following unaudited pro forma statement of operations data for the years
ended September 30, 1999 and 1998 gives effect to the Saturn acquisition as if
it had occurred on October 1, 1998 and 1997, respectively (in thousands):
<TABLE>
<CAPTION>
Year ended
September 30,
------------------
1999 1998
-------- --------
<S> <C> <C>
Revenue.............................................. $ 78,414 $ 61,171
Loss before provision for income taxes............... $(60,686) $(37,834)
</TABLE>
Pro forma adjustments include: (i) amortization of goodwill over 10 years;
(ii) interest expense on the Saturn Note and the Marshalls Note; and (iii)
interest expense on borrowings from IPC at a US bank prime rate plus two
percent. The pro forma financial information presented above is not necessarily
indicative of the operating results which would have been achieved had the
acquisition occurred at October 1, 1998 or 1997, or of the results to be
achieved thereafter.
20
<PAGE>
IXNET, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
Strategic Agreement
On September 24, 1999, IXnet entered into a $20 million strategic agreement,
including the licensing of certain software products to enhance the
intelligence of the network, for a purchase price consisting of $10.0 million
in cash, payable within the next twelve months, and 500,000 shares of
restricted IXnet common stock valued at an average closing price prior to the
agreement date. The strategic agreement is intended to create a unique network
infrastructure with embedded intelligence, delivering financial enterprise
integration, subject-based addressing, trading turret integration and
application management capabilities.
5. IPC Merger and Special Charge:
On April 30, 1998, Arizona Acquisition Corp. was merged into IPC (the
"Merger"). In connection with the Merger, IPC issued $247.4 million aggregate
principal amount at maturity of 10 7/8% Senior Discount Notes due 2008 (the
"Notes"). The Notes were issued under an indenture between IPC, as issuer, and
United States Trust Company of New York, as trustee.
The indenture contains various covenants and conditions which impose
limitations on IPC and its subsidiaries (including IXnet), including, (i)
indebtedness, (ii) restricted payments, (iii) dividends, (iv) issuance and sale
of capital stock of subsidiaries, (v) issuance of guarantees by subsidiaries,
(vi) certain transactions with shareholders and affiliates, (vii) liens, (viii)
sale-leaseback transactions, (ix) asset sales, and (x) maintaining various
financial ratios.
In connection with the Merger, IEXN incurred a special charge for bonuses
and the cancellation of IPC stock options of $1.4 million.
6. Property and Equipment:
Property and equipment is comprised of the following (in thousands):
<TABLE>
<CAPTION>
September 30,
----------------
Useful Lives 1999 1998
------------ -------- -------
<S> <C> <C> <C>
Network equipment............................. 2 to 5 years $ 39,700 $15,907
Network equipment under capital leases........ 5 years 28,637 20,717
Indefeasible rights of use.................... IRU term 6,571 4,448
Network software.............................. 3 years 21,485 --
Office equipment and furniture................ 5 years 6,227 3,871
Leasehold improvements........................ Lease term 2,524 2,127
-------- -------
Total depreciable property and equipment.... 105,144 47,070
Less accumulated depreciation and
amortization............................... 24,974 10,719
-------- -------
$ 80,170 $36,351
======== =======
</TABLE>
Included in accumulated depreciation and amortization at September 30, 1999
and 1998, was $10.8 million and $5.8 million, respectively, representing
accumulated depreciation of network equipment under capital leases.
21
<PAGE>
IXNET, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
7. Benefit Plans:
Pension Plans
The Company participates in IPC's defined contribution plan covering all
eligible US employees. According to plan provisions, IPC contributions are
discretionary and are subject to approval by IPC's board of directors. Eligible
employees may contribute 15% of their compensation up to $10,000 annually. The
Company contributed $184,519, $103,000 and $48,000 to the plan on behalf of the
Company's employees for the years ended September 30, 1999, 1998 and 1997.
IPC's Stock Option and Incentive Plans
Under IPC's 1994 Stock Option and Incentive Plan, 1998 Stock Option Plan,
and 1999 Incentive Stock Option Plan certain employees of the Company received
grants of stock options.
A summary of IPC's stock option plan and changes related to employees of the
Company as of September 30, 1999, 1998, and 1997, and for the years then ended
is presented below.
<TABLE>
<CAPTION>
Weighted
Average
Option Exercise
Shares Price
-------- --------
<S> <C> <C>
Outstanding at September 30, 1996............................ 231,000 $ 7.93
Options granted............................................ 186,000 $ 7.25
Options forfeited.......................................... (53,334) $ 7.53
Options exercised.......................................... (26,666) $ 6.83
-------- ------
Outstanding at September 30, 1997............................ 337,000 $ 7.71
Options forfeited.......................................... (4,002) $ 7.63
Options exercised.......................................... (4,998) $ 8.00
Options exercised and retired at merger.................... (328,000) $ 7.70
Options granted (1998 Option Plan)......................... 401,734 $10.50
-------- ------
Outstanding at September 30, 1998............................ 401,734 $10.50
Options forfeited.......................................... (22,868) $10.50
Options exercised.......................................... (160,300) $10.50
Options granted............................................ 195,146 $10.50
-------- ------
Outstanding at September 30, 1999............................ 413,712 $10.50
======== ======
</TABLE>
There were 413,712, 0, and 53,445 options exercisable at September 30, 1999,
1998 and 1997, respectively. The weighted average fair value per share of
options granted was $10.50, $4.10, $3.31 for the years ended September 30,
1999, 1998 and 1997, respectively. The weighted average contractual life of
stock options outstanding at September 30, 1999 was 9.1 years.
In connection with the Merger, IPC terminated the 1994 Option Plan and
replaced it with the 1998 Option Plan. Under the 1998 Option Plan, employees
generally vest in stock options over a five-year period, subject to certain
accelerated vesting provisions based on IPC common stock achieving specified
fair market levels for specified periods. Such fair market levels have been met
and accordingly, all options are vested and exercisable.
22
<PAGE>
IXNET, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
IXnet 1999 Stock Option Plan
During May 1999, IXnet's Board of Directors and IPC approved the 1999 Stock
Option Plan, authorizing the grant of options to purchase up to 7,053,409
shares of the Company's common stock. At that time, options to purchase
6,530,184 shares were granted to employees, directors and others at an
exercise price of $13.96 per share. Except for 1,763,352 options granted to
the Chief Executive Officer which vested immediately, such options vest over
four years. Options become exercisable, to the extent then vested, 30 months
from the date of grant.
In connection with the issuance of stock options under the Plan, the
Company recorded deferred compensation in the aggregate amount of
approximately $26.4 million based upon the deemed fair market value for
accounting purposes of IXnet's common stock at the date of grant. For the year
ended September 30, 1999, $9.1 million of the deferred compensation was
included as expense. The remaining balance will be amortized over the
remaining vesting period of the options. In addition, certain of these options
are treated as variable options for accounting purposes and may result in
additional deferred compensation expense in future periods.
A summary of IXnet's stock option plan from the initial issuance to
September 30, 1999 is as follows:
<TABLE>
<CAPTION>
Option Weighted Average
Shares Exercise Price
--------- ----------------
<S> <C> <C>
Beginning Balance............................. 6,530,184 $13.96
Options granted............................... 489,764 $16.04
Options forfeited............................. (193,919) $13.98
--------- ------
Outstanding at September 30, 1999............. 6,826,029 $14.11
========= ======
</TABLE>
Stock-Based Compensation
IXnet applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations in accounting for its
stock based compensation plans. Accordingly, no compensation expense has been
recognized for the 1994 or 1998 IPC Option Plan. The Company has adopted the
disclosure-only provisions of SFAS 123, "Accounting for Stock-Based
Compensation". In connection with the IPC Merger, the Company recognized
compensation expense in the amount of $875,000 in the year ended September 30,
1998, representing payments to IXnet option holders upon cancellation of their
IPC stock options. Had compensation expense for employees of the Company
receiving stock options under IXnet's 1999 Stock Option Plan, IPC's 1998 Stock
Option Plan and IPC's 1994 Option Plan been determined based on the fair value
at the grant date for awards under these plans in the years ended September
30, 1999, 1998, and 1997 respectively, consistent with the provisions of SFAS
123, the Company's net loss would have been increased to the pro forma amounts
indicated below (in thousands):
<TABLE>
<CAPTION>
Year ended September 30,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net loss--as reported...................... $(59,467) $(27,639) $(15,208)
Net loss--pro forma........................ $(63,076) $(28,114) $(15,859)
Basic and diluted loss per share--as
reported.................................. $ (1.35) $ (0.64) $ (0.35)
Basic and diluted loss per share--pro
forma..................................... $ (1.43) $ (0.65) $ (0.37)
</TABLE>
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes Option-Pricing Model with the following weighted
average assumptions used for grants for the years ended
23
<PAGE>
IXNET, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
September 30, 1999, 1998 and 1997, respectively: zero dividend yield and
expected volatility of 0.3%, 0.5% and 0.5%; weighted average risk-free interest
rate of 6.0%, 5.61% and 6.01%; and expected lives of 4, 3 and 4 years.
8. Supplemental Financial Data:
Prepaids and other current assets include the following (in thousands):
<TABLE>
<CAPTION>
September 30,
-------------
1999 1998
------ ------
<S> <C> <C>
Value added tax recoverable................................ $3,349 $1,211
Prepaid telecommunication transport lines and circuits..... -- 376
Deposits................................................... -- 750
Other receivables.......................................... 590 --
Other...................................................... 1,566 370
------ ------
$5,505 $2,707
====== ======
</TABLE>
Accounts payable include the following (in thousands):
<TABLE>
<CAPTION>
September 30,
--------------
1999 1998
------- ------
<S> <C> <C>
Installment purchase of IRU................................ $ -- $3,600
Trade accounts payable..................................... 10,198 3,428
------- ------
$10,198 $7,028
======= ======
</TABLE>
Accrued liabilities include the following (in thousands):
<TABLE>
<CAPTION>
September 30,
--------------
1999 1998
------- ------
<S> <C> <C>
Carrier costs.............................................. $12,351 $3,815
Compensation and benefits.................................. 3,463 2,206
Deferred revenue........................................... 2,695 615
Other...................................................... 3,936 2,371
------- ------
$22,445 $9,007
======= ======
</TABLE>
9. IPC's Revolving Credit Facility:
On June 21, 1999, IPC amended and restated its $55.0 million Revolving
Credit Facility to provide for a Working Capital Facility of $45.0 million and
a $20.0 million Term Loan. In addition, certain terms relating to eligibility
of receivables used in determining the amount available under the Working
Capital Facility were changed to increase the availability. The amendment and
restatement also provided for a pledge by IPC Communications of IPC common
stock and a pledge by IPC of IXnet common stock and certain additional
financial covenants including a leverage ratio and fixed charge ratio. All of
the Company's real and personal property will continue to be pledged as
collateral and the Company and its subsidiaries will continue to be guarantors
under IPC's revolving credit agreement. The $20.0 million Term Loan is
repayable in quarterly installments of $1.3 million, commencing September 30,
1999 and bears interest at LIBOR plus 2.75% or at the Base Rate plus 1.75% at
IPC's option. IPC's credit agreement, which provides for both the Working
Capital Facility and the Term Loan, matures on April 30, 2003.
24
<PAGE>
IXNET, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
10. Commitments and Contingencies:
Leases
The Company has entered into various operating leases for real estate,
equipment, and telecommunication transport lines and circuits and has entered
into capital lease agreements for certain network equipment.
Future minimum lease payments required under noncancellable capital and
operating leases at September 30, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Fiscal Leases Leases
------ ------- ---------
<S> <C> <C>
2000.................................................. $ 7,608 $ 24,154
2001.................................................. 7,322 5,438
2002.................................................. 5,184 4,268
2003.................................................. 3,414 3,853
2004.................................................. 1,525 3,813
Thereafter............................................ -- 2,142
------- -------
Total................................................. $25,053 $43,668
=======
Less, amounts representing interest................... 4,005
-------
Net present value of minimum lease payments under
capital leases....................................... $21,048
=======
</TABLE>
Expenses under operating leases were $17.1 million, $13.3 million, and $8.3
million for the years ended September 30, 1999, 1998, and 1997 respectively.
Indefeasible Rights of Use
The Company may enter into IRU agreements for participation in international
cable systems. Commitments under these agreements are payable as follows (in
thousands):
<TABLE>
<CAPTION>
Fiscal
------
<S> <C>
2000........................................... $10,435
2001........................................... 5,202
2002........................................... 863
-------
$16,500
=======
</TABLE>
Intercompany Agreement
As of July 1, 1999, the Company, IPC and IEXN entered into an intercompany
agreement which provides, among other matters, for IPC to furnish up to $50.0
million of credit, including the provision of letters of credit, guarantees and
other forms of credit enhancements limited to $6.25 million per quarter,
commencing July 1, 1999 and continuing through the quarter ending June 30,
2001. Outstanding notes payable on July 1, 1999 and additional amounts borrowed
under the agreement bear interest at the Base Rate, as defined, plus 2%. Any
and all amounts advanced by IPC which are outstanding on June 30, 2001 shall be
immediately due and payable.
25
<PAGE>
IXNET, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
The amount due IPC at September 30, 1999 and 1998, respectively, was $52.1
million and $43.6 million. For the quarter ended September 30, 1999, the $6.25
million limitation had been exceeded representing a delay in reimbursement of a
fourth quarter funding by IPC, the transfer of a UK VAT receivable from IPC to
the Company and interest expense on the outstanding amounts. The amounts were
subsequently reimbursed and the balances are now consistent with the
intercompany agreement.
Employment Agreements
The Company has executed employment contracts with certain senior executives
for future services that vary in length up to 5 years, for which the Company
has a minimum commitment aggregating $8.6 million at September 30, 1999.
11. Transactions with IPC:
IPC provided certain corporate functions on behalf of IXnet (relating to
accounting, executive management, legal, administrative, human resources,
information systems, insurance and other corporate functions). These expenses
have been allocated to IXnet based on its direct and indirect utilization of
specific services. Indirect expenses were allocated based on IXnet's headcount
in proportion to combined IXnet and IPC headcount. Included in general and
administrative expenses were corporate allocations of $1.8 million, $1.5
million, and $0.9 million for the years ended September 30, 1999, 1998 and
1997, respectively. Management believes these allocations are reasonable.
Amounts due IPC for these expenses are included in note payable to parent.
The note payable to parent includes net cash advances, payments of third-
party liabilities on behalf of IXnet and amounts due for direct and indirect
services performed by IPC, offset in part by tax benefits related to IXnet
which were utilized by IPC in its consolidated tax return. Interest expense in
the amounts of $5.1 million, $2.2 million, and $1.1 million for the years ended
September 30, 1999, 1998 and 1997, respectively, was charged based on a U.S.
bank prime rate plus two percent on the average net amount outstanding each
month. In addition, the Company uses IPC technicians to install certain network
equipment. Costs incurred for these technicians for the years ended September
30, 1999, 1998 and 1997 were $1.9 million, $325,000 and $250,000, respectively.
IXnet provides domestic and international long distance telecommunications
services to IPC as well as private line services between IPC's domestic
locations. Amounts charged to IPC were $155,000, $170,000 and $165,000 for the
years ended September 30, 1999, 1998 and 1997, respectively.
12. Income Taxes:
Pre tax earnings consisted of the following (in thousands):
<TABLE>
<CAPTION>
Year ended September 30,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
United States............................... $(55,768) $(28,218) $(15,425)
Foreign..................................... (2,406) 1,052 446
-------- -------- --------
Total pretax earnings....................... $(58,174) $(27,166) $(14,979)
======== ======== ========
</TABLE>
26
<PAGE>
IXNET, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
The provision for income taxes consisted of the following (in thousands):
<TABLE>
<CAPTION>
Year ended
September 30,
------------------
1999 1998 1997
------ ----- -----
<S> <C> <C> <C>
Current:
Federal.............................................. $ -- $ -- $ --
State and local...................................... -- -- --
Foreign.............................................. 1,149 358 --
------ ----- -----
$1,149 $ 358 $ --
====== ===== =====
Deferred:
Federal.............................................. $ -- $ -- $ --
State and local...................................... -- -- --
Foreign.............................................. 144 115 229
------ ----- -----
144 115 229
------ ----- -----
Income tax provision................................... $1,293 $ 473 $ 229
====== ===== =====
</TABLE>
The components of net deferred tax liabilities are as follows (in
thousands):
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------------------------
1999 1998
----------------------------------- -----------------------------------
Federal State Foreign Total Federal State Foreign Total
-------- ------- ------- -------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Deferred tax assets:
Amortization of
intangibles........... $ 3,343 $ 544 $ -- $ 3,887 $ 481 $ 80 $ -- $ 561
Accounts receivable.... -- -- -- -- 217 36 -- 253
Accrued expenses....... 398 65 -- 463 477 80 -- 557
Net operating loss..... 33,300 5,421 -- 38,721 17,512 2,927 -- 20,439
-------- ------- ----- -------- -------- ------- ----- --------
Total deferred tax
assets.............. 37,041 6,030 -- 43,071 18,687 3,123 -- 21,810
Deferred tax
liabilities:
Excess tax over book
depreciation.......... 1,701 367 550 2,618 1,402 234 406 2,042
-------- ------- ----- -------- -------- ------- ----- --------
Net deferred tax
(liability) asset..... 35,340 5,663 (550) 40,453 17,285 2,889 (406) 19,768
Less valuation
allowance........... (35,340) (5,663) -- (41,003) (17,285) (2,889) -- (20,174)
-------- ------- ----- -------- -------- ------- ----- --------
Net deferred tax
liability........... $ -- $ -- $(550) $ (550) $ -- $ -- $(406) $ (406)
======== ======= ===== ======== ======== ======= ===== ========
</TABLE>
The Company is included in the IPC consolidated federal income tax return
and the benefits of their net operating losses have been realized on such
return. Amounts received from IPC related to these benefits have been recorded
as capital contributions. Future income tax benefits from operating losses and
temporary timing differences will be recognized to the extent they would be
realized on a separate return basis.
The following table summarizes the significant differences between the U.S.
federal statutory income tax rate and the Company's effective tax rate for
financial statement purposes.
<TABLE>
<CAPTION>
Year ended September 30,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
U.S. federal statutory income tax rate.. (35.0)% (35.0)% (35.0)%
State and local taxes, net of federal
income tax effect...................... (5.9) (5.9) (5.9)
Change in valuation allowance........... 35.8 41.2 41.3
Other................................... 2.9 1.4 1.1
-------- -------- --------
2.2% 1.7% 1.5%
======== ======== ========
</TABLE>
27
<PAGE>
IXNET, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
13. Disclosures about Segments of an Enterprise and Related Information
The Company is focused on providing a seamless global network providing a
variety of voice, data, and content distribution services which has been
specifically designed to meet the specialized requirements of the financial
services industry. All of our revenue is derived from our global network. All
operating expenses and assets of the Company are combined and reviewed by the
chief operating decision makers on an enterprise wide-basis, resulting in no
additional discrete financial information or reportable segment information.
Our network connects customers in 37 countries around the world and we have
major offices in New York, London and Sydney from which we coordinate our sales
and marketing, finance and administrative functions in North America, Europe
and the Asia Pacific countries. We refer to these areas as regions. All of our
products and services are similar in each of the regions. We specifically
address the needs of the financial services industry and therefore the types
and class of customers for all products and services in each of the regions are
similar. The methods of providing services on our global network are similar.
Enterprise wide information is provided in accordance with SFAS 131
"Disclosures about Segments of an Enterprise and Related Information"
Geographic sales information is based on the currency in which the customer is
billed. Long-lived asset information is based on the physical location of the
assets. The following is revenue and long-lived asset information for
geographic areas (in thousands):
<TABLE>
<CAPTION>
Year ended September 30,
------------------------------------------------
1999 1998 1997
---------------- --------------- ---------------
Revenue Assets Revenue Assets Revenue Assets
------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
North America................ $38,764 $ 78,958 $21,892 $40,404 $7,757 $15,298
Europe....................... 22,131 10,693 12,596 6,122 9,712 4,245
Asia/Pacific................. 12,720 47,246 1,365 -- 369 --
------- -------- ------- ------- ------- -------
$73,615 $136,897 $35,853 $46,526 $17,838 $19,543
======= ======== ======= ======= ======= =======
</TABLE>
For the year ended September 30, 1999, revenue from the United States,
United Kingdom, and Australia represented 51.6%, 27.7%, and 10.7% of total
revenue, respectively. For the years ended September 30, 1998 and 1997, revenue
was generated primarily from the United States and the United Kingdom.
Long-lived assets primarily located within the United States, represent
31.8%, 67.0%, and 55.3% of total assets, as of September 30, 1999.
For the year ended September 30, 1999, two customers accounted for 14.0% and
10.0% of total revenue. For the year ended September 30, 1998, two customers
accounted for 23% and 14% of total revenue For the year ended September 30,
1997, one customer accounted for 45% of the total revenue.
28
<PAGE>
IPC COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
March 31, September 30,
---------- --------------
2000 1999
---------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 31,621 $ 43,946
Marketable securities........................................................ - 28,357
Marketable securities, restricted............................................ 3,000 20,435
Trade receivables............................................................ 83,600 80,309
Inventories.................................................................. 39,022 31,903
Prepaids and other current assets............................................ 25,308 24,807
--------- ---------
Total current assets..................................................... 182,551 229,757
Property, plant and equipment, net............................................ 117,382 98,682
Long term marketable securities, restricted................................... - 6,065
Debt issuance costs, net...................................................... 10,264 10,675
Goodwill and intangible assets, net........................................... 88,097 66,203
Other assets.................................................................. 1,725 1,827
--------- ---------
Total assets............................................................. $ 400,019 $ 413,209
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable............................................................. $ 40,625 $ 23,485
Accrued liabilities.......................................................... 48,320 46,343
Customer advances and deferred revenue....................................... 41,368 30,432
Current portion of notes payable............................................. 50,316 34,425
Current portion of capital leases............................................ 7,205 6,265
--------- ---------
Total current liabilities................................................ 187,834 140,950
Senior unsecured notes........................................................ 220,647 209,230
Notes payable, less current portion........................................... 5,503 18,354
Lease obligations, less current portion....................................... 18,648 15,651
Other liabilities............................................................. 3,558 3,575
--------- ---------
Total liabilities........................................................ 436,190 387,760
--------- ---------
Minority interest............................................................. 14,627 25,828
Commitments and contingencies
Stockholders' deficit:
Common stock - $0.01 par value, authorized 25,000,000 shares;
8,838,855 shares issued and outstanding at March 31, 2000; 8,577,480
shares issued and outstanding at September 30, 1999....................... 88 86
Paid-in capital.............................................................. 115,900 104,913
Accumulated deficit.......................................................... (165,580) (105,594)
Accumulated other comprehensive income....................................... (1,206) 216
--------- ---------
Total stockholders' deficit.............................................. (50,798) (379)
--------- ---------
Total liabilities and stockholders' deficit.............................. $ 400,019 $ 413,209
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
29
<PAGE>
IPC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
March 31 March 31
-------------------------- -------------------------
2000 1999 2000 1999
------- -------- ------- --------
<S> <C> <C> <C> <C>
Revenue:
Product sales and installation.......................... $ 35,013 $ 38,803 $ 73,766 $ 73,159
Service................................................. 52,727 42,130 97,454 75,524
-------- -------- -------- --------
87,740 80,933 171,220 148,683
-------- -------- -------- --------
Cost of revenue (exclusive of depreciation and amortization
shown separately below)
Product sales and installation.......................... 20,335 22,409 44,103 41,192
Service................................................. 45,968 31,807 83,928 56,821
-------- -------- -------- --------
66,303 54,216 128,031 98,013
-------- -------- -------- --------
Gross profit....................................... 21,437 26,717 43,189 50,670
Research and development expenses.......................... 3,201 2,193 6,113 4,594
Selling, general and administrative expenses............... 22,777 12,749 41,689 25,343
Depreciation and amortization.............................. 12,632 7,613 23,415 13,274
Stock compensation charge.................................. 1,236 - 2,599 -
Merger related costs....................................... 23,288 - 23,288 -
-------- -------- -------- --------
(Loss) income from operations..................... (41,697) 4,162 (53,915) 7,459
Interest expense, net...................................... (7,447) (6,953) (14,240) (13,144)
Other (expense) income, net................................ (768) (22) (572) 54
-------- -------- -------- --------
Loss before provision for income taxes
and minority interest.......................... (49,912) (2,813) (68,727) (5,631)
Provision for income taxes................................. 1,219 478 2,460 1,319
-------- -------- -------- --------
Loss before minority interest..................... (51,131) (3,291) (71,187) (6,950)
Minority interest.......................................... 7,634 - 11,201 -
-------- -------- -------- --------
Net loss.......................................... $(43,497) $ (3,291) $(59,986) $ (6,950)
======== ======== ======== ========
Basic and diluted loss per share........................... $ (4.97) $ (0.41) $ (6.91) $ (0.86)
======== ======== ======== ========
Basic and diluted weighted average number of shares
outstanding........................................... 8,748 8,076 8,681 8,076
======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
30
<PAGE>
IPC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six months ended
March 31,
-------------------
2000 1999
--------- -------
Cash flows from operating activities:
Net loss......................................... $ (59,986) $ (6,950)
Adjustments to reconcile net loss to net cash
(used in) provided by (used in)
operating activities
Stock compensation charge..................... 2,599 -
Minority interest............................. (11,201) -
Depreciation and amortization................. 23,415 13,349
Other interest amortization................... 12,241 11,217
Bad debt and sales credit provision........... 1,632 672
Changes in operating assets and liabilities:
Trade receivables............................. (4,409) 11,267
Inventories................................... (7,119) (2,194)
Prepaids and other current assets............. (49) (2,010)
Other assets.................................. (1,654) 239
Accounts payable.............................. 16,153 (1,094)
Accrued liabilities and other liabilities..... 2,122 938
Customer advances and deferred revenue........ 10,936 (4,783)
--------- -------
Net cash (used in) provided by operating
activities................................ (15,320) 20,651
--------- -------
Cash flows from investing activities:
Capital expenditures.......................... (27,666) (9,410)
Net change in marketable securities........... 52,453 -
Acquisitions, net of cash acquired............ (23,863) (40,418)
--------- -------
Net cash provided by (used in) investing
activities................................ 924 (49,828)
--------- -------
Cash flows from financing activities:
Proceeds from revolving credit borrowings..... 15,150 22,082
Repayments of revolving credit borrowings..... - (5,276)
Principal payments on capital leases.......... (3,269) (2,376)
Principal payments on notes payable........... (12,303) (555)
Debt issuance costs........................... (413) (384)
Proceeds from the exercise of stock options... 4,328 -
Other......................................... - (42)
--------- -------
Net cash provided by financing activities... 3,493 13,449
--------- -------
Effect of exchange rate changes on cash.......... (1,422) (317)
--------- -------
Net decrease in cash............................. (12,325) (16,045)
Cash and cash equivalents, beginning of period... 43,946 28,084
--------- -------
Cash and cash equivalents, end of period......... $ 31,621 $12,039
========= =======
Non-cash investing and financing activities:
the period
Capital lease obligations entered
into during the period......................... $ 7,207 $ 5,318
Deferred compensation in
connection with grants of stock options........ 2,599 -
See Notes to Consolidated Financial Statements
31
<PAGE>
1. Background and basis for presentation
IPC Communications, Inc. ("IPC" or the "Company") is the world's leading
supplier of voice trading systems to the financial services community with a
sophisticated suite of globally integrated voice and data telecommunications
products. IPC focuses on serving the financial trading environment by designing,
manufacturing, installing, and servicing products that allow traders around the
world to communicate with each other instantly and reliably. In addition,
through its subsidiary, IXnet, Inc. ("IXnet"), the Company provides a high
performance intelligent global extranet (the "IXnet Extranet") designed
exclusively for the financial community. Through a single connection, IXnet
delivers end-to-end managed data and voice communications solutions to the
financial services community around the world. The Company's primary customers
include securities and investment banking firms, merchant and commercial banks,
interdealer brokers, foreign exchange and commodity brokers and dealers,
securities and commodity exchanges, mutual and hedge fund companies, asset
managers and insurance companies. The Company uses an integrated approach to
marketing its products and services, leveraging its established customer base
throughout the financial sector.
IPC became the holding company for IPC Information Systems, Inc. ("IPC
Information Systems") effective May 21, 1999 through a merger. Following the
merger, IPC represented the same consolidated financial position as IPC
Information Systems prior to the merger. Accordingly, the consolidated financial
statements included in this Form 10-Q reflect the operations of IPC Information
Systems and its subsidiaries through May 20, 1999 and of IPC thereafter.
On February 22, 2000, the Company, IPC Information Systems and IXnet
entered into a merger agreement with Global Crossing, Ltd. (the "Merger"). The
Merger was approved by a majority of the Company's and IXnet's stockholders.
Under the terms of the Merger agreement, at the closing, Company stockholders
will be entitled to receive 5.417 shares of Global Crossing common stock for
each share of Company common stock and IXnet stockholders will be entitled to
receive 1.184 shares of Global Crossing common stock for each share of IXnet
common stock. The Merger is expected to close by the end of the Company's third
fiscal quarter. For the three and six months ended March 31, 2000, the Company
recorded costs of $23.3 million related to the Merger. These costs primarily
included investment banker fees, legal fees, other professional fees, and other
direct costs.
In the opinion of management, the accompanying unaudited financial
statements include all necessary adjustments (consisting of normal recurring
accruals and appropriate intercompany elimination adjustments) for a fair
presentation of the financial position of IPC as of March 31, 2000, and the
results of its operations for the three and six months ended March 31, 2000 and
1999 and cash flows for the six months ended March 31, 2000 and 1999, in
conformity with generally accepted accounting principles, commonly referred to
as "GAAP", for interim financial information applied on a consistent basis. The
results of operations for the three and six months ended March 31, 2000 are not
necessarily indicative of the results to be expected for the full year. Certain
information and note disclosures normally included in financial statements
prepared in accordance with GAAP have been omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. These financial
statements should be read in conjunction with IPC's Annual Report on Form 10-K
for the fiscal year ended September 30, 1999.
2. Summary of Significant Accounting Policies
Trade Receivables
Trade accounts receivable relate to Trading Systems and ITS sales and
installations which are progress billed until the installation is complete.
Turret sales to distributors are billed after the product is shipped and service
contract invoices are billed in advance. Trade receivables are recorded net of
allowance for doubtful accounts of $4.6 million and $2.3 million for the period
ended March 31, 2000 and 1999, respectively.
Reclassifications
Certain reclassifications have been made to the 1999 financial statements in
order to conform to the current period's presentation.
Earnings Per Share:
Basic loss per share is computed using the weighted average number of common
shares outstanding during the year. Diluted loss per share is computed using
the weighted average number of shares of common stock adjusted for the dilutive
effect of common stock equivalent shares of common stock options. Common stock
equivalent shares are calculated using the treasury stock method. All stock
options outstanding have been excluded from the computation of diluted loss per
share as their effect would be antidilutive. Accordingly, there is no
difference between basic and diluted EPS.
3. Comprehensive loss
Effective October 1, 1998, IPC adopted SFAS No. 130, "Reporting Comprehensive
Income". This statement requires the Company to include within its financial
statements information on comprehensive income/loss, which is defined as all
activity impacting equity from non-owner sources. Comprehensive income/loss
includes IPC's net income/loss and foreign currency translation adjustments.
IPC's total comprehensive loss for the six months ended March 31, 2000 and
1999 was as follows (in thousands):
Six Months Ended
March 31,
----------------------------------
2000 1999
-------- -------
Net loss $(59,986) $(6,950)
Translation adjustment (1,422) (1,045)
-------- -------
Total comprehensive loss $(61,408) $(7,995)
======== =======
32
<PAGE>
4. Acquisitions and Strategic Agreement:
Systems Programming & Network Computing, Inc. ("SPNC")
On January 25, 2000, IXnet acquired all of the issued and outstanding common
shares of SPNC which is a leader in providing and integrating sophisticated
multi-system, multi-platform applications for the financial services community.
The purchase price was approximately $1.5 million and consisted of $300,000 in
cash, a $100,000 promissory note issued by the Company and 6,080 shares of IXnet
common stock. The acquisition was accounted for using the purchase method of
accounting and resulted in $111,000 of goodwill, which will be amortized over a
5 year period from the date of the acquisition.
Business Networks of New York, Inc. ("BNNY")
Effective January 1, 2000, IXnet acquired all of the issued and outstanding
common shares of BNNY which is a leader in providing voice and data services to
the financial community, primarily in the New York Metropolitan Area. The $26.5
million purchase price consisted of $24.5 million in cash and 45,707 shares of
IXnet common stock. The acquisition was accounted for using the purchase method
of accounting and resulted in $27.3 million of goodwill, which will be amortized
over a 10 year period from the date of the acquisition.
Strategic Agreement
On September 24, 1999, IXnet entered into a strategic agreement (the
"Strategic Agreement"), including the licensing of certain software products to
enhance the intelligence of its network for a purchase price of $20.0 million
consisting of $10.0 million in cash financed from the proceeds from IXnet's IPO
and 500,000 shares of IXnet restricted common stock valued at an average closing
price prior to the agreement date. The Strategic Agreement is designed to
enhance IXnet's network capabilities with embedded intelligence, delivering
financial enterprise integration, subject-based addressing trading turret
integration and application management.
V-Band Corporation ("V-Band")
On June 21, 1999, the Company acquired V-Band for approximately $1.5 million
in cash. The purchase was financed through a combination of cash from operations
and borrowings under the Revolving Credit Facility.
Reuters Voice Systems ("RVS")
On December 31, 1998, the Company purchased the assets of RVS, a business unit
of Reuters Group PLC, for approximately $5.7 million in cash. The purchase was
financed through a combination of cash from operations and borrowings under the
Revolving Credit Facility.
Saturn Global Network Service Holdings Ltd. ("Saturn")
On December 18, 1998, International Exchange Networks, Ltd. ("IENL") acquired
all of the issued and outstanding common shares of Saturn from Marshalls 106
Limited ("Marshalls"). The acquisition was accounted for using the purchase
method of accounting.
The purchase price for Saturn included a cash payment in the amount of $35.7
million and the issuance of a promissory note in the amount of $7.5 million
bearing interest at the UK Sterling Base Rate, as defined, plus three percent
and payable over three years. In addition, IENL assumed indebtedness of Saturn
due to Marshalls in the amount of $5.0 million payable over 24 months with
interest at 9.25%. Under this agreement, the Marshalls Note is subject to a
working capital adjustment and right of offset. The working capital adjustment
was settled in June 1999 resulting in a reduction of the obligation by
approximately $2.0 million.
33
<PAGE>
5. Property, Plant and Equipment (In thousands):
March 31, September 30,
---------- -------------
2000 1999
---------- -------------
Building $ 2,463 $ 2,463
Machinery and equipment 39,247 36,300
Furniture and fixtures 3,004 2,812
Leasehold improvements 10,576 9,092
Network equipment 49,586 39,865
Network equipment under capital leases 43,444 28,649
Network software 24,547 21,561
IRU's 10,759 6,692
-------- --------
Total depreciable property, plant and equipment 183,626 147,434
Less accumulated depreciation and amortization (66,595) (49,761)
-------- --------
117,031 97,673
Land and other 351 1,009
-------- --------
$117,382 $ 98,682
======== ========
34
<PAGE>
6. Business Segments:
The Company's operations include Trading Systems, Information Transport
Systems ("ITS") and IXnet. Trading Systems reports sales of turret systems as
"Product sales and installation." It reports revenue from turret system
maintenance, including annual and multi-year service contracts, and from moves,
additions and changes to existing turret system installations as "Service." ITS
reports revenue from the design, integration and implementation of cabling
infrastructure projects, including Local and Wide Area Networks, and from the
sales of intelligent network products, such as hubs, bridges and routers, as
"Product sales and installation." It reports revenue from on-site maintenance of
customer cable infrastructure, including annual and multi-year contracts, and
from the provision of outsourcing services for the support, expansion and
upgrading of existing customer networks as "Service." IXnet reports revenue from
sales of premium voice, managed bandwidth and outsourcing services, switched
voice, shared internet protocol and other services (In thousands):
<TABLE>
<CAPTION>
Trading
Systems I T S IXnet Consolidated
------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
For the Six Months ended March 31, 2000
Revenue:
Product sales and installation................... $ 54,433 $ 19,333 $ - $ 73,766
Service.......................................... 38,250 7,097 52,107 97,454
-------- -------- -------- --------
Total revenue....................................... $ 92,683 $ 26,430 $ 52,107 $ 171,220
======== ======== ======== =========
Gross profit (loss)................................. 43,824 2,953 (3,588) 43,189
Research & development expenses..................... 6,113 - - 6,113
Selling, general & administrative expenses (a)...... 12,146 2,014 24,060 41,689
Depreciation and amortization....................... 4,884 195 18,336 23,415
Merger related costs................................ 4,750 18,538 23,288
Stock compensation charge........................... - - 2,599 2,599
-------- --------- --------- -------
Income (loss) from operations....................... $ 15,931 $ 744 $ (67,121) $ (53,915)
======== ======== ========= =========
EBITDA (b).......................................... $ 17,346 $ 939 $ (46,186) $ (27,901)
======== ======== ========= =========
Total assets........................................ $222,093 $ 26,206 $ 151,720 $ 400,019
======== ======== ========= =========
</TABLE>
(a) Consolidated selling, general & administrative expenses include corporate
general & administrative expenses of $3,469 for the six months ended
March 31, 2000
(b) EBITDA represents operating income before net interest, other expenses,
income taxes, depreciation and amortization and non-cash stock compensation
charges. EBITDA is not a measurement of financial performance under generally
accepted accounting principles. It is not intended to represent cash flow from
operations and should not be considered as an alternative to net loss as an
indicator of our operating performance or to cash flows as a measure of
liquidity. We believe that EBITDA is widely used by analysts, investors and
others in the telecommunications industry. EBITDA is not necessarily comparable
with similarly titled measures used by other companies.
35
<PAGE>
<TABLE>
<CAPTION>
Trading
Systems I T S IXnet Consolidated
-------- -------- --------- ------------
<S> <C> <C> <C> <C>
For the Six Months ended March 31, 1999
Revenue:
Product sales and installation $ 56,933 $ 16,226 $ - $ 73,159
Service 34,332 8,680 32,512 75,524
-------- -------- --------- --------
Total revenue $ 91,265 $ 24,906 $ 32,512 $148,683
======== ======== ========= ========
Gross profit (loss) 45,762 3,330 1,578 50,670
Research & development expenses 4,594 - 4,594
Selling, general & administrative expenses (a) 11,373 2,095 7,693 25,343
Depreciation and amortization 3,598 168 9,508 13,274
-------- -------- --------- --------
Income (loss) from operations $ 26,197 $ 1,067 $ (15,623) $ 7,459
======== ======== ========= ========
EBITDA (b) $ 29,795 $ 1,235 $ (6,115) $ 20,733
======== ======== ========= ========
Total assets $125,578 $ 31,465 $ 125,440 $282,483
======== ======== ========= ========
</TABLE>
(a) Consolidated selling, general & administrative expenses include corporate
general & administrative expense of $4,182 for the six months ended March 31,
1999
(b) EBITDA represents operating income before net interest, other expenses,
income taxes, depreciation and amortization and non-cash stock compensation
charges. EBITDA is not a measurement of financial performance under generally
accepted accounting principles. It is not intended to represent cash flow from
operations and should not be considered as an alternative to net loss as an
indicator of our operating performance or to cash flows as a measure of
liquidity. We believe that EBITDA is widely used by analysts, investors and
others in the telecommunications industry. EBITDA is not necessarily comparable
with similarly titled measures used by other companies.
7. Stock Compensation Charge:
In May 1999, IXnet recorded $26.4 million in non-cash deferred stock
compensation reflecting the issuance by the Company of options to purchase
6,530,184 shares of common stock of IXnet at $13.96 per share. The deferred
stock compensation is based upon the deemed fair market value of IXnet's common
stock and the exercise price of such options issued on the date of grant. The
Company recorded an additional $2.1 million of non-cash deferred stock
compensation during the quarter and $4.4 million during the six months ended
March 31, 2000, which represents the charge for the issuance of options in May
1999 that are treated as variable options for accounting purposes. Stock
compensation expense for the three and six months ended March 31, 2000 is $1.2
million and $2.6 million respectively. The remaining deferred compensation will
be amortized over the remaining vesting period of the options.
36
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders
of IPC Communications, Inc.:
In our opinion, the accompanying consolidated financial statements
present fairly, in all material respects, the consolidated financial position
of IPC Communications, Inc. and its subsidiaries at September 30, 1999 and
1998, and the results of their operations and cash flows for each of the three
years in the period ended September 30, 1999, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits in accordance with auditing standards generally accepted
in the United States, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/S/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, New York
November 30, 1999
37
<PAGE>
IPC COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
September 30,
---------------------------
1999 1998
------------ -------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents............................................................ $ 43,946 $ 28,084
Marketable securities................................................................ 28,357 -
Marketable securities, restricted.................................................... 20,435 -
Trade receivables.................................................................... 80,309 71,521
Inventories.......................................................................... 31,903 40,046
Prepaids and other current assets.................................................... 24,807 15,214
--------- ---------
Total current assets....................................................... 229,757 154,865
Property, plant and equipment, net...................................................... 98,682 57,113
Long term marketable securities, restricted............................................. 6,065 -
Debt issuance costs, net................................................................ 10,675 10,707
Goodwill and intangible assets, net..................................................... 66,203 15,639
Other assets............................................................................ 1,827 3,318
--------- ---------
Total assets............................................................... $ 413,209 $ 241,642
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable...................................................................... $ 23,485 $ 20,094
Accrued liabilities................................................................... 46,343 40,704
Customer advances and deferred revenue................................................ 30,432 38,469
Current portion of notes payable...................................................... 34,425 -
Current portion of capital leases..................................................... 6,265 4,462
--------- ---------
Total current liabilities.................................................. 140,950 103,729
Senior unsecured notes................................................................. 209,230 188,223
Notes payable, less current portion.................................................... 18,354 -
Lease obligations, less current portion................................................ 15,651 12,490
Other liabilities...................................................................... 3,575 3,741
--------- ---------
Total liabilities.......................................................... 387,760 308,183
--------- ---------
Minority Interest....................................................................... 25,828 -
Commitments and contingencies
Stockholders' deficit:
Common stock - $0.01 par value, authorized 25,000,000 shares; 8,577,480 shares
issued and outstanding at September 30, 1999; 8,076,188
shares issued and outstanding at September 30, 1998................................ 86 81
Paid-in capital....................................................................... 104,913 5,855
Accumulated deficit................................................................... (105,594) (73,049)
Accumulated other comprehensive income................................................ 216 572
--------- ---------
Total stockholders' deficit................................................ (379) (66,541)
--------- ---------
Total liabilities and stockholders' deficit................................ $ 413,209 $ 241,642
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
38
<PAGE>
IPC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the year ended September 30,
------------------------------------------
1999 1998 1997
------------- ------------- -------------
Revenue:
<S> <C> <C> <C>
Product sales and installation.................................................. $ 178,201 $ 173,350 $ 179,978
Service......................................................................... 160,991 122,467 90,080
--------- --------- ---------
339,192 295,817 270,058
--------- --------- ---------
Cost of revenue (excluding depreciation and amortization
shown separately below)
Product sales and installation.................................................. 103,837 99,974 126,623
Service......................................................................... 127,404 89,084 68,674
--------- --------- ---------
231,241 189,058 195,297
--------- --------- ---------
Gross profit............................................................... 107,951 106,759 74,761
Research and development expenses.................................................. 9,786 8,276 8,490
Selling, general and administrative expenses....................................... 58,047 53,345 48,100
Depreciation and amortization...................................................... 30,110 15,690 8,630
Stock compensation charge.......................................................... 9,079 -- --
Change in control expense.......................................................... -- 10,640 --
--------- --------- ---------
Income from operations.................................................... 929 18,808 9,541
Interest expense, net.............................................................. (27,263) (10,337) (1,844)
Other income (expense), net........................................................ 451 (2) 417
--------- --------- ---------
(Loss) income before provision for income taxes
and minority interest.................................................. (25,883) 8,469 8,114
Provision for income taxes......................................................... 7,968 6,191 4,280
--------- --------- ---------
(Loss) income before minority interest.................................... (33,851) 2,278 3,834
Minority interest.................................................................. 1,395 -- --
========= ========= =========
Net (loss) income......................................................... $ (32,456) $ 2,278 $ 3,834
========= ========= =========
Basic (loss) earnings per share.................................................... $ (3.97) $ 0.14 $ 0.18
========= ========= =========
Basic weighted average number of shares outstanding................................ 8,172 15,774 21,328
========= ========= =========
Diluted (loss) earnings per share.................................................. $ (3.97) $ 0.14 $ 0.18
========= ========= =========
Diluted weighted average number of shares outstanding.............................. 8,172 15,941 21,408
========= ========= =========
</TABLE>
See Notes to consolidated Financial Statements
39
<PAGE>
IPC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
For the year ended September 30,
-------------------------------------------
1999 1998 1997
------------- ------------ --------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net (loss) income........................................................ $ (32,456) $ 2,278 $ 3,834
Adjustments to reconcile net (loss) income to net cash provided by
(used in) operating activities:
Stock compensation charge............................................. 9,079 -- --
Minority Interest..................................................... 1,395 -- --
Depreciation and amortization......................................... 30,110 15,158 8,416
Non-cash interest on senior discount notes............................ 21,007 8,212 --
Other interest amortization........................................... 1,703 842 327
Provision for doubtful accounts....................................... 3,236 2,786 338
Deferred income taxes................................................. 3,720 (4,769) 83
Changes in operating assets and liabilities:
Trade receivables..................................................... (7,061) (11,126) 4,909
Inventories........................................................... 11,043 (5,978) 3,240
Prepaids and other current assets..................................... 841 3,218 (2,926)
Other assets.......................................................... 2,377 (2,077) (45)
Accounts payable...................................................... (1,708) (2,690) 2,859
Accrued liabilities and other liabilities............................. (15,635) 20,569 5,099
Customer advances and deferred revenue................................ (11,033) 20,339 (1,453)
--------- --------- ---------
Net cash provided by operating activities.................... 16,618 46,762 24,681
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures.................................................. (26,645) (18,293) (13,509)
Purchase of marketable securities..................................... (54,857) -- --
Acquisitions, net of cash acquired.................................... (42,913) (7,535) (1,500)
--------- --------- ---------
Net cash (used in) investing activities...................... (124,415) (25,828) (15,009)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from IXnet initial public offering....................... 102,775 -- --
Proceeds from revolving credit borrowings............................. 66,817 -- --
Repayments of revolving credit borrowings............................. (52,095) -- --
Proceeds from notes payable........................................... -- -- 2,182
Principal payments on notes payable................................... (5,948) (8,807) (12,526)
Proceeds from issuance of senior discount notes....................... -- 180,011 --
Proceeds from equity investment....................................... -- 54,721 --
Purchase of IPC common stock at Merger................................ -- (200,271) --
Costs, Obligations and equity charges at Merger....................... (1,380) (19,778) --
Proceeds from the exercise of stock options........................... 13,551 468 301
--------- --------- ---------
Net cash provided by (used in) financing activities.......... 123,720 6,344 (10,043)
--------- --------- ---------
Effect of exchange rate changes on cash............................... (61) (659) (470)
--------- --------- ---------
Net increase (decrease) in cash....................................... 15,862 26,619 (841)
Cash and cash equivalents, beginning of period........................ 28,084 1,465 2,306
--------- --------- ---------
Cash and cash equivalents, end of period.............................. $ 43,946 $ 28,084 $ 1,465
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for-
Income taxes.......................................................... $ 4,282 $ 4,822 $ 4,100
Interest.............................................................. $ 4,323 $ 2,138 $ 1,040
Non-cash investing and financing activities-
Issuance of stock to acquire remaining 20% interest in subsidiary..... $ -- $ 4,799 $ --
Installment purchase for property, plant and equipment................ $ -- $ 3,600 $ --
Retirement of treasury stock.......................................... $ -- $ 718 $ --
Capital lease obligations entered into during the year................ $ 10,284 $ 7,092 $ 10,776
Purchase of software in connection with Strategic Agreement........... $ 20,000 $ -- $ --
Working capital adjustment in connection with Saturn.................. $ 1,952 $ -- $ --
Additional amount payable in connection with the aquisition of
Bridge Electronics, Inc............................................ $ -- $ -- $ 3,500
</TABLE>
See Notes to Consolidated Financial Statements.
40
<PAGE>
IPC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Dollar and share amounts in thousands)
<TABLE>
<CAPTION>
Paid- Accumulated
Common Stock in (deficit)
Shares Amount capital earnings
------- -------- --------- ---------
<S> <C> <C> <C> <C>
Consolidated balance, September 30, 1996............................ 10,618 $ 109 $ 47,889 $ 24,341
Net income....................................................... - - - 3,834
Translation adjustment........................................... - - - -
Total comprehensive income.................................. - - - -
Issuance of common stock under employment contracts.............. 32 - 478 -
Issuance of common stock under stock purchase plan............... 21 - 312 -
Issuance of common stock under stock option plan................. 20 - 301 -
------- -------- --------- ---------
Consolidated balance, September 30, 1997............................ 10,691 109 48,980 28,175
Net income....................................................... - - - 2,278
Translation adjustment........................................... - - - -
Total comprehensive income
Issuance of common stock under stock purchase plan............... 18 - 262 -
Issuance of common stock under stock option plan................. 32 1 467 -
Repurchase and retirement of IPC common stock from............... - - - -
Merger dated April 30, 1998................................... (9,537) (95) (103,346) (96,830)
Retirement of treasury stock..................................... - (2) - (716)
Issuance of Common Stock from Merger............................. 2,606 26 54,695 -
Equity charges related to the Merger............................. - - - (5,916)
Issuance of common stock to acquire remaining 20% interest
in subsidiary................................................. 228 2 4,797 -
Two-for-one stock split effected in the form of a 100% stock
dividend, issued on June 10, 1998.............................. 4,038 40 - (40)
------- -------- --------- ---------
Consolidated balance, September 30, 1998............................ 8,076 81 5,855 (73,049)
Net loss......................................................... - - - (32,456)
Translation adjustment........................................... - - - -
Total comprehensive income.................................. - - - -
IXnet initial public offering.................................... - - 93,799 -
Equity charges related to the Merger............................. - - - (89)
Issuance of common stock under stock option plan................. 491 5 5,259 -
------- -------- --------- ---------
Consolidated balance, September 30, 1999............................ 8,567 $ 86 $ 104,913 $ (105,594)
======= ======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other Total
Comprehensive Treasury stockholders' Comprehensive
Income stock (deficit) equity Income (loss)
-------------- ------- ---------------------------------
<S> <C> <C> <C> <C>
Consolidated balance, September 30, 1996............................ $ 94 $ (718) $71,715
Net income....................................................... - - 3,834 $ 3,834
Translation adjustment........................................... 270 - 270 270
-------
Total comprehensive income.................................. - - - $ 4,104
=======
Issuance of common stock under employment contracts.............. - - 478
Issuance of common stock under stock purchase plan............... - - 312
Issuance of common stock under stock option plan................. - - 301
-------------- ------- ---------
Consolidated balance, September 30, 1997............................ 364 (718) 76,910
Net income....................................................... - - 2,278 $ 2,278
Translation adjustment........................................... 208 - 208 208
-------
Total comprehensive income.................................. $ 2,486
=======
Issuance of common stock under stock purchase plan............... - - 262
Issuance of common stock under stock option plan................. - - 468
Repurchase and retirement of IPC common stock from............... - - -
Merger dated April 30, 1998................................... - - (200,271)
Retirement of treasury stock..................................... - 718 -
Issuance of Common Stock from Merger............................. - - 54,721
Equity charges related to the Merger............................. - - (5,916)
Issuance of common stock to acquire remaining 20% interest
in subsidiary................................................. - - 4,799
Two-for-one stock split effected in the form of a 100% stock
dividend, issued on June 10, 1998.............................. - - -
-------------- ------- ---------
Consolidated balance, September 30, 1998............................ 572 - (66,541)
Net loss......................................................... - - (32,456) $(32,456)
Translation adjustment........................................... (356) - (356) (356)
--------
Total comprehensive income.................................. - - - $(32,812)
========
IXnet initial public offering.................................... - - 93,799
Equity charges related to the Merger............................. - - (89)
Issuance of common stock under stock option plan................. - - 5,264
-------------- ------- ---------
Consolidated balance, September 30, 1999............................ $ 216 $ - $ (379)
============== ======= =========
</TABLE>
See Notes to Consolidated Financial Statements.
41
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation:
IPC Communications, Inc. ("IPC") is the leading provider of integrated
telecommunications equipment and services that facilitate the execution of
transactions by the worldwide financial services community. These
transactions involve the trading of equity and debt securities,
commodities, currencies and other financial instruments. The Company
designs, manufactures, installs and services turret systems which provide
desktop access to time-sensitive communications and data. In addition,
through its subsidiary, IXnet, Inc. ("IXnet"), the Company operates a
global network (the "IXnet Extranet"), providing a variety of voice, data
and content distribution services specifically designed to meet the
specialized communications requirements of the financial services
community. The Company's primary customers include securities and
investment banking firms, merchant and commercial banks, interdealer
brokers, foreign exchange and commodity brokers and dealers, securities and
commodity exchanges, mutual and hedge fund companies, asset managers and
insurance companies. The Company uses an integrated approach to marketing
its products and services, leveraging its established customer base
throughout the financial sector.
IPC became the holding company for IPC Information Systems, Inc. ("IPC
Information Systems") effective May 21, 1999 through a merger. Following
the merger, IPC represented the same consolidated financial position as IPC
Information Systems prior to the merger. Accordingly, the consolidated
financial statements included in this Form 10-K reflect the operations of
IPC Information Systems and its subsidiaries through May 20, 1999 and of
IPC thereafter.
2. Summary of Significant Accounting Policies:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. Intercompany balances and transactions have been
eliminated.
Revenue Recognition
Revenue from product sales and related installation is recognized upon
completion of the installation except for revenue from sales to
distributors, which is recognized upon shipment. Under contract provisions,
customers may be progress-billed prior to the completion of the
installations. The revenue related to these advance payments is deferred
until the system installations are completed. Contracts for maintenance are
billed in advance, and are recorded as deferred revenue and recognized
ratably over the contractual periods. Revenue from network services are
recognized in the month the related service is provided and related
installation revenue is deferred and recognized ratably over the average
contract term. Bandwidth and switched voice charges are billed and
recognized monthly based on customer usage. All other revenues are billed
and recognized monthly based on flat-rate monthly charges.
Cash and Cash Equivalents
The Company places cash with high credit quality financial institutions.
Temporary cash investments with original maturities of three months or less
are considered cash equivalents. Temporary cash investments are stated at
cost, which approximates fair value. These investments are not subject to
significant market risk.
42
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
Marketable Securities
Marketable securities consist of investments in short-term government grade
commercial paper with maturities of less than one year. Such securities are
classified as available for sale and, accordingly, are carried at fair
value, which approximates cost at September 30, 1999. The amortized cost of
debt securities is adjusted for amortization of premium and accretion of
discounts to maturity. Amortization of purchase premiums or accretion of
discounts and realized gains and losses are included in interest income.
On September 24, 1999, IXnet entered into a strategic agreement (the
"Strategic Agreement"), including the license of certain software products
to enhance the intelligence of its network. The purchase price included
$10.0 million of cash to be paid in installments over six months beginning
on October 30, 1999. Separately, IXnet also entered into agreements to
purchase indefeasible rights of use ("IRU's") over the next three years in
an aggregate amount of $16.5 million. In accordance with an amendment to
the Revolving Credit Facility revised in connection with the Strategic
Agreement, these amounts are invested in marketable securities dedicated to
satisfy these commitments.
Trade Receivables
Trade accounts receivable potentially expose the Company to concentrations
of credit risk, as a large volume of business is conducted with several
major financial institutions, primarily companies in the brokerage, banking
and financial services industries. To help reduce this risk, customers may
be progress-billed prior to the completion of the contract. Trade
receivables are recorded net of allowance for doubtful accounts of $3.6
million and $2.4 million for the years ended September 30, 1999 and 1998,
respectively.
Inventories
Inventories are stated at the lower of FIFO (first in, first out) cost or
market. Inventory costs include all direct manufacturing costs and applied
overhead.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and depreciated or
amortized on a straight-line basis over their estimated useful lives or
related contract terms beginning in the year the asset was placed into
service. Network switching equipment includes direct costs of installation.
Amortization of network switching equipment under capital leases and IRUs is
calculated using the straight-line method over the terms of the lease or
IRU's and is included in depreciation and amortization expense.
43
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
Debt Issuance Costs
Debt issuance costs represent costs associated with the issuance of the
Senior Discount Notes and in connection with the Revolving Credit Facility.
These costs are amortized to interest expense utilizing the effective
interest method over the life of the Senior Discount Notes and on a
straight-line basis over the term of the Revolving Credit Facility.
Intangible Assets
Intangible assets, which are carried at cost less accumulated amortization,
consist primarily of acquired technology and goodwill. Goodwill represents
the excess of the cost over the fair value of the identifiable tangible and
intangible assets acquired in various acquisitions. Costs allocated to
technology and goodwill are amortized on a straight-line basis over the
periods benefited, principally 2.75 to 10 years.
Research and Development
Research and development expenditures are charged to expense as incurred.
Stock Options
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation ("SFAS No. 123") requires the Company to choose
between two different methods of accounting for stock options. The
Statement defines a fair-value-based method of accounting for stock options
but allows an entity to continue to measure compensation cost for stock
options using the accounting prescribed by Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees ("APB No.
25"). The Company has elected to continue using the accounting methods
prescribed by APB No. 25 and to disclose the amount of the proforma
compensation expense required to be disclosed under SFAS No. 123.
Income Taxes
In accordance with SFAS No. 109, Accounting for Income Taxes ("SFAS No.
109"), the Company recognizes deferred income taxes for the tax consequences
in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year end, based on
enacted tax laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation allowances
are established when necessary to reduce deferred tax assets to the amount
that is "more likely than not" to be realized. The provision for income
taxes is the tax payable for the period and the change during the period in
deferred tax assets and liabilities.
IXnet IPO and Minority Interest
The Company recorded an increase to paid-in-capital representing the
increase in its share of IXnet's net assets as a result of the proceeds from
the offering. The Company continues to consolidate the financial statements
of IXnet, with an allocation of the net loss of IXnet to its minority
shareholders.
Foreign Currency Translation Adjustment
The balance sheets and statements of operations of the Company's foreign
operations are measured using the local currency as the functional currency.
Assets and liabilities of these foreign operations are translated at the
year-end exchange rate and revenue and expense amounts are translated at the
average rate of exchange prevailing during the year. Translation
adjustments arising from the use of differing exchange rates from period to
period are included in accumulated other comprehensive income account in
stockholders' (deficit) equity.
44
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
Earnings Per Share
Basic earnings per share is computed based upon the weighted average number
of common shares outstanding during the periods. Diluted earnings per share
is computed based upon the weighted average number of common shares
outstanding plus the assumed issuance of common stock equivalents computed
in accordance with the treasury stock method.
Comprehensive Income
Effective October 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. This statement requires the Company to include within
its financial statements information on comprehensive income/loss, which is
defined as all activity impacting equity from non-owner sources.
Comprehensive income/loss includes the Company's net income/loss and foreign
currency translation adjustments.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the 1998 and 1997 financial
statements in order to conform to the current year's presentation.
Effects of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivatives and Hedging Activities, which establishes
accounting and reporting standards for derivative instruments and hedging
activities. The effective date of this standard was deferred to all fiscal
quarters of fiscal years beginning after June 15, 2000 by SFAS 137,
Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133 which was issued on June 30,
1999. Management does not believe the adoption of this standard will have a
material impact on the Company's operations.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 ("SOP 98-1"), Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use. SOP 98-1 is effective for
financial statements for fiscal years beginning after December 15, 1998.
The Company does not anticipate the adoption of this standard to have a
material effect on its financial position, results of operations or cash
flows.
3. Acquisitions and Strategic Agreement:
Strategic Agreement
On September 24, 1999, IXnet entered into a strategic agreement (the
"Strategic Agreement"), including the licensing of certain software products
to enhance the intelligence of its netowork for a purchase price of $20.0
million consisting of $10.0 million in cash financed from the proceeds from
IXnet's IPO and 500,000 shares of IXnet restricted common stock valued at an
average closing price prior to the agreement date. The Strategic Agreement
is designed to enhance IXnet's
45
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
network capabilities with embedded intelligence, delivering financial
enterprise integration, subject-based addressing, trading turret integration
and application management.
V-Band Corporation ("V-Band")
On June 21, 1999, IPC acquired V-Band Corporation for approximately $1.5
million in cash. The purchase was financed through a combination of cash
from operations and borrowings under the Revolving Credit Facility. The
acquisition was accounted for using the purchase method of accounting and
resulted in approximately $7.5 million of goodwill, of which approximately
$7.0 million remains unamortized at September 30, 1999.
Reuters Voice Systems ("RVS")
On December 31, 1998, IPC purchased the assets of Reuters Voice Systems, a
business unit of Reuters Group PLC, for approximately $5.7 million in cash.
The purchase was financed through a combination of cash from operations and
borrowings under the Revolving Credit Facility. The acquisition was
accounted for using the purchase method of accounting and resulted in
approximately $5.3 million in goodwill, of which approximately $3.8 million
remains unamortized at September 30, 1999.
Saturn Global Network Service Holdings Ltd. ("Saturn")
On December 18, 1998, IENL acquired all of the issued and outstanding common
shares of Saturn from Marshalls. The acquisition was accounted for using
the purchase method of accounting. As a result of the acquisition, IENL
recorded approximately $49.2 million of goodwill, which is being amortized
on a straight-line basis over ten years.
The purchase price for Saturn included a cash payment in the amount of
$35.7 million and the issuance of a promissory note in the amount of $7.5
million bearing interest at the UK Sterling Base Rate, as defined, plus
three percent and payable over three years. In addition, IXnet assumed
indebtedness of Saturn due to Marshalls in the amount of $5.0 million
payable over 24 months with interest at 9.25%. Under this agreement, the
Marshalls Note is subject to a working capital adjustment and right of
offset. The working capital adjustment was settled in June 1999 resulting
in a reduction of the obligation by approximately $2.0 million.
The following unaudited pro forma statement of operations data for the years
ended September 30, 1999 and 1998 gives effect to the Saturn acquisition as
if it had occurred on October 1, 1999 and 1998 respectively (In thousands):
<TABLE>
<CAPTION>
September 30,
1999 1998
-------- --------
<S> <C> <C>
Revenue $ 343,991 $321,135
Loss before provision for income taxes and minority interest ($35,065) ($5,700)
</TABLE>
Pro forma adjustments include (i) amortization of goodwill over 10 years and
(ii) interest expense on the Saturn Note and the Marshalls Note. The pro
forma financial information presented above does not purport to be
indicative of the operating results which would have been achieved had the
acquisition occurred at October 1, 1998 or 1997, or the results to be
achieved thereafter.
46
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
MXNet Inc. ("MXNet")
In February 1998, the Company acquired, by the issuance of a promissory note
in the amount of $6.7 million, all of the issued and outstanding common
stock of MXNet, a wholly owned subsidiary of National Discount Brokers
Group, Inc. The promissory note plus accrued interest was paid on April 8,
1998. In addition, MXNet entered into employment agreements with four MXNet
executives which included signing and retention bonuses in the aggregate
amount of approximately $1.1 million payable over two years. This
acquisition was accounted for using the purchase method of accounting and
resulted in $5.5 million of goodwill of which $1.5 million remains in
intangible assets at September 30, 1999.
IXnet
During June 1995, the Company acquired an 80% interest in IXnet for $5.5
million in cash. The acquisition was accounted for using the purchase
method of accounting. Included in intangible assets is $0.7 million and
$0.9 million at September 30, 1998 and 1997, respectively, representing
acquired technology.
In conjunction with the April 1998 Merger, the Company acquired the
remaining 20% interest in IXnet (the "IXnet Exchange") through the issuance
of 457,142 shares of Surviving Corporation Common Stock, valued at $4.8
million. Included in intangible assets is $3.7 million at September 30,
1999, representing acquired technology.
4. Merger and Recapitalization:
On April 30, 1998, Arizona Acquisition Corp. ("AAC") was merged into IPC
Information Systems (the "Merger"). Under the terms of the Merger, each
share of common stock of IPC Information Systems was converted at the
election of the holder thereof into either (i) the right to receive $10.50
in cash (on a post split basis) or (ii) the right to retain one share of
common stock of the surviving corporation. In connection with the Merger,
the Company issued $247.4 million aggregate principal amount at maturity
($180.0 million initial proceeds upon issuance) of 10 7/8% Senior Discount
Notes due 2008 (the "Notes"). A portion of the proceeds from the Notes
($145.6 million), together with $54.7 million of capital provided by AAC
were used to repurchase 19,073,330 shares (on a post split basis) of IPC
Common Stock, at a price of $10.50 per share, from IPC shareholders who did
not elect to retain stock of the surviving corporation upon the Merger.
Prior to the Merger, AAC was owned by (i) Cable Systems Holdings LLC ("CSH
LLC"), whose membership interests were owned by Citicorp Venture Capital,
Ltd. and David Kirby and John O'Mara, private investors, (ii) CSH LLC's
indirect subsidiary Cable Systems International, Inc. and (iii) the
investment fund of Lawrence Smith & Horey III, L.P. (now known as Allegra
Capital Partners III, L.P.). The Merger was accounted for as a leveraged
recapitalization. Accordingly, the historical basis of the Company's assets
and liabilities has not been impacted by the Merger.
In connection with the Merger, the Company incurred various non-recurring
costs totaling approximately $27.8 million. These costs consist primarily of
professional fees, printing costs, change of control costs and other
expenses. Of this amount, $10.6 million was recorded in fiscal 1998 as a
non-recurring charge for change in control expenses, comprised of certain
change in control bonuses and severance payments ($4.3 million), payments to
option holders upon cancellation of their stock options ($5.9 million) and
miscellaneous other expenses ($0.5 million).
47
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
Unaudited pro forma statement of operations information for the years ended
September 30, 1998 and 1997, as if the Merger occurred on October 1, 1996 is
as follows (In thousands, except per share amounts):
<TABLE>
<CAPTION>
For the year ended
September 30,
-----------------------------
1998 1997
------ ------
<S> <C> <C>
Revenue $295,817 $270,058
Operating Income (loss) $ 18,129 $ (2,263)
Net loss $ (6,447) $(14,943)
Basic loss per share $ (0.80) $ (1.85)
Basic and diluted weighted average number of
common shares outstanding (in thousands) 8,076 8,076
</TABLE>
Pro forma adjustments include: (i) elimination of non-recurring charge for
change in control expense; (ii) full year of interest expense on the Notes
and related amortization of debt issuance costs and discount; and (iii)
amortization of the acquired technology related to the IXnet Exchange. All
pro forma adjustments were tax effected at the Company's 44% incremental tax
rate. The pro forma financial information presented above is not
necessarily indicative of the operating results which would have been
achieved had the Merger occurred at October 1, 1996 or of the results to be
achieved in the future.
5. Stock Split:
On May 29, 1998 the Company declared a two-for-one stock split effected in
the form of a 100% stock dividend (the "Stock Dividend"). The Stock
Dividend was distributed on June 24, 1998 to holders of record on June 10,
1998. As a result, the number of shares increased from 4,038,094 shares
(the number of shares issued and outstanding subsequent to the Merger and
IXnet Exchange) to 8,076,188 shares. Unless otherwise indicated, all share
and per share data, including stock option information, is stated to reflect
the Stock Dividend.
6. Inventories (In thousands):
<TABLE>
<CAPTION>
September 30,
-----------------------------
1999 1998
------------ -------------
<S> <C> <C>
Components and work in process $16,519 $13,639
Inventory on customer sites awaiting installation 11,554 21,516
Parts and maintenance supplies 3,830 4,891
------------ -------------
$31,903 $40,046
============ =============
</TABLE>
48
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
7. Property, Plant and Equipment (In thousands):
<TABLE>
<CAPTION>
September 30,
----------------------------------------
1999 1998
------------------- -----------------
<S> <C> <C>
Building $ 2,463 $ 2,462
Machinery and Equipment 36,300 36,230
Furniture and Fixtures 2,812 2,758
Leasehold Improvements 9,092 8,503
Network Equipment 39,865 13,638
Network Equipment under capital leases 28,649 20,717
Network Software 21,561 -
IRU's 6,692 4,000
------------------- -----------------
Total depreciable property, plant and equipment 147,434 88,308
Less accumulated depreciation and amortization (49,761) (32,502)
------------------- -----------------
97,673 55,806
Land and other 1,009 1,307
------------------- -----------------
$ 98,682 $ 57,113
=================== =================
</TABLE>
8. Supplemental Financial Data:
Prepaids and other current assets include the following (In thousands):
September 30,
1999 1998
------- -------
Deferred taxes $ 5,634 $ 9,354
Prepaid expenses 3,318 3,808
ACT recoverable 9,257 -
Other current assets 6,598 2,052
------- -------
Total $24,807 $15,214
======= =======
Accrued liabilities includes the following (In thousands):
September 30,
1999 1998
------- -------
Compensation $14,051 $12,351
Income taxes 2,263 1,859
Carrier costs 12,351 3,815
Other expenses 17,678 22,679
------- -------
Total $46,343 $40,704
======= =======
9. Short-Term Credit Facilities:
As a result of the Merger, the Company's short-term credit facilities with
various banks of up to $35.0 million were terminated on April 30, 1998.
49
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
In April 1998, IPC Information Systems entered into a five year $55.0
million senior secured revolving credit agreement (the "Revolving Credit
Facility"), with Morgan Stanley Senior Funding, Inc., as syndication agent,
and other lenders , to be used for working capital and other general
corporate purposes. The Revolving Credit Facility was subject to borrowing
base limitations, which at September 30, 1998 approximated $33.6 million.
Borrowings under the Revolving Credit Facility bore interest at a rate equal
to, at the Company's option, the base rate plus 1.5% or the LIBOR rate plus
a margin of 1.5% to 2.5% depending upon the Company's leverage ratio. The
base rate was a fluctuating interest rate equal to the higher of (i) the
rate of interest announced publicly by Citibank, N.A. as its base rate and
(ii) a rate equal to 1/2 of 1% per annum above the weighted average of the
rates on overnight Federal funds transactions with members of the Federal
Reserve System as published by the Federal Reserve Bank of New York.
The Revolving Credit Facility contained various covenants and conditions,
including restrictions on (i) asset dispositions, (ii) mergers and
acquisitions, (iii) capital expenditures, (iv) restricted payments, (v) the
incurrence of indebtedness, (vi) loans and investments, (vii) liens, (viii)
certain transactions with affiliates and (ix) maintaining various financial
ratios.
On June 21, 1999, IPC Information Systems, IPC, General Electric Capital
Corporation, as the Administrative Agent and Collateral Agent, First Union
Capital Markets, Inc., as Documentation Agent, and the Lenders and the
Issuing Bank named therein, amended the Revolving Credit Facility to provide
for (1) a working capital facility of $45.0 million, based on eligible
accounts receivable and inventory, and (2) a $20.0 million term loan. In
addition, certain terms relating to the eligibility of accounts receivable
used in determining the amount available under the working capital facility
were relaxed. The amendment also provides for certain additional financial
covenants including a leverage ratio and fixed charge ratio. The Revolving
Credit Facility was further amended to permit the issuance of additional
shares of IXnet common stock, to permit the incurrence of certain deferred
payment obligations, and to modify certain financial ratios applicable
through January 15, 2000, at which time the Company expects that such ratios
will be reset in accordance with updated future projections. The Company
has segregated marketable securities to satisfy such deferred payment
obligations.
Under the Revolving Credit Facility, substantially all of the Company's real
and personal property is pledged as collateral, including inventory,
accounts receivable and substantially all of the common stock of its
significant subsidiaries.
The $20.0 million term loan is repayable in quarterly installments of $1.3
million, which commenced on September 30, 1999 and initially bears interest
at LIBOR plus 2.75% or at the base rate plus 1.75%, at the Company's option.
The base rate is equal to the higher of (1) the rate of interest announced
publicly by Citibank, N.A. at its head office in New York as the base rate
of Citibank and (2) 1/2 of 1% per annum above the federal funds rate, as
defined in the Revolving Credit Facility. The proceeds of the term loan
were used to repay borrowings outstanding under and for fees incurred in
connection with the Revolving Credit Facility.
Loans made under the working capital facility initially bear interest, at
the Borrower's option, at the base rate plus 1.5% or LIBOR plus 2.5%. At
September 30, 1999, $14.7 million was outstanding. The Revolving Credit
Facility also provides a $10.0 million sub-limit for the issuance of letters
of credit, of which $8.9 million was outstanding at September 30, 1999.
Availability
50
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
under the working capital facility at September 30, 1999, after giving
effect to the outstanding borrowings and letters of credit, approximated
$17.9 million.
The base rate and LIBOR rate for the Revolving Credit Facility are subject
to step-downs based on the Company's leverage ratio.
The Revolving Credit Facility requires the Company to pay a commitment fee
equal to 0.5% per annum on the unused commitment amount. The Company
incurred $0.1 million and $0.3 million in commitment fees and $0.4 million
and $0.1 million of interest amortization, for the years ended September 30,
1999 and 1998, respectively, associated with the Revolving Credit Facility.
10. Long-Term Debt:
Senior Discount Notes
On April 30, 1998, the Company issued $247.4 million aggregate principal
amount at maturity ($180.0 million proceeds at issuance) of 10 7/8% Senior
Discount Notes due 2008. The Notes were issued under an indenture between
the Company, as issuer, and United States Trust Company of New York, as
trustee. The indenture contains certain restrictive covenants which impose
limitations on the Company and its subsidiaries, including, (i)
indebtedness, (ii) restricted payments, (iii) dividends, (iv) issuance and
sale of capital stock of subsidiaries, (v) issuance of guarantees by
subsidiaries, (vi) certain transactions with shareholders and affiliates,
(vii) liens, (viii) sale-leaseback transactions, and (ix) asset sales.
The Notes were issued at a discount to their aggregate principal amount
resulting in gross proceeds to the Company of $180.0 million. Although
interest on the Notes will not accrue until May 1, 2001 (the "Interest
Accrual Date"), the Notes will accrete in value to the principal amount by
the Interest Accrual Date. The Notes will bear interest at 10 7/8% from the
Interest Accrual Date through redemption and is payable semiannually on May
1 and November 1. There are no sinking fund payments related to the Notes.
Up to 35% of the Notes may be redeemed by the Company at 110.875% of the
accreted value plus accrued and unpaid interest with the proceeds of one or
more equity offerings, as defined, prior to May 1, 2001. In addition, the
Company may redeem the Notes in whole or in part, at any time after May 1,
2003 and prior to maturity at a premium of 105.428% decreasing to the
principal amount on May 1, 2006. The indenture also provides for a
mandatory offer by the Company to repurchase the Notes in the event of a
change of control at 101% of the accreted value plus accrued interest.
The Notes are unsubordinated, unsecured indebtedness of IPC Information
Systems, ranking pari passu in right of payment with all existing and future
unsubordinated, unsecured indebtedness of IPC Information Systems and senior
in right of payment to all existing and future subordinated indebtedness of
IPC Information Systems.
Interest expense, net includes $21.0 million and $8.2 million related to the
amortization of the discount of the Notes and $0.3 million and $0.4 million
related to issuance costs of the Notes, for the years ended September 30,
1999 and 1998, respectively.
The estimated fair value of the Notes, calculated using the quoted closing
price of the bonds was $192.7 million and $178.1 million at September 30,
1999 and 1998, respectively.
51
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
Saturn Note
In conjunction with the acquisition of Saturn, two notes were issued and
assumed by the Company in the aggregate amount of $12.5 million. The first
is a 3 year $7.5 million note issued to Marshalls Finance Ltd. bearing
interest at a rate of the UK Sterling plus 3%. The second note assigned to
IXnet in accordance with the acquisition of Saturn amounting to $5.0
million. Under the agreement, the assumed Marshalls note is subject to a
working capital adjustment and right of offset. This working capital
adjustment was settled in June 1999 resulting in a reduction of the
obligation by approximately $2.0 million.
Strategic Agreement
In connection with the Strategic Agreement, IXnet agreed to pay $10.0
million over a six-month period ending on April 1, 2000.
Future debt payments required by the Saturn Note, the Marshalls Note, the
Strategic Agreement and the Revolving Credit Facility (included as a $14.7
million payment in fiscal 2000) at September 30, 1999 are as follows (In
thousands):
Fiscal
------
2000 $29,402
2001 3,189
2002 2,445
-------
$35,036
=======
The future payments noted above exclude any payments in relation to the
Senior Note Indenture. The interest payments relating to the indenture
begin paying semi-annually on November 1, 2001.
11. Deferred Compensation and Other Benefit Plans:
Deferred Compensation
The Company has deferred compensation agreements with certain past key
officers and employees. Payments began in 1992 and continue through 2019.
The gross and discounted present value (using an interest rate of 7.5%), net
of cash payments, of the amounts to be paid under these agreements,
aggregated $6.6 million and $3.6 million at September 30, 1999 and $6.9
million and $3.9 million at September 30, 1998, respectively.
52
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
Approximate payments for subsequent annual periods related to the deferred
compensation agreements, at September 30, 1999, are as follows (In
thousands):
2000 $ 320
2001 390
2002 471
2003 490
2004 434
Thereafter 4,503
------
$6,608
======
Pension Plans
IPC maintains a 401(k) savings plan for all eligible US employees. According
to plan provisions, IPC contributions are discretionary and are subject to
approval by the Board of Directors. Eligible employees may contribute up to
15% of their annual compensation. IPC contributed $0.7 million, $0.6 million
and $0.4 million to the plan for the years ended September 30, 1999, 1998
and 1997, respectively.
IPC-UK has a defined contribution plan covering all UK employees. Employee
contributions are limited by statute, generally not to exceed 17.5% of base
salary. IPC-UK contributions, net of forfeitures, were $0.2 million per
year for the years ended September 30, 1999, 1998 and 1997.
The Company paid to Kleinknecht Electric Company ("KEC") and Kleinknecht
Electric Company - New Jersey ("KEC-NJ"), both affiliated companies, in
accordance with labor pooling agreements, approximately $8.1 million, $7.6
million, and $7.6 million for the years ended September 30, 1999, 1998 and
1997, respectively, representing pass-through contributions to various union
sponsored pension plans.
IPC Employee Stock Option and Purchase Plan
In connection with the Merger, the employee stock purchase plan was
terminated April 30, 1998. On April 30, 1998 the Company terminated its
existing plan and replaced it with a new stock option plan. Under the new
plan, employees generally vest in stock options over a five-year period.
In connection with the Reorganization, IPC Information Systems assigned, and
IPC assumed, the obligations for the performance of the IPC Information
Systems, Inc. 1998 Stock Incentive Plan, which, effective as of December 3,
1998 had been amended to increase its share reserve from 1,108,224 to
1,538,322 shares of the Company's Common Stock and which was renamed the
"IPC Communications, Inc. 1999 Stock Incentive Plan." The Stock Incentive
Plan provides for the grant of options to purchase Common Stock of the
Company to certain officers, employees, consultants and directors of the
Company and its subsidiaries.
IXnet Stock Option Plan
During May 1999, IXnet's Board of Directors and the Company approved the
IXnet, Inc. 1999 Stock Option Plan authorizing the grant of options to
purchase up to 7,053,409 shares of IXnet's common stock. At that time,
options to purchase 6,530,184 shares were granted to employees, directors
and others at an exercise price of $13.96 per share. Except for 1,763,352
options granted
53
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
to IXnet's chief executive officer which vested immediately, such options
vest over four years. Such options become exercisable, to the extent then
vested, 30 months from the date of grant.
Stock Compensation Data
A summary of the Company's stock option plan as of September 30, 1999, 1998
and 1997 and changes during the years then ended is presented below (In
thousands).
<TABLE>
<CAPTION>
IPC Stock Option Plan
---------------------
Consolidated IXnet Employee Options IXnet 1999 Stock Option Plan
-------------- ------------------------ ----------------------------
Weighted Weighted Weighted
Number of Average Number of Average Number of Average
Options Exercise Price Options Exercise Price Options Exercise Price
--------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at September 30, 1996 1,652,402 $ 8.05 231,000 $ 7.93 - -
Granted 791,000 $ 7.42 186,000 $ 7.25 - -
Exercised (39,730) $ 7.00 (26,666) $ 6.83 - -
Forfeited (356,472) $ 8.18 (53,334) $ 7.53 - -
---------- --------
Outstanding at September 30, 1997 2,047,200 $ 7.81 337,000 $ 7.71 - -
Granted 200,000 $12.50 401,734 $10.50 - -
Granted 1,071,284 $10.50 - - - -
Exercised (63,722) $ 7.47 (4,998) $ 8.00 - -
Exercised and retired at merger (1,814,266) $ 7.37 (328,000) $ 7.70 - -
Forfeited (369,212) $12.58 (4,002) $ 7.63 - -
---------- --------
Outstanding at September 30, 1998 1,071,284 $10.50 401,734 $10.50 - -
May 4, 1999 initial grant - - - - 6,530,184 $13.96
Granted 647,443 $20.13 195,146 $10.50 489,764 $16.04
Exercised (490,576) $10.50 (160,300) $10.50 - -
Forfeited (120,220) $10.50 (22,868) $10.50 193,919 $13.98
---------- -------- ---------
Outstanding at September 30, 1999 1,107,931 $16.13 413,712 $10.50 6,826,029 $14.11
========== ======== =========
Options exercisable
At September 30, 1997 544,990 $ 7.44 - - - -
At September 30, 1998 - - - - - -
At September 30, 1999 1,107,931 $10.50 413,712 $10.50 - -
</TABLE>
The weighted average contractual life of stock options outstanding at
September 30, 1999 was 9.1 years.
In connection with the IPO of IXnet, the Company recognized $9.1 million of
compensation expense during the year ended September 30, 1999.
Additionally, in connection with the April 30, 1998 Merger, included in the
$10.6 million non-recurring change in control expense, the Company
recognized compensation expense in the amount of $5.9 million, representing
payments to option holders upon cancellation of their stock options. As a
result of the charges mentioned above, under the provisions of SFAS No. 123,
the Company's net income and earnings per share on a pro forma basis is the
same as actual for the years ended September 30, 1999 and 1998. Had
compensation cost for the Company's stock option plan and employee stock
purchase plan been determined based on the fair value at the grant date for
awards in fiscal 1997, consistent with the provisions of
54
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
SFAS No. 123, the Company's net income and earnings per share would have
been reduced to the pro forma amounts indicated below (In thousands, except
per share amounts).
<TABLE>
<CAPTION>
For the year ended
September 30,
-----------------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Net (loss) income - as reported.............................. $(32,456) $2,278 $3,834
Net (loss) income - pro forma................................ $(37,039) $2,278 $2,934
Basic (loss) earnings per share - as reported................ $ (3.97) $ 0.14 $ 0.18
Basic (loss) earnings per share - pro forma.................. $ (4.53) $ 0.14 $ 0.14
Diluted (loss) earnings per share - as reported.............. $ (3.97) $ 0.14 $ 0.18
Diluted (loss) earnings per share - pro forma................ $ (4.53) $ 0.14 $ 0.14
</TABLE>
The fair value of each option grant is estimated on the date of the grant
using the "Black-Scholes option-pricing model" with the following weighted
average assumptions used for grants for the years ended September 30, 1999,
1998 and 1997; zero dividend yield; expected volatility of 55%; weighted
average risk-free interest rate of 6.5% in fiscal 1999, 6.19% in fiscal 1998
and 6.03% in fiscal 1997; and expected lives of 5 years in fiscal 1999, 4.78
years in 1998 and 4 years for fiscal 1997.
12. Earnings Per Share:
The following is a reconciliation of the computations of basic and diluted
earnings per share (In thousands, except per share amounts).
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Basic earnings (loss) per share computation
Net Income (loss).................................. $(32,456) $ 2,278 $ 3,834
------------- ----------- -----------
Weighted average common shares outstanding......... 8,172 15,774 21,328
Total shares....................................... 8,172 15,774 21,328
============= =========== ===========
Basic earnings (loss) per share.................... $ (3.97) $ 0.14 $ 0.18
============= =========== ===========
Year Ended September 30,
--------------------------------------------
1999 1998 1997
------------- ----------- -----------
Diluted earnings (loss) per share computation
Net income (loss).................................. $(32,456) $ 2,278 $ 3,834
------------- ----------- -----------
Weighted average common shares outstanding....... 8,172 15,774 21,328
Common stock equivalent of stock options......... - 167 80
------------- ----------- -----------
Total shares....................................... 8,172 15,941 21,408
============= =========== ===========
Diluted earnings (loss) per share.................. $ (3.97) $ 0.14 $ 0.18
============= =========== ===========
</TABLE>
Approximately 1,071,284 and 318,000 stock options were outstanding for the
years ended September 30, 1998 and 1997, respectively, which were not
included in the computation of diluted earnings per share because the
exercise prices exceeded the average market price of the Company's common
stock for each period. For the year ended September 30, 1999, Common
55
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
Stock equivalents of stock options were excluded from the diluted earnings
per share calculation as their effect would have been anti-dilutive.
13. Commitments and Contingencies:
Operating Leases
----------------
The Company has entered into various operating leases primarily for real
estate and related lines and equipment.
Rental expenses under operating leases were $20.8 million, $17.4 million and
$13.7 million for the years ended September 30, 1999, 1998 and 1997,
respectively.
Future minimum annual rental payments required under noncancellable
operating leases at September 30, 1999 are as follows (In thousands):
2000 $28,530
2001 9,665
2002 8,353
2003 7,436
2004 6,789
Thereafter 4,379
-------
$65,151
=======
Capital Leases
--------------
The Company has entered into capital lease agreements for certain network
switching equipment and for certain computer equipment and software. Total
assets acquired under capital leases was approximately $31.1 million at
September 30, 1999 and $22.4 million at September 30, 1998. The accumulated
depreciation and amortization at September 30, 1999 and 1998 was
approximately $12.1 million and $6.1 million, respectively.
Future minimum lease payments required under noncancellable capital leases
at September 30, 1999 are as follows (In thousands):
2000 $13,189
2001 12,249
2002 7,854
2003 4,540
2004 1,525
-------
39,357
Less, amount representing interest 17,441
------
Net present value of minimum lease payments under
capital leases $21,916
=======
14. Related Party Transactions:
Services Provided
-----------------
Affiliated companies performed various services and provided certain
equipment to the Company. Services and/or equipment provided by affiliates
are billed to the Company and settled through a periodic cash transfer to
the respective affiliate.
56
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
The Company has a written arrangement with KEC and KEC-NJ with respect to a
pool of field technicians utilized by the Company. KEC and KEC-NJ are
responsible for administering the payroll and related benefits for these
technical and clerical workers and the Company reimburses all compensation
and benefits paid by KEC and KEC-NJ attributable to services performed for
the Company plus a fee equal to 2.5% of such costs. Effective for the
fiscal year 1997, the parties amended these agreements to provide a fixed
fee payment of $50 thousand per month in lieu of the fee payment of 2.5%.
Approximately $53.0 million, $51.7 million and $52.7 million of technical
labor, and $2.1 million, $2.0 million and $2.2 million of administrative
labor was provided through agreements with KEC and KEC-NJ during the years
ended September 30, 1999, 1998 and 1997, respectively.
For the years ended September 30, 1999, 1998 and 1997, KEC and KEC-NJ billed
the Company payroll administrative services of $0.6 million annually.
Included in prepaid expenses and other current assets is a net related party
receivable of $0.6 million at September 30, 1999. $0.3 million of net
related party payable is included in accrued expenses at September 30, 1998.
A portion of the Company's New York branch operation was co-located with KEC
through 1997 in a building owned by Knight Ventures, Inc., a company owned
by Richard P. Kleinknecht and Peter J. Kleinknecht (the "Former Principal
Stockholders"). For the year ended September 30, 1997 the Company was
charged rent of approximately $0.2 million.
Subcontracts and Other
The Company and other companies controlled by the Former Principal
Stockholders periodically subcontract certain work to one another. Amounts
charged to companies controlled by the Former Principal Stockholders under
subcontracts with IPC for the years ended September 30, 1999, 1998 and 1997
were approximately $3.1 million, $2.9 million and $0.1 million,
respectively, while amounts charged to IPC under subcontracts with companies
controlled by the Former Principal Stockholders were approximately $0.1
million, $0.2 million and $0.3 million, respectively.
In addition to the foregoing, the Company, KEC and KEC-NJ entered into a
twenty-year agreement dated May 9, 1994, with respect to business
opportunities regarding cabling of communication infrastructures. KEC and
KEC-NJ have agreed not to bid for or accept cabling jobs in competition with
the Company, if the Company intends to bid or accept such work. In
addition, because the Company is not a licensed electrical contractor, it
has agreed to refrain from bidding for or accepting without the consent of
KEC or KEC-NJ, as the case may be, all opportunities that combine both
electrical and cabling work. The Company has also agreed to continue to
refer to KEC and KEC-NJ certain electrical contracting bid opportunities
identified from time to time. Pursuant to such agreement, all estimates for
cabling work shall be generated by the Company on behalf of KEC, and KEC
will pay the Company a nominal amount for preparing such estimates.
The Company and companies controlled by the Former Principal Stockholders
also charge each other certain miscellaneous expenses, including, but not
limited to, office equipment rentals and certain other administrative
expenses. Such amounts are not significant.
57
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
15. Income Taxes:
Pretax (loss) earnings consisted of the following (In thousands):
<TABLE>
<CAPTION>
For the year ended September 30,
---------------------------------------------------------
1999 1998 1997
-------------- ------------------ ---------------
<S> <C> <C> <C>
United States $(31,955) $(18,275) $1,689
Foreign 6,072 26,744 6,425
-------------- ------------------ ---------------
Total pretax (loss) earnings $(25,883) $ 8,469 $8,114
============== ================== ===============
</TABLE>
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
For the year ended September 30,
---------------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Current:
Federal $ - $ 295 $ (182)
State and local 687 1,545 2,037
Foreign 3,561 9,120 2,342
---------------- ---------------- ----------------
$4,248 $10,960 $4,197
---------------- ---------------- ----------------
Deferred:
Federal $2,549 $(3,737) $ 323
State and local 750 (885) 9
Foreign 421 (147) (249)
---------------- ---------------- ----------------
3,720 (4,769) 83
---------------- ---------------- ----------------
Income tax provision $7,968 $ 6,191 $4,280
================ ================ ================
</TABLE>
The components of net deferred tax assets are as follows (In thousands):
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------------------------------------------------
1999 1998
--------------------------------------------- ------------------------------------------
US Foreign Total US Foreign Total
--------- ---------- --------- --------- --------- ---------
Deferred tax assets:
<S> <C> <C> <C> <C> <C> <C>
Excess of book over tax
depreciation $ 189 $ - $ 189 $ 745 $ 91 $ 836
Amortization of intangibles 4,701 - 4,701 621 - 621
Inventory and receivables 1,388 - 1,388 2,685 569 3,254
Accrued expenses 2,658 369 3,027 4,510 20 4,530
Net operating loss carryforward 13,649 291 13,940 - - -
AMT tax credit carryforward 334 - 334 128 - 128
Foreign tax credit carryforward 4,657 - 4,657 3,999 - 3,999
-------- ------- ---------- --------- ------- ---------
Total 27,576 660 28,236 12,688 680 13,368
Less valuation allowance (20,133) (291) (20,424) (3,999) - (3,999)
-------- ------- ---------- --------- ------- ---------
Total deferred tax assets $ 7,443 $ 369 $ 7,812 $ 8,689 $680 $ 9,369
</TABLE>
58
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Deferred tax liabilities:
Excess of book over tax (2,068) (110) (2,178) (15) - (15)
depreciation
------------ ------- ---------- --------- ------- ---------
Net deferred tax assets $ 5,375 $ 259 $ 5,634 $ 8,674 $680 $ 9,354
============ ======= ========== ========= ======= =========
</TABLE>
A valuation allowance is provided for foreign tax credit carryforwards, net
operating loss carryforwards related to IXnet and certain foreign net
operating loss carryforwards which expire at various times. The U.S. net
operating loss of $40.1 million as of September 30, 1999 expires in the year
2019.
A reconciliation between the statutory US federal income tax rate and the
Company's effective tax rate, excluding minority interest, is as follows:
<TABLE>
<CAPTION>
For the year ended September 30,
--------------------------------------------------------
1999 1998 1997
-------------- ----------------- --------------
<S> <C> <C> <C>
Statutory US federal tax rate (35.0%) 35.0% 35.0%
State and local income taxes,
net of federal benefit 3.6 7.8 16.4
Incremental foreign tax effect 7.2 22.3 -
Losses with no benefit 62.3 - -
Other, net (7.3) 8.0 1.4
-------------- ----------------- --------------
(30.8%) 73.1% 52.8%
============== ================= ==============
</TABLE>
16. Business Segment and Geographic Information:
Business Segments
-----------------
The Company has adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, for reporting information about
operating segments and related disclosures about products and services,
geographic areas and major customers.
The Company's operations include trading systems, ITS and IXnet. Trading
systems reports sales of turret systems to distributors and direct sales and
installations of turret systems as "Product sales and installation". It
reports revenue from turret system maintenance, including annual and multi-
year service contracts, and from moves, additions and changes to existing
turret system installations as "Service". ITS reports revenue from the
design, integration and implementation of cabling infrastructure projects
including LAN's and WAN's, and from the sales of intelligent network
products, such as hubs, bridges and routers as "Product sales and
installation". It reports revenue from on-site maintenance of customer
cable infrastructure, including annual and multi-year contracts, and from
the provision of outsourcing services for the support, expansion and
upgrading of existing customer networks as "Service." IXnet reports revenue
from sales of premium voice, managed bandwidth and outsourcing services, and
to a lesser extent, switched voice, shared internet protocol and other
services (In thousands).
59
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
<TABLE>
<CAPTION>
Trading
Systems ITS IXnet Eliminations Consolidated
------------- ------------ -------------- ---------------- -----------------
Fiscal Year 1999:
Revenue:
<S> <C> <C> <C> <C> <C>
Product sales and installation $122,836 $55,365 - - $178,201
Service 71,734 15,748 $ 73,509 - 160,991
Intersegment - - 106 $(106) -
------------- ------------ -------------- ---------------- -----------------
Total Revenue 194,570 71,113 73,615 (106) 339,192
Gross profit (excluding
depreciation and amortization) 98,189 9,090 778 (106) 107,951
Research & development 9,786 - - - 9,786
Selling, general & administrative (a) 22,975 4,458 21,627 (106) 58,047
Depreciation & amortization 8,177 357 21,576 - 30,110
Stock compensation charge - - 9,079 - 9,079
------------- ------------ -------------- ---------------- -----------------
Income from operations $ 57,251 $ 4,275 $(51,504) - $ 929
============= ============ ============== ================ =================
EBITDA (b) $ 65,428 $ 4,632 $(20,849) - $ 40,118
============= ============ ============== ================ =================
Total assets (c) $193,548 $23,806 $195,855 - $413,209
============= ============ ============== ================ =================
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year 1998:
Revenue:
<S> <C> <C> <C> <C> <C>
Product sales and installation $133,233 $40,117 - - $173,350
Service 63,592 23,192 $ 35,683 - 122,467
Intersegment - - 170 $(170) -
------------- ------------ -------------- ---------------- -----------------
Total Revenue 196,825 63,309 35,853 (170) 295,817
Gross profit (excluding
depreciation and amortization) 98,610 7,948 371 (170) 106,759
Research & development 8,276 - - - 8,276
Selling, general & administrative (a) 22,018 5,146 13,626 (170) 53,345
Depreciation & amortization 6,209 421 9,060 - 15,690
Change in control expense 8,837 453 1,350 - 10,640
------------- ------------ -------------- ---------------- -----------------
Income from operations $ 53,270 $ 1,928 $(23,665) - $ 18,808
============= ============ ============== ================ =================
EBITDA (b) $ 68,316 $ 2,802 $(13,255) - $ 45,138
============= ============ ============== ================ =================
Total assets (c) $202,859 $24,280 $ 14,503 - $241,642
============= ============ ============== ================ =================
</TABLE>
60
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
<TABLE>
<CAPTION>
Fiscal Year 1997:
Revenue:
<S> <C> <C> <C> <C> <C>
Product sales and installation $122,493 $57,485 - - $179,978
Service 55,146 17,261 $ 17,673 - 90,080
Intersegment - - 165 $(165) -
------------- ------------ -------------- ---------------- -----------------
Total Revenue 177,639 74,746 17,838 (165) 270,058
Gross profit (excluding
depreciation and amortization) 71,602 5,344 (2,020) (165) 74,761
Research & development 8,490 - - - 8,490
Selling, general & administrative (a) 24,632 4,904 7,576 (165) 48,100
Depreciation & amortization 4,776 394 3,460 - 8,630
------------- ------------ -------------- ---------------- -----------------
Income from operations $ 33,704 $ 46 $(13,056) - $ 9,541
============= ============ ============== ================ =================
EBITDA (b) $ 38,480 $ 440 $ (9,596) - $ 18,171
============= ============ ============== ================ =================
Total assets (c) $135,779 $13,035 $ 10,083 - $158,897
============= ============ ============== ================ =================
</TABLE>
(a) Consolidated selling, general & administrative includes corporate general &
administrative expenses of $9,093, $12,725 and $11,153 for the years ended
September 30, 1999, 1998 and 1997 respectively.
(b) Earnings before interest, taxes, depreciation and amortization ("EBITDA")
represents operating income plus depreciation and amortization. EBITDA for
the year ended September 30, 1999 excludes $9.1 million of deferred
compensation expense and for the year ended September 30, 1998 excludes a
$10.6 million non-recurring change in control expense.
(c) The Company's management reviews corporate assets combined with trading
system's assets.
Geographic sales information is based on the currency in which the customer
is billed. Information about the Company's operations by geographic area is as
follows (In thousands):
<TABLE>
<CAPTION>
For the year ended September 30,
--------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
Revenues:
<S> <C> <C> <C>
North America $242,479 $211,237 $205,745
Europe 73,306 70,708 50,682
Asia/Pacific and other 23,407 13,872 13,631
-------------- -------------- --------------
$339,192 $295,817 $270,058
============== ============== ==============
Long Lived Assets:
United States $ 97,252 $ 72,104 $ 36,232
United Kingdom 1,813 12,636 11,042
Rest of World 92 101 -
-------------- -------------- --------------
$ 99,157 $ 84,841 $ 47,274
============== ============== ==============
</TABLE>
No single customer accounted for 10% or more of total revenues for the years
ended September 30, 1999, 1998 and 1997.
61
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
17. Quarterly Financial Information (unaudited):
The following tables set forth unaudited quarterly financial information
for the years ended September 30, 1999 and 1998 (In thousands, except
per share amounts):
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------
December 31, March 31, June 30, September 30,
----------- -------- -------- --------------
Year ended
September 30, 1999:
-------------------
<S> <C> <C> <C> <C>
Revenue $67,750 $80,933 $ 91,206 $ 99,303
Gross profit (excluding 27,769 31,424 19,847 28,911
depreciation and amortization)
Net income (loss) (3,659) (3,291) (11,610) (13,896)
Basic and diluted (loss) per share ($0.45) ($0.41) ($1.44) ($1.70)
Year ended
September 30, 1998:
-------------------
Revenue $67,052 $61,145 $ 77,954 $ 89,666
Gross profit (excluding 26,627 23,713 31,536 24,883
Depreciation and amortization)
Net income 3,594 2,154 (3,839) 369
Basic and diluted earnings (loss)
per share $ 0.17 $ 0.10 ($0.31) $ 0.05
</TABLE>
The quarterly earnings per share information is computed separately for each
period. Therefore, the sum of such quarterly per share amounts may differ
from the total for the year.
In connection with the Merger, the Company incurred a pre-tax non-recurring
charge for change in control expenses of $10.6 million in the quarter ended
June 30, 1998. As a result of this charge, the Company incurred a net loss
in the quarter and diluted earnings per share was not calculated as the
common stock equivalents would have had an anti-dilutive effect. For the
year ended September 30, 1999, Common Stock equivalents of stock options
were excluded from the diluted earnings per share calculation as their
effect would have been anti-dilutive.
62
<PAGE>
GLOBAL CROSSING LTD.
SELECTED UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial
information of Global Crossing, Global Marine Systems, Frontier, Racal Telecom,
the Hutchison Global Crossing joint venture, IPC Communications and IXnet,
which we refer to as "Pro Forma Global Crossing Ltd.", has been prepared to
demonstrate how these companies or businesses might have looked if (1) the
Global Marine Systems acquisition and related financing, (2) the Frontier
acquisition, (3) the Racal Telecom acquisition and related financing, (4) the
Hutchison Global Crossing joint venture, including the related issuance of 6
3/8% cumulative convertible preferred stock, series B, of Global Crossing, (5)
the IPC and IXnet acquisitions, (6) the offering of our 6 3/8% cumulative
convertible preferred stock completed on November 5, 1999, (7) the offering of
the 9 1/8% senior notes due 2006 and 9 1/2% senior notes due 2009 of Global
Crossing Holdings completed on November 19, 1999, (8) the offering of our 7%
cumulative convertible preferred stock completed on December 15, 1999 and (9)
the offering of our 6 3/4% cumulative convertible preferred stock and
21,673,706 shares of our common stock completed in April 2000 had been
completed as of the date or at the beginning of the period presented.
We have prepared the pro forma financial information using the purchase
method of accounting. We expect that we will have reorganization and
restructuring expenses and potential synergies relating to the acquisitions of
Global Marine Systems, Racal Telecom, IPC and IXnet, the Hutchison Global
Crossing joint venture and the acquisition of Frontier's long distance business
and increased opportunities to earn more revenue as a result of those
transactions. The unaudited pro forma information does not reflect these
expenses and synergies.
The pro forma information, while helpful in illustrating the financial
characteristics of the combined company under one set of assumptions, does not
attempt to predict or suggest future results. The pro forma information also
does not attempt to show how the combined company would actually have performed
had the companies been combined throughout these periods. If the companies had
actually been combined in prior periods, these companies and businesses might
have performed differently. You should not rely on pro forma financial
information as an indication of the results that would have been achieved if the
Global Marine Systems, Frontier, Racal Telecom, IPC and IXnet acquisitions and
the Hutchison Global Crossing joint venture had taken place earlier or the
future results that the companies will experience after completion of these
transactions.
You should read these unaudited pro forma condensed combined financial
statements in conjunction with the historical financial statements of Global
Crossing, Global Marine Systems, Frontier, Racal, Telecom HCL Holdings, IPC and
IXnet.
PRO FORMA GLOBAL CROSSING LTD.
Unaudited Pro Forma Condensed Combined Balance Sheet
As of March 31, 2000
(in thousands)
<TABLE>
<CAPTION>
Global Global
Crossing IPC/IXnet Pro Forma Financing Crossing
Historical (1) Historical (2) Adjustments (3) Adjustments (4) Pro Forma
-------------------------------------------------------------- ----------
ASSETS
Current Assets:
<S> <C> <C> <C> <C> <C>
Cash, restricted cash and investments............... $ 1,383,969 $ 34,621 $ - $ 1,802,000 $ 3,220,590
Accounts receivable, net............................ 912,071 83,600 - - 995,671
Other assets and prepaid costs...................... 319,562 64,330 - - 383,892
------------------------------------------------------------------------
Total Current Assets................................ 2,615,602 182,551 - 1,802,000 4,600,153
Restricted cash and cash equivalents................ 69,545 - - - 69,545
Accounts receivable................................. 42,419 - - - 42,419
Property and equipment, net......................... 7,985,651 117,382 - - 8,103,033
Goodwill and other intangibles, net................. 9,436,715 88,097 (88,097) - 12,649,272
3,212,557
Investment in and advances to/from affiliates, net.. 604,291 - - - 604,291
Other assets, net................................... 735,747 11,989 147,770 895,506
------------------------------------------------------------------------
Total Assets........................................ $21,489,970 $400,019 $3,272,230 $ 1,802,000 $ 26,964,219
========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accrued construction costs.......................... $ 570,461 $ - $ - $ - $ 570,461
Accounts payable and accrued liabilities............ 919,910 88,945 33,000 - 1,041,855
Accrued interest and preferred dividends............ 162,260 - - - 162,260
Deferred revenue.................................... 216,234 41,368 - - 257,602
Income taxes payable................................ 88,325 - - - 88,325
Current portion of long term debt................... 11,649 50,316 - - 61,965
Other current liabilities........................... 264,314 7,205 - - 271,519
------------------------------------------------------------------------
Total Current Liabilities........................... 2,233,153 187,834 33,000 - 2,453,987
Long term debt...................................... 6,031,662 226,150 - - 6,257,812
Deferred revenue.................................... 489,331 - - - 489,331
Deferred credits and other.......................... 819,485 22,206 - - 841,691
------------------------------------------------------------------------
Total Liabilities................................... 9,573,631 436,190 33,000 - 10,042,821
------------------------------------------------------------------------
MINORITY INTEREST....................................... 478,030 14,627 (14,627) - 478,030
------------------------------------------------------------------------
MANDATORILY REDEEMABLE AND CUMULATIVE CONVERTIBLE
PREFERRED STOCK..................................... 2,485,267 - - 1,113,000 3,598,267
------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Common stock, 3,000,000,000 shares authorized, par value
$.01, 802,436,245 and 799,137,142 shares issued as of
March 31, 2000 and December 31, 1999, respectively. 8,030 88 574 217 8,821
(88)
Treasury stock, 22,033,758 shares................... (209,415) - - - (209,415)
Other shareholders' equity.......................... 9,575,617 114,694 (114,694) 688,783 13,466,885
2,856,722
345,763
Accumulated deficit................................. (421,190) (165,580) 165,580 (421,190)
-------------------------------------------------------------------------
8,953,042 (50,798) 3,253,857 689,000 12,845,101
-------------------------------------------------------------------------
Total liabilities and shareholders' equity....... $21,489,970 $400,019 $3,272,230 $1,802,000 $26,964,219
========================================================================
</TABLE>
63
<PAGE>
PRO FORMA GLOBAL CROSSING LTD.
Unaudited Pro Forma Condensed Combined Statement of Operations
For the three months ended March 31, 2000
(In thousands, except share and per share information)
<TABLE>
<CAPTION>
Global Global
Crossing IPC/IXnet Pro Forma Financing Crossing
Historical (5) Historical (6) Adjustments (3) Adjustments (4) Pro Forma
------------------------------------------------------------------ -------------
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES............................. $ 1,119,516 $ 87,740 $ - $ - $ 1,207,256
------------------------------------------------------------------ -------------
OPERATING EXPENSES:
Operations,selling, general
and administrative..................... 1,014,763 93,517 - - 1,108,280
Merger related expenses................ - 23,288 - - 23,288
Depreciation and amortization.......... 140,943 8,626 - - 149,569
Goodwill and intangibles amortization.. 131,634 4,006 (4,006) - 211,948
80,314
------------------------------------------------------------------ -------------
1,287,340 129,437 76,308 - 1,493,085
------------------------------------------------------------------ -------------
OPERATING LOSS................................. (167,824) (41,697) (76,308) - (285,829)
EQUITY IN LOSS OF AFFILIATES................... (5,140) (5,140)
MINORITY INTEREST.............................. (15,731) 7,634 (7,634) - (15,731)
Other income (expense):
Interest income........................ 22,798 22,798
Interest expense....................... (85,676) (7,447) - - (93,123)
Other income (expense)................. (5,628) (768) - - (6,396)
------------------------------------------------------------------ -------------
Loss before provision of income taxes.......... (257,201) (42,278) (83,942) - (383,421)
Provision for income taxes............. (5,000) (1,219) - - (6,219)
------------------------------------------------------------------ -------------
Net loss....................................... (262,201) (43,497) (83,942) - (389,640)
Preferred stock dividends.............. (45,258) - - (19,406) (64,664)
------------------------------------------------------------------ -------------
Loss applicable to common shareholders........ $ (307,459) $ (43,497) $ (83,942) $ (19,406) $ (454,304)
================================================================== =============
Loss per common share:
Loss applicable to common
shareholders .......................... $ (0.39) $ (0.53)
=============== =============
Shares used in computing information
applicable to common shareholders...... 778,780,323 857,864,029
=============== =============
</TABLE>
64
<PAGE>
Pro Forma Global Crossing Ltd.
Unaudited Pro Forma Condensed Combined Statements of Operations
For the Year Ended December 31, 1999
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Global Global Marine
Crossing Systems Frontier
Historical (7) Historical (8) Historical(9)
---------------------------------------------------
<S> <C> <C> <C>
Operating Revenues............................................................. $ 1,664,824 $ 173,498 $ 1,995,556
Operating Expenses:
Operating, selling, general and administrative............................ 1,420,370 127,165 1,561,646
Merger expenses........................................................... - - 74,519
Depreciation and amortization............................................. 124,294 12,817 173,600
Goodwill amortization..................................................... 127,621 812 25,749
----------------------------------------------------
1,672,285 140,794 1,835,514
----------------------------------------------------
Operating income (loss)................................................... (7,461) 32,704 160,042
Equity in income (loss) of affiliates..................................... 15,708 4,539 17,235
Minority interest......................................................... (1,338) - -
Other Income (Expenses):
Interest expense.......................................................... (139,077) (6,869) (48,739)
Interest income........................................................... 67,407 511 4,754
Other income (expenses)................................................... 180,765 143 (2,346)
----------------------------------------------------
Income (loss) before extraordinary item, taxes and cumulative
effect of changes in accounting principle................................. 116,004 31,028 130,946
(Provision) benefit for income taxes...................................... (126,539) (11,885) (77,181)
----------------------------------------------------
Income (loss) before extraordinary item and cumulative effect
of changes in accounting principle........................................ (10,535) 19,143 53,765
Preferred stock dividends................................................. (66,642) - (510)
----------------------------------------------------
Income (loss) applicable to common shareholders before extraordinary item and
cumulative effect of changes in accounting principle........................... (77,177) 19,143 53,255
Diluted earnings adjustment............................................... - - 270
----------------------------------------------------
Income (loss) applicable to common shareholders before extraordinary item and
cumulative effect of changes in accounting principle........................... $ (77,177) $ 19,143 $ 53,525
====================================================
Loss per common share:
Loss applicable to common shareholders before extraordinary item
and cumulative effect of changes in accounting principle
Basic and diluted............................................ $ (0.15)
===============
Shares used in computing information applicable to common shareholders
Basic and diluted............................................ 502,400,851
===============
<CAPTION>
Hutchison
Racal Global
Telecom Crossing IPC/IXnet
Historical (10) Adjustments (11) Historical (12)
--------------------------------------------------------
<S> <C> <C> <C>
Operating Revenues........................................................ $ 306,019 $ - $ 354,922
Operating Expenses:
Operating, selling, general and administrative....................... 286,442 - 334,365
Merger expenses...................................................... 24,600 - -
Depreciation and amortization........................................ 52,716 - 23,363
Goodwill amortization................................................ - - 11,869
-------------------------------------------------------
363,758 - 369,597
-------------------------------------------------------
Operating income (loss).............................................. (57,739) - (14,675)
Equity in income (loss) of affiliates................................ (560) (15,825) -
(21,240)
Minority interest.................................................... - - 4,962
Other Income (Expenses):
Interest expense..................................................... (30,908) - (27,863)
Interest income...................................................... 3,856 - -
Other income (expenses).............................................. 369 - 569
-------------------------------------------------------
Income (loss) before extraordinary item, taxes and cumulative
effect of changes in accounting principle............................ (84,982) (37,065) (37,007)
(Provision) benefit for income taxes................................. 30,116 - (8,279)
-------------------------------------------------------
Income (loss) before extraordinary item and cumulative effect
of changes in accounting principle................................... (54,866) (37,065) (45,286)
Preferred stock dividends............................................ - (25,529) -
-------------------------------------------------------
Income (loss) applicable to common shareholders........................... (54,866) (62,594) (45,286)
Diluted earnings adjustment.......................................... - - -
-------------------------------------------------------
Income (loss) applicable to common shareholders........................... $ (54,866) $ (62,594) $ (45,286)
=======================================================
Loss per common share:
Loss applicable to common shareholders before extraordinary item
and cumulative effect of changes in accounting principle
Basic and diluted
Shares used in computing information applicable to common shareholders
Basic and diluted
<CAPTION>
Global
Financing Pro Forma Crossing
Adjustments Adjustments Pro Forma
-------------------------------------------------
<S> <C> <C> <C>
Operating Revenues.......................................................... $ - $ - $ 4,494,819
Operating Expenses:
Operating, selling, general and administrative......................... - - 3,729,988
Merger expenses........................................................ - - 99,119
Depreciation and amortization.......................................... - - 386,790
Goodwill amortization.................................................. - (812) (13) 830,317
19,690 (13)
(25,749) (14)
305,907 (14)
55,843 (15)
(11,869) (3)
321,256 (3)
--------------------------------------------------
- 664,266 5,046,214
--------------------------------------------------
Operating income (loss)................................................ - (664,266) (551,395)
Equity in income (loss) of affiliates.................................. - - (143)
Minority interest...................................................... - (4,962) (3) (1,338)
Other Income (Expenses):
Interest expense....................................................... 93,577 (17) (24,000) (16) (523,558)
(243,316) (17) (96,363) (18)
Interest income........................................................ - - 76,528
Other income (expenses)................................................ - - 179,500
--------------------------------------------------
Income (loss) before extraordinary item, taxes and cumulative
effect of changes in accounting principle.............................. (149,739) (789,591) (820,406)
(Provision) benefit for income taxes................................... (7,200) (17) 23,115 (19) (170,653)
7,200 (20)
--------------------------------------------------
Income (loss) before extraordinary item and cumulative effect
of changes in accounting principle..................................... (156,939) (759,276) (991,059)
Preferred stock dividends.............................................. (108,936) (17) 510 (21) (278,732)
(77,625) (4)
--------------------------------------------------
Income (loss) applicable to common shareholders............................. (343,500) (758,766) (1,269,791)
Diluted earnings adjustment............................................ - (270) (22) -
--------------------------------------------------
Income (loss) applicable to common shareholders............................. $ (343,500) $ (759,036) $ (1,269,791)
==================================================
Loss per common share:
Loss applicable to common shareholders before extraordinary item
and cumulative effect of changes in accounting principle
Basic and diluted......................................... $ (1.50)
==============
Shares used in computing information applicable to common shareholders
Basic and diluted......................................... 846,438,857 (23)
==============
</TABLE>
65
<PAGE>
Pro Forma Global Crossing Ltd.
Notes to Unaudited Pro Forma Condensed Combined Financial
Statements
(1) This column represents the historical financial position of Global
Crossing as of March 31, 2000, including the assets acquired in the
Frontier merger, the Global Marine Systems and Racal Telecom acquisitions
and the Hutchison Global Crossing joint venture.
(2) This column represents the historical financial position of IPC
Communications, Inc. (IPC) as of March 31, 2000, including its subsidiary
IXnet, Inc (IXnet).
(3) These adjustments reflect the elimination of IPC's shareholders' equity
accounts, the minority interest related to the shares of IXnet not owned
by IPC and the excess consideration over the net liabilities assumed
(goodwill). The preliminary goodwill is calculated as follows (in
thousands, except exchange ratios and share prices):
<TABLE>
<CAPTION>
Shares of IXnet common stock outstanding at
<S> <C> <C>
March 31, 2000....................................................... 51,148
Less shares held by IPC.............................................. (43,100)
-------
Shares of IXnet to be exchanged...................................... 8,048
IXnet exchange ratio................................................. 1.184
------
Shares of Global Crossing to be issued to IXnet shareholders......... 9,529
Shares of IPC common stock outstanding at
March 31, 2000....................................................... 8,839
IPC exchange ratio................................................... 5.417
------
Shares of Global Crossing to be issued to IPC shareholders........... 47,881
---------
Total shares of Global Crossing to be issued......................... 57,410
Global Crossing market price at agreement date....................... $ 49.77
---------
2,857,296
Acceleration of stock option vesting................................. 345,763
Tax benefit related to the vesting of
Stock options...................................................... (147,770)
Estimated Global Crossing transaction costs.......................... 30,000
---------
Estimated total consideration........................................ 3,085,289
Historical net book value of IPC:
Historical IPC net liabilities at
March 31, 2000................................................... $36,171
Historic goodwill and other intangibles.............................. 88,097
Estimated IPC and IXnet transaction costs............................ 3,000
-------
127,268
----------
Preliminary goodwill................................................. $3,212,557
==========
</TABLE>
Global Crossing will issue approximately 57,410,000 shares of its common
stock at a ratio of 1.184 shares of Global Crossing common stock for each
share of IXnet common stock not owned by IPC, and 5.417 shares of Global
Crossing common stock for each share of IPC common stock. Global Crossing
has tentatively considered the carrying value of the acquired assets to
approximate their fair value, with all of the excess of such acquisition
costs being attributable to goodwill. Global Crossing is in the process of
fully evaluating the assets to be acquired and, as a result, the purchase
price allocation among the tangible and intangible assets acquired (and
their related useful lives) may change. Goodwill associated with the
transaction is currently anticipated to be amortized over a 10-year life.
(4) These adjustments represent the issuance of 4,600,000 shares of Global
Crossing 6 3/4% cumulative convertible preferred stock and related
dividends and 21,673,706 shares of Global Crossing common stock in April
2000.
(5) This column represents the results of operations of Global Crossing Ltd.
for the three months ended March 31, 2000 including the results of Global
Marine Systems, Frontier and Racal operations for the three months ended
March 31, 2000 and the Hutchison joint venture for the period from
January 12, 2000 to March 31, 2000.
(6) This column represents the results of operations of IPC, including the
results of its subsidiary, IXnet, for the three months ended March 31,
2000.
(7) This column represents the historical results of operations for the year
ended December 31, 1999, including the results of Global Marine Systems
operations for the six months ended December 31, 1999, the results of
Frontier operations for the three months ended December 31, 1999 and the
results of Racal Telecom operations for the period from November 24,
1999 to December 31, 1999.
(8) This column represents the historical results of operations of Global
Marine Systems for the six months ended June 30, 1999.
(9) This column represents Frontier's historical results of operations for the
nine months ended September 30, 1999.
(10) This column represents Racal Telecom's results from operations from
January 1, 1999 to November 23, 1999, after giving effect to pro forma
adjustments to present these statements in accordance with United States
GAAP, to reflect the disposal of the Racal Translink and Racal Fieldforce
divisions of Racal Telecommunications Limited (which Global Crossing did
not acquire) and to reflect the likely effect of the trading among Racal
Translink, Racal Fieldforce and Racal Telecom based on contractual
obligations among the divisions. Global Crossing summarizes these
adjustments in the table below:
Racal Telecom Pro Forma
Unaudited Pro Forma Condensed Combined Statements of Operations
For the period from January 1, 1999 to November 23, 1999
(in thousands)
<TABLE>
<CAPTION>
US GAAP and Racal
BV Acquisition Accounting Telecom Racal
and Carve-Out Policy Interim Telecom
Historical(a) Adjustments Adjustments(d) Period(e) Pro Forma
------------ --------------- -------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Operating Revenues................................. $ 390,578 $ (110,354)(c) $ (22,447) $ 47,937 $ 306,019
305 (b)
--------- ---------- --------- -------- ---------
Operating Expenses:
Operating, selling, general and
administrative.............................. 355,110 (99,595)(c) 1,737 53,544 311,042
246 (b)
Depreciation and amortization................. 61,774 (11,978)(c) (3,340) 6,265 52,716
(5)(b)
--------- ---------- --------- -------- ---------
416,884 (111,332) (1,603) 59,809 363,758
--------- ---------- --------- -------- ---------
Operating income (loss)............................ (26,306) 1,283 (20,844) (11,872) (57,739)
Equity in income (loss) of affiliates.............. (560) -- -- -- (560)
Other income (expense):
Interest expense.............................. (30,905) (3)(b) -- -- (30,908)
Interest income............................... -- 3,089 (c) -- 767 3,856
Other income (expense)........................ 76,390 (76,021)(c) -- -- 369
--------- ---------- --------- -------- ---------
Income (loss) before extraordinary item, taxes and
cumulative effect of changes in accounting
principle........................................ 18,619 (71,652) (20,844) (11,105) (84,982)
(Provision) benefit for income taxes.......... 3,563 (70)(b) 18,918 7,705 30,116
--------- ---------- --------- -------- ---------
Income (loss) before extraordinary item and
cumulative effect of changes in accounting
principle........................................ $ 22,182 $ (71,722) $ (1,926) $ (3,400) $ (54,866)
========= ========== ========= ======== =========
</TABLE>
(a) This column represents the combined historical results of operations
of Racal Telecommunications Limited, Racal Telecommunications Networks
Limited, Racal Internet Services Limited and Racal Telecommunications
Inc., which we refer to as "Racal Telecom", in accordance with United
Kingdom GAAP translated into United States dollars for the 41 weeks
ended October 15, 1999.
(b) Global Crossing is treated as having acquired the business and assets
of Racal Network Services BV as that company was in the process of
being reorganized into Racal Telecommunications Networks Limited in
the course of 1999. These adjustments reflect the financial position
and results of operations of Racal Network Services BV as if this
transaction had been completed as of the dates or at the beginning of
the periods presented.
(c) In July 1999, the Racal Telecom business was separated into three
divisions: Racal Telecom, Racal Translink and Racal Fieldforce. On
October 1, 1999, the Racal Translink and Racal Fieldforce businesses
were sold to another company within the Racal Electronics plc group.
This adjustment eliminates the results of operations of Racal
Translink and Racal Fieldforce, reflects the likely effect of the
trading among Racal Translink, Racal Fieldforce and Racal Telecom
based on contractual obligations among the divisions and adjusts the
profit on disposal of these operations. No taxation liabilities were
incurred on the disposal as this disposal was to another Racal
Electronics plc group company.
(d) The Racal Telecom combined financial statements are prepared in
accordance with United Kingdom GAAP which differ in certain material
respects from United States GAAP. The differences that are material
are disclosed in the notes to the combined financial statements,
incorporated by reference. In addition, an adjustment has been made to
treat sales of dark fiber made by Racal Telecom after July 1, 1999 as
operating leases, recognizing income over the period of the service
provision in accordance with the provision of FASB Interpretation No.
43.
(e) This column represents Racal Telecom's historical results from October
16, 1999 to November 23, 1999.
(11) On January 12, 2000, Global Crossing and Hutchison Whampoa Limited formed
a joint venture called Hutchison Global Crossing. This joint venture is
owned in equal parts by Global Crossing and Hutchison Whampoa. In exchange
for its 50% interest, Hutchison Whampoa contributed to the joint venture
its existing building-to-building fixed-line telecommunications network in
Hong Kong and certain Internet-related assets previously held by Hutchison
Telecommunications Limited. In exchange for its 50% interest, Global
Crossing contributed to the joint venture international telecommunications
capacity rights on its network and know-how related to Internet data
centers valued at $350 million and $50 million in cash. In addition,
Global Crossing issued to Hutchison Whampoa $400 million aggregate
liquidation preference of Global Crossing's 6 3/8% cumulative convertible
preferred stock, series B, convertible into Global Crossing common stock.
The Hutchison Global Crossing joint venture is anticipated to be accounted
for as an unconsolidated joint venture under the equity method of
accounting.
<TABLE>
<CAPTION>
(In thousands)
--------------
<S> <C> <C>
Total Consideration
Cash contributed................................................... $ 50,000
6 3/8% Cumulative Convertible Preferred Stock, Series B............ 400,000
Estimated cost of capacity contributed............................. 83,800
Global Crossing transaction costs.................................. 5,000
--------
Total consideration..................................................... 538,800
Less: Historical net tangible book value of HCL Holdings:
Historical HCL Holdings net liabilities at December 31, 1999....... $(149,393)
Cash contributed................................................... 50,000
Estimated cost of capacity contributed............................. 83,800
---------
Adjusted net tangible book value................................... (15,593)
50% ownership interest............................................. 7,797
---------
(7,796)
--------
Total Goodwill.......................................................... $546,596
========
</TABLE>
Global Crossing has tentatively considered the carrying value of the
acquired assets to approximate their fair value, with all of the excess of
those acquisition costs being attributable to goodwill. Global Crossing is
in the process of fully evaluating the assets acquired and, as a result,
the purchase price allocation among the tangible and intangible assets
acquired and their useful lives may change. Global Crossing currently
anticipates that goodwill associated with the transaction will be amortized
over a 25-year life.
These adjustments also include the assumed equity in the results of
operations of Hutchison Global Crossing for the year ended December 31,
1999.
(12) This column represents the results of operations of IPC, including the
results of its subsidiary, IXnet, for the year ended December 31, 1999.
66
<PAGE>
(13) These adjustments reflect the reversal of historic goodwill amortization
and goodwill amortization expense of the excess consideration over the net
assets acquired (goodwill) in connection with the Global Marine Systems
acquisition, which Global Crossing has estimated to be approximately $693
million. Global Crossing is amortizing goodwill and other intangible assets
on the straight-line method over 3-25 years. The initial purchase price
allocation is based on current estimates. Global Crossing will make the
final purchase price allocation based upon final values for certain assets
and liabilities. As a result, the final purchase price allocation may
differ from the presented estimate.
(14) These adjustments reflect the reversal of historic goodwill amortization
and the goodwill amortization expense of the excess consideration over the
net assets acquired (goodwill) in connection with the Frontier merger,
which Global Crossing has estimated to be approximately $7.7 billion.
Global Crossing is amortizing goodwill and other intangible assets on a
straight-line method over 6-25 years. The initial purchase price allocation
is based on current estimates. Global Crossing will make the final purchase
price allocation based upon final values for certain assets and
liabilities. As a result, the final purchase price allocation may differ
from the presented estimate.
(15) This adjustment reflects the amortization expense of the excess
consideration over the net assets acquired (goodwill) in connection with
the Racal acquisition, which Global Crossing has estimated to be
approximately $1.6 billion. Global Crossing has tentatively considered the
carrying value of the acquired assets to approximate fair value, with all
excess of those acquisition costs being attributable to goodwill. Global
Crossing is in the process of fully evaluating the assets acquired and, as
a result, the purchase price allocation among the tangible and intangible
assets acquired, and their related useful lives, may change. Global
Crossing currently anticipates that goodwill associated with the
transaction will be amortized over a 25 year life.
(16) This amount reflects the assumed interest expense, at an 8% interest rate,
incurred on the $600 million debt assumed issued as of the earliest date
presented in connection with the acquisition of Global Marine Systems.
(17) These adjustments represent the assumed interest expense, including
amortization of deferred financing fees and the resulting tax adjustment,
in connection with the issuance and assumed repayment of existing debt
related to the 9 1/8% senior notes due 2006 and 9 1/2% senior notes due
2009 of Global Crossing Holdings, Global Crossing's 6 3/8% cumulative
convertible preferred stock and Global Crossing's 7% cumulative convertible
preferred stock. In connection with the issuance of the 9 1/8% senior notes
due 2006 and 9 1/2% senior notes due 2009 of Global Crossing Holdings,
Global Crossing incurred approximately $29.7 million in financing fees. The
financing fees will be amortized over the life of the debt.
(18) This amount reflects the assumed interest expense, at a 9% interest rate,
including the amortization of deferred financing fees, incurred on the $1.1
billion debt issued to finance the acquisition of Racal Telecom assumed
issued as of the earliest date presented.
(19) This adjustment represents the tax benefit resulting from the interest
expense assumed in connection with the debt issued for the acquisition of
Global Marine Systems.
(20) This adjustment represents the tax benefit resulting from the interest
expense assumed in connection with the debt issued for the acquisition of
Racal Telecom.
(21) This adjustment assumes that Frontier's preferred stock dividends would not
have been incurred, as Frontier's preferred stock would have been redeemed
as of the earliest date presented.
(22) To eliminate diluted earnings adjustment due to the combined net loss
position.
(23) Pro forma per share data are based on the number of shares of Global
Crossing common stock that would have been outstanding had the Frontier
merger, the IPC acquisition and the April 2000 issuance of common stock
occurred at the earliest date presented. Global Crossing issued
355,181,000 shares in connection with the Frontier merger, 21,673,706
shares in connection with the April 2000 common stock issuance, and
approximately 57,410,000 shares in connection with the IPC and IXnet
acquisitions.
67
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
GLOBAL CROSSING LTD.
Dated: June 15, 2000 By: /s/ Dan J. Cohrs
---------------------------------
Name: Dan J. Cohrs
Title: Senior Vice President and
Chief Financial Officer
68
