UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended June 30, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 000-26959
IXNET, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of 13-4060000
incorporation or organization) (IRS Employer Identification No.)
WALL STREET PLAZA, 88 PINE STREET, NEW YORK, NY 10005
(Address of principal executive offices) (Zip Code)
(212) 412-6400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes No X
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Common Stock Number of Shares Outstanding, August 31, 1999
--------------------- ---------------------------------------------
$0.01 par value 50,575,000
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IXNET, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements (unaudited)
<S> <C>
Consolidated and Combined Balance Sheets at June 30, 1999 and
September 30, 1998..........................................................................1
Consolidated and Combined Statements of Operations for the Three and Nine Months
ended June 30, 1999 and 1998................................................................2
Consolidated and Combined Statements of Cash Flows for the Nine months ended
June 30, 1999 and 1998......................................................................3
Notes to Consolidated and Combined Financial Statements........................................4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................................7
Item 3. Quantitative and Qualitative Disclosure About Market Risk.....................................16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................17
Item 2. Changes in Securities and Use of Proceeds.....................................................17
Item 3. Defaults Upon Senior Securities...............................................................17
Item 4. Submission of Matters to a Vote of Security Holders...........................................17
Item 5. Other Information.............................................................................17
Item 6. Exhibits and Reports on Form 8-K..............................................................18
Signatures....................................................................................20
</TABLE>
<PAGE>
IXNET, INC.
CONSOLIDATED AND COMBINED BALANCE SHEETS (unaudited)
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,554 $ 1,255
Trade receivables, less allowance for doubtful accounts of
$1,281 and $621, respectively 16,312 9,844
Prepaid expenses and other current assets 4,182 2,707
--------- --------
Total current assets 22,048 13,806
Property, plant and equipment, less accumulated depreciation of
$19,508 and $10,719, respectively 53,683 36,351
Goodwill, net 50,324 9,023
Other assets 1,996 1,152
--------- --------
Total assets $ 128,051 $ 60,332
========= ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 12,121 $ 7,028
Accrued liabilities 16,252 9,007
Current portion of capital leases 7,166 4,057
Current portion of notes payable 4,938 -
--------- --------
Total current liabilities 40,477 20,092
Notes payable to parent 41,207 43,629
Lease obligations, net of current portion 14,310 11,570
Notes payable, net of current portion 4,658 -
--------- --------
Total liabilities 100,652 75,291
Commitments and contingencies
Stockholder's equity (deficit):
Common stock - $0.01 per share par value, authorized 100,000,000 shares;
43,100,000 shares issued and outstanding 431 431
Paid-in capital 136,454 33,830
Accumulated deficit (90,386) (49,709)
Deferred compensation (18,501) -
Cumulative translation adjustment (599) 489
--------- --------
Total stockholder's equity (deficit) 27,399 (14,959)
--------- --------
Total liabilities and stockholder's equity (deficit) $ 128,051 $ 60,332
========= ========
</TABLE>
See Notes to Consolidated and Combined Financial Statements.
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IXNET, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS (unaudited)
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $ 20,038 $ 9,917 $ 52,649 $ 25,235
Cost of revenue (exclusive of depreciation and
amortization shown separately below) 20,093 9,439 51,027 24,852
Sales and marketing expense 3,377 2,247 8,255 5,460
General and administrative expense 2,078 1,472 4,893 3,803
Depreciation and amortization 5,297 2,692 14,805 5,616
Special charge - 1,350 - 1,350
Stock compensation charge 7,881 - 7,881 -
-------- ------- -------- --------
Loss from operations (18,688) (7,283) (34,212) (15,846)
Interest expense, net (1,792) (916) (6,112) (2,437)
Other income (expense), net 235 (2) 224 1
-------- ------- -------- --------
Loss before provision for income taxes (20,245) (8,201) (40,100) (18,282)
Provision for income taxes 319 143 577 318
-------- ------- -------- --------
Net loss $(20,564) $(8,344) $(40,677) $(18,600)
======== ======= ======== ========
Basic and diluted loss per share $ (0.48) $ (0.19) $ (0.94) $ (0.43)
======== ======= ======== ========
Basic and diluted weighted average number of
shares outstanding 43,100 43,100 43,100 43,100
======== ======= ======== ========
</TABLE>
See Notes to Consolidated and Combined Financial Statements.
2
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IXNET, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine months ended
June 30,
--------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (40,677) $ (18,600)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 9,347 5,172
Amortization of goodwill 5,458 444
Provision for doubtful accounts 1,093 772
Deferred compensation charge 7,881 -
Changes in operating assets and liabilities:
Trade receivables (4,078) (2,025)
Prepaid expenses and other assets (1,350) 1,730
Accounts payable and accrued liabilities 1,801 5,226
--------- ---------
Net cash used in operating activities (20,525) (7,281)
--------- ---------
Cash flows from investing activities:
Capital expenditures (12,481) (11,109)
Acquisition of Saturn, net of cash acquired (34,713)
--------- ---------
Net cash used in investing activities (47,194) (11,109)
--------- ---------
Cash flows from financing activities:
Financings from parent, net 70,578 12,297
Capital contributed from tax utilization 3,242 8,149
Principal payments on capital leases (3,366) (2,171)
Repayment of notes payable (1,348)
--------- ---------
Net cash provided by financing activities 69,106 18,275
--------- ---------
Effect of exchange rate changes on working capital (1,088) 243
--------- ---------
Net increase in cash 299 128
Cash and cash equivalents, beginning of period 1,255 525
--------- ---------
Cash and cash equivalents, end of period $ 1,554 $ 653
========= =========
Cash paid during the period for-
Interest $ 5,577 $ 2,404
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 -
Capital lease obligations entered into during the period 9,215 5,054
Deferred compensation in connection with grants of stock options 26,382 -
Working capital adjustment in connection with Saturn acquisition 1,862 -
Goodwill adjustment in connection with Saturn acquisition 400 -
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.
3
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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 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
consisting of managed voice and data services, switched voice communications and
content hosting and distribution of news, research, analytics and market data.
In connection with the Company's initial public 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
$.01 per share, authorized. 1,000 shares were 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 $.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 $.01 per share, authorized. On February 13,
1998, IPC acquired the outstanding common stock of MXNet, which was contributed
to IEXN on May 12, 1999.
The financial statements present the consolidated financial position,
results of operations and cash flows of IEXN and its subsidiaries combined with
the financial position, results of operations, changes in stockholders' 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 incurred
by IPC that have been charged to the Company on a direct or allocated basis.
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 June 30, 1999, and
the results of its operations for the three and nine months ended June 30, 1999
and 1998, 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 nine months ended June 30,
1999, 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 audited financial
statements and notes thereto for the year ended September 30, 1998, as included
in IXnet's registration Statement on Form S-1 filed with the Securities and
Exchange Commission on August 12, 1999.
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The financial statements as of June 30, 1999 and 1998, and for the
periods ended June 30, 1999 and 1998, combine the historical financial
information of IEXN and its consolidated subsidiaries with the historical
financial information of MXNet from the date of both acquisitions. Intercompany
balances and transactions within and between IEXN and MXNet have been
eliminated.
2. 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. For the Company,
comprehensive loss includes net loss and foreign currency translation
adjustments.
The Company's total comprehensive loss for the nine months ended June
30, 1999 and 1998 was as follows (in thousands):
Nine months ended
June 30,
--------
1999 1998
---- ----
Net loss ($40,677) ($18,600)
Translation adjustment (1,088) 243
-------- --------
Total comprehensive loss ($41,765) ($18,357)
======== ========
3. ACQUISITIONS
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 of IPC and
IXnet and IPC's market capitalization through the second, third or fourth
quarters of fiscal 2000. Based upon data as of June 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.
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.
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
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<PAGE>
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").
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.
4. 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.
Approximately $7.9 million of deferred stock compensation is included as expense
for the three and nine months ended June 30, 1999. The remaining deferred
compensation will be amortized over 4 years, the 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.
5. IPC'S REVOLVING CREDIT FACILITY
Historically, IPC has funded IXnet's operations through cash flow and
through borrowings under a revolving credit facility. On June 21, 1999, IPC
amended and restated its revolving Credit Facility to provide for a Working
Capital Facility of $45 million and a $20 million Term Loan. In addition,
certain terms relating to eligibility of receivables under the Working Capital
Facility were changed to increase the availability. The amendment and
restatement also provides for a pledge by IPC of IXnet common stock and certain
additional financial covenants including a leverage ratio and fixed charge
ratio. All of IXnet's real and personal property are pledged as collateral under
IPC's revolving credit agreement, and IXnet and its subsidiaries are guarantors.
6. SUBSEQUENT EVENTS
On August 12, 1999, IXnet completed its initial public offering of
6,500,000 shares at a price of $15 per share. On August 30, 1999, the
underwiters exercised their over-allotment option and purchased an additional
975,000 shares at $15 per share. Total proceeds received by IXnet net of
commissions were approximately $104,500,000. The proceeds of the IPO are to be
used to finance the continued expansion of IXnet's telecommunications network
and for possible acquisitions, strategic alliances, or investments in IXnet's
business.
On September 24, 1999, the Company entered into a strategic agreement
including the license of certain software products to enhance its network
intelligence. The $20 million purchase price consists of approximately $10
million in cash and 500,000 shares of IXnet common stock.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
IXnet is a leading provider of communications services to the worldwide
financial services community. We have built and operate a global seamless
communications network connecting financial services firms and their business
partners, as well as multiple offices within the same firm. We refer to this
network as our Extranet. Through our Extranet, our customers obtain highly
reliable, secure and fully managed voice and data connectivity without having to
access multiple disparate public networks or rely on multiple customer service
organizations.
In 1995, we began building our Extranet and offering voice and data
services. We funded the initial construction of our Extranet, including capital
expenditures and working capital, through inter-company investments and loans
provided by our parent, IPC. As of June 30, 1999, our Extranet was comprised of
two network operations centers, three data centers, 73 points of presence, more
than 1,000 customer access nodes placed on customer premises and high capacity
bandwidth facilities. Our Extranet connects over 500 customers in financial
centers in 34 countries around the world, including New York, Chicago, Toronto,
London, Frankfurt, Paris, Zurich, Hong Kong, Tokyo, Sydney and Singapore.
We provide services tailored to meet the specialized needs of the
financial services community, including managed voice and data services, virtual
private network services and fully outsourced network solutions. In addition, we
aggregate, host and distribute financially oriented content, such as news,
research, analytics and market data, for information service providers.
We have incurred operating losses, net losses and negative operating
cash flow for each month since our formation. As of June 30, 1999, we had an
accumulated deficit of approximately $90.4 million. We expect to substantially
increase our expenditures and operating expenses as we continue the buildout of
our Extranet. We expect to incur substantial operating losses, net losses, and
negative cash flow during the network buildout and as we penetrate each new
market during the foreseeable future.
On August 12, 1999, IXnet completed its initial public offering of
6,500,000 shares at price of $15 per share. On August 30, 1999, the underwiters
exercised their over-allotment option and purchased an additional 975,000 shares
at $15 per share. IXnet has 50,575,000 shares of common stock outstanding, of
which 43,100,000 shares are owned by IPC.
Total proceeds received by IXnet net of commissions were approximately
$104,500,000. The proceeds of the IPO are to be used to finance the continued
expansion of IXnet's telecommunications network and for possible acquisitions,
strategic alliances, or investments in IXnet's business.
On September 24, 1999, we entered into a strategic agreement including
the license of certain software products to enhance its network intelligence.
The $20 million purchase price consists of approximately $10 million in cash and
500,000 shares of IXnet common stock.
COMPONENTS OF REVENUES
We offer a full range of services to meet the needs of our customers,
including the following voice and data communications services:
o Premium voice--dedicated private voice lines connecting financial
firms globally;
o Managed bandwidth--fully managed dedicated bandwidth facilities;
o Outsourcing--end-to-end management of a customer's entire
communications network;
o Switched voice--high quality voice communications services;
o Shared internet protocol--network delivery and hosting of third
party market data, research, analytics, news and other trading
information to the desktop, also known as our Liquidity service;
and
o Frame relay--dedicated transport of facilitated data
applications.
We currently derive a majority of our revenues from sales of premium
voice, managed bandwidth and outsourcing services, and to a lesser extent
switched voice, shared internet protocol and other services. Our services are
billed on a monthly basis in advance of customer utilization, except for
switched voice services, which are billed monthly after service is provided.
Revenue is recorded as services are provided.
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PRICING POLICIES
Rates for our premium voice, managed bandwidth and frame relay services
are determined by geographic location and bandwidth utilization. For frame relay
service, there is frequently an additional pricing component for optional
telecommunications equipment deployed on customers' premises. These fees may be
adjusted for customer volume commitments and term of contract.
The primary components of pricing for switched voice are duration of
call and geographic location, which may be adjusted for customer volume
commitment, term of contract and connections to an on-net customer.
Rates for our outsourcing service are determined by geographic
location, bandwidth utilization, telecommunications equipment deployed on the
customers' premises, level of service requested and any custom requirements. The
rate may be adjusted for customer volume commitments and term of contract.
The components of pricing shared internet protocol may include the
following charges paid by content providers:
o an access fee to connect to our Extranet;
o a fee to deliver service to end-users; and
o fees associated with housing of equipment and customer
application support.
The access and delivery fees are determined by geographic location and
bandwidth utilization. The hosting fee is determined by amount of space and
level of required service. The other component of pricing, paid either by the
end-user or the content provider, is a fee for end-user access to our Extranet.
This fee is determined by geographic location and bandwidth utilization and may
be adjusted for volume commitment and term of contract. The Company also expects
to charge sub-licensing fees in connection with the use of licensed software for
the delivery of content over our network.
LONG TERM AGREEMENTS
The terms of our sales agreements typically range from one to five
years and are determined based on the level of service requested. Customers who
outsource their entire network needs to us tend to have longer term agreements,
up to five years. Our ability to obtain fixed term agreements from our customers
provides us with a certain level of predictability as to revenue generation. We
continue to penetrate our customer base by marketing additional services to
existing customers, adding new customer locations and renewing the term of our
existing customer agreements. We also provide services to some of our customers
on a month-to-month basis.
COMPONENTS OF COSTS AND EXPENSES
COST OF REVENUE
Cost of revenue consists primarily of leased local and long distance
circuit costs, personnel and related operating expenses associated with network
operations, customer support and field service support. Depreciation and
amortization related to the cost of our network operations centers, points of
presence, customer access nodes, and indefeasible rights to use cable and fiber
optic lines, are included in depreciation and amortization expense. The increase
in these expenses relates primarily to the expansion of our network and
resulting increases in leased circuit, maintenance, personnel, facilities, and
customer support costs. Although we expect that cost of revenue will continue to
increase as our customer base increases, we anticipate that such expenses as a
percentage of revenues will decrease over time. These expenses may be incurred
prior to the realization of anticipated revenue. We intend to lease or buy
higher capacity local and long distance circuits. As a result of these lease
agreements and purchases, we expect to realize the associated benefits of lower
unit costs as the use of our network increases. In addition, as revenues grow,
we expect to realize economies of scale associated with a relatively fixed
operating infrastructure.
SALES AND MARKETING EXPENSE
Sales and marketing expense consists primarily of personnel costs,
commissions, bad debt, travel and entertainment, marketing and advertising. We
market our services to the financial services community primarily through our
direct salesforce. We intend to significantly expand our salesforce within the
U.S., Europe and the Asia/Pacific region over the next 12 to 18 months through
the hiring of highly motivated personnel who have backgrounds in network
services
8
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or experience with the specialized communication needs of the financial
services community. Although we compensate our salesforce employees, in part,
on a commission basis, hiring, training, integrating and retaining these new
hires requires substantial expenditures in advance of any revenue realization
that may arise from the sales efforts of new hires. We estimate that an average
of three months elapses between the hiring of a new sales employee and the
realization of recognizable productivity, and approximately another two months
elapses before any significant revenues result. We expect that sales and
marketing expenses will increase in the future as we expand our sales and
marketing staffs to keep pace with our rapid growth both domestically and
internationally but that such expenses will decrease over time as a percent of
revenue.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense consists primarily of salaries and
occupancy costs for executive, financial, and management information systems
personnel. Certain accounting and management information systems functions,
human resources, legal, executive and administrative services have historically
been performed under inter-company understandings, and will in the future be
performed under an inter-company agreement with our parent, IPC. The related
costs of providing such services have been, and will continue to be, allocated
based upon the direct and indirect utilization of the specific services.
Indirect expenses were allocated based upon the relation of our headcount to the
combined headcount of us and IPC. We expect that general and administrative
expenses will increase in the future as we expand our management and
administrative staffs to keep pace with our rapid growth both domestically and
internationally, but that such expenses will decrease over time as a percent of
revenue.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense includes the allocation of cost
for property, plant and equipment and goodwill over their expected useful lives.
Property, plant and equipment, excluding indefeasible rights of use and
leasehold improvements, are depreciated over five years. The cost of
indefeasible rights of use are amortized over the leased term, generally 20 to
25 years, leasehold improvements are amortized over the life of the lease term,
generally five years, and goodwill is amortized over periods ranging from 2.25
to ten years.
NETWORK EXPANSION
Since the beginning of our operations, we have undertaken a program of
developing and expanding our Extranet. We have made significant investments in
network capacity and telecommunications equipment, including routers, customer
access nodes, transmission electronics, switches, circuits and other equipment
to produce a technologically advanced global extranet. Historically, a large
portion of our network expense was associated with the development of our
Extranet and was only undertaken based on customer demand. Subsequent to our
initial public offering, we have begun to make greater network investments in
certain strategic areas in anticipation of increased customer demand.
Investments in customer access nodes and network capacity through acquisitions
of indefeasible rights of use and the buildout of our points of presence will
continue to represent significant capital expenditures over the next 12 months
and are expected to be substantially above historical levels.
DEFERRED COMPENSATION
During May 1999, our board of directors and our sole stockholder, IPC,
approved the IXnet, Inc. 1999 Stock Option Plan (the "Plan"), authorizing the
grant of options to purchase up to 7,053,409 shares of our 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 our Chief Executive Officer which vested immediately, such
options vest over four years. All such options become exercisable, to the extent
then vested, 30 months from the date the Plan was adopted, subject to certain
exceptions.
In connection with this issuance of stock options, we have recorded
deferred compensation in the aggregate amount of approximately $26 million,
based upon the deemed fair market value of our common stock at the date of
grant. Approximately $7.9 million of the deferred compensation has been expensed
in our June 30, 1999 quarter, with the balance being amortized over the vesting
period of the options. In addition, certain of these options may be treated as
variable options and may result in additional deferred compensation expense in
future periods as the value of our shares changes over the vesting period.
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RESULTS OF OPERATIONS......
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1999 TO THE THREE MONTHS
ENDED JUNE 30, 1998
REVENUE. Revenue was $20.0 million for the three months ended June 30,
1999, an increase of $10.1 million, or 102.1%, from $9.9 million for the three
months ended June 30, 1998. Of this increase, $7.1 million related to revenues
from Saturn, which we acquired in December 1998. The balance of the increase was
primarily due to increased revenue from the growth in our overall customer base.
COST OF REVENUE. Cost of revenue was $20.1 million for the three months
ended June 30, 1999, an increase of $10.7 million, or 112.9%, from $9.4 million
for the three months ended June 30, 1998. The increase was primarily due to
increased leased circuit costs and, to a lesser extent, the increase in
operations personnel. Leased circuit costs were $14.8 million for the three
months ended June 30, 1999, an increase of $8.2 million, or 124.2%, from $6.6
million for the three months ended June 30, 1998. This increase was due to the
expansion of our network points of presence, increased engineering support and
the build out of the network ahead of revenue.
SALES AND MARKETING EXPENSE. Sales and marketing expense was $3.4
million for the three months ended June 30, 1999, an increase of $1.1 million,
or 50.3%, from $2.3 million for the three months ended June 30, 1998. This
increase was primarily due to the growth in our sales force and related support
personnel, from both internal growth and the Saturn acquisition.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
was $2.1 million for the three months ended June 30, 1999, an increase of $0.6
million, or 41.2%, from $1.5 million for the three months ended June 30, 1998.
This increase was primarily due to an increase in the costs of certain shared
administrative and general services provided by IPC, personnel costs related to
internal growth and acquisitions, and, to a lesser extent, higher occupancy and
professional fees.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization was $5.3
million for the three months ended June 30, 1999, an increase of $2.6 million,
or 96.8%, from $2.7 million for the three months ended June 30, 1998. This
increase was primarily due to the increase in property, plant and equipment in
connection with the expansion of our network and the $1.2 million of
amortization of goodwill associated with the Saturn acquisition.
SPECIAL CHARGE. In April 1998, IPC completed a recapitalization. In
connection with the recapitalization, certain IXnet employees received bonuses
and payments in the aggregate amount of $1.4 million in consideration of the
cancellation of their IPC stock options.
STOCK COMPENSATION CHARGE. Stock compensation charge was $7.9 million
for the three months ended June 30, 1999. During the quarter, $26.4 million was
recorded in stockholders' equity as deferred compensation in connection with the
grants of stock options. The balance of $18.5 million will be amortized over the
remaining vesting period which is approximately 48 months.
INTEREST EXPENSE, NET. Interest expense, net was $1.8 million for the
three months ended June 30, 1999, an increase of $0.9 million, or 95.6%, from
$0.9 million for the three months ended June 30, 1998. This increase was
primarily due to higher average borrowings from IPC during the three months
ended June 30, 1999 as compared to the 1998 period in order to fund the Saturn
acquisition, losses from operations, debt service payments and capital
expenditures. Also contributing to the increase in interest expense, net, were
increased capital lease obligations related to certain network assets acquired.
As a result of the $73.0 million contribution to paid-in capital of the then
outstanding $98.5 million note payable to IPC as of June 30, 1999, and the
completion of our initial public offering in August 1999, interest expense is
expected to decrease in future periods.
PROVISION FOR INCOME TAXES. The provision for income taxes consisted of
foreign taxes. As of June 30, 1999, and September 30, 1998, we had federal net
operating loss carryforwards of approximately $80.0 million and $50.0 million,
respectively. These net operating loss carryforwards may be carried forward in
varying amounts until 2013. In accordance with generally accepted accounting
principles, we have provided a valuation allowance for the net deferred tax
asset resulting from these carryforwards, since it is more likely than not we
would not realize these benefits on a stand alone basis. However, under our tax
sharing arrangement with IPC, we will be reimbursed by IPC to the extent that
IPC receives a tax benefit related to the inclusion of our tax losses in the
consolidated federal income tax return of IPC. Since we
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currently can not derive this tax benefit on a stand alone basis, these benefits
are treated by us as a contribution to paid-in capital.
COMPARISON OF THE NINE MONTHS ENDED JUNE 30, 1999 TO THE NINE MONTHS ENDED
JUNE 30, 1998
REVENUE. Revenue was $52.6 million for the nine months ended June 30,
1999, an increase of $27.4 million, or 108.6%, from $25.2 million for the nine
months ended June 30, 1998. Of this increase, $15.7 million related to revenues
from Saturn, which we acquired in December 1998. The balance of the increase was
primarily due to increased revenue from the growth in our overall customer base.
COST OF REVENUE. Cost of revenue was $51.0 million for the nine months
ended June 30, 1999, an increase of $26.1 million, or 105.3%, from $24.9 million
for the nine months ended June 30, 1998. The increase was primarily due to
increased leased circuit costs and, to a lesser extent, the increase in
operations personnel. Leased circuit costs were $30.9 million for the nine
months ended June 30, 1999, an increase of $13.2 million, or 74.5%, from $17.7
million for the nine months ended June 30, 1998. This increase was due to the
expansion of our points of presence, increased engineering support and the build
out of the network ahead of revenue.
SALES AND MARKETING EXPENSE. Sales and marketing expense was $8.3
million for the nine months ended June 30, 1999, an increase of $2.8 million, or
51.2%, from $5.5 million for the nine months ended June 30, 1998. This increase
was primarily due to the growth in our sales force and related support
personnel, from both internal growth and the Saturn acquisition.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
was $4.9 million for the nine months ended June 30, 1999, an increase of $1.1
million, or 28.7%, from $3.8 million for the nine months ended June 30, 1998.
This increase was primarily due to an increase in the costs of certain shared
administrative and general services provided by IPC, personnel costs related to
internal growth and acquisitions, and, to a lesser extent, higher occupancy and
professional fees.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization was $14.8
million for the nine months ended June 30, 1999, an increase of $9.2 million, or
163.6%, from $5.6 million for the nine months ended June 30, 1998. This increase
was primarily due to the increase in property, plant and equipment in connection
with the expansion of our network and the $2.9 million of amortization of
goodwill associated with the Saturn acquisition.
SPECIAL CHARGE. In April 1998, IPC completed a recapitalization. In
connection with the recapitalization, certain IXnet employees received bonuses
and payments in the aggregate of $1.4 million in consideration of the
cancellation of their IPC stock options.
STOCK COMPENSATION CHARGE. Stock compensation charge was $7.9 million
for the nine months ended June 30, 1999. During the third quarter, $26.4 million
was recorded in stockholders' equity as deferred compensation in connection with
the grants of stock options. The balance of $18.5 million will be amortized over
the remaining vesting period which is approximately 48 months.
INTEREST EXPENSE, NET. Interest expense, net was $6.1 million for the
nine months ended June 30, 1999, an increase of $3.7 million, or 150.8%, from
$2.4 million for the nine months ended June 30, 1998. This increase was
primarily due to higher average borrowings from IPC during the nine months ended
June 30, 1999 as compared to the 1998 period in order to fund the Saturn
acquisition, losses from operations, debt service payments and capital
expenditures. Also contributing to the increase in interest expense, net, were
increased capital lease obligations related to certain network assets acquired.
As a result of the $73.0 million contribution to paid-in capital of the then
outstanding $98.5 million note payable to IPC as of June 30, 1999, and the
completion of our initial public offering in August 1999, interest expense is
expected to decrease in future periods.
PROVISION FOR INCOME TAXES. The provision for income taxes consisted of
foreign taxes. As of June 30, 1999, and September 30, 1998, we had federal net
operating loss carryforwards of approximately $80.0 million and $50.0 million,
respectively. These net operating loss carryforwards may be carried forward in
varying amounts until 2013. In accordance with generally accepted accounting
principles, we have provided a valuation allowance for the net deferred tax
asset resulting from these carryforwards, since it is more likely than not we
would not realize these benefits on a stand alone
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basis. However, under our tax sharing arrangement with IPC, we will be
reimbursed by IPC to the extent that IPC receives a tax benefit related to the
inclusion of our tax losses in the consolidated federal income tax return of
IPC. Since we currently can not derive this tax benefit on a stand alone basis,
these benefits are treated by us as a contribution to paid-in capital.
LIQUIDITY AND CAPITAL RESOURCES
Since the commencement of our operations in 1995, we have relied
primarily on IPC to fund our operating cash requirements, property, plant and
equipment expenditures, debt service payments and acquisitions. We have also
obtained financing for certain of our network equipment, which is either
guaranteed by IPC and/or partially supported by letters of credit issued under
IPC's credit agreement. In addition, we obtained certain seller financing for
the Saturn acquisition, which has been guaranteed by IPC. From inception to June
30, 1999, the aggregate net amount of inter-company funding, exclusive of
guarantees and letters of credit, was approximately $98.5 million, of which
$73.0 million was contributed to equity.
FINANCING ARRANGEMENTS. Subject to the terms and conditions of our
inter-company agreement, IPC has agreed to continue to provide us with ongoing
financing and to obtain letters of credit on our behalf. The amount available
under the inter-company agreement will start at $6.25 million and increase by
that amount quarterly thereafter, up to an aggregate of $50 million during the
period beginning July 1, 1999 through June 30, 2001. On June 30, 2001, all
amounts loaned and outstanding under the inter-company agreement will become
immediately due and payable. In addition, IPC, in its sole discretion, will
continue to provide guarantees of our obligations.
IPC has two sources of funds from which it can fund our working capital
needs. The first is from its cash flow and the second is through its $65 million
secured credit facility, consisting of a $20 million term loan facility and a
revolving credit facility of up to $45 million. However, IPC will not make loans
to us, obtain letters of credit on our behalf or provide us with guarantees if,
our request for a loan, issuance of a letter of credit or guarantee:
o is prohibited under IPC's credit agreement;
o would result in a default or event of default under IPC's credit
agreement; or
o would result in a default or event of default under the indenture
for IPC's senior discount notes.
All borrowings under the inter-company agreement will be evidenced by
demand notes. However, IPC has agreed not to demand payment on those notes until
June 30, 2001, unless a default or an event of default under IPC's credit
agreement or a change in control occurs. In either case, all amounts owing under
the inter-company agreement will be immediately due and payable upon demand. A
change in control will occur if IPC ceases to own at least 50% of our voting
securities.
Under the inter-company agreement, all currently outstanding and any
future loans from IPC will be made at a rate per annum equal to 2% over the base
rate under IPC's credit agreement. The base rate under IPC's credit agreement is
equal to the higher of:
o the rate of interest announced publicly by Citibank, N.A. at its
head office in New York as its base rate; and
o 1/2 of 1% per annum above the federal funds rate.
In addition, any amounts loaned by IPC to us which are outstanding on
July 1, 1999 will bear interest at a rate equal to 2% over the base rate and
will not reduce the amount of funding that will be available to us.
The inter-company agreement provides that any letters of credit or
guarantees provided by IPC which were outstanding on July 1, 1999 shall continue
in full force and effect at no cost to us on their same terms and conditions
until their expiration. Loans from IPC and letters of credit procured by IPC
which were outstanding on July 1, 1999 will not reduce the amounts available to
us under the inter-company agreement.
We will reimburse IPC for the applicable costs, fees and charges
incurred by IPC in obtaining letters of credit or for providing guarantees to us
after July 1, 1999 or payments made by IPC in connection with any enforcement by
third
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parties of such letters of credit and guarantees. All other costs under IPC's
credit agreement will continue to be borne by IPC.
The inter-company agreement also provides for the allocation between us
and IPC of certain allowances provided for in IPC's credit agreement, which
include sales of assets, investments and debt that may be incurred.
CASH FLOWS
Cash flows from operating activities can vary significantly from period
to period depending upon the timing of operating cash receipts and payments,
particularly accounts receivable, prepaid expenses and other assets, and
accounts payable and accrued liabilities. During the three years ended September
30, 1998, our net losses were the primary component of net cash used in
operating activities, offset by significant non-cash depreciation and
amortization expenses. Net cash used in operating activities was $20.5 million
for the nine months ended June 30, 1999, as compared to $7.3 million for the
nine months ended June 30, 1998.
Cash used in investing activities was $47.2 million, and $11.1 million
for the nine months ended June 30, 1999 and 1998, respectively. The largest
components of cash used in investing activities during the nine months ended
June 30, 1999 resulted from $34.7 million used for the Saturn Acquisition and
$12.5 million used for expenditures for property, plant and equipment, which
consisted primarily of network equipment. We intend to continue to invest in the
expansion of our Extranet and future acquisitions.
Cash provided by financing activities was $69.1 million for the nine
months ended June 30, 1999 as compared to $18.3 million for the nine months
ended June 30, 1998. The increase was primarily due to $34.7 million in
borrowings from IPC, which we used to finance the Saturn acquisition purchase
price and related expenses.
COMMITMENTS, CAPITAL EXPENDITURES AND FUTURE FINANCING REQUIREMENTS
As of June 30, 1999, we had capital lease commitments to certain
telecommunications vendors totaling $21.5 million payable in various years
through 2004 of which $7.2 million were due within one year. Additionally, as of
June 30, 1999, we were obligated to make future minimum lease payments for
property, leased circuits, indefeasible rights of use and equipment of $42.0
million under non-cancelable operating leases expiring in various years through
2009.
Capital expenditures were $12.5 million for the nine months ended June
30, 1999. In addition, we had notes in the aggregate amount of $10.0 million
outstanding as of June 30, 1999 to the former shareholders of Saturn, of which
$4.7 million is due within one year.
Installation of customer access nodes, acquisition of indefeasible
rights of use and the buildout of our points of presence will continue to be our
most significant capital expenditure items over the next 12 months. We expect to
continue to acquire high capacity bandwidth to enhance our global network
capabilities in North America, Europe and the Asia/Pacific region which would be
accompanied by capital expenditures in the deployment of points of presence. We
expect that our purchase of property, plant and equipment will increase
substantially from historic levels and that net proceeds from the initial public
offering, along with third party equipment financing arrangements, will be
sufficient to meet our network needs for the next 12 months.
As of June 30, 1999, we had available cash of $1.6 million. We are
currently generating operating losses and expect to continue to do so for the
foreseeable future. Under the indenture for IPC's senior discount notes, the net
proceeds from our initial public offering may not be used to fund our working
capital needs. We believe that we will need additional working capital, along
with the funding of our debt obligations, which consist of capital lease
obligations, installment payments for indefeasible rights to use international
cable systems, and payments on the notes to Saturn. Under IPC's credit agreement
and our inter-company agreement with IPC, we are restricted from seeking
additional debt or equity financing other than debt financing from IPC for
working capital and other operating costs. Accordingly we will continue to
primarily rely upon IPC to fund these requirements.
We have purchased or committed to purchase interests in or indefeasible
rights to use international cable systems on projects such as TAT12/13, TAT14,
Gemini, Southern Cross, CANTAT3, Germany-U.K.6, Japan-U.S. and NTL. Further, we
expect to continue to enter into commitments to purchase similar interests and
rights using the proceeds from our initial public offering.
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OTHER POSSIBLE STRATEGIC RELATIONSHIPS AND ACQUISITIONS
We intend to make strategic acquisitions as appropriate opportunities
arise to expand our service offerings, expand our Extranet and/or increase our
customer base. See "Overview."
FOREIGN EXCHANGE RATE RISK
We conduct our business in more than 34 countries, and transactions
from these foreign operations are denominated in local currencies. With respect
to these foreign operations, we are exposed to foreign currency fluctuations for
our net working capital positions. Foreign currency fluctuations historically
have not had a significant impact on our revenues or operating results. We
currently do not have a foreign exchange hedging program; however, we may
implement a program to mitigate foreign currency transaction risk in the future.
Although our foreign operations are subject to economic, fiscal and monetary
policy of foreign governments, to date these factors have not had a material
effect on our results of operations or liquidity. A significant and growing
portion of our business is from our international operations, and changes in the
global economy, foreign tax laws, international business practices and currency
exchange rates could adversely affect our business.
EURO CONVERSION
On January 1, 1999, several members of the European Union established
fixed conversion rates between their existing sovereign currencies, and adopted
the Euro as their new legal currency. Since its adoption, the Euro has not had a
material adverse effect on the Company's business or financial condition.
EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement establishes standards for
the way companies report information about operating segments in annual
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. This standard
is effective for our year ending September 30, 1999. Financial statement
disclosures for prior periods are required to be restated. We are in the process
of evaluating the disclosure requirements. We believe that the adoption of SFAS
No. 131 will not have a material impact on our financial position, results of
operations or cash flows.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives
and Hedging Activities," which establishes accounting and reporting standards
for derivative instruments and hedging activities. This standard is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999. We do not
currently use derivative financial instruments.
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. We do not
anticipate that the adoption of this standard will have a material effect on our
financial position, results of operations or cash flows.
IMPACT OF YEAR 2000
The Year 2000 issue is the result of computer-controlled systems using
two digits rather than four to define the applicable year. For example, computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including among other
things, a temporary inability to process transactions, deliver products and
services to customers, send invoices, or engage in similar normal business
activities.
OUR STATE OF READINESS. We have assessed and are in the process of
implementing and validating the Year 2000 readiness of our customer access
nodes, the communications equipment in our points of presence, network
management systems, and internal accounting, billing and office systems. Certain
of our customer access nodes require hardware and software updates, which, in
many cases, necessitate one or more site visits. We have contracted with the
original equipment manufacturer of some of our customer access nodes to complete
such updates. These updates, except for customer access nodes located at a few
customer locations have been completed. Those customer access nodes not updated
are due
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to difficulties in obtaining access to customer sites and are expected to be
completed by October 1999. We believe that substantially all of the
communications equipment in our points of presence are currently Year 2000
ready. Our network management systems have been upgraded and are Year 2000
ready. In August 1999, we converted to our new internal accounting
enterprise-wide system which is Year 2000 ready. Our new billing system has been
purchased from a third-party source and is being tailored to our specific
requirements and has been stated to be Year 2000 ready. Our office systems,
which are comprised primarily of personal computers, file servers and routers,
as well as software applications, are expected to be Year 2000 ready prior to
December 31, 1999.
We are currently in the process of obtaining Year 2000 readiness
documentation from suppliers of our domestic and international communication
bandwidth. We have evaluated the potential risk of certain suppliers that may
not be Year 2000 ready. We anticipate such suppliers will be located outside of
the areas where the majority of our customers are located. If we determine that
certain carriers pose a threat to our Extranet, we intend to notify our
customers in advance that it may be necessary to discontinue service to that
region in order to maintain the integrity of our Extranet.
COSTS. Most of our expenses in connection with Year 2000 readiness have
related to, and are expected to continue to relate to, the operating costs
associated with time spent by employees in the evaluation process and Year 2000
readiness matters. Our costs associated with Year 2000 readiness issues,
excluding the cost of implementing our new accounting system which is being
borne by IPC, is currently anticipated to be approximately $2.0 million all of
which has been incurred or committed.
POTENTIAL RISKS. While we believe that we are taking the necessary
steps to identify and correct any Year 2000 problems in our systems, we may
discover Year 2000 readiness problems in our systems or services that will
require substantial correction. Our failure to fix or replace our internally
developed software, third-party software, hardware or services on a timely basis
could result in the loss of revenues, increased operating costs, the loss of
customers and other business interruptions any of which could have a material
adverse effect on our business, results of operations and financial condition.
Moreover, the failure to adequately address Year 2000 readiness issues related
to our services could result in claims of mismanagement, misrepresentation or
breach of contract and related litigation, which could be costly and
time-consuming to defend. We also cannot provide assurances that third-party
providers of products and services, including telecommunications companies, and
our customer base consisting primarily of firms in the financial services
industry, will be Year 2000 ready. The failure of such entities to be Year 2000
ready could result in a systematic failure, beyond our control. Such failures
may result in prolonged telecommunications or electrical failure, or the
inability of our customers to make payment for services rendered, which could
have a material adverse effect on our business, results of operations and
financial condition.
In a recent SEC release regarding Year 2000 disclosure, the SEC stated
that public companies must disclose the most reasonably likely worst case Year
2000 scenario. Although it is not possible to assess the likelihood of any of
the following events, each must be included in a consideration of worst case
scenarios:
o widespread failure of electrical, gas, and similar suppliers
serving us;
o widespread disruption of the services provided by common
communications carriers;
o disruption to the means and modes of transportation for us and
our employees, contractors, suppliers and customers;
o significant disruption to our ability to gain access to, and
remain working in, office buildings and other facilities;
o the failure of our mission-critical computer hardware and
software systems, including both internal business systems and
systems controlling operational facilities; and
o the failure of third-party banking and finance systems.
If we cannot operate effectively after December 31, 1999, we could,
among other things, face substantial claims by customers or loss of revenue due
to service interruptions, inability to fulfill contractual obligations or bill
customers accurately and on a timely basis, and increased expenses associated
with litigation, stabilization of operations following critical system failures
and the execution of contingency plans. We could also experience an inability by
customers and
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others to pay us for our services on a timely basis or at all. Under these
circumstances, the adverse effects, although not quantifiable at this time,
would be material.
CONTINGENCY PLANS. We are engaged in an ongoing Year 2000 readiness
assessment and are in the process of developing contingency plans. The results
of our enterprise-wide system conversion and responses received from vendors and
service providers will be taken into account in determining the nature and
extent of such contingency plans.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Statements contained in this Report that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. This act provides a "safe harbor" for
forward-looking statements to encourage companies to provide prospective
information about themselves so long as they identify these statements as
forward-looking and provide meaningful cautionary statements identifying
important factors that could cause actual results to differ from the projected
results. Investors are cautioned that forward-looking statements are inherently
uncertain. Actual performance and results may differ materially from that
projected or suggested herein due to certain risks and uncertainties. You can
identify these statements by forward-looking words such as "may," "will,"
"expect," "anticipate," "believe," "estimate" and "continue" or similar words.
Additional information concerning certain risks and uncertainties that could
cause actual results to differ materially from that projected or suggested may
be identified from time to time in the Company's Securities and Exchange
Commission filings and the Company's public announcements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not Applicable.
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IXNET, INC.
PART II
OTHER INFORMATION
ITEM 1. Legal Proceedings - None.
ITEM 2. Changes in Securities and Use of Proceeds
(a) None.
(b) None.
(c) None.
(d) On August 12, 1999, we completed the sale of 6,500,000 shares of
common stock priced at $15 per share for an aggregate offering
price of $97,500,000 in an initial public offering led by an
underwriting group consisting of Donaldson, Lufkin & Jenrette,
Salomon Smith Barney, Merrill Lynch & Co., First Union Capital
Markets Corp., and DLJDIRECT, Inc. 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.
Total proceeds received by us from the initial public offering
including the exercise of the underwriters' over-allotment were
approximately $102,056,562, net of underwriting commissions of
$7,568,438 and estimated offering expenses of $2,500,000. The
Registration Statement on Form S-1 filed by us with the SEC in
connection with the offering (File No. 333-79079), as amended,
was declared effective by the Commission on August 12, 1999.
Since the completion of the offering, the net offering proceeds
have been applied or committed to the following uses in the
following approximate amounts:
o Approximately $86,427,000 is invested in U.S. investment
grade and government securities and $13,628,000 is held in
cash equivalent accounts. These amounts will be used for
continued deployment and expansion of our Extranet, as well
as possible future acquisitions, strategic alliances or
investments in property or assets used in our business.
o $10,000,000 has been committed in connection with a
strategic agreement including the license of certain
software products to enhance our network intelligence.
o $2,000,000 to fund investments in network capacity and
telecommunications equipment in our continuing expansion of
our network.
All of the payments indicated above were direct or indirect
payments to entities or persons other than our (i) directors,
officers or their associates, (ii) greater than 10% owners of
any of our equity securities or (iii) our affiliates.
ITEM 3. Defaults Upon Senior Securities - None.
ITEM 4. Submission of Matters to a Vote of Security Holders - None.
ITEM 5. Other Information - None.
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ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
3.1 Amended and Restated Certificate of Incorporation of IXnet,
Inc.*
3.2 Bylaws of IXnet, Inc.*
4.1 Specimen Stock Certificate*
10.1 Form of Inter-Company Agreement among IXnet, Inc.,
International Exchange Networks, Ltd. And IPC Information
Systems, Inc.*
10.2 Form of Tax Sharing Agreement by and between IPC
Communications, Inc. and IXnet, Inc.*
10.3 Form of Registration Rights Agreement by and between IPC
Information Systems, Inc. and IXnet, Inc.*
10.4 Form of Maintenance Agreement by and between International
Exchange Networks, Ltd. and IPC Information Systems, Inc.*
10.7 Amendment No. 1, dated as of June 1, 1999, to the Amended and
Restated Employment Agreement by and between David A. Walsh
and International Exchange Networks, Ltd.*
10.8 Waiver letter, dated as of June 9, 1999, from David A. Walsh
regarding provisions in the Amended and Restated Employment
Agreement by and between David A. Walsh and International
Exchange Networks, Ltd.*
10.9 Employment Agreement, dated as of May 1, 1998, by and between
Charles F. Auster and International Exchange Networks, Ltd.*
10.10 Amendment No. 1, dated as of June 1, 1999, to the Employment
Agreement by and between Charles F. Auster and International
Exchange Networks, Ltd.*
10.12 Waiver letter, dated as of June 9, 1999, from Anthony
Servidio regarding provisions in the Amended and Restated
Employment Agreement by and between Anthony M. Servidio and
International Exchange Networks, Ltd.*
10.13 Employment Agreement, dated as of June 1, 1999, by and
between William E. Walsh and International Exchange Networks,
Ltd.*
10.14 Employment Agreement, dated as of June 1, 1999, by and
between John M. Faccibene and International Exchange
Networks, Ltd.*
10.15 Employment Agreement, dated as of June 1, 1999, by and
between Paul Pluschkell and International Exchange Networks,
Ltd.*
10.16 Employment Agreement, dated as of August 6, 1998, by and
between Peter Hase and Saturn Global Network Services (UK)
Limited.*
10.17 Employment Agreement, dated as of August 6, 1998, by and
between Drew Kelton and Saturn Global Network Services Pty
Ltd.*
10.18 Employment Agreement, dated as of July 1, 1999, by and
between James M. Demitrieus and International Exchange
Networks, Ltd.*
10.19 IXnet, Inc. 1999 Stock Option Plan.*
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27.1 Financial Data Schedule.
- ----------------
* Previously filed with the Commission as an exhibit to the registration
statement on Form S-1 (File No. 333-79079) and incorporated herein by
reference.
(b) Reports on Form 8-K:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IXnet, Inc.
Dated: September 27, 1999 By: /s/ James M. Demitrieus
-------------------
James M. Demitrieus
Executive Vice President and
Chief Financial Officer
20
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FDS FOR THIRD QUARTER 10-Q
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<NAME> IXNET, INC.
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