<PAGE>
As Filed with the Securities and Exchange Commission on May 21, 1999
Registration No. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------
IXnet, Inc.
(exact name of registrant as specified in its certificate of incorporation)
------------
<TABLE>
<S> <C> <C>
Delaware 4813 13-4060000
(IRS Employer Identification
(state or other jurisdiction (Primary Standard No.)
of incorporation or
organization) Classification Code Number)
</TABLE>
Wall Street Plaza
88 Pine Street
New York, New York 10005
(212) 412-6400
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
------------
David A. Walsh
Chief Executive Officer
IXnet, Inc.
Wall Street Plaza
88 Pine Street
New York, New York 10005
(212) 412-6400
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------
Copies to:
<TABLE>
<S> <C>
Thomas N. Talley, Esq. Michael A. Conza, Esq.
Mark I. Sokolow, Esq. Testa, Hurwitz & Thibeault, LLP
Thacher Proffitt & Wood 125 High Street
Two World Trade Center Boston, Massachusetts 02110
New York, New York 10048 (617) 248-7000
(212) 912-7400
</TABLE>
------------
Approximate date of commencement of proposed sale to public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Title of each Proposed
Class of Securities Maximum Aggregate Amount of
to be Registered Offering Price (1) Registration Fee
- --------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $0.01 par value............... $185,437,500 $51,552
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) of the Securities Act of 1933, as amended.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to
Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+We will amend and complete the information in this prospectus. Although we +
+are permitted by U.S. federal securities laws to offer these securities using +
+this prospectus, we may not sell them or accept your offer to buy them until +
+the documentation filed with the SEC relating to these securities has been +
+declared effective by the SEC. This prospectus is not an offer to sell these +
+securities or our solicitation of your offer to buy these securities in any +
+jurisdiction where that would not be permitted or legal. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION - MAY 21, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Prospectus
, 1999
[Logo of IXnet]
IXnet
Shares of Common Stock
- --------------------------------------------------------------------------------
IXnet, Inc.: The Offering:
. We provide highly . We are offering to
reliable, secure the public
and fully managed shares of our
communications common stock.
services to the
worldwide financial . The underwriters
community through have an option to
our global purchase an
Extranet. additional shares
from us to cover
. IXnet, Inc. over-allotments.
88 Pine Street
New York, New York . This is our initial
10005 public offering,
(212) 412-6400 and no public
market currently
Proposed Symbol & exists for our
Market: shares.
. IXNT/Nasdaq . We plan to use the
National Market proceeds from this
offering to invest
in the expansion of
our global
Extranet. We may
also use these
proceeds for
possible future
acquisitions,
strategic alliances
or investments in
property or assets
for our business.
. Closing: , 1999.
<TABLE>
---------------------------------------------------
<CAPTION>
Per Share Total
---------------------------------------------------
<S> <C> <C>
Public offering price, estimated: $ $
Underwriting fees:
Proceeds to IXnet:
---------------------------------------------------
</TABLE>
This investment involves risk. See "Risk Factors" beginning on page 12.
- --------------------------------------------------------------------------------
Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
- --------------------------------------------------------------------------------
Joint Book-Running Managers
Donaldson, Lufkin & Jenrette Salomon Smith Barney
--------
Merrill Lynch & Co.
First Union Capital Markets Corp.
DLJdirect Inc.
<PAGE>
[Graphic consisting of a cloud encircling the text "IXnet
Global Extranet." Surrounding the cloud are IXnet's target
customer groups identified by text. Starting from the top and
proceeding clockwise the groups are: "broker-dealers,"
"investment banks," "asset managers/hedge funds," "inter-
dealer brokers," "electronic trading firms,"
"commodities/futures trading firms," "content providers" and
"exchanges." Below the graphic is the text "IXnet is a leading
provider of communications services to the worldwide financial
services community. Our global Extranet links the key
financial trading centers worldwide and can be accessed by all
types of financial services firms."]
[Map of the world with the names and location of each of the
39 cities in which IXnet has points of presence. Lines
representing the Extranet connect the cities.]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 12
IXnet, Inc............................................................... 22
Use of Proceeds.......................................................... 24
Dividend Policy.......................................................... 24
Capitalization........................................................... 25
Dilution................................................................. 26
Selected Combined and Consolidated Financial Data........................ 27
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 33
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Business................................................................... 46
Management................................................................. 66
Principal Stockholders..................................................... 75
Certain Relationships and Related Transactions............................. 77
Description of Capital Stock............................................... 82
Shares Eligible for Future Sale............................................ 83
Underwriting............................................................... 85
Legal Matters.............................................................. 87
Experts.................................................................... 87
Additional Information..................................................... 87
Index to Financial Statements.............................................. F-1
</TABLE>
------------
The following are the trademarks and service mark of IXnet: IXPrime(TM);
IXGlobal(TM); Trade24(TM); IXLink(TM); DigiHoot(TM); MetroLink SM and
Liquidity(TM). This prospectus also refers to trademarks, trade names and
service marks of other companies. Each trademark, trade name or service mark
of any other company appearing in this prospectus belongs to its holder.
3
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company, the common stock we are offering and the
financial statements and notes to those statements that appear elsewhere in
this prospectus. We will refer to IXnet, Inc. and its subsidiaries as "IXnet,"
"we," "us" and "our." We will refer to our parent company, IPC Information
Systems, Inc., and its subsidiaries, as "IPC."
IXnet
Our Business and Services
IXnet is a leading provider of communication services to the worldwide
financial services community. We have built and operate the IXnet network, a
global extranet connecting financial services firms and their business partners
as well as multiple offices within the same firm on a seamless network. 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.
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 turnkey 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,
enabling them to efficiently reach this community. Our on-net customers receive
the following benefits by connecting to our Extranet:
. access to our high performance global network that connects over 450
financial services firms and their business partners;
. multiple voice and data services over a single high capacity network
connection;
. outsourced network solutions;
. on-demand access to multiple content providers;
. rapid and efficient provisioning of inter- and intra-firm communication
links;
. superior customer service and support from a single network provider;
and
. a content neutral delivery mechanism for content providers to
efficiently, economically and effectively reach their target market.
Financial service firms and their business partners comprise a large global
community that relies heavily on efficient communications, interaction among
members and timely access to industry-related information to conduct its
business. As a result, fault tolerant communications services are mission-
critical to this community. We believe our Extranet provides a unique value
proposition, enabling these firms to reliably communicate in any manner over a
common multi-protocol network platform, and to efficiently access information
from multiple providers. We connect customers to our Extranet by installing
intelligent network gateways, known as customer access nodes or CANs, on our
customers' premises. Once we have installed a CAN at the customer site, we
refer to the customer as being "on-net."
As the number of on-net customers increases, the value of the Extranet to
current and prospective customers grows. Adding key firms and sites to our
Extranet will greatly increase its value to end-users by allowing (1) customers
broader accessibility to connect to other on-net users, (2) quicker
provisioning of inter-firm dedicated
4
<PAGE>
private line services, (3) greater cost-efficiencies to end-users for on-net
inter-firm communications and (4) higher performance communications between on-
net customers. We believe that our current customer base of financial services
firms will attract many of their business partners to also become customers of
our Extranet. This should create a cycle that will attract new customers and
fuel growth in the number of services we provide to individual firms. We also
believe that content providers will be attracted to our Extranet due to the
efficient and cost-effective method it offers to reach the desktops of our
significant audience of on-net financial services customers. We believe that as
we deliver the services of an increasing number of content providers over our
Extranet, additional customers will be attracted to the expanded content
offerings on our Extranet.
Our Extranet currently connects 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. The Extranet
employs advanced networking technologies such as Internet protocol, or IP, and
asynchronous transfer mode, or ATM, and is designed to maximize performance
through features such as redundant, dedicated fiber optic facilities,
geographically distributed network operations centers, or NOCs, and physical
points of presence, or POPs. In addition, we have three data centers where we
provide hosting for content providers and manage servers and other equipment
for customers who have outsourced their network applications to us.
Members of the financial services community that we target as customers
include broker-dealers, investment banks, asset managers/hedge funds, inter-
dealer brokers, electronic trading firms, commodities/futures trading firms,
content providers, exchanges, trade execution systems, correspondents, clearing
and settlement firms, and insurance companies. We currently have over 450
customers including the following:
<TABLE>
<CAPTION>
Broker-Dealers/ Asset Managers/ Inter-dealer
Investment Banks Hedge Funds Brokers Trading Firms
<S> <C> <C> <C> <C>
Bankers Trust Goldman, Sachs Charles Schwab Cantor Fitzgerald AIG Trading
Barclays Bank J.P. Morgan Fidelity Management Eurobrokers Amerex Petroleum
Bear Stearns Lehman Brothers Janus Exco CHOICE! Energy LP
CIBC Oppenheimer Merrill Lynch Moore Capital Garban ED&F Mann
Chase Manhattan Bank Morgan Stanley Dean Witter Robertson Stephens Harlow Butler FIMAT USA
Citibank NationsBanc Montgomery Sanford C. Bernstein Liberty Natsource
Deutsche Bank NatWest Securities Schroder MW Marshalls Orion Energy
Donaldson, Lufkin PaineWebber Soros Fund Management Natsource Power Merchants
& Jenrette Prudential Securities State Street Research Prebon Yamane PVM Oil
Dresdner Bank Salomon Smith Barney Wellington Management Tradition NorthAmerica Sempra Energy
First Union Spectron Energy
</TABLE>
- --------------------------------------------------------------------------------
In addition to the customers listed above, we also host and deliver data
applications on behalf of over 30 content providers including First Call, News
Edge, Gov PX, IDEA and Optimark.
5
<PAGE>
Market Opportunity
The financial services community represents a large, rapidly growing market
that spends significant amounts of money on technology and communications each
year. Members of this community rely upon communications to conduct their
business and therefore demand uniform, highly reliable and secure
communications services, including access to real-time financial industry
information in a highly efficient and cost effective manner. The Wall Street
Telecommunications Association (WSTA) membership survey estimated that its 170
members had combined 1997 budgets in excess of $17 billion for information and
communications services. This represents only a portion of the total
communications services market for the financial services community as WSTA
members include only those firms doing business in New York. Based on this WSTA
survey and our experience in the industry, we estimate that the market for
information and communications services to the worldwide financial services
community is at least $25 billion annually and that this market is currently
growing by an average of more than 15% per year.
The financial services community currently has the following limited
alternatives to address its exacting communications requirements: (1) building
private networks, (2) utilizing the common carriers' public networks or (3)
utilizing the public Internet. However, these alternatives do not provide a
complete and efficient means of handling the demanding global communications
needs of the financial services community.
Building a private network often requires the commitment of substantial
development time, capital and personnel as well as ongoing operating and
maintenance costs. Additionally, integrating a private network with separate
public and other private infrastructures and protocols is often difficult and
hampers the flow of inter-firm information that is critical to the financial
services community.
Broad-based common carriers' public networks do not offer the performance,
quality, services, reliability, speed or single point of responsibility that
are available through a dedicated private network.
While the Internet has become a vehicle of inexpensive communications, it
has significant drawbacks including the lack of reliability, limited security
and the absence of a single governing authority and contact point for all
matters of accountability.
Our Solution
Through our Extranet, our customers obtain the benefits of a dedicated
private network, including highly reliable and secure global voice and data
connectivity with the additional benefits of (1) seamless inter-firm
connectivity, (2) a fully managed and/or outsourced network solution through
one contact point for all matters of accountability and (3) not having to incur
the substantial cost of building, maintaining and operating a sophisticated
network infrastructure.
Our Strategy
Our goal is to be the leading provider of multimedia communications services
to the financial services community. Our business strategy includes the
following elements:
. Exploit first mover advantage. We are the first company to offer network
services through a dedicated Extranet exclusively focused on the
financial services community. We intend to significantly leverage our
first mover position by aggressively expanding our direct salesforce and
investing in the IXnet brand.
. Rapidly deploy CANs. Adding key firms and sites to our Extranet will
greatly increase its value by enabling us to offer greater inter-firm
connectivity. This should enable us to attract larger numbers of
potential customers and content providers, which, in turn, will further
increase the value of our Extranet.
6
<PAGE>
. Accelerate network expansion. We are focused on expanding the
infrastructure of our Extranet to extend our addressable market areas,
enhance reliability and increase cost efficiencies.
. Aggressively add content providers to the Extranet. We intend to become
the best delivery vehicle for content providers who want to reach the
financial services community. We will seek to accomplish this by
remaining a content neutral delivery system and by offering content
providers a cost-effective method of reaching their target market
through a network gateway or by having us host their content at one of
our data centers.
. Further leverage IPC's installed base. We will continue to leverage our
parent company's existing long term customer relationships in the
financial services community into new IXnet business opportunities.
. Further penetrate our existing customer base. Our customer list already
includes many of the key global financial services firms, but we
currently capture only a small percentage of their communications
services expenditures. Accordingly, we are seeking to further penetrate
our existing customer base.
. Expand portfolio of focused service offerings. We plan to continuously
expand our service offerings to meet changing customer needs, help
further penetrate our customer base, attract new customers and increase
the value of our Extranet.
. Pursue strategic acquisitions. We intend to make strategic acquisitions
as appropriate opportunities arise in order to expand our service
offerings, broaden the reach of our Extranet and increase our customer
base.
Our Relationship with IPC
IPC currently owns all of our common stock and after this offering is
expected to own approximately % of our common stock. IPC was established in
1973 and for the last 26 years has manufactured telephone equipment
specifically designed to perform in the demanding environment of the financial
trading community. IPC has grown to become a leader in providing integrated
telecommunications equipment and services that facilitate the execution of
transactions by the financial trading community. IPC designs, manufactures,
installs and services trading room voice communication systems ("turret
systems" or "dealerboards") and installs and services the cabling
infrastructure and networks that provide financial traders with desktop access
to time-sensitive communications and data. IPC has placed into service more
than 100,000 turrets worldwide. IPC's target customer base is nearly identical
to ours. IPC is a publicly traded company on the American Stock Exchange under
the symbol IPI.
Our relationship with IPC has provided us with a level of credibility and an
entree into the financial services sector, which other emerging communications
companies in our market sector do not have. Moreover, through our relationship
with IPC, we are able to provide turret-to-turret on-net connectivity to the
significant installed IPC customer base and integrate our CANs into IPC turret
systems so that we can rapidly provision IPC customers with on-net services. We
also coordinate our sales and marketing effort with the IPC sales effort,
thereby offering a complete hardware and network solution for the
communications needs of financial services firms.
IPC acquired 80% of our stock in June 1995 and the remaining 20% in April
1998. Since that time we have operated as a wholly owned subsidiary of IPC. In
anticipation of this offering, we reorganized our corporate structure and
entered into agreements with IPC to govern various interim and ongoing
relationships between us. All of the agreements with IPC were negotiated in the
context of a parent-subsidiary relationship. Accordingly,
7
<PAGE>
the terms of these agreements may be more or less favorable to us than if they
had been negotiated with unaffiliated third parties. See "Risk Factors--IPC's
control of us may conflict with your interests as a stockholder", "--Our assets
are pledged to support IPC's obligations" and "Certain Relationships and
Related Transactions" for a more detailed description of our relationship and
inter-company agreements with IPC.
------------
Our principal executive offices are located at Wall Street Plaza, 88 Pine
Street, 6th Floor, New York, New York 10005 and our telephone number is (212)
412-6400. Our e-mail address is ixnet [email protected].
Our World Wide Web address is www.ixnet.com. Information contained in our
Web site does not constitute part of this prospectus.
8
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered.............. shares
Common stock outstanding after the shares or shares assuming the
offering......................... underwriters exercise their over-allotment
option in full.
Common stock to be held by IPC
immediately after the offering... shares
Use of proceeds................... We will use the proceeds from this offering
primarily to finance the continued
deployment and expansion of our Extranet.
Proceeds from the offering may also be used
for possible future acquisitions, strategic
alliances, or investments in property or
assets for our business. See "Use of
Proceeds."
Proposed Nasdaq National Market IXNT
symbol...........................
Risk factors...................... You should review the "Risk Factors"
section of this prospectus for a discussion
of certain factors about us, the financial
services community and this offering that
you should consider before buying any
shares of our common stock.
</TABLE>
The shares of common stock outstanding exclude shares of common stock
reserved for issuance under our stock option plan, of which shares are
subject to outstanding options at an exercise price of $ per share, none of
which are immediately exercisable.
9
<PAGE>
Summary Financial and Other Data
The following summary combined and consolidated balance sheet data as of
March 31, 1999 and statement of operations and other operating data for the
years ended September 30, 1996, 1997 and 1998 and for the six months ended
March 31, 1998 and 1999 have been derived from our Combined and Consolidated
Financial Statements included elsewhere in this prospectus. The summary
unaudited pro forma combined and consolidated statement of operations and other
operating data for the year ended September 30, 1998 and for the six months
ended March 31, 1999 have been derived from the unaudited pro forma combined
and consolidated financial information included elsewhere in this prospectus.
The unaudited balance sheet data as of March 31, 1999, as adjusted, gives
effect to this offering and the estimated net proceeds as of March 31, 1999.
The unaudited results of operations for the six months ended March 31, 1999 may
not be indicative of the results to be expected for the full year.
IPC acquired MXNet Inc. in February 1998. We refer to this transaction as
the MXNet Acquisition. Our subsidiary, International Exchange Networks, Ltd.,
acquired Saturn Global Network Services Holdings Limited and its subsidiaries
in December 1998. We refer to this transaction as the Saturn Acquisition. In
connection with this offering, IPC contributed MXNet to International Exchange
Networks, and IPC contributed International Exchange Networks to us. The
historical results of operations for IXnet for the year ended September 30,
1998 and for the six months ended March 31, 1999 include the consolidated
results of operations of International Exchange Networks and its subsidiaries
combined with the results of operations of MXNet Inc. from February 13, 1998.
Additionally, the historical results for the six months ended March 31, 1999
include the results of operations of Saturn from December 18, 1998.
The information contained in the following table should be read in
conjunction with "Selected Combined and Consolidated Financial Data," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," the Combined and Consolidated Financial Statements of
IXnet, Inc. and related notes, the Financial Statements of MXNet Inc. and
related notes, the Consolidated Financial Statements of Saturn Global Network
Services Holdings Limited and related notes, and the unaudited pro forma
combined and consolidated financial information and related notes included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
Year Ended September 30, Six Months Ended March 31,
------------------------------------------- ----------------------------------
1996 1997 1998 1998 1998 1999 1999
-------- -------- --------- ------------ --------- --------- ------------
Actual Pro forma(1) Actual Pro forma(2)
----------------------------- ------------ -------------------- ------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................ $ 3,459 $ 17,838 $ 35,853 $ 62,170 $ 15,318 $ 32,611 $ 37,370
Cost of revenue........ 4,406 19,823 35,652 56,957 15,413 30,934 34,988
Sales and marketing
expense................ 1,057 4,172 8,455 8,455 3,213 4,878 4,884
General and
administrative
expense................ 2,868 3,439 5,001 11,498 2,331 2,815 4,061
Depreciation and
amortization.......... 998 3,460 9,060 16,730 2,924 9,508 10,830
Special charge(3)....... -- -- 1,350 1,350 -- -- --
-------- -------- --------- --------- --------- --------- ---------
Loss from operations... (5,870) (13,056) (23,665) (32,820) (8,563) (15,524) (17,393)
Interest expense, net... (247) (2,040) (3,527) (2,496) (1,521) (4,318) (2,300)
Other income (expense),
net.................... -- 117 26 26 3 (18) 5
-------- -------- --------- --------- --------- --------- ---------
Loss before provision
for income taxes...... (6,117) (14,979) (27,166) (35,290) (10,081) (19,860) (19,688)
Provision for income
taxes.................. 62 229 473 563 171 257 271
-------- -------- --------- --------- --------- --------- ---------
Net loss............... $ (6,179) $(15,208) $ (27,639) $ (35,853) $ (10,252) $ (20,117) $ (19,959)
======== ======== ========= ========= ========= ========= =========
Basic and diluted loss
per share.............. $ (6,179) $(15,208) $ (27,639) $ (35,853) $ (10,252) $ (20,117) $ (19,959)
======== ======== ========= ========= ========= ========= =========
Basic and diluted
weighted average number
of common shares
outstanding............ 1,000 1,000 1,000 1,000 1,000 1,000 1,000
======== ======== ========= ========= ========= ========= =========
Other Operating Data:
EBITDA(4)............... $ (4,872) $ (9,596) $ (14,605) $ (16,090) $ (5,639) $ (6,016) $ (6,563)
Capital expenditures.... 4,858 3,495 12,930 5,680 7,683
Other Data: (at period
end)
Number of POPs.......... 6 13 21 17 73
Number of CANs.......... 41 207 488 377 1,010
Number of customer
accounts(5)............ 45 131 248 178 456
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
March 31, 1999
-----------------------
Actual As Adjusted(6)
-------- --------------
(In thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.............................. $ 4,061 $
Total assets............................................ 125,444
Note payable to parent(7)............................... 25,522
Notes payable, net of current portion.................. 7,031
Lease obligations, net of current portion............... 13,907
Total stockholder's equity............................. 42,255
</TABLE>
- --------------------
(1) Represents the historical financial statements of IXnet and gives effect to
the MXNet and the Saturn Acquisitions as if they occurred on October 1,
1997 and includes adjustments for (a) the results of operations of MXNet
for the period from October 1, 1997 to the date of acquisition, and the
results of operations of Saturn for the year ended July 31, 1998, (b)
amortization of the goodwill resulting from the MXNet and the Saturn
Acquisitions from October 1, 1997 to the date of acquisition, (c) interest
expense related to borrowings for the Saturn Acquisition, (d) the net
reduction in interest resulting from the March 31, 1999 capitalization of
$73.0 million of the note payable to parent and change in the related
interest rate as if it had occurred on October 1, 1997 and (e) the tax
effects of such adjustments. See "IXnet, Inc."
(2) Represents the historical financial statements of IXnet and gives effect to
the Saturn Acquisition as if it occurred on October 1, 1997 and includes
adjustments for (a) the results of operations of Saturn for the period from
October 1, 1998 to the date of acquisition, (b) amortization of the
goodwill resulting from the Saturn Acquisition from October 1, 1998 to the
date of acquisition, (c) interest expense related to borrowings for the
Saturn Acquisition, (d) the net reduction in interest resulting from the
March 31, 1999 capitalization of $73.0 million of the note payable to
parent and change in the related interest rate as if it had occurred on
October 1, 1997 and (e) the tax effects of such adjustments.
(3) Special charge represents bonus payments and payments for cancellation of
IPC stock options relating to our employees in connection with the merger
of IPC and Arizona Acquisition Corp. in 1998. See Note 5 of the Notes to
the Combined and Consolidated Financial Statements of IXnet, Inc., included
elsewhere in this prospectus.
(4) EBITDA consists of loss from operations before depreciation and
amortization. EBITDA is presented to enhance an understanding of our
operating results and is not intended to represent cash flow or results of
operations in accordance with generally accepted accounting principles, or
GAAP, for the periods indicated. EBITDA is not calculated under GAAP and is
not necessarily comparable to similarly titled measures used by other
companies.
(5) Generally, multiple contractual relationships with a single legal entity
are considered a single customer account. However, we are not always aware
of and, accordingly, do not always reflect combinations, mergers and
consolidations between our customers.
(6) Adjusted to reflect the sale of shares of common stock at an assumed
initial public offering price of $ per share.
(7) The March 31, 1999 note payable to parent represents amounts due to IPC and
is net of the capitalization to paid-in capital of $73.0 million as of
March 31, 1999.
11
<PAGE>
RISK FACTORS
This prospectus contains forward-looking statements that involve
substantial 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. You should read
statements that contain these words carefully, because they discuss our future
expectations, contain projections of our future results of operations or of
our financial condition or state other "forward-looking" information. We
believe that it is important to communicate our future expectations to our
investors. However, there may be events in the future that we are not able to
accurately predict or control. The factors listed in this section and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," as well as any cautionary language in this prospectus, provide
examples of risks, uncertainties and events that may cause our actual results
to differ materially from the expectations we describe in our forward-looking
statements. Before you invest in our common stock, you should be aware that
the occurrence of the events described in this section, the section of this
prospectus captioned "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this prospectus could
have a material adverse effect on our business, operating results and
financial condition.
We have a limited operating history.
We commenced operations in June 1995, and we have only a limited operating
history on which an evaluation of our business and prospects may be based. Our
prospects must be considered in light of the risks, uncertainties, expenses
and difficulties frequently encountered by companies in their early stages of
development. To address these risks and uncertainties, we must, among other
things, accelerate our network expansion, increase the size of our customer
base, maintain and enhance the IXnet brand, successfully implement and execute
our business and marketing strategy, continue to develop and upgrade our
technology and global network infrastructure, continue to enhance our branded
services and develop an expanded portfolio of service offerings to meet the
needs of a changing market, provide superior customer service, respond to
competitive developments, and attract, integrate, retain and motivate
qualified personnel. We cannot assure you that we will be successful in
accomplishing any or all of the above, and the failure to do so could have a
material adverse effect on our business, results of operations and financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
We have experienced significant operating losses and may not be able to
achieve profitability.
We have incurred net losses since we began operations. We incurred net
losses of $27.6 million for the year ended September 30, 1998 and $15.2
million for the year ended September 30, 1997. Net loss for the six months
ended March 31, 1999 was $20.1 million. We expect to continue to incur
significant losses and experience negative cash flow for the foreseeable
future. We intend to rapidly and substantially increase spending to expand our
Extranet, but we cannot assure you that our revenues will increase in the near
future or at all as a result of our increased spending. If revenues grow more
slowly than we anticipate, or if operating expenses exceed our expectations,
we may not become profitable. While revenues have grown in recent periods,
this growth is attributable, in part, to the acquisitions we made, and we
cannot assure you that this growth will continue. We cannot assure you that we
will ever become or remain profitable or that we will generate positive cash
flow from operations.
IPC's control of us may conflict with your interests as a stockholder.
IPC controls and will continue to control a majority of our voting power,
and IPC's interests in us may conflict with your interests as a stockholder.
IPC currently owns all of the issued and outstanding shares of our common
stock. At the completion of this offering, IPC will own shares (or %)
of our common stock. Thus, IPC will be able to control our management and
affairs and all matters submitted to our stockholders for approval, including
the election and removal of directors, and any merger, consolidation or sale
of all or substantially all of our assets. As a result, the price of our
common stock may be adversely affected.
12
<PAGE>
IPC's debt obligations restrict our ability to raise capital. We will
require additional funds to finance the expansion and development of our
business as well as fund operating losses, but our ability to raise such
funds is significantly limited by agreements entered into by IPC which are
also binding upon us. IPC has issued debt securities to the public under an
indenture and also has a revolving credit agreement. Under our inter-
company agreement with IPC and as a guarantor under IPC's revolving credit
agreement, we are subject to the restrictions and covenants under the IPC
indenture and revolving credit agreement. These restrictions will, among
other things, limit our ability to incur indebtedness, pay dividends or
make other distributions, engage in sale and leaseback transactions, create
liens, sell our assets, issue, sell or repurchase our stock or other equity
interests, or enter into mergers and consolidations. As a result, our
future financing sources will be significantly limited. The revolving
credit agreement contains various covenants and conditions, including the
maintenance of various financial ratios and restrictions on (a) asset
dispositions, (b) mergers and acquisitions, (c) capital expenditures, (d)
certain payments, (e) the incurrence of indebtedness, (f) loans and
investments, (g) liens, (h) certain transactions with affiliates and (i)
our issuance or sale of capital stock.
Restrictions on our ability to use the proceeds of this
offering. Pursuant to the indenture, in order to avoid an obligation to
utilize the proceeds from this offering to prepay IPC's unsubordinated
debt, we must within 12 months of the closing of this offering either (1)
invest the net proceeds of this offering in property or assets (other than
current assets) of a nature or type used in our business (or invest in a
company with a business similar or related to our business) or (2) enter
into an agreement to so invest the net proceeds within 12 months after
entering into such agreement. Accordingly, we will not be able to use the
proceeds of this offering to fund operating losses, working capital, debt
service or other uses that are not described above.
We will depend on IPC for our funding needs. We depend, and after this
offering will continue to depend, on IPC to fund our operating losses,
working capital and debt service. At March 31, 1999, IPC had outstanding
$247.5 million of consolidated indebtedness and a stockholder's deficit of
$74.4 million. The extent of IPC's leverage and its financial condition and
results of operations will directly affect its ability to fund our
operating losses, working capital and debt service.
Financing arrangements. Under the inter-company agreement, IPC has agreed
to continue to provide us with ongoing financing and other forms of credit
enhancements, such as letters of credit and guarantees of our obligations,
from time to time, upon reasonable notice by us, up to an aggregate of $50
million during the period beginning July 1, 1999 through June 30, 2001. IPC
has two sources of funds from which it can fund our needs. The first is
from its cash flow; and the second is through its $55 million revolving
credit agreement. As of March 31, 1999, availability under the revolving
credit facility was limited to $26.6 million of which $24.9 million was
utilized for borrowings and letters of credit. However, IPC will not
advance funds to us, if at the time of any request for an advance, IPC (1)
is not or would not be in compliance with its obligations under the
indenture or (2) does not or would not meet certain financial and other
covenants measuring operating performance (in its revolving credit
agreement). Amounts borrowed from IPC may be used by us to fund our
operating losses, working capital and debt service.
IPC may not be able to provide us with a sufficient source of funds,
under its revolving credit agreement or otherwise, to fund our operating
losses, working capital needs or debt service. Any failure of IPC to
advance funds to us in a timely fashion under such financing arrangement
could have a material adverse effect upon our financial condition and
results of operations, which may adversely affect the price of our common
stock. The degree to which IPC is leveraged could have important
consequences to our future operations, including but not limited to:
. increasing our vulnerability to general adverse economic and industry
conditions;
. limiting our ability to obtain additional financing to fund future
working capital, debt service, operating losses, capital expenditures,
acquisitions and other general corporate requirements;
. limiting our flexibility in reacting to changes in our business and the
industry in which we compete; and
. placing us at a competitive disadvantage compared to better capitalized
competitors.
13
<PAGE>
We will have substantial ongoing relationships with IPC. IPC has provided
and is expected to continue to provide us with many financial,
administrative and operational services and related support functions,
including field service, human resources and legal. See "Certain
Relationships and Related Transaction." Prior to the consummation of this
offering, we have entered into an inter-company agreement under which IPC
has agreed to continue to provide such services to us for at least 12
months for specified fees. If IPC unexpectedly stops providing these
services for any reason, we could face significant challenges and costs in
transitioning to our own or alternative general and administrative
functions. Such a transition and any resulting impairment of our operations
could harm our financial results. Our marketing and business plan also
relies, in part, on leveraging IPC's established presence as a supplier of
telecommunications hardware to the financial services community. If IPC
ceases doing business or changes its focus, we may have to increase
marketing expenditures to raise our market presence. Our legal counsel,
Thacher Proffitt & Wood, is also counsel to IPC. Consequently, we do not
have legal representation independent from IPC.
Our assets are pledged to support IPC's obligations.
We have guaranteed IPC's obligations under its revolving credit agreement,
and all of our and our subsidiaries' capital stock and real and personal
property (including tangible and intangible property) are pledged as
collateral to support the borrowings of IPC thereunder. A breach by IPC or any
of its subsidiaries, including us, of the terms of the revolving credit
agreement could enable the lenders under such facility to pursue us for
payment and to take any or all of our assets, including the stock of our
operating subsidiaries, in order to satisfy IPC's obligations. Any such
foreclosure could have a material adverse effect upon our financial condition
and results of operations, which would adversely affect the price of our
common stock.
Our directors and our executive officers may have conflicts of interest
because of their relationships with IPC.
We currently anticipate that, upon completion of this offering, five of our
eight directors and four of our executive officers will also be directors
and/or executive officers of IPC. These directors and executive officers will
have obligations to both companies and may have conflicts of interest with
respect to matters potentially or actually involving or affecting us, such as
acquisitions, financings and other corporate opportunities that may be
suitable for both us and IPC. In order to attain approval by a majority of the
members of the board, which is the minimum vote required to approve such
actions under Delaware law and our by-laws, the approval of one or more of the
IPC directors will be required.
Our directors and some of our executive officers own substantial amounts of
IPC stock and options on IPC stock. Such ownership could create, or appear to
create, potential conflicts of interest when directors and officers are faced
with decisions that could have different implications for us and IPC. See
"Certain Relationships and Related Transactions" and "Principal Stockholders."
Our growth will suffer if we cannot successfully expand our Extranet.
Continuing to expand our Extranet is critical to achieving our business
strategy. This expansion will require significant expenditures for hardware
and software, and will also include the opening of one additional NOC and
additional POPs. We intend to aggressively add capacity over the next two
years, sometimes in advance of customer demand. Our ability to do so
successfully depends on:
. anticipating and preparing for future demand;
. having access to sufficient capital; and
. locating and securing satisfactory sites for the NOC and additional POPs
and implementing the buildout of these sites, all of which may require
significant lead time.
14
<PAGE>
If we cannot expand capacity effectively, our growth will suffer, and we
may not be able to adequately meet the demands of existing customers or have
sufficient capacity to add new customers.
Because the success of our business is dependent on the efficient and
uninterrupted operation of our Extranet, a systems failure or breach of
security could cause a significant disruption to our business.
We believe our reputation for providing reliable service to our customers
is critical to our future success. Our Extranet and data centers are subject
to damage from human error and tampering, natural disasters, fire, power loss,
capacity limitations, software defects, breaches of security, physical break-
ins, telecommunications failures, intentional acts of vandalism and other
factors that can cause interruptions in service or reduced capacity for our
customers. We intend to use a portion of the proceeds of this offering to
enhance the redundancy of our Extranet, which is not now, nor will it ever be,
fully redundant. Despite precautions we have taken and plan to take, the
occurrence of a natural disaster or other unanticipated problems could result
in interruptions in the services we provide to our customers, which could
subject us to loss of business. If a person circumvents our security measures,
he or she could jeopardize the security of confidential information stored on
our computer systems, misappropriate proprietary information or cause
interruptions in our operations. Any of these events could have a material
adverse affect on our business, materially damage our reputation and expose us
to a risk of loss or liability. We may be required to make significant
additional investments and efforts to protect against or remedy security
breaches.
We may not be able to successfully manage additional growth.
We have experienced a period of rapid growth that has placed significant
demands on our managerial, operational, financial and accounting resources. We
intend to continue to expand operations and expect to dedicate a substantial
portion of our financial and management resources to support such expansion.
Our future success will depend in part on whether we can improve our
operational, financial and accounting systems and expand, train and manage our
employee base. Whether we can increase revenues is in part dependent upon
hiring and training a sufficient number of suitably skilled employees.
Competition for qualified employees, particularly those with sales, marketing
or technical expertise is intense, and there is a limited number of persons
with relevant knowledge and experience. A failure to manage our growth
effectively could have a material adverse effect on our financial condition
and results of operations.
Because our revenues are derived primarily from the financial services
community, an economic downturn in the financial services industry could
adversely affect our business.
Almost all of our revenues are derived from, and our future success will be
dependent upon, sales to customers in the financial services community. If the
financial services industry suffers an economic downturn or other long-term
disruption, it is likely that we would experience a decline in revenues, which
would have a material adverse effect on our financial condition and results of
operations.
We are dependent on key customers.
We are dependent on Deutsche Bank, Optimark and Reuters, our three largest
customers. These customers accounted for about 23%, 14% and 6% of our
consolidated revenues in fiscal 1998, respectively, and about 11%, 14% and 7%
of our consolidated revenues for the six months ended March 31, 1999,
respectively. These customers do not have long-term contracts, and,
accordingly, we cannot assure you that we will maintain our current volume of
business with them. We anticipate that the level of sales activity and
revenues derived from Reuters will decline during the remaining term of its
contract and that Reuters will not renew this contract when it expires in May
2000. Additionally, while we do not anticipate that Deutsche Bank will reduce
its volume or terminate its relationship with us, it is not obligated to spend
a minimum nor is it currently subject to a long-term contract. The loss of any
of these customers, or a substantial reduction in the amount of services we
provide to any of these customers, could have a material adverse effect on our
business and results of operations.
15
<PAGE>
Our management has broad discretion in the application of proceeds and may not
effectively invest the proceeds of this offering.
While we are subject to contractual restrictions on how we may use the net
proceeds of this offering, our Board of Directors and management have broad
discretion over how to use the proceeds. Failure to effectively manage the
application of the net proceeds of this offering could have a material adverse
effect on our business, financial condition and results of operations. See
"Use of Proceeds."
Risks related to our acquisition strategy and acquisition financing.
As a part of our business strategy, we may acquire additional strategically
attractive businesses. We expect to face competition for acquisition
candidates, which may limit the number of acquisition opportunities and may
lead to higher acquisition prices. We may not be able to identify, acquire or
manage additional businesses profitably or to successfully integrate any
acquired businesses. Businesses that we acquire may have liabilities that we
underestimate or do not discover during our pre-acquisition investigations.
Certain liabilities, even if not expressly assumed by us, may be imposed on us
under certain legal principles of successor liability. Further, each
acquisition involves a number of other special risks that could cause the
acquired business to fail to meet our expectations. For example:
. the acquired business may not achieve expected results;
. we may not be able to retain key personnel of the acquired business;
. we may incur substantial, unanticipated costs, delays or other
operational or financial problems during the integration process;
. the transfer of required permits, authorizations or licenses may be more
difficult, time consuming or costly than we anticipated;
. our management group's attention may be diverted; or
. our management group may not be able to effectively manage the combined
entity or to effectively implement our acquisition program and internal
growth strategy simultaneously.
We cannot readily predict the timing, size or success of any future
acquisitions or the associated capital requirements. Our inter-company
agreement with IPC and the IPC revolving credit agreement contain covenants
restricting our ability to issue equity or debt or to acquire indebtedness as
consideration for an acquisition and limiting the aggregate consideration that
may be paid. These restrictions may limit our ability to react quickly to
potential acquisition opportunities. In addition, we may not be able to obtain
acquisition financing when required, or such financing may only be available
on terms and conditions that are unacceptable to us. If we are unable to fund
our acquisition plans, our growth could be limited.
We may not be able to attract and retain key personnel we need to succeed.
Our success depends to a significant degree upon the continued
contributions of our senior management team and technical, marketing and sales
personnel. Although our key employees, such as Messrs. David Walsh and Charles
Auster, currently have employment agreements with us, they may voluntarily
terminate their employment with us at any time. See "Management--Employment
Agreements." The loss of the services of these persons or other key personnel,
or the inability to attract additional qualified personnel, could have a
material adverse effect on our results of operations, service development
efforts and ability to expand our business. We may not be successful in
attracting and retaining executives and personnel that we need for our
business.
We have many competitors, and we may not be able to compete effectively
against them.
The markets in which we operate are comprised of a substantial number of
global and regional competitors, including national and international carriers
and global alliances. The continuing trend toward business
16
<PAGE>
combinations and strategic alliances in the communications industry may create
significant new competitors or strengthen existing competitors. Many of our
current and potential competitors have greater financial, engineering,
marketing and other resources than us. Competing with such companies will
require our continued investment in our Extranet, engineering, marketing,
research and development and customer service and support. In addition, in
many non-U.S. markets, we face competition from dominant local providers that
have long standing relationships with our target customers. See "Business--
Competition." The principal competitive factors in this market include:
. quality of service;
. reliability and security;
. service provisioning speed;
. key features and functions; and
. price.
Our current and potential competitors in the market include:
. large interexchange carriers such as MCI WorldCom, AT&T and Cable &
Wireless;
. specific product competitors such as EQUANT N.V., Infonet Services
Corporation and GAINS;
. common carriers such as British Telecom, France Telecom and the Bell
Operating Companies;
. content providers such as Bloomberg L.P., Bridge Information Systems,
Inc. and Reuters Holdings Plc; and
. resellers of network services such as Business Networks International
Inc., Sector, Inc. and WestCom Corp.
We operate in markets that are intensely competitive and feature rapidly
changing technology and evolving standards. Our competitors may be able to
respond more quickly than we can to new or emerging technologies and/or
changes in customer requirements. Competitive pressures could require us to
reduce the price of our services, which could have a material adverse effect
on our business, operating results and financial condition. See "Business--
Competition."
Our international operations make us susceptible to global economic factors,
foreign tax law issues, international business practices and currency
fluctuations.
We currently have established offices and distributors to market and sell
our services in Europe, and the Asia/Pacific region. Revenue from our
international operations accounted for $15.1 million, or 46.3% of total
revenue, for the six months ended March 31, 1999. This period includes the
results of Saturn since December 18, 1998, and we expect our percentage of
revenues from international operations to increase in future periods. We plan
to expand our current international operations and to establish facilities and
marketing relationships in additional regions. Managing our international
operations subjects us to particular risks, including:
. impact of recessions or inflation in foreign economies;
. increased cost of enforcing contractual obligations;
. unique and unanticipated regulatory issues;
. difficulties and costs of managing foreign operations;
. limited protection for intellectual property rights in some countries;
. currency exchange rate fluctuations;
. political and economic instability; and
. potentially adverse tax consequences.
17
<PAGE>
Our international revenues are generally denominated in local currencies.
Many of our international customers have fixed price contracts between six to
twelve months. To the extent inflation or a fluctuation in currency exchange
rates adversely affects our revenues, it may take us several months before we
can renegotiate certain customer contracts. We do not currently engage in
currency hedging activities; however, we may implement a program to mitigate
foreign currency risk in the future.
Our success depends on keeping up with rapid technological changes in
communications and network equipment.
The networking services and communications market are characterized by
rapid technological change. In order to provide our customers with value added
services on a cost effective basis, we need to keep abreast of and adopt,
where prudent, new technologies. The cost of new technologies may be
substantial, and a decision to forego or delay adoption of new technologies
may leave us at a competitive disadvantage.
The critical nature of our Extranet may subject us to liability claims.
Because our Extranet provides critical global communications links to key
members of the worldwide financial services community, we may be subject to
liability claims if our customers believe that our services have failed to
perform as intended. The security services that we offer in connection with
our global Extranet cannot assure complete protection from computer viruses,
breaches, break-ins, natural disasters and other disruptive problems. Although
we attempt to contractually limit our liability in such instances, the
occurrence of these problems may result in claims against us and possibly
liability. These claims, regardless of their ultimate outcome, could result in
costly litigation and could have a material adverse effect on our business and
reputation and on our ability to attract and retain customers for our
services.
Changes in United States, state or international government regulations could
adversely affect our business.
In the United States, the telecommunication services we provide are subject
to the provisions of the Communications Act of 1934, as amended by various
statutes including the Telecommunications Reform Act of 1996 ("the
Telecommunications Act"), and the Federal Communications Commission, or the
FCC, regulations thereunder, as well as the applicable laws and regulations of
the various states as administered by the relevant state Public Utility
Commissions, or PUCs. The FCC and relevant state PUCs exercise extensive
authority to regulate ownership of transmission facilities, provision of
services and the terms and conditions under which our communications services
are provided. The interpretation and enforcement of laws and regulations by
these regulatory authorities vary and could limit our ability to provide
certain communications services. Thus, it is possible that changes in current
or future laws or regulations or future judicial intervention or other
regulatory investigation or intervention in the United States or in any
individual state could have a material adverse effect on us.
In addition, we are required by federal and state law and regulations to
file tariffs listing the rates, terms and conditions of the services we
provide. Any failure to maintain proper federal or state tariffs or
certifications or any finding by federal or state agencies that we are not
operating under permissible terms and conditions may result in an enforcement
action or investigation, either of which could have a material adverse effect
on us.
The existing regulatory environment for countries other than the United
States are based on the laws and regulations of the individual country and
intergovernmental agreements such as the World Trade Organization Basic
Telecommunication Agreement ("WTO Agreement"). In recent years many countries
have adopted competitive regulatory structures for communications. This pro-
competitive trend has been recently advanced by the WTO Agreement.
Nevertheless, national and local laws and regulations continue to differ
significantly among the countries in which we currently operate and plan to
operate. Most of the regulatory structures outside the United States pursuant
to which we operate were recently enacted. Consequently, there is very limited
guidance on the scope of the authority provided to us in many countries. Thus,
an examination of our operations by a
18
<PAGE>
regulatory or governmental authority could result in a determination that we
are not operating in a manner consistent with existing law, regulations or
licenses issued to us. If a regulatory authority in a particular country
concludes that we are not operating in a manner consistent with law,
regulations or licenses issued to us, it could limit our ability to provide
certain communications services to or from that country and could result in
substantial fines, penalties or loss of our operating authority in such
jurisdiction. There may be changes in current and future laws or regulations
of any particular country or the WTO Agreement that may have a material
adverse effect on our business, results of operations and financial condition.
We may be liable for the material our content providers distribute over our
Extranet.
The law relating to the liability of private network operators for
information carried on or disseminated through their networks is currently
unsettled. We may become subject to legal claims relating to the content
disseminated on our Extranet. For example, lawsuits may be brought against us
claiming that material on our Extranet which one of our customers relied on
was inaccurate. Claims could also involve matters such as defamation, invasion
of privacy and copyright infringement. Content providers operating private
networks have been sued in the past, sometimes successfully, based on the
content of material. If we have to take costly measures to reduce our exposure
to these risks, or are required to defend ourselves against such claims, our
business, financial condition and results of operations may be materially and
adversely affected.
Year 2000 problems could disrupt our business, reduce our profits and lower
the value of your stock.
Some computers, software and other equipment include programming code in
which calendar year data is stored as only two digits. As a result of this
programming design, some of these systems, including our systems and those of
third parties that we rely upon, could fail to operate or fail to produce
correct results if "00" is interpreted to mean 1900, rather than 2000. These
problems are commonly referred to as the "Year 2000 problem."
The Year 2000 problem presents us with several potential risks including,
but not limited to, the following:
. Network equipment we have installed for on-net customers. Once
installed, our equipment may interact with other products of the
customer and operate on systems not under our control. These factors
could affect the performance of our Extranet and/or related services if
a Year 2000 problem exists in our customer's information technology
infrastructure.
. Internal infrastructure. The Year 2000 problem could affect computers,
software and other equipment that we use internally as well as divert
management's attention from ordinary business activities. In addition to
computers and related systems, the operation of our office and
facilities equipment, such as fax machines, photocopiers, telephone
switches, security systems, elevators and other common devices may be
affected by the Year 2000 problem.
. Customers/suppliers/third-party relationships. The Year 2000 problem is
currently placing a strain on organizations' information technology
budgets and resources. Some organizations may lack sufficient resources
to undertake the type of integration projects required to adequately
address the Year 2000 problem. It is possible that our customers,
suppliers or other third parties that we rely upon will not resolve any
or all of their Year 2000 problems on a timely basis.
We are in the process of identifying and resolving the Year 2000 problems
that could materially adversely affect our business, financial condition or
results of operations. However, we believe that it is not possible to
determine with complete certainty that all Year 2000 problems affecting us
will be identified or corrected in a timely manner. We are in the process of
developing contingency plans to be implemented as part of our efforts to
identify and correct Year 2000 problems that may affect our services; however,
these plans are not yet finalized. The results of our enterprise-wide system
conversion and responses received from vendors, suppliers and service
providers will be taken into account in determining the nature and extent of
any contingency plans. If we fail to identify and correct all Year 2000
problems affecting our internal systems, or if we are forced to implement a
contingency plan, our business, financial condition or results of operations
could be materially adversely affected.
19
<PAGE>
We strongly urge you to read about our Year 2000 efforts under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Impact of Year 2000."
Our use of proprietary technology may subject us to liability claims.
We could be subject to claims that we have infringed the intellectual
property rights of others. In addition, we may be required to indemnify our
global partners and customers for similar claims made against them. Any claims
against us could require us to spend significant time and money in litigation,
pay damages, develop new intellectual property or acquire licenses to
intellectual property that is the subject of the infringement claims.
Additional licenses, if required, may be costly or may not be available on
acceptable terms. As a result, intellectual property claims against us could
have a material adverse effect on our business, operating results and
financial condition.
Our success depends in part upon our technology and proprietary rights,
although we believe that our success is more dependent upon our technical
expertise than our proprietary rights. It may be possible for a third party to
copy or otherwise obtain and use our services or technology without
authorization or to independently develop similar technology. We may not be
able to take adequate measures to protect our proprietary technology, and our
competitors may independently develop technologies that are substantially
equivalent or superior to our technology. This could have a material adverse
effect on our business and results of operations.
Our common stock may be subject to erratic price fluctuations.
From time to time, the stock market experiences significant price and
volume fluctuations, which may affect the market price of our common stock for
reasons unrelated to our performance. Recently, such volatility has
particularly impacted the stock prices of technology companies. Securities
class action litigation often is instituted against companies following
periods of volatility in the market price of the companies' securities. If
similar litigation were instituted against us, it could result in substantial
costs and a diversion of our management's attention and resources, which could
have an adverse effect on our business. In addition, the market price of our
common stock may be subject to significant fluctuations in response to
numerous factors, including:
.variations in our annual or quarterly financial results or those of our
competitors;
. changes by financial research analysts in their estimates of our
earnings or our failure to meet such estimates;
. conditions in the economy in general or in the financial services,
Internet, communications and other technology industries;
.announcements of key developments by competitors;
.loss of key personnel;
. unfavorable publicity affecting our industry or us;
. adverse legal events affecting us;
. IPC's financial condition or public announcements made by IPC; or
. sales of our common stock by existing stockholders, particularly if such
sales are by our directors or officers.
The absence of an active public market for our common stock may make it
difficult for you to resell your shares at or above the offering price, and
the availability of significant amounts of common stock for sale could
adversely affect its market price.
Prior to this offering, there has been no public market for our common
stock, and an active public market for our common stock may not develop. The
initial public offering price for our common stock was determined
20
<PAGE>
by negotiation between us and the representatives of the underwriters, and you
may be unable to resell your shares of common stock at or above the initial
public offering price.
IPC will own in the aggregate shares (or %) of our common stock after
the offering. If IPC sells a large portion of these shares on the open market
and at one time, our market price per share would likely decline. You should
read "Shares Eligible for Future Sale" for a more detailed discussion of when
and how many shares of our common stock may be sold after this offering.
You will incur immediate and substantial dilution.
The initial public offering price of the common stock is substantially
higher than the pro forma net tangible book value per share of the outstanding
common stock. As a result, you will incur immediate and substantial dilution
of $ per share based upon an assumed initial public offering price of $
per share. In the event we issue additional shares of common stock in the
future, you may experience further dilution. Furthermore, we have issued
options to purchase shares of common stock at an exercise price equal to
per share. To the extent such options are exercised, you will experience
further dilution.
21
<PAGE>
IXnet, Inc.
Our subsidiary, International Exchange Networks Ltd., was incorporated in
March 1993 and commenced operations in June 1995. On June 23, 1995, IPC
acquired 80% of the stock of International Exchange Networks. By acquiring
International Exchange Networks, IPC sought to position itself as the premier
company with a portfolio of services and hardware tailored to address the
unique communications needs of the financial services community.
In February 1998, IPC acquired MXNet, a provider of market data
distribution services to content providers. In April 1998, in connection with
the recapitalization of IPC, IPC acquired the remaining 20% of the outstanding
stock of International Exchange Networks.
In December 1998, International Exchange Networks acquired Saturn, a
provider of managed premium grade voice and data communication services to
financial services firms in Europe and the Asia/Pacific region.
On May 4, 1999, in connection with this offering, IXnet, Inc., a Delaware
corporation, was incorporated, and IPC contributed (1) MXNet to International
Exchange Networks and (2) International Exchange Networks to IXnet.
As of the date of this prospectus, we are a wholly-owned subsidiary of IPC
and we own all of the outstanding shares of common stock of International
Exchange Networks and its subsidiaries, MXNet and Saturn (together with
Saturn's subsidiaries).
IPC
IPC was established in 1973 to provide telephone equipment specifically
designed to perform in the demanding environment of the financial trading
community. Since that time IPC has grown to become a leader in providing
integrated telecommunications equipment and services that facilitate the
execution of transactions by the financial trading community. IPC's customer
base is nearly identical to ours.
IPC's major operating units are IXnet and:
Trading Systems. IPC's Trading Systems division provides sophisticated
turret systems, which consist of desktop appliances connected with associated
switching equipment and which provide highly reliable, "non-blocking" voice
communications for trading operations. These systems incorporate a proprietary
design, including many features designed to increase the trader's
productivity, and must be highly reliable because of the time-sensitive nature
of trading activity and the high potential opportunity cost of a service
outage. IPC estimates that it has the largest installed base of turrets in the
world, including a majority of the installed base of turrets in New York City
and a significant presence in other major financial centers including London.
Information Transport Systems ("I.T.S."). IPC's I.T.S. division provides
cabling infrastructure, design, installation and maintenance services for high
speed voice and data networks, including LANs, WANs and data connectivity
applications. IPC's I.T.S. engineers design and implement intelligent network
infrastructures to provide connectivity to a wide array of customer-owned
devices. The I.T.S. division's expertise includes network design, and the
installation of all available physical transport media, including copper,
fiber optic and coaxial cable. I.T.S. services also include project management
for network infrastructure upgrades and on-site, as well as on-call, technical
support worldwide.
IPC completed its initial public offering in October 1994 and is publicly
traded on the American Stock Exchange under the symbol IPI. IPC was recently
reorganized into a holding company structure and became a wholly-owned
subsidiary of IPC Communications, Inc., the successor publicly traded entity,
on May 21, 1999.
22
<PAGE>
MXNet
Through MXNet we entered the business of distributing market data for
content providers. We operate a "virtual warehouse" where we host the data of
various content providers and then distribute such data to end-users on behalf
of the content providers. Our Extranet serves as a content neutral delivery
system to the desktops of the financial services community. This approach
allows our customers to display content in the formats they desire. Because we
often are willing to expand our Extranet to reach additional end-users
targeted by our content provider customers, we believe our Extranet is more
attractive than existing distribution networks of competing content providers.
As of March 31, 1999, we were aggregating data from more than 30 sources, 13
of which were acquired as part of the MXNet Acquisition.
Saturn
Saturn is a U.K. holding company that owns communication network operating
subsidiaries in the United Kingdom, the United States, Hong Kong, Australia,
Japan and Singapore. Saturn has established a business selling managed premium
grade voice and data communication services to the financial services
community, similar to IXnet but focused on Europe and the Asia/Pacific region.
23
<PAGE>
USE OF PROCEEDS
Our net proceeds from the sale of the shares of common stock we are
offering are estimated to be $ million ($ million if the underwriters
exercise the over-allotment option in full), at an assumed public offering
price of $ per share and after deducting the underwriting discounts and
estimated offering expenses we will pay.
We expect to use the net proceeds from this offering for continued
deployment and expansion of our global Extranet, including anticipated capital
expenditures of approximately $ million in 1999. In addition, we may use a
portion of the net proceeds from this offering for possible future
acquisitions, strategic alliances or investments in property or assets used in
our business. We currently have no commitments or agreements with respect to
any such transactions. Pending use of the net proceeds of this offering, we
intend to invest the net proceeds in short term U.S. investment grade and
government securities.
Under the indenture for IPC's senior discount notes, and as agreed to by us
in our inter-company agreement with IPC, within 12 months after completion of
our initial public offering, in order to prevent a breach of our inter-company
agreement, we must either (1) invest the net proceeds from this offering in
property or assets (other than current assets) of a nature or type used in our
business (or invest in a company with a business similar or related to our
business) or (2) enter into an agreement to so invest the net proceeds within
12 months after entering into such agreement. See "Risk Factors--IPC's control
of us may conflict with your interest as a stockholder--Restrictions on our
ability to use the proceeds of this offering" and "Certain Relationships and
Related Transactions."
DIVIDEND POLICY
We have not paid, and do not anticipate paying in the foreseeable future,
any cash dividends on our common stock. We intend to retain any earnings for
use in our growth and ongoing operations. If we decide to pay dividends in the
future, such dividends would be subject to certain contractual limitations in
the revolving credit agreement and the indenture for IPC's senior discount
notes, to which we have agreed to comply pursuant to our inter-company
agreement with IPC. See "Certain Relationships and Related Transactions--
Inter-Company Agreement."
24
<PAGE>
CAPITALIZATION
The following table sets forth IXnet's capitalization as of March 31, 1999
on an actual basis and as adjusted to reflect our sale of shares of common
stock at an assumed initial public offering price of $ per share. The
capitalization information set forth in the table below is qualified by and
should be read in conjunction with the more detailed Combined and Consolidated
Financial Statements and related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
March 31, 1999
---------------------
Actual As Adjusted
-------- -----------
(In thousands)
<S> <C> <C>
Cash and cash equivalents................................ $ 4,061 $
======== ====
Current portion of notes payable......................... $ 4,941 $
Current portion of capital leases........................ 4,885
Long-term debt, excluding current portion:
Note payable to parent................................. 25,522
Lease obligations...................................... 13,907
Notes payable.......................................... 7,031
-------- ----
Total long-term debt................................. 46,460
-------- ----
Stockholder's equity:
Common stock--$0.01 par value; 2,000 shares authorized,
actual, shares authorized, as adjusted; 1,000
shares issued and outstanding, actual, shares
issued and outstanding, as adjusted................... --
Paid-in capital........................................ 112,515
Accumulated deficit.................................... (69,826)
Cumulative translation adjustment...................... (434)
-------- ----
Total stockholder's equity........................... 42,255
-------- ----
Total capitalization............................... $ 98,541 $
======== ====
</TABLE>
The outstanding share information is based on our shares outstanding as of
March 31, 1999. This information excludes shares of common stock issuable
upon exercise of options issued after March 31, 1999 at an exercise price of
$ per share, and additional shares of common stock reserved for
issuance under our 1999 Stock Option Plan.
25
<PAGE>
DILUTION
Our pro forma net tangible book deficit as of March 31, 1999, was $12.5
million, or $ per share of common stock, after giving effect to the for
1 stock split effected on , 1999. Pro forma net tangible book deficit per
share represents the amount of our total tangible assets less total
liabilities, divided by the total number of shares of common stock
outstanding. Our pro forma net tangible book value as of March 31, 1999 would
have been $ , or $ per share after giving effect to the sale of shares
of common stock offered by us (at an assumed initial public offering price of
$ per share) and after deducting the underwriting discounts and commissions
and other estimated offering expenses. This represents an immediate increase
in pro forma net tangible book value of $ per share to existing stockholders
and an immediate dilution of $ per share to new investors purchasing shares
of common stock in this offering. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share........................ $
Pro forma net tangible book deficit per share as of March 31, 1999... $
Increase in pro forma net tangible book value per share attributable
to new stockholders.................................................
---
Pro forma net tangible book value per share after offering.............
Dilution per share to new stockholders................................. $
===
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1999,
the difference between the existing stockholders and new stockholders with
respect to the number of shares of common stock purchased from us, the total
consideration paid to us and the average price paid per share by the existing
stockholder and by new stockholders:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
<S> <C> <C> <C> <C> <C>
Existing stockholders.... % $ % $
New stockholders.........
---------- ----- ------------ -----
Total................ 100.0% 100.0%
========== ===== ============ =====
</TABLE>
The foregoing discussion excludes (1) any shares to be issued pursuant to
the over-allotment option and (2) any shares of common stock issuable upon the
exercise of options (as of March 31, 1999, no options were outstanding, and as
of the date hereof, options to purchase shares of common stock were
outstanding with an exercise price of $ per share).
26
<PAGE>
SELECTED COMBINED AND CONSOLIDATED FINANCIAL DATA
The statement of operations data for the years ended September 30, 1996,
1997 and 1998 and the balance sheet data as of September 30, 1997 and 1998
have been derived from the Combined and Consolidated Financial Statements of
IXnet, Inc., audited by PricewaterhouseCoopers LLP, included elsewhere in this
prospectus. The statement of operations data for the year ended September 30,
1995 and the balance sheet data as of September 30, 1995 and 1996 have been
derived from our consolidated unaudited financial statements which do not
appear in this prospectus. The statement of operations data for the six months
ended March 31, 1998 and 1999 and the balance sheet data as of March 31, 1999
have been derived from our unaudited Combined and Consolidated Financial
Statements. The unaudited combined and consolidated interim financial
statements for all periods have been prepared on the same basis as the audited
Combined and Consolidated Financial Statements, and in our opinion reflect all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of such data.
Our results of operations for the year ended September 30, 1998 and for the
six months ended March 31, 1999 include the consolidated results of operations
of International Exchange Networks and its subsidiaries combined with the
results of operations of MXNet from February 13, 1998. Additionally, our
results of operations for the six months ended March 31, 1999 include the
consolidated results of operations of Saturn from December 18, 1998.
The information contained in the following table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the Combined and Consolidated Financial Statements
of IXnet, Inc. and related notes, the Financial Statements of MXNet Inc. and
related notes, and the Consolidated Financial Statements of Saturn Global
Network Services Holdings Limited and related notes, included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended September 30, March 31,
---------------------------------- ------------------
1995 1996 1997 1998 1998 1999
----- ------- -------- -------- -------- --------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................ $ -- $ 3,459 $ 17,838 $ 35,853 $ 15,318 $ 32,611
Cost of revenue........ 500 4,406 19,823 35,652 15,413 30,934
Sales and marketing
expense............... -- 1,057 4,172 8,455 3,213 4,878
General and
administrative
expense............... 229 2,868 3,439 5,001 2,331 2,815
Depreciation and
amortization.......... -- 998 3,460 9,060 2,924 9,508
Special charge (1)..... -- -- -- 1,350 -- --
----- ------- -------- -------- -------- --------
Loss from operations... (729) (5,870) (13,056) (23,665) (8,563) (15,524)
Interest expense, net.. (3) (247) (2,040) (3,527) (1,521) (4,318)
Other income (expense),
net................... 49 -- 117 26 3 (18)
----- ------- -------- -------- -------- --------
Loss before provision
for income taxes...... (683) (6,117) (14,979) (27,166) (10,081) (19,860)
Provision for income
taxes................. -- 62 229 473 171 257
----- ------- -------- -------- -------- --------
Net loss............... $(683) $(6,179) $(15,208) $(27,639) $(10,252) $(20,117)
===== ======= ======== ======== ======== ========
Basic and diluted loss
per share............. $(683) $(6,179) $(15,208) $(27,639) $(10,252) $(20,117)
===== ======= ======== ======== ======== ========
Basic and diluted
weighted average
common shares
outstanding........... 1,000 1,000 1,000 1,000 1,000 1,000
===== ======= ======== ======== ======== ========
Other Operating Data:
EBITDA (2)............. $(729) $(4,872) $ (9,596) $(14,605) $ (5,639) $ (6,016)
Capital expenditures... -- 4,858 3,495 12,930 5,680 7,683
Other Data:
Number of POPs......... 2 6 13 21 17 73
Number of CANs......... -- 41 207 488 377 1,010
Number of customer
accounts (3).......... -- 45 131 248 178 456
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
September 30, March 31,
----------------------------- ---------
1995 1996 1997 1998 1999
------ ------ ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............ $5,159 $1,616 $ 525 $ 1,255 $ 4,061
Total assets......................... 6,431 13,703 27,646 60,332 125,444
Note payable to parent (4)........... 1,474 7,026 20,072 43,629 25,522
Notes payable, net of current
portion............................. -- -- -- -- 7,031
Lease obligations, net of current
portion............................. -- 3,429 9,576 11,570 13,907
Total stockholder's equity
(deficit)........................... 4,845 890 (8,581) (14,959) 42,255
</TABLE>
- ---------------------
(1) Special charge represents bonus payments and payments for cancellation of
stock options to our employees in connection with the merger of IPC and
Arizona Acquisition Corp. in the year ended September 30, 1998. See Note 5
of Notes to the Combined and Consolidated Financial Statements of IXnet,
Inc. included elsewhere in this prospectus.
(2) EBITDA consists of loss from operations before depreciation and
amortization. EBITDA is presented to enhance an understanding of our
operating results and is not intended to represent cash flow or results of
operations in accordance with GAAP for the periods indicated. EBITDA is
not calculated under GAAP and is not necessarily comparable to similarly
titled measures used by other companies.
(3) Generally, multiple contractual relationships with a single legal entity
are considered a single customer account. However, we are not always aware
of and, accordingly, do not always reflect combinations, mergers and
consolidations between our customers.
(4) The March 31, 1999 note payable to parent represents amounts due to IPC
and is net of the capitalization to paid-in capital of $73.0 million as of
March 31, 1999.
28
<PAGE>
UNAUDITED PRO FORMA COMBINED AND CONSOLIDATED
FINANCIAL INFORMATION
The following unaudited pro forma combined and consolidated financial
information is based on the historical Combined and Consolidated Financial
Statements of IXnet, Inc. and gives effect to the MXNet Acquisition on
February 13, 1998 and the Saturn Acquisition on December 18, 1998.
Our historical results of operations for the year ended September 30, 1998
and for the six months ended March 31, 1999 include the consolidated results
of operations of International Exchange Networks and its subsidiaries combined
with the results of operations of MXNet from February 13, 1998. Additionally,
our historical results for the six months ended March 31, 1999 include the
results of operations of Saturn from December 18, 1998. Earnings per share
reflects our common stock as if it had been outstanding for the periods
presented.
The unaudited pro forma combined and consolidated statement of operations
for the year ended September 30, 1998 gives effect to the MXNet and Saturn
Acquisitions as if they had occurred on October 1, 1997. The pro forma results
of operations for the year ended September 30, 1998 include the historical
results of Saturn for the year ended July 31, 1998. The unaudited pro forma
combined and consolidated statement of operations for the six months ended
March 31, 1999 gives effect to the Saturn Acquisition as if it had occurred on
October 1, 1997. As the MXNet and Saturn Acquisitions are included in the
historical balance sheet as of March 31, 1999, contained elsewhere in this
prospectus, no pro forma balance sheet has been provided.
The unaudited pro forma combined and consolidated financial information and
accompanying notes should be read in conjunction with the historical financial
statements of IXnet, MXNet and Saturn, and related notes, included elsewhere
in this prospectus. The unaudited pro forma combined and consolidated
financial information does not purport to represent what our results of
operations would have been had the MXNet and Saturn Acquisitions occurred on
such dates or to project our results of operations or financial position for
any future period or date.
29
<PAGE>
IXnet, Inc.
UNAUDITED PRO FORMA COMBINED AND
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended September 30, 1998
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Saturn
----------
Year ended
July 31, Pro forma
Historical 1998 adjustments Pro forma
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Revenue......................... $ 35,853 $25,784 $ 533 (a) $ 62,170
Cost of revenue................. 35,652 21,305 56,957
Sales and marketing expense..... 8,455 -- 8,455
General and administrative
expense........................ 5,001 5,753 744 (a) 11,498
Depreciation and amortization... 9,060 1,479 384 (a) 16,730
908 (c)
4,899 (d)
Special charge.................. 1,350 -- -- 1,350
-------- ------- ------- --------
Loss from operations.......... (23,665) (2,753) (6,402) (32,820)
Interest (expense) income, net.. (3,527) 13 (4,249)(e) (2,496)
5,267 (h)
Other income, net............... 26 -- -- 26
-------- ------- ------- --------
Loss before provision for
income taxes................. (27,166) (2,740) (5,384) (35,290)
Provision (benefit) for income
taxes.......................... 473 (16) 106 (g) 563
-------- ------- ------- --------
Net loss...................... $(27,639) $(2,724) $(5,490) $(35,853)
======== ======= ======= ========
Basic and diluted loss per
share.......................... $(27,639) $(35,853)
======== ========
Basic and diluted weighted
average number of shares
outstanding.................... 1 1
======== ========
</TABLE>
See notes to unaudited pro forma combined and consolidated financial
information.
30
<PAGE>
IXnet, Inc.
UNAUDITED PRO FORMA COMBINED AND
CONSOLIDATED STATEMENT OF OPERATIONS
Six Months Ended March 31, 1999
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro forma
Historical adjustments Pro forma
---------- ----------- ---------
<S> <C> <C> <C>
Revenue.................................... $ 32,611 $ 4,759 (b) $ 37,370
Cost of revenue............................ 30,934 4,054 (b) 34,988
Sales and marketing expense................ 4,878 6 (b) 4,884
General and administrative expense......... 2,815 1,246 (b) 4,061
Depreciation and amortization.............. 9,508 257 (b) 10,830
1,065 (d)
-------- ------- --------
Loss from operations..................... (15,524) (1,869) (17,393)
Interest expense, net...................... (4,318) (1)(b) (2,300)
(840)(f)
2,859 (h)
Other (expense) income, net................ (18) 23 (b) 5
-------- ------- --------
(Loss) income before provision for income
taxes................................... (19,860) 172 (19,688)
Provision for income taxes................. 257 14(g) 271
-------- ------- --------
Net (loss) income........................ $(20,117) $ 158 $(19,959)
======== ======= ========
Basic and diluted loss per share........... $(20,117) $(19,959)
======== ========
Basic and diluted weighted average number
of shares outstanding..................... 1 1
======== ========
</TABLE>
See notes to unaudited pro forma combined and consolidated financial
information.
31
<PAGE>
IXnet, Inc.
NOTES TO UNAUDITED PRO FORMA COMBINED AND CONSOLIDATED
FINANCIAL INFORMATION
Year Ended September 30, 1998 and
Six Months Ended March 31, 1999
(a) Represents the unaudited financial results of MXNet from October 1, 1997
to the date of the MXNet Acquisition.
(b) Represents the unaudited financial results of Saturn from October 1, 1998
to the date of the Saturn Acquisition.
(c) Reflects the amortization of goodwill for the MXNet Acquisition using a
2.25 year life from October 1, 1997 to the date of the MXNet Acquisition,
assuming the acquisition occurred on October 1, 1997.
(d) Reflects the amortization of goodwill for the Saturn Acquisition using a
ten-year life for the year ended September 30, 1998 and from October 1,
1998 to the date of the Saturn Acquisition, assuming the acquisition
occurred on October 1, 1997.
(e) Represents interest expense for the year ended September 30, 1998 on
borrowings to finance the Saturn Acquisition, assuming the acquisition
occurred on October 1, 1997.
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Note payable to IPC in the amount of $35.7 million
bearing interest at a U.S. bank prime rate plus 1/4 of
one percent, estimated at 8.75%......................... $ 3,121
Marshalls Note, a $7.5 million promissory note issued by
us and guaranteed by IPC bearing interest at the U.K.
Base Rate, as defined, plus three percent, estimated at
9.25%, compounded monthly, payable over three years..... 785
Saturn Note payable to Marshalls in the amount of $5.0
million payable in monthly installments over two years
bearing interest at 9.25%............................... 343
-------
Total.................................................. $ 4,249
=======
</TABLE>
(f) Represents interest expense from October 1, 1998 to the date of the
acquisition on borrowings to finance the Saturn Acquisition, assuming the
acquisition occurred on October 1, 1997.
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Note payable to IPC......................................... $ 678
Marshalls Note.............................................. 117
Saturn Note................................................. 45
-----
Total..................................................... $ 840
=====
</TABLE>
(g) Reflects the tax effect of the pro forma adjustments impacting foreign
operations at the foreign statutory tax rate. All pro forma adjustments
impacting domestic operations increase the net operating loss carryforward
deferred tax asset and corresponding valuation allowance and result in a
net effect of zero.
(h) Reflects the reduction of interest expense in connection with the March
31, 1999 capitalization of $73.0 million of note payable to parent, to
paid-in capital as if it occurred on October 1, 1997, net of the increase
in interest expense resulting from the change in the inter-company
borrowing rate to a U.S. bank prime rate plus two percent.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read together with the
Combined and Consolidated Financial Statements of IXnet, Inc., the Financial
Statements of MXNet Inc. and the Consolidated Financial Statements of Saturn
Global Network Services Holdings Limited and related notes to these statements
appearing elsewhere in this prospectus. The following discussion contains
forward-looking statements based on our current expectations, assumptions,
estimates and projections about our company and its industry. Our results
could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including the risks and
uncertainties discussed in "Risk Factors" and elsewhere in this prospectus.
Overview
IXnet is a leading provider of communications services to the worldwide
financial services community. Our Extranet connects financial services firms
and their business partners as well as multiple offices within the same firm
on a seamless network. 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 March 31, 1999, our
Extranet was comprised of two NOCs, three data centers, 73 physical POPs, more
than 1,000 CANs placed on customer premises and high capacity bandwidth
facilities. Our Extranet connects over 450 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.
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:
. Premium Voice--dedicated private voice trading lines connecting
financial trading firms globally;
. Managed Bandwidth--dedicated fully managed bandwidth facilities;
. Outsourcing--end-to-end management of a customer's entire communications
network;
. Switched Voice--high quality voice communications services;
. Shared IP--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
. 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 IP and other services. Service revenue is recorded as services
are provided.
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, and may be adjusted for customer volume commitment,
term of contract and whether the call is to another on-net customer.
33
<PAGE>
Rates for our outsourcing service are determined by geographic location,
bandwidth utilization, telecommunications equipment deployed on the customers'
premises, quality of service and any custom requirements. The rate may be
adjusted for customer volume commitments and term of contract.
The components of pricing for shared IP may include the following charges
paid by content providers: (i) an access fee to connect to our Extranet, (ii)
a fee to deliver service to end-users and (iii) optional hosting fees
associated with housing of equipment. 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 fourth
component of pricing, paid either by the end-user or the content provider, is
a fee for end-user access to the Extranet. This fee is determined by
geographic location and bandwidth utilization and may be adjusted for volume
commitment and term of contract.
Our services are billed on a monthly basis in advance, except for switched
voice services, which are billed monthly after service is provided.
Long term agreements
The terms of our 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 new
services to existing customers, adding new customer locations and renewing the
term of existing agreements with our current customers. Our customers
frequently add additional services at their current location or expand to
other locations. Revenues for the six months ended March 31, 1999 generated
from our installed customer base at September 30, 1997 increased in excess of
20% as compared to the same period for the prior year. This growth (1)
includes the impact of lost customer revenue from this customer base and (2)
excludes revenue from customers added after September 30, 1997. 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, and personnel and related operating expenses associated with
network operations, customer support and field service support. Depreciation
and amortization related to the cost of our NOCs, POPs, CANs, and Indefeasible
Rights of Use, or IRUs, 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 and expect to realize the associated benefits of lower units costs as
our network utilization 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 a background in network
services 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,
34
<PAGE>
integrating and retaining these new hires nevertheless require substantial
expenditures in advance of any increased revenues that may arise from the
sales effort 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 pursuant to inter-company understandings, and will
in the future be performed pursuant to informal inter-company arrangements
with 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. The costs
related to such allocation represented 18.2%, 24.8%, 30.6%, and 34.1% of
general and administrative expenses for the three years ended September 30,
1996, 1997 and 1998 and six months ended March 31, 1999, respectively. 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 IRUs and leasehold improvements, are
depreciated over five years. The cost of IRUs are amortized over the leased
term, generally 20 to 25 years, leasehold improvements are amortized over the
contract 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, CANs,
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 only
undertaken if there existed customer demand. Under this "success based"
network deployment model, we limited the investment in our Extranet to
additional customer demand and resulting revenues. Recently, we have begun to
make greater network investments in certain strategic areas in anticipation of
increased customer demand. Investment in CANs and network capacity (through
acquisitions of IRUs and the buildout of our POPs) will continue to represent
our most significant capital expenditures over the next 12 months and are
expected to increase substantially from historic levels. Depending on the
services required by the customer, a CAN will consist of a router,
multiplexer, channel bank or a digital line interface card, or DLIC, or a
combination of these CANs, and typically costs between $2,000 and $50,000 per
CAN.
Acquisitions
MXNet Inc.
On February 13, 1998, IPC acquired all of the issued and outstanding common
stock of MXNet, a wholly-owned subsidiary of National Discount Brokers Group,
Inc., and paid $6.7 million by the issuance of a promissory note. This
acquisition was accounted for using the purchase method of accounting and
resulted in
35
<PAGE>
$5.5 million of goodwill, which is being amortized on a straight-line basis
over 2.25 years. IPC contributed the shares of MXNet to us on May 12, 1999.
Saturn Global Network Services Holdings Limited
On December 18, 1998, International Exchange Networks Limited acquired all
of the issued and outstanding shares of Saturn from Marshalls 106 Limited.
This acquisition was accounted for using the purchase method of accounting. As
a result of the acquisition, we 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 of $35.7 million made
through borrowings from IPC, and the issuance of a promissory note guaranteed
by IPC in the amount of $7.5 million. In addition, we assumed indebtedness of
Saturn due to Marshalls in the amount of $5.0 million. Under the agreement,
the Marshalls note is subject to certain rights of offset.
36
<PAGE>
Results of Operations
The following table presents the components of our results of operations
data as a percentage of our revenues:
<TABLE>
<CAPTION>
Six Months Ended
Year Ended September 30, March 31,
----------------------------- -------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue........... 127.4 111.1 99.4 100.6 94.9
Sales and marketing
expense.................. 30.6 23.4 23.6 21.0 15.0
General and administrative
expense.................. 82.9 19.3 14.0 15.2 8.6
Depreciation and
amortization............. 28.9 19.4 25.3 19.1 29.2
Special charge............ -- -- 3.8 -- --
-------- ------- ------- -------- --------
Loss from operations.... (169.7) (73.2) (66.0) (55.9) (47.6)
Interest expense, net..... (7.1) (11.4) (9.8) (9.9) (13.2)
Other income (expense),
net...................... -- 0.7 0.1 0.0 (0.1)
-------- ------- ------- -------- --------
Loss before provision
for income taxes....... (176.8) (84.0) (75.8) (65.8) (60.9)
Provision for income
taxes.................... 1.8 1.3 1.3 1.1 0.8
-------- ------- ------- -------- --------
Net loss................ (178.6)% (85.3)% (77.1)% (66.9)% (61.7)%
======== ======= ======= ======== ========
</TABLE>
Historical Operating Trends
Cost of revenue as a percentage of revenue has declined over the periods
reported. This cost has decreased as a result of improved utilization of our
Extranet as well as more favorable unit pricing from carriers.
Sales and marketing expense as a percentage of revenue has declined over
the periods reported. This expense has decreased as a result of higher
incremental revenue generation per sales representative.
General and administrative expense as a percentage of revenue has declined
over the periods reported. This expense has decreased as a result of increased
leverage of fixed administrative charges.
Depreciation and amortization as a percentage of revenue has increased over
the periods reported. This expense has increased as a result of increased
amortization of goodwill associated with the Saturn Acquisition and increase
in fixed assets associated with the expansion of our Extranet.
Comparison of the six months ended March 31, 1999 to the six months ended
March 31, 1998
Revenue. Revenue was $32.6 million for the six months ended March 31, 1999,
an increase of $17.3 million, or 112.9%, from $15.3 million for the six months
ended March 31, 1998. Of this increase, $10.8 million related to revenues from
Saturn, which we acquired in December 1998, and MXNet, which we acquired in
February 1998. The balance of the increase was primarily due to increased
revenue from the growth in our customer base of 62.4%, to 178 customers at
March 31, 1998 from 289 customers at March 31, 1999, excluding the 167
customers of Saturn, and, to a lesser extent, from growth in revenue from our
March 1998 customer base.
Cost of revenue. Cost of revenue was $30.9 million for the six months ended
March 31, 1999, an increase of $15.5 million, or 100.7%, from $15.4 million
for the six months ended March 31, 1998. The increase was primarily due to
increased leased circuit costs and, to a lesser extent, additional personnel.
Leased circuit costs were $22.2 million for the six months ended March 31,
1999, an increase of $11.3 million, or 103.7%, from $10.9 million for the six
months ended March 31, 1998.
Sales and marketing expense. Sales and marketing expense was $4.9 million
for the six months ended March 31, 1999, an increase of $1.7 million, or
51.8%, from $3.2 million for the six months ended March 31,
37
<PAGE>
1998. This increase was primarily due to a $1.4 million increase in costs
associated with the growth in our salesforce and related support personnel,
through both internal growth and the Saturn and MXNet Acquisitions. Provisions
for bad debts for the six months ended March 31, 1999 was $0.5 million, or
1.6% of revenue, as compared to $0.4 million, or 2.5% of revenue, for the six
months ended March 31, 1998. The decrease in the rate of the provision for bad
debt was primarily due to controls implemented in the fourth quarter of 1998
to minimize bad debt expense in future periods.
General and administrative expense. General and administrative expense was
$2.8 million for the six months ended March 31, 1999, an increase of $0.5
million, or 20.8%, from $2.3 million for the six months ended March 31, 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 $9.5
million for the six months ended March 31, 1999, an increase of $6.6 million,
or 225.2%, from $2.9 million for the six months ended March 31, 1998. This
increase was primarily due to the increase in property, plant and equipment in
connection with the expansion of our Extranet and the $3.1 million of
amortization of goodwill associated with the Saturn and MXNet Acquisitions.
The six months ended March 31, 1999 included only one full fiscal quarter of
amortization of goodwill related to the Saturn Acquisition.
Interest expense, net. Interest expense, net was $4.3 million for the six
months ended March 31, 1999, an increase of $2.8 million, or 183.9%, from $1.5
million for the six months ended March 31, 1998. This increase was primarily
due to higher average borrowings from IPC during the six months ended March
31, 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 capital expenditures.
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 March 31, 1999, interest
expense is expected to decrease. As of March 31, 1999, the outstanding balance
on the note payable to IPC was $25.5 million.
Provision for income taxes. The provision for income taxes consisted of
foreign taxes. As of September 30, 1998, and March 31, 1999, we had federal
net operating loss carryforwards of approximately $50.0 million and $65.0
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,
pursuant to our tax sharing arrangement with IPC, we are 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.
Comparison of the year ended September 30, 1998 to the year ended September
30, 1997
Revenue. Revenue was $35.9 million for the year ended September 30, 1998,
an increase of $18.0 million, or 101.0% from $17.8 million for the year ended
September 30, 1997. Approximately $15.6 million of the increase was primarily
due to growth in our customer base of 89.3%, to 248 customers at September 30,
1998 from 131 customers at September 30, 1997. The balance of the increase was
primarily due to the MXNet Acquisition.
Cost of revenue. Cost of revenue was $35.7 million for the year ended
September 30, 1998, an increase of $15.8 million, or 79.9%, from $19.8 million
for the year ended September 30, 1997. The increase was primarily due to
expanding and maintaining the leased bandwidth to service the customers on our
Extranet. The largest component of cost of revenue, leased circuit costs, was
$24.8 million for the year ended September 30, 1998, an increase of $10.9
million, or 78.7%, from $13.9 million for the year ended September 30, 1997.
38
<PAGE>
Sales and marketing expense. Sales and marketing expense was $8.5 million
for the year ended September 30, 1998, an increase of $4.3 million, or 102.7%,
from $4.2 million for the year ended September 30, 1997. This increase was
primarily due to an increase in sales and related personnel to 70 at September
30, 1998 from 32 at September 30, 1997. The balance of the increase resulted
from an increase in the provision for bad debts to $1.7 million for the year
ended September 30, 1998, as compared to $0.3 million for the year ended
September 30, 1997. $1.0 million of this increase was due to write-offs
relating to three customers that ceased doing business. Due to controls
implemented in the fourth quarter of fiscal 1998 we expect bad debts as a
percentage of revenue to decrease.
General and administrative expense. General and administrative expense was
$5.0 million for the year ended September 30, 1998, an increase of $1.6
million, or 45.4%, from $3.4 million for the year ended September 30, 1997.
The increase was primarily due to additional personnel and an increase in the
allocation of certain shared administrative and general expenses provided by
IPC.
Depreciation and amortization. Depreciation and amortization was $9.1
million for the year ended September 30, 1998, an increase of $5.6 million, or
161.9%, from $3.5 million for the year ended September 30, 1997. This increase
was primarily due to the increase in property, plant and equipment during the
year ended September 30, 1998, as well as $1.5 million of goodwill
amortization associated with the MXNet acquisition.
Special charge. In April 1998, IPC completed its recapitalization by way of
merger with Arizona Acquisition Corp. In connection with the recapitalization,
certain of our employees received bonuses of $0.5 million and payments of $0.9
million in consideration of the cancellation of their IPC stock options. See
Note 5 of the Notes to the Combined and Consolidated Financial Statements of
IXnet, Inc. included elsewhere in this prospectus.
Interest expense, net. Interest expense, net was $3.5 million for the year
ended September 30, 1998, an increase of $1.5 million, or 72.9%, from $2.0
million for the year ended September 30, 1997. The increase was primarily due
to higher average borrowings from IPC to fund operations, the MXNet
Acquisition, debt service payments and capital expenditures, as well as
interest expense on increased capital lease obligations associated with
certain capital expenditures.
Provision for income taxes. The provision for income taxes consisted of
foreign taxes.
Comparison of the year ended September 30, 1997 to the year ended September
30, 1996
Revenue. Revenue was $17.8 million for the year ended September 30, 1997,
an increase of $14.4 million, or 415.7%, from $3.5 million for the year ended
September 30, 1996. The increase of 191.1% was primarily due to the growth in
the customer base of 191.1%, to 131 customers at September 30, 1997 from 45
customers at September 30, 1996, as well as increased penetration of existing
customer accounts.
Cost of revenue. Cost of revenue was $19.8 million for the year ended
September 30, 1997, an increase of $15.4 million, or 349.9%, from $4.4 million
for the year ended September 30, 1996. The increase was primarily due to costs
associated with expanding and maintaining our Extranet. The largest component
of cost of revenue was leased circuit costs, which was $13.9 million for the
year ended September 30, 1997, an increase of $11.4 million, or 456.0%, from
$2.5 million for the year ended September 30, 1996.
Sales and marketing expense. Sales and marketing expense was $4.2 million
for the year ended September 30, 1997, an increase of $3.1 million, or 294.7%,
from $1.1 million for the year ended September 30, 1996. This increase was
primarily due to salaries and related costs associated with the increased
number of personnel to 32 at September 30, 1997 from 20 at September 30, 1996.
General and administrative expense. General and administrative expense was
$3.4 million for the year ended September 30, 1997, an increase of $0.6
million, or 19.9%, from $2.9 million for the year ended
39
<PAGE>
September 30, 1996. This increase was primarily due to professional fees
associated with establishing our presence in foreign countries.
Depreciation and amortization. Depreciation and amortization was $3.5
million for the year ended September 30, 1997, an increase of $2.5, or 246.7%,
million from $1.0 million for the year ended September 30, 1996. This increase
was primarily due to the increase in property, plant and equipment.
Interest expense, net. Interest expense, net was $2.0 million for the year
ended September 30, 1997, an increase of $1.8 million from $0.2 million for
the year ended September 30, 1996. The increase was primarily due to higher
average borrowings from IPC to fund operations and capital expenditures, as
well as, increased capital lease obligations.
Provision for income taxes. The provision for income taxes consisted of
foreign taxes.
Quarterly Results
The following tables set forth certain unaudited quarterly financial data,
and such data expressed as a percentage of revenue, for the six quarters ended
March 31, 1999. We believe that the unaudited financial information set forth
below has been prepared on the same basis as the audited financial information
included elsewhere in this prospectus and includes all adjustments, consisting
only of normal recurring adjustments, necessary to present fairly the
information set forth. The operating results for any quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------
1997 1998 1999
------- ---------------------------------- -------
Dec 31 Mar 31 June 30 Sep 30 Dec 31 Mar 31
------- ------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenue................. $ 7,390 $ 7,928 $ 9,917 $10,618 $12,752 $19,859
Cost of revenue......... 7,770 7,643 9,439 10,800 12,458 18,476
Sales and marketing
expense................ 1,352 1,861 2,247 2,995 2,092 2,786
General and
administrative
expense................ 762 1,569 1,472 1,198 1,215 1,600
Depreciation and
amortization........... 1,289 1,635 2,692 3,444 3,922 5,586
Special charge.......... -- -- 1,350 -- -- --
------- ------- ------- ------- ------- -------
Loss from operations.... $(3,783) $(4,780) $(7,283) $(7,819) $(6,935) $(8,589)
======= ======= ======= ======= ======= =======
EBITDA(1)............. $(2,494) $(3,145) $(4,591) $(4,375) $(3,013) $(3,003)
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------
1997 1998 1999
------ --------------------------------- ------
Dec 31 Mar 31 June 30 Sep 30 Dec 31 Mar 31
<S> <C> <C> <C> <C> <C> <C>
Revenue.................. 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenue.......... 105.1 96.4 95.2 101.7 97.7 93.0
Sales and marketing
expense................. 18.3 23.5 22.7 28.2 16.4 14.0
General and
administrative expense.. 10.3 19.8 14.8 11.3 9.5 8.1
Depreciation and
amortization............ 17.4 20.6 27.2 32.4 30.8 28.1
Special charge........... -- -- 13.6 -- -- --
----- ----- ----- ----- ----- -----
Loss from operations..... (51.2)% (60.3)% (73.4)% (73.6)% (54.4)% (43.2)%
===== ===== ===== ===== ===== =====
EBITDA(1).............. (33.8)% (39.7)% (46.3)% (41.2)% (23.6)% (15.1)%
</TABLE>
- ---------------------
(1) EBITDA consists of loss from operations before depreciation and
amortization. EBITDA is presented to enhance an understanding of our
operating results and is not intended to represent cash flow or results of
operations in accordance with GAAP for the periods indicated. EBITDA is not
calculated under GAAP and is not necessarily comparable to similarly titled
measures used by other companies.
40
<PAGE>
Our quarterly operating results have fluctuated and will continue to
fluctuate from period to period for the foreseeable future depending upon such
factors as:
. the success of our efforts to expand our customer base, and to sell
additional services to our existing customer base,
. changes in and the timing of expenditures relating to the continued
expansion of our Extranet,
. the success of our efforts to add content providers to our Extranet,
. the development of new service offerings,
. changes in pricing policies by us or our competitors,
. the growth in our salesforce, and
. the timing of acquisitions.
In view of the significant historical growth of our operations, we believe
that period-to-period comparisons of our financial results should not be
relied upon as an indication of future performance and that we may experience
significant period-to-period fluctuations in operating results in the future.
We expect to focus in the near term on building and increasing our customer
base and increasing our Extranet utilization both through internal growth and
through acquisitions which may require us from time to time to increase our
expenditures for personnel, marketing, global network infrastructure and the
development of new services offerings.
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 $55.0
million revolving credit agreement. In addition, we obtained certain seller
financing for the Saturn Acquisition, which has been guaranteed by IPC. From
inception to March 31, 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.
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 $55.0
million revolving credit agreement. However, the revolving credit agreement is
subject to limitations based upon eligible accounts receivable and inventory.
Financing arrangements. Under the inter-company agreement, IPC has agreed to
continue to provide us with ongoing financing and other forms of credit
enhancements such as letters of credit and guarantees of our obligations from
time to time, upon reasonable notice by us, up to the aggregate of $50 million
during the period beginning July 1, 1999 through June 30, 2001. Funding under
the inter-company agreement will be extended at a rate based upon a U.S. prime
rate plus 2%. 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
$55 million revolving credit agreement. As of March 31, 1999, $24.9 million
was utilized for borrowings and letters of credit under the revolving credit
facility, and an additional $1.7 million was available to be borrowed by IPC.
However, IPC will not advance funds to us if, at the time of any request for
an advance, IPC (1) is not or would not be in compliance with its obligations
under the indenture for its senior discount notes or (2) does not or would not
meet certain financial and other covenants measuring operating performance in
its revolving credit agreement. Amounts borrowed from IPC may be used by us to
fund our working capital, debt service and operating losses. We believe that
through a combination of IPC's cash flow and amounts available under the
revolving credit facility, IPC will be able to fund our working capital needs
for the next 12 months.
The revolving credit agreement and indenture contains various covenants and
conditions, including the maintenance of various financial ratios and
restrictions on (1) asset dispositions, (2) mergers and acquisitions, (3)
capital expenditures, (4) certain payments, (5) the incurrence of
indebtedness, (6) loans and investments, (7) liens, (8) certain transactions
with affiliates and (9) our issuance or sale of capital stock. All of our and
our
41
<PAGE>
subsidiaries' capital stock and real and personal property (including tangible
and intangible property), are pledged as collateral under the revolving credit
agreement. See "Risk Factors--IPC's control of us may conflict with your
interests as a stockholder, Financing Arrangements" and "--Our assets are
pledged to support IPC's obligations" and "Certain Relationships and Related
Transactions."
As of March 31, 1999, our note payable to IPC was $25.5 million and bore
interest at a rate equal to a U.S. bank prime rate plus one quarter of one
percent on the average net amount outstanding each month, which is net of the
capital contribution in the form of a reduction in the amount of $73.0 million
of indebtedness owed by us to IPC as of March 31, 1999. See "Certain
Relationships and Related Transactions."
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 $11.6 million
for the six months ended March 31, 1999, as compared to $6.2 million for the
six months ended March 31, 1998.
Cash used in investing activities was $42.4 million, and $5.7 million for
the six months ended March 31, 1999 and 1998, respectively. The largest
components of cash used in investing activities during the six months ended
March 31, 1999 resulted from $34.7 million used for the Saturn Acquisition and
$7.7 million used for expenditures for property, plant and equipment, which
consisted primarily of network equipment. Investments in our network and
facilities during the year ended September 30, 1998 resulted in total
additions to fixed assets of $22.9 million. Of this amount, $6.4 million was
financed under vendor or other financing arrangements, $3.6 million related to
IRU facilities acquired under an installment purchase contract due within one
year, and $12.9 million was expended in cash. For the year ended September 30,
1997, total additions to fixed assets were $13.2 million, of which $9.7
million was financed and $3.5 million was expended in cash. For the year ended
September 30, 1996, total additions to fixed assets were $9.5 million, of
which $4.6 million was financed and $4.9 million expended in cash. We intend
to continue to invest in the expansion of our Extranet and future
acquisitions.
Cash provided by financing activities was $57.4 million for the six months
ended March 31, 1999 as compared to $11.9 million for the six months ended
March 31, 1998. The increase was primarily due to $35.7 million in borrowings
from IPC, which we used to finance the Saturn Acquisition.
Commitments, Capital Expenditures and Future Financing Requirements
As of March 31, 1999, we had capital lease commitments to certain
telecommunications vendors totaling $18.8 million payable in various years
through 2003 of which $4.9 million were due within one year. Additionally, as
of March 31, 1999, we were obligated to make future minimum lease payments for
property, leased circuits, IRUs and equipment of $41.3 million under non-
cancellable operating leases expiring in various years through 2009.
Capital expenditures were $7.7 million for the six months ended March 31,
1999. In addition, we had notes in the aggregate amount of $12.0 million
outstanding as of March 31, 1999 to the former shareholders of Saturn, of
which $4.9 million is due within one year.
Installation of CANs, acquisition of IRUs and the buildout of our POPs 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
POPs. We expect that our purchase of property, plant and equipment will
increase substantially from historic levels and that the net proceeds from
42
<PAGE>
this offering, along with third party equipment financing arrangements, will
be sufficient to meet our needs for property, plant and equipment for at least
the next 12 months.
As of March 31, 1999, we had available cash of $4.1 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 this 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,
IRU installment payments and payments on the notes to Saturn. Pursuant to the
revolving credit agreement and our inter-company agreement with IPC, we are
restricted from seeking additional debt or equity financing. Therefore we have
entered into the inter-company agreement with IPC, whereby we can borrow funds
from IPC for working capital and other operating costs. Accordingly we will
continue to rely upon IPC to fund these requirements.
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 "Risk Factors--Risks related to our acquisition strategy
and acquisition financing."
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 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. See "Risk Factors--Our international
operations make us more susceptible to global economic factors, foreign tax
law, issues, international business practices and currency fluctuations."
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. Our international operations are transacted
primarily using British pound sterling as the functional currency. Since its
adoption, the Euro has not had a material adverse effect on our business or
financial condition.
Effects of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, 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 the Company's year ending September
30, 1999. Financial statement disclosures for prior periods are required to be
restated. The Company is in the process of evaluating the disclosure
requirements. The adoption of SFAS No. 131 will have no impact on the
Company's 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 ("SOP") 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use." SOP
43
<PAGE>
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 CANs, the
communications equipment in our POPs, Network Management Systems, and internal
accounting, billing and office systems. Certain of our CANs 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 CANs to complete such updates by July 1999. We believe that substantially
all of the communications equipment in our POPs are currently Year 2000 ready,
with the exception of our U.S. switch, which we expect to have ready through
software updates by June 1999. Our Network Management Systems have been
upgraded and are expected to be Year 2000 ready once our U.S. switch is
updated. In July 1999, we will begin the conversion to our new internal
accounting enterprise-wide system, currently in use at most of our parent
company locations. Such system is Year 2000 ready and we anticipate completion
by August 1999. Our new billing system, which should be operational by August
1999, 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.
We are currently in the process of obtaining Year 2000 readiness
documentation from suppliers of our domestic and international communication
bandwidth. By July 1999, we plan on having an evaluation of the potential risk
associated with those 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 will 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 our parent company, is currently anticipated to be less than $2.0
million.
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 assure you 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
44
<PAGE>
condition. In addition, pursuant to the IPC revolving credit agreement, we are
subject to a covenant that we will be Year 2000 compliant by August 31, 1999.
Failure of either IPC or us to reach Year 2000 compliance by such date will
result in a breach of such agreement.
In a recent Securities and Exchange Commission, or 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:
. widespread failure of electrical, gas, and similar suppliers serving us;
. widespread disruption of the services provided by common communications
carriers;
. disruption to the means and modes of transportation for us and our
employees, contractors, suppliers and customers;
. significant disruption to our ability to gain access to, and remain
working in, office buildings and other facilities;
. the failure of our mission-critical computer hardware and software
systems, including both internal business systems and systems
controlling operational facilities; and
. the failure of third-party banking and finance systems.
We urge you to read "Risk Factors--Year 2000 problems could disrupt our
business, reduce our profits and could lower the value of your stock."
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 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.
45
<PAGE>
BUSINESS
IXnet is a leading provider of communication services to the worldwide
financial services community. We have built and operate the IXnet network, a
global extranet connecting financial services firms and their business
partners as well as multiple offices within the same firm on a seamless
network. 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.
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 turnkey outsourced network solutions. In addition, we
aggregate, host and distribute financial oriented content, such as news,
research, analytics and market data, for information service providers,
enabling them to efficiently reach this community. Our on-net customers
receive the following benefits by connecting to our Extranet:
. access to our high performance global network that connects over 450
financial services firms and their business partners;
. multiple voice and data services over a single high capacity network
connection;
. outsourced network solutions;
. on-demand access to multiple content providers;
. rapid and efficient provisioning of inter- and intra-firm communication
links;
. superior customer service and support from a single network provider;
and
. a content neutral delivery mechanism for content providers to
efficiently, economically and effectively reach their target market.
Financial service firms and their business partners comprise a large global
community that relies heavily on efficient communication, interaction among
members and timely access to industry-related information to conduct its
business. As a result, fault tolerant communications services are mission-
critical to this community. We believe our Extranet provides a unique value
proposition, enabling these firms to reliably communicate in any manner over a
common multi-protocol network platform; and to efficiently access information
from multiple providers. We connect customers to our Extranet by installing
intelligent network gateways, known as CANs, on our customers' premises. Once
we have installed a CAN at the customer site, we refer to the customer as
being "on-net."
As the number of on-net customers increases, the value of the Extranet to
current and prospective customers grows. Adding key firms and sites to our
Extranet will greatly increase its value to end-users by allowing (1)
customers broader accessibility to connect to other on-net users, (2) quicker
provisioning of inter-firm dedicated private line services, (3) greater cost
efficiencies to end-users for on-net inter-firm communications and (4) higher
performance communications between on-net customers. We believe that our
current customer base of financial services firms will attract many of their
business partners to also become customers of our Extranet. This should create
a cycle that will attract new customers and fuel growth in the number of
services we provide to individual firms. We also believe that content
providers will be attracted to our Extranet due to the efficient and cost-
effective method it offers to reach the desktops of our significant audience
of on-net financial services customers. We believe that as we deliver the
services of an increasing number of content providers over our Extranet,
additional customers will be attracted to the expanded content offerings on
our Extranet.
Our Extranet connects 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. The Extranet employs advanced
networking technologies such as IP and ATM and is designed to maximize
performance through features such as redundant, dedicated fiber optic
facilities, geographically distributed NOCs and physical POPs. In addition, we
have three data centers where we host information from our content providers
and co-locate servers of our customers who have outsourced their network
applications to us. As of March 31, 1999, we had over 450 customers and had
deployed approximately 1,000 CANs globally.
46
<PAGE>
Financial Services Community
Members of the financial services community include broker-dealers,
investment banks, asset managers/hedgefunds, inter-dealer brokers, electronic
trading firms, commodities/futures trading firms, content providers,
exchanges, trade execution systems, correspondents, clearing and settlement
firms, and insurance companies. Members of this community rely upon
communications, to conduct their business and therefore demand uniform, highly
reliable and secure communications services, including access to real-time
financial industry information in a highly efficient and cost effective
manner. Further, many of the financial institutions operate globally and
require these communications services to be provided on a worldwide basis.
Additionally, most members of the financial services community interact to a
great extent with many other members. The exchange of information, such as
pricing, indications of interest, market data, news, research and confirmation
of trades, characterizes the interdependent relationships among the various
members.
Communication Trends in the Financial Services Community
The financial services community represents a large, quickly growing
market, spending significant amounts of money on technology and communications
each year. The WSTA membership survey estimated that its 170 members had
combined 1997 budgets in excess of $17 billion for information and
communications services. This represents only a portion of the total
communications services market for the financial services community as WSTA
include only those firms doing business in New York. Based on this WSTA survey
and our experience in the industry, we estimate that the market for
information and communications services to the worldwide financial services
industry is at least $25 billion annually and that this market is currently
growing by an average of more than 15% per year.
The growing demand for information and communications services is being
driven by a number of factors, including continued industry globalization,
expansion of emerging markets and increasing volume of market transactions.
The increase in market transactions is largely a result of the growth of
electronic trading, new trading markets arising from the deregulation of
industries such as the United States energy market, the lengthening of the
trading day and increased cross border flow of capital.
Movement towards outsourcing of private communications networks. Over the
past decade, many financial services firms committed vast resources to
building private networks to meet their exacting global communications
requirements. However, many of those firms, as well as many new financial
services firms, are moving away from relying on private networks because of,
in part, the costs (both capital and personnel) of maintaining and operating
these networks, the limited usefulness of intra-firm only solutions and the
difficulty and cost of incorporating technological innovations. Accordingly,
firms are increasingly looking to fully managed services and/or outsourced
networks to address their communications needs.
Proliferation of content providers and a growing need for a content neutral
delivery mechanism. The financial services community relies heavily on its
ability to gain access to electronically disseminated data (including market
quotes, news and trade confirmations), as well as research and other
analytical tools and applications to increase the utility of information,
expedite business decisions and obtain access to electronic trading. Over the
last several years, the number of firms providing data to the financial
services community has grown dramatically in response to the rapid growth in
the size of the financial services community and the growth in the volume of
market transactions. More than 1,400 firms currently provide content to the
financial services community, and the number of such firms continues to
increase.
Most content providers do not own the networks that deliver their data
because they do not want to incur the high capital and personnel costs
necessary to build such networks as well as the ongoing cost of operating and
maintaining the network. Such firms are often left to rely on one of the few
large content providers who own their own networks to deliver their content.
This arrangement is not ideal for such firms because (1) such large firms are
often their competitors, (2) the means of delivery established by such large
content providers is optimized for their data and not that of other content
providers, often causing other content providers' data to be displayed in a
less effective manner, (3) content providers may have limited opportunities to
brand their products
47
<PAGE>
and receive market recognition and (4) distribution is limited to the clients
of such large content providers. For these reasons, many content providers are
seeking alternatives to efficiently and effectively deliver their content over
a content neutral delivery mechanism.
Current Communications Environment in the Financial Services Community
The financial services community currently has the following limited
alternatives to address its unique communications requirements: (1) building
private networks, (2) utilizing the common carriers' public networks or (3)
utilizing the public Internet. However, these alternatives do not provide a
complete and efficient means of handling the exacting global communications
needs of the financial services community.
Building a private network often requires the commitment of substantial
development time, capital and personnel as well as ongoing operating and
maintenance costs. Additionally, integrating a private network with separate
public and other private infrastructures and transmission protocols is often
difficult and hampers the flow of inter-firm information that is critical to
the financial services community.
Broad-based common carriers' public networks do not offer the performance,
quality, services, reliability, speed or single point of responsibility that
are available through a dedicated private network. Public networks consist of
numerous non-homogeneous systems and services offered by a multiplicity of
local providers in different national markets. Presently, a large portion of
international communications, including services marketed by some of the
largest telecommunications carriers, are typically conducted through disparate
public networks and service organizations. For example, an international data
or voice connection may be routed through a local exchange carrier, a domestic
international carrier, a foreign international carrier and a foreign local
exchange carrier. Problems related to determining why a network has failed and
which carrier is responsible for reestablishing a communication connection may
be more difficult to resolve on these public networks. In contrast, a
dedicated private network offers end-to-end network monitoring and a single
point of contact for all matters of accountability.
Although the Internet has become a mainstream vehicle for communications
and on-line consumer trading, it is not well suited for critical financial
services applications. The drawbacks of the Internet include the lack of
reliability, limited security and the absence of a single governing authority
and contact point for all matters of accountability.
48
<PAGE>
The IXnet Solution
We have built and operate the IXnet network, a global Extranet connects
financial services firms and their business partners, as well as multiple
offices within the same firm on a high performance network. Through our
Extranet, our customers obtain the benefits of a dedicated private network,
including highly reliable and secure global voice and data connectivity, with
the additional benefits of (1) seamless inter-firm connectivity, (2) a fully
managed and/or outsourced network solution through one contact point for all
matters of accountability and (3) not having to incur the substantial cost of
building, maintaining and operating a sophisticated network infrastructure.
The following graphic depicts the fully managed end-to-end service of our
Extranet:
[Graphic consisting of two boxes, each containing symbols and the text
"customer sites" connected by a horizontal line. Segments of the line are
denoted, from left to right, "local exchange carrier", "international
carrier", "international carrier" and "local exchange carrier". Also
connecting the two customer sites is a second line which peaks above the
horizontal line. At the peak of the second line is the IXnet logo, a computer
terminal and the text "Network Management System".]
49
<PAGE>
We offer many significant advantages over our competition, including:
. High performance global network. Our Extranet is a scalable network that
currently provides seamless connectivity to over 450 customers in 39
global financial centers. Our Extranet was built using the latest
networking technologies and redundant fiber optic facilities, which
enables us to reliably, securely and efficiently deliver multiple
services. We employ a uniform platform throughout our Extranet
consisting primarily of Newbridge Networks and Cisco Systems networking
technologies, enabling us to provide mission-critical voice and data
services over dedicated fiber optic facilities. In addition, we deploy
ATM switches in the backbone to support high bandwidth multimedia
applications in combination with IP switches for specialized data
delivery. In contrast, many of our competitors have legacy networks
optimized for voice telephony and low speed data services and cannot
easily adapt their network architecture to accommodate the current
diverse and mission-critical communications requirements of the evolving
financial services community.
. Fully managed end-to-end network services. By connecting customers to
our Extranet through a CAN physically located at each on-net customer
site, we are able to provide fully managed end-to-end network services.
Once a CAN is deployed, we are able to remotely monitor, administer and
provision network connections to the customer site and in many cases
directly to the desktop. In addition, we are a single point of
responsibility for the installation, maintenance and operation of our
services and equipment. We provide technical support 24 hours per day,
seven days per week, and utilize IPC's global field service personnel to
address local network issues in many of the cities where we provide
service. As a result, customers that connect to our Extranet enjoy the
benefits of a seamless private network without having to coordinate
service offerings among multiple local and long haul carriers and their
respective customer service organizations.
. Multiple communication services through a single "pipe." By deploying
CANs at our customer sites, we are able to provide bundled services over
a single, high capacity network connection. CANs serve as multi-purpose
gateways that support commonly used voice and data protocols as well as
specialized protocols such as financial information exchange, or FIX,
for trading applications. CANs typically connect to our Extranet through
a high capacity connection enabling customers to cost-effectively
provision multiple voice and data services as opposed to ordering
single, low capacity circuits from a local carrier. In addition, because
the CAN is a scaleable platform, we can rapidly deploy new services such
as video delivery to the desktop over our current infrastructure. We
believe that we are one of the only companies focused on the financial
services community that globally delivers such a broad base of voice and
data services through a single network connection.
. Critical mass of on-net customers. We have established a customer base
of over 450 of the world's top financial services firms on our Extranet.
We have just begun to penetrate our current customer base and believe
that this core group of financial services firms will attract many of
their business partners to also become customers of our Extranet. This
should create a cycle that will further fuel growth in the number of our
customers and penetration of our current customer base. We also believe
that as we continue to penetrate our customer base with more services
and attract other large financial services firms to our Extranet, it
will become increasingly difficult for competitors to establish
themselves in our market sector.
. Singular focus on the financial services community. Our singular focus
enables us to offer services tailored to the specialized needs of our
customers. Unlike many of our competitors who offer services to a broad
base of customers with wide ranging communications requirements, our
approach is to focus only on the exacting requirements of the financial
services community. For example, our understanding of the trading
environment and our customers' needs led us to develop our DigiHoot
Service, a specialized open voice conference system allowing continuous
voice contact between trading floors. DigiHoot is the first fully
managed global digital hoot & holler service available to financial
services firms. In addition, the combination of our management team's
great depth of knowledge and experience in providing communications
services to financial services firms and our relationship with IPC,
provides us with significant advantages over our competitors.
50
<PAGE>
. IPC relationship. IPC is a worldwide market leader in providing voice
trading systems to the financial services community and has served this
market for more than 25 years. IPC has provided us with a level of
credibility and an entree into the financial services sector, which
other emerging communications companies in our market sector do not
have. Moreover, through our relationship with IPC, we are able to (1)
provide turret-to-turret on-net connectivity to the significant
installed IPC customer base and (2) integrate our CANs into IPC turret
systems so that we can rapidly provision IPC customers with on-net
services. We also coordinate our sales and marketing efforts with the
IPC sales efforts, thereby offering a complete hardware and network
solution for the communications needs of financial services firms.
. High level of customer service and flexibility in customer relations. We
offer services at cost competitive prices and dedicate considerable
resources to providing the highest quality global network with well-
qualified and responsive customer service representatives. We monitor
and manage our Extranet from our NOCs, 24 hours per day, seven days per
week. Together with IPC, we have a worldwide presence of field service
representatives and, in many cases, on-site technical support personnel.
We are also focused on offering highly customized solutions for all of
our customers' service, billing and reporting needs. In addition to our
broad portfolio of globally available services, our Extranet allows us
to implement solutions that meet the individual connectivity needs and
requirements of each customer. Our billing system also allows us to
generate customized reports for customers. This customization approach
differentiates us from most of our competition, which are large
organizations with standard products, prices and support and who are not
generally known for flexibility and customization. This approach also
differentiates us from our many other competitors, who offer low prices
with limited quality, availability and customer support.
. Corporate position as content neutral. Unlike the few large content
providers who have their own networks and carry the content of their
competitors to the desktop, we are not in competition with content
providers who use our Extranet. We are focused on being an efficient and
effective distribution vehicle for the content of others, not on being a
content provider ourselves. Our Extranet serves as a content neutral
delivery system to the desktops of the financial services community.
This approach allows our customers to display content in the formats
they desire. Because we often are willing to expand our Extranet to
reach additional end-users targeted by our content provider customers,
we believe our Extranet is more attractive than existing distribution
networks of competing content providers.
Our Strategy
Our goal is to be the leading provider of multimedia communications
services to the financial services community. Our business strategy includes
the following elements:
. Exploit first mover advantage. We are the first company to offer network
services through a dedicated Extranet exclusively focused on the
financial services community. We intend to significantly leverage our
first mover position by aggressively expanding our direct salesforce and
investing in the IXnet brand. In addition, we will continue to invest in
our Extranet to expand its capacity and reach in order to offer a
greater array of bandwidth intensive services to our customer base. We
believe that the high concentration of communications traffic among a
relatively defined number of financial services members should enable us
to achieve sufficient customer concentration that will make us the
preferred service provider to the financial services community.
. Rapidly deploy CANs. Adding key firms and sites to our Extranet will
greatly increase its value by enabling us to offer greater inter-firm
connectivity. This should enable us to attract larger numbers of
potential customers, which, in turn, will further increase the value of
our Extranet. We expect that the addition of new customers to our
Extranet will also attract new content providers to our Extranet who
seek to deliver content to our expanded customer base. Similarly, we
believe that as the number of content providers whose services we
deliver over our Extranet increases, additional customers will be
attracted to the expanded content on our Extranet.
51
<PAGE>
. Accelerate network expansion. We are focused on expanding the
infrastructure of our Extranet to extend our addressable market, enhance
reliability and increase cost efficiencies. We currently plan to begin
construction of a new NOC in the Asia/Pacific region in 1999 to expand
our regional presence. We also intend to build physical POPs in certain
cities in which we do not yet have a presence to expand the reach of our
Extranet and in those cities where we do have a presence to meet
customer demand and provide redundancy. This will allow us to reach more
potential customers and increase the value of our Extranet to current
customers. In order to maintain our superior quality and highly reliable
services, we intend to acquire more bandwidth through leases and IRU
agreements from multiple vendors to increase the Extranet's redundancy,
capacity and capability.
. Aggressively add content providers to the Extranet. We intend to become
the best delivery vehicle for content providers who want to reach the
financial services community. We will seek to accomplish this goal by
remaining a content neutral delivery system and by offering content
providers a cost-effective method of reaching their target market
through a network gateway or by having us host their content at one of
our data centers. We also believe that our core customer base will
attract content providers who want to reach the largest financial
services firms in a highly efficient manner.
. Further leverage IPC's installed base. We will continue to leverage our
parent company's existing long term customer relationships in the
financial services community into new IXnet business opportunities,
including through the launch of bundled services (network and
equipment). In addition, during the next six months, we intend to take
advantage of our exclusive arrangement with IPC under our inter-company
agreement and begin buying and integrating DLICs, a specific type of CAN
with voice service capabilities, in each new IPC turret system sold.
This will enable us to rapidly provision services to on-net IPC
customers.
. Further penetrate our existing customer base. We currently have a
significant established customer base encompassing many of the key
global financial services firms, but we capture only a small percentage
of their communications services expenditures. We will seek to further
penetrate our customer base by aggressively marketing additional
services to our existing customers that we can rapidly provision through
our installed CANs and expanding our selling efforts to IPC's
significant customer base. As the number of on-net users increases, the
value of the Extranet to current and prospective customers grows.
. Expand portfolio of focused service offerings. We plan to continuously
expand our service offerings to help further penetrate our customer
base, attract new customers and increase the value of our Extranet.
Within the next 12 months, we plan to offer real-time collaborative
capability including video streaming applications delivered directly to
the desktop to support analyst presentations and electronic roadshows.
We are also planning to offer user initiated service provisioning, which
will allow our on-net customers to remotely provision additional
services.
. Pursue strategic acquisitions. We intend to make strategic acquisitions
as appropriate opportunities arise in order to expand our service
offerings, broaden the reach of our Extranet and increase our customer
base.
52
<PAGE>
Services
We offer our customers a variety of specialized voice and data services
over our Extranet. The following table sets forth a brief description and the
benefits of each of our branded services. We are capable of providing any one
of these services either alone or in combination with one or more other
services, or collectively as part of our management of the customer's entire
network.
<TABLE>
<CAPTION>
Branded
Service Description Benefits Services
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premium voice Dedicated voice Access to high quality voice DigiHoot
communications lines services without the need to MetroLink
which are primarily used build a private network.
in conjunction with
turrets and trading
applications.
- ---------------------------------------------------------------------------------------------------
Virtual private voice Seamless global virtual Fast call connect time, industry- IXGlobal
network private network with a wide abbreviated dialing and cost Trade24
single uniform effective for on-net customers.
technology platform and
global toll free
feature.
- ---------------------------------------------------------------------------------------------------
Switched voice High quality voice Competitive rates and simplified IXPrime
communications worldwide billing.
with simplified pricing.
- ---------------------------------------------------------------------------------------------------
Managed bandwidth Fractional T-1/E-1 Access to high quality digital IXLink
digital lines with end- services without the need to
to-end service build a private network.
management for
connections between
LANs, WANs and data
centers.
- ---------------------------------------------------------------------------------------------------
Outsourcing End-to-end management of Outsourcing enables customers to Trader Connect
a customer's entire focus on core business by placing
network. responsibility for network and
hardware on IXnet.
- ---------------------------------------------------------------------------------------------------
Shared IP Network delivery of Efficient distribution method for Liquidity
third-party news, content providers. Simplicity of
research, analytics, multiple services through a
market data and other single network connection for
trading applications via end-users.
data center hosting and
our Extranet.
- ---------------------------------------------------------------------------------------------------
Frame relay Transport for data Cost effective alternative to IXFrame
applications. Includes leased line networks.
router deployment and
management.
</TABLE>
Our branded services are described below.
DigiHoot. Our DigiHoot hoot & holler networks are specialized open line
voice conference systems utilized by trading firms to allow continuous voice
contact between various trading floors. Our DigiHoot service is a desktop to
desktop managed solution delivered over the Extranet combined with IPC's
Tradenet MX turret systems and speaker systems. We support DigiHoot globally
with 24-hour network management and customer support including remote
diagnostics. DigiHoot service can be rapidly provisioned and reconfigured to
meet our customers' demands for a flexible trading environment.
53
<PAGE>
MetroLink. MetroLink is a digital private line service that connects IPC's
Tradenet MX customers within a metropolitan area. We serve as a single source
provider of hardware and connectivity from turret to turret. Compared to the
analog connections typically available in the market, MetroLink provides
faster circuit provisioning, end-to-end managed digital connectivity, reduced
installation cost and rapid circuit reconfigurations at a competitive price.
Metrolink is currently offered in the New York metropolitan area and we intend
to offer Metrolink within the next 12 months within other metropolitan areas.
We also intend to provide this service between customers in different cities.
IXGlobal. IXGlobal, our on-net switched voice service, provides a seamless
international virtual private voice network service to the financial services
community over a uniform switching platform. Because we provide end-to-end
connectivity among all our on-net customers, we are able to offer the same
high performance characteristics presently available only on dedicated private
networks. Features of IXGlobal include: preferential and competitive pricing
for on-net calls, fast call completion and advanced features such as caller
name and ID, abbreviated dialing plans and customized billing formats.
Trade24. Trade24 is a service that allows our customers to offer their
customers 24 hours per day, seven days per week global toll free access.
Trade24 routes calls to an active trading floor regardless of the time of day,
day of week or holiday schedule. Call routing can be managed rapidly and
remotely to accommodate business requirements or unexpected situations such as
weather conditions or disaster recovery.
IXPrime. IXPrime is our off-network switched voice service. Features of
IXPrime include switched or dedicated originating access and flat rate pricing
for calls.
IXLink. IXLink provides a premium end-to-end managed digital service for
voice and/or data transmission with bandwidth available from 64Kbps to
768Kbps. IXLink's features include end-to-end circuits which eliminate the
need for multiple vendors, bandwidth on demand, simplified billing from a
single worldwide service provider and shorter provisioning intervals.
TraderConnect. TraderConnect service is provided in connection with the IPC
Trading Systems division for a fully integrated solution. As part of this
service, IPC Tradenet MX turret systems are located in our POPs. TraderConnect
enables a customer to utilize the features of the turret system remotely and
also access our various network services.
Liquidity. Liquidity is a turnkey managed data network service based on IP
technology. Liquidity provides, over a single network connection, secure and
reliable delivery of time-sensitive financial information and applications,
such as market data, access to institutional electronic trading systems and
routing of messages such as FIX used in the electronic trading process.
Standard Liquidity features include a customer-site router and network
connection which is supplied, owned and managed by us, as well as network
performance guarantees and several levels of optional content data center
hosting including complete outsourcing.
IXFrame. IXFrame is a managed data network service using frame relay as its
underlying technology and including managed customer-site routers.
We also provide the following services:
Content Hosting. We provide content hosting services that permit financial
information services providers to deliver data to the desktop of the financial
services community without having to invest significantly in technology,
infrastructure or operations staff. The level of hosting services we provide
scales from simple co-location to fully outsourced network solutions.
Outsourcing. We provide end-to-end management of a customer's network
including network services and hardware. We take complete responsibility for
building, operating and maintaining the network, enabling our customers to
focus on their core business and avoid the cost of maintaining a network. In
addition, as the
54
<PAGE>
hardware often resides on our premises, our outsourcing customers are not
required to dedicate space and facilities for network equipment.
Bandwidth Resale. We provide leased bulk bandwidth at speeds of 768Kbps and
above for various customer applications. This is a cost effective service for
customers with large bandwidth requirements.
Dedicated Internet Access. We offer dedicated high-speed continuous access
to the Internet to customers. This service is provided at speeds up to
1.5Mbps.
The IXnet Extranet
Overview
We have created a global Extranet built specifically to meet the stringent
communications requirements of the financial services community. Our Extranet
provides highly reliable and secure communications and minimizes the
likelihood of any single point of failure.
Our Extranet is built upon the following strategic principles:
. Establish a uniform network equipment platform using "best of breed"
vendors. We have selected and deployed a uniform equipment platform
throughout our Extranet. Our strategy ensures that our services are
available with the same features and functionality globally. We utilize
hardware, software and facilities vendors who are known for their high
quality products and technologies and have achieved broad acceptance.
Some of our vendors include Cisco Systems Inc. ("Cisco"), Newbridge
Networks Corporation ("Newbridge") and Nortel Networks Corporation
("Nortel Networks"). These vendors have facilitated our deployment of
the advanced technologies such as IP and ATM.
. Deploy CANs on customer premises. Our strategy is to place CANs on
customer premises and to link those CANs to our POPs through high
capacity facilities. These CANs enable us to manage the network end-to-
end on a full time basis and rapidly provision services.
. Primarily utilize a success-based network deployment model. The
scalability of our network enables us to enter each new market with a
small POP and build to a larger presence as our business grows.
Similarly, at most new customer sites, we deploy a CAN on a customer's
premises and augment the CAN to accommodate increasing demand for
additional services.
. Utilize multiple carriers to ensure diverse network routing. We use
multiple carriers to obtain our local access, domestic and international
long haul backbone facilities. Diverse routing among several carriers
ensures maximum availability and reliability of our Extranet.
. Reduce network costs by purchasing segments on fiber optic
facilities. Due to the growing supply of international bandwidth, the
cost of bandwidth has declined significantly. We have and will continue
to aggressively take advantage of this positive development to reduce
our bandwidth costs, which are a significant portion of our capital
expenditure plan and expense structure. Currently, a majority of our
capacity is leased. We intend to purchase bandwidth as and when
purchasing would be advantageous and more cost effective than leasing
bandwith. We have purchased and are committed to purchase IRUs on
numerous international cable systems in the Atlantic, the Pacific and
intra-Europe, which has enabled us to increase our bulk bandwidth in a
highly cost effective manner.
Global Network Infrastructure
We have deployed our global network infrastructure to 39 financial centers
worldwide. The Extranet consists of IXnet-owned switches, NOCs, POPs, data
centers and CANs, and primarily leased fiber optic facilities.
55
<PAGE>
Our Extranet utilizes a uniform equipment platform based on Newbridge
network management technology, and augmented with Nortel Networks switches for
enhanced voice services and Cisco routers for enhanced data services.
Newbridge network access nodes and network management software are located at
our POPs, while CANs are directly installed at the customers' premises. The
Newbridge platform provides advanced global network management which allows
for rapid provisioning and end-to-end network diagnostics from our NOCs to our
customers' premises. We own two Nortel Networks digital switches located in
New York and London that allow for universal availability of services, rapid
provisioning of services, short call setup times and a single network
management and control system. We have deployed Cisco products for various
network functions including core routing, distribution routing and customer
premises routing. The advanced features and built-in scalability of the Cisco
routers enable us to offer high quality and globally advanced data services
such as Liquidity and IXFrame.
The infrastructure of our Extranet includes the following components:
. Network operations centers (NOCs). We have deployed NOCs in the
financial districts of New York and London, each of which serves as a
control center of our Extranet. Each NOC is staffed 24 hours per day,
seven days per week, and houses the specialized equipment necessary for
managing the Extranet. The NOCs contain workstation-based software
systems utilizing state of the art graphical user interfaces to provide
a global view of our Extranet, including all CANs worldwide. This
network management system allows for the display of alarms for all
network faults, testing of the network for adverse conditions, re-
routing of traffic to other equipment or facilities, and remote
maintenance for certain network faults. While the New York NOC
concentrates on the Americas and Asia, it also acts as the overall NOC
for our entire Extranet. The London NOC services Europe but also acts as
a backup system for the New York NOC and is capable of supporting the
entire Extranet if required. We currently plan to begin construction
within the next 12 months of a new NOC in the Asia/Pacific region in
order to expand our presence.
. Points of presence (POPs). We have 73 POPs in 39 financial centers
worldwide. POPs house the network transmission equipment required to
provide all IXnet services to the financial community. A POP enables us
to bring our broad portfolio of services through the local high speed
access facility in a prompt and cost effective manner. These POPs are
built pursuant to high standards with backup power capability, battery
and UPS systems, separate humidity control and air conditioning, raised
equipment flooring, static electricity control and security, fire and
other control systems. POPs are either located in facilities owned and
operated by us or are co-located in other facilities through
arrangements with other carriers. Equipment in the POPs may include:
. Newbridge products for global transmission bandwidth management as
well as ATM switching;
. Nortel Networks and other voice switches; and
. Various other equipment, such as Stratum 1 clocking, echo
cancellers, compression equipment, digital cross connection systems,
test equipment and patch panels.
The following is a list of cities in which our 73 POPs are currently
located (and, if more than one, the number of POPs located in that city):
<TABLE>
<CAPTION>
Americas Europe Asia/Pacific
-------- ------ ------------
<S> <C> <C> <C>
Atlanta Amsterdam Luxembourg Adelaide
Boston Athens Madrid Auckland
Chicago (3) Brussels Milan (3) Brisbane
Houston Budapest (2) Paris (2) Hong Kong (4)
Los Angeles (3) Copenhagen (2) Rotterdam Melbourne (3)
New York (3) Dublin Stockholm Perth
San Francisco Frankfurt (4) Vienna Philippines
San Jose Geneva (2) Warsaw Singapore (3)
Toronto (2) Helsinki Zurich (2) Sydney (6)
London (4) Tokyo (3)
Wellington
</TABLE>
56
<PAGE>
In cities with developing demand for our services, such as in emerging and
secondary markets, we service our customers as off-network customers through
our relationships with carriers who have established a presence in such
locations until there is sufficient demand, at which point we would build a
POP at that location. As of March 31, 1999, we were providing service in over
250 off-net cities. Over the next 12 months, we intend to build POPs in a
number of these cities in order to expand our network footprint, and to build
additional POPs in those cities where we already have a presence in order to
meet customer demand and provide redundancy. New POPs will only be built after
careful consideration of the size of the market opportunity, customer demand,
the regulatory environment and the competitive situation as well as the costs
to enter and support the market. Emerging financial markets may be a large
growth opportunity in the coming years and will be closely monitored.
Some of the other markets where we are considering building POPs over the
next several years include the following cities:
.Sao Paolo (Brazil);
.Montreal (Canada);
.Denver, Stamford, Miami (U.S.);
.Shanghai (China);
.Kuala Lumpur (Malaysia);
.Seoul (S. Korea);
.Johannesburg (S. Africa);
.Prague (Czech Republic); and
.Moscow (Russia).
. Data centers. Our POPs in New York, London and Jersey City, New Jersey
also house Liquidity content centers. These data centers enable us to
host and distribute the content of various content providers. Equipment
in the data centers includes:
.Extreme Networks--layer 3 switches;
.Bay Networks--distribution routers; and
.Cisco Systems--inter-data center and dial backup routers.
Additional data centers will be built to complement existing or new
POPs based on demand.
. Customer access nodes (CANs). A key differentiator of our Extranet is
our deployment of CANs on customer premises. CANs vary in size and
complexity based on customer needs and requirements, but may include one
or more of a Newbridge multiplexer, a Cisco router or a DLIC, which is a
device that connects the customer's turret directly to our network for
voice circuits. All CANs can be controlled by us remotely, enabling us
to fully manage the network end-to-end and to rapidly provision
services. In addition, CANs are scalable to allow for future growth as a
customer's requirements expand. CANs are connected to our closest POP by
fiber optic facilities utilizing diverse redundant local facilities
where possible.
. Backbone facilities. In connecting POP to POP, we have both leased and
purchased various T-1/E-1/DS-3 long haul facilities worldwide. We lease
fiber optic facilities from major international facilities-based
carriers such as MCI WorldCom Inc., Frontier/GlobalCenter, Williams
Communications Group, Inc., Sprint Communications Company, L.P., Cable &
Wireless plc, Singapore Telecommunications Limited, Hongkong Telecom,
France Telecom, British Telecommunications plc, Teleglobe Inc, Sprint
Canada Inc., Bell Canada, Swisscom, Telstra Corporation Limited, Hermes
and Deutsche Telekom AG. In addition, we are focused on buying IRUs. In
addition, we have purchased or committed to purchase IRUs on projects
such as: TAT12/13, TAT 14, Gemini, Southern Cross, CANTAT 3, Germany-
U.K. 6, Japan-U.S. and NTL. We expect to further expand our Extranet in
this manner to support growth as well as to improve cost efficiencies.
57
<PAGE>
. Local loop facilities. We utilize many local facilities-based carriers
to connect our POPs and CANs. For example, in the New York area, we have
contracted with major local providers such as Bell Atlantic Corporation,
MCI WorldCom Inc. and AT&T Corp. to provide diversely routed, fiber
optic facilities from our POP to the customers' premises. Where
possible, we utilize carriers that employ fiber optic ring protection
for reliability and disaster recovery.
Sales and Marketing
Our sales and marketing activities are targeted to members of the financial
services community in the key financial centers worldwide. Our customers
include members of the financial services community including broker-dealers,
investment banks, asset managers/hedge funds, inter-dealer brokers, electronic
trading firms, commodities/futures trading firms, content providers,
exchanges, trade execution systems, correspondents, clearing and settlement
firms, and insurance companies.
The major components of our sales strategy are as follows:
. Utilize a direct salesforce. We have deployed a dedicated and
experienced salesforce in many of the major cities worldwide where we
have operational POPs. As of March 31, 1999, our salesforce consisted of
28 commissioned salespeople (16 of whom were in the Americas, seven of
whom were in Europe and five of whom were in the Asia/Pacific region).
Because our salespeople are regionally based, they are able to consult
prospective customers face-to-face to discuss their network needs and
technical requirements and develop tailored solutions. Our sales
representatives also market our services to financial institutions at
industry seminars and trade shows. Our salespeople are familiar with the
applications, requirements and technical terminology of the financial
services community as well as its unique business practices.
We have developed programs to attract and train high quality, motivated
sales representatives who, in addition to having strong financial
services industry backgrounds, technical skills and knowledge of
industry applications, have consultative sales experience. These
programs include competitive compensation plans including stock option
pools, technical sales training and consultative selling technique
training. Sales representatives from our United States and
international operations jointly attend training programs in order to
ensure an integrated sales approach domestically and internationally.
. Expand our salesforce. We believe that our rate of growth is directly
related to the size and productivity of our sales force. Therefore, we
are focused on expanding our salesforce over the next 12 to 18 months
through the hiring of motivated personnel who have backgrounds in
network services or experience with the specialized communications needs
of the financial services community. We intend on growing our salesforce
both within North America and in Europe and the Asia/Pacific area. Until
the full deployment is complete to all major cities, some foreign
markets will be handled through distributor relationships.
. Focus sales efforts on strategic customer sites. We place emphasis on
adding customers and CANs in sites that we believe are strategic in
nature. Strategic sites are those with which our existing on-net
customers or potential customers are interested in communicating, such
as those with large trading or processing volume.
. Leverage the salesforces of our content providers. The salesforces of
our content providers have, in effect, become secondary salesforces for
us by selling their content delivered over our Extranet to their end-
users. In order to access this content, end-users must connect to our
Extranet, if they are not connected already. These secondary salesforces
have been able to significantly grow the number of on-net user sites on
the Extranet.
. Coordinate joint sales efforts worldwide. Our regional salesforces work
together in a cooperative and coordinated manner to create higher levels
of customer satisfaction which we believe will lead to additional
business. This approach maximizes the benefits of selling our services
locally as well as
58
<PAGE>
globally and confers a unified corporate level sales relationship
between our regional salesforces for our customers worldwide.
. Coordinate joint sales efforts with IPC salesforce. Coordinating the
efforts of our salesforce with the IPC salesforce has helped to
introduce our Extranet to the significant installed base of IPC
customers. IPC's salesforce is provided with incentives to reach certain
sales targets in connection with their sales of our services.
We maintain a high profile in the financial services marketplace with
targeted marketing and public relations efforts. We place our company
information and press releases in many financial services industry
publications such as the Security Industry News, Wall Street and Technology
and Trading Technology Week. We actively participate in financial industry
organizations such as the Wall Street Telecommunications Association and the
Securities Industry Association and seminars such as the "On-Line Securities
Trading Seminar" and the "Future of Buy Side/Sell Side Transaction
Technologies" which enable our representatives to communicate our vision and
capabilities directly to prospective customers. Moreover, we are highly
visible at key industry trade shows including "IT for Wall Street" and the
"SIA Technology Management Conference."
Customers
Our customers are members of the financial services community. The
following is a representative list of customers from whom we generated at
least $25,000 in revenues during the six months ended March 31, 1999. Deutsche
Bank and Optimark Inc. accounted for 23% and 14%, respectively, of our
consolidated revenues for the fiscal year ended September 30, 1998, and 11%
and 14%, respectively, of our consolidated revenues for the six months ended
March 31, 1999.
<TABLE>
<S> <C>
ABN Amro Incorporated Fuji Securities Incorporated
AIG Trading Corporation Futuresource/Bridge, L.L.C.
Australia and New Zealand Banking Group Limited Garban Broking Services Ltd.
BancBoston Robertson Stevens Inc. Generic Trading Inc.
Bank of Montreal GFI Ltd
The Bank of Nova Scotia GNI Limited
Bankers Trust Company Goldman, Sachs & Co.
Banque Paribas Greenwich Capital Corp.
Barclays Bank PLC Gruntal & Co., L.L.C.
Bayerische Vereinsbank Aktiengesellschaft Hambrecht & Quist LLC
Bear, Stearns & Co. Inc. Harlow Butler U.K. Ltd.
BT Alex. Brown Incorporated Herzog Heine Geduld, Inc.
Cantor Fitzgerald, L.P. Hilliard Farber & Co. Inc.
Carr Futures Inc. HSBC Bank USA
The Chase Manhattan Bank ING Baring Furman Selz LLC
CHOICE! Energy LP Intercapital Government Securities, Inc.
CIBC Oppenheimer Corp. ITG Inc.
Citibank, N.A. Janus Distributors, Inc.
Commerzbank Aktiengesellschaft J B Were & Son Inc.
Credit Agricole Indosuez Jefferies International Ltd.
Credit Suisse First Boston, Inc. J.P. Morgan & Co. Incorporated
Dawnay Day & Co. Ltd. Lazard Freres & Co. LLC
D.E. Shaw & Co. Ltd. Lehman Brothers Inc.
Deutsche Bank Liberty Eurasia Ltd.
Donaldson, Lufkin & Jenrette Securities Corporation Long Term Capital Company
Dresdner Bank AG Lloyd's Bank
ED&F Mann International Martin Brokers (U.K.) PLC
Eurobrokers AS Meitan Traditional Co., Ltd.
Fiduciary Trust Co. Merrill Lynch & Co., Inc.
FIMAT USA, Inc. Mitsui Trust & Banking Co., Ltd.
First Union Corporation Moneyline Corporation
Moody's Investors Service, Inc.
Moore Capital
Morgan Stanley Dean Witter & Co.
M. W. Marshall & Company Limited
National Australia Bank Limited
NationsBanc Montgomery Securities LLC
NatSource Inc.
NatWest Securities Corp.
Nesbitt Burns Inc.
Optimark Inc.
OTA Limited Partnership
Paloma Partners L.L.C.
PaineWebber Group Inc.
Power Merchants Group
Prebon Yamane (USA) Inc.
Prudential Securities Incorporated
RBC Dominion Securities Inc.
Rabobank International Ltd.
Republic National Bank of New York
Reuters Holdings Plc
Salomon Smith Barney Inc.
Sanford C. Bernstein & Co. Inc.
SBC Warburg Dillon Read LLC
Schroder & Co. Inc.
SG Cowen Securities Corporation
Societe Generale
Soros Fund Management Company
Standard Bank London Ltd.
Standard Chartered Bank
The Toronto Dominion Bank
Tradition North America Inc.
Union Bank of Switzerland
Westpac Banking Corporation
</TABLE>
59
<PAGE>
The following is a representative list of our content provider customers:
[TO BE PROVIDED]
Customer Service
High quality customer service and support are critical to our objective of
retaining and developing our customer base. We differentiate ourselves from
many of our competitors by customizing solutions and providing individualized
support to our customers. For example, we utilize customized billing in local
currencies and provide reports designed to address the specific needs of our
customers. To support a customer's business requirements, we make available
numerous IXnet resources, including technical support, engineers and project
managers in the pre-implementation phase and customer service representatives
and help desk personnel in the post-implementation phase. To ensure a rapid
response and remedy to any customer network concerns, we monitor and manage
our Extranet from our NOCs, 24 hours per day, seven days per week. When
necessary, we also dispatch IPC's global field service personnel to address
certain local network issues.
In addition to person-to-person customer service, we are developing other
methods of customer support through our Internet web site. We plan to include
various types of reporting, customer communication and billing, and we may
include payment and customer initiated order entry.
Case Studies
The following examples illustrate how two of our customers use our services
and capabilities to their significant business needs:
Deutsche Bank. In 1995, Deutsche Bank sought to build a network to
interconnect its trading desks on a global basis, allowing traders to be in
constant voice contact with each other. These hoot & holler networks would
effectively create a virtual trading environment within Deutsche Bank. We
brought a worldwide outsourced solution to Deutsche Bank, providing both
network and hardware with local support for over 4,000 traders in more than 20
countries.
Deutsche Bank selected us over the bids of several competing network
providers because of our ability to understand their business, to rapidly
implement this network and provide local technical and customer support. We
deployed the initial hoot & holler networks for Deutsche Bank in late 1995 and
early 1996. Since then, Deutsche Bank has added other voice and data services
in numerous locations throughout the world. Our relationship with Deutsche
Bank exemplifies the global reach and enhanced services that we offer our
customers.
MoneyLine. MoneyLine Corporation aggregates real-time market data, news,
commentary, historical prices, analytics and interactive applications from the
world's financial markets and delivers such information and applications to
its customers' desktops in a cost effective manner.
As a relatively new company, MoneyLine did not have a network to deliver
its information to potential customers, nor did it have the internal expertise
to establish such a network. Accordingly, MoneyLine sought a turnkey network
solution for the distribution of its information. Through our Extranet, we
were able to offer and rapidly deploy a highly reliable, secure, and fully
outsourced and managed network solution capable of delivering MoneyLine's
content to the desktops of MoneyLine's target market.
60
<PAGE>
MoneyLine is able to direct its financial and technical resources toward
developing its application and building its business rather than developing
and maintaining a communications network. Today MoneyLine and IXnet are
implementing service to firms nationwide.
Competition
Our competition varies geographically and by service offerings. Currently,
while no one company dominates the voice and data communications market for
the financial services industry, many companies compete with us in individual
service categories and on a regional basis. We compete with and expect
continued competition from:
. Large interexchange carriers and partnerships. Many of the large
carriers, such as MCI WorldCom Inc., Cable & Wireless plc, Global One
and the AT&T Corp./British Telecommunications plc venture are expanding
their capabilities to support high-speed, end-to-end communications
services. These large carriers compete with us in the areas of switched
voice, outsourcing, premium voice and frame relay. Increasingly, their
bundled services include high-speed local access combined with
metropolitan and wide area networks services and we expect them to offer
combined data, voice and video services over these networks in the
future. These carriers have greater financial, marketing and
technological resources, have already deployed large scale networks,
have large numbers of existing customers and enjoy strong brand
recognition, and, as a result, are significant competitors.
. Specific product competitors and other communications companies. Several
companies, such as EQUANT N.V., Infonet Services Corporation, GAINS and
GTE Internetworking, have focused on competing within a particular
service category and offer some of the same communications services
including frame relay, managed bandwidth, premium voice and outsourcing.
These companies have significant experience in offering tailored
services and sell themselves as experts in such services and related
technology. We believe that they have the financial capability and
technical expertise to expand their existing networks and service
offerings to become more competitive.
. Common carriers. Common carriers, such as British Telecommunications
plc, France Telecom and the former Bell Operating Companies, have
extensive regional networks. Common carriers currently provide some
communications services to many members of the financial services
community in their market area. These common carriers compete with us in
the areas of switched voice and managed bandwidth services and have
marketing, financial and technical resources substantially greater than
ours. Common carriers are expanding the capabilities of their network
services and may be able to offer bundled services that would be
competitive with us if they receive regulatory approval.
. Content providers. Content providers, such as Bloomberg L.P., Bridge
Information Systems, Inc. and Reuters Holdings Plc, have developed
extensive communications networks in the financial services industry and
distribute their content and the content of other providers. Although
they have wide distribution in the industry, their focus is on content,
not network services. In addition, while they are potential customers
for our services, they also compete directly with us in the content
delivery segment of our business. Further, these companies have
substantial resources and brand recognition.
. Resellers. Resellers, such as Business Networks International Inc.,
Sector, Inc. and WESTCom Corp., resell other companies' network services
and do not focus on building or managing their own networks. They
principally compete on price and do not focus on network quality,
features or functionality.
Depending on the specific competitor, we compete on the basis of many
elements, including customer service, quality, reliability, network security,
service provisioning speed, service features, functionality and cost
effectiveness.
Regulatory Environment
The telecommunications services that we provide must be structured to
comply with the laws and regulations of national, state and local government
agencies in countries we serve. The primary regulatory policy
61
<PAGE>
of the United States in this area is to promote effective competition in the
United States telecommunications service market, including the market for
international services. The United States government has advocated that
competitive international markets will provide incentives for further market
entry both in the United States and foreign markets. Many other countries are
also moving toward the implementation of competitive market structures.
United States Regulatory Considerations
For domestic telecommunication services in the United States, the FCC and
State PUCs have direct jurisdiction, granted by statute, over all aspects of
our telecommunications service offerings. With international traffic, however,
the United States regulatory structure is limited to the origination or
termination of telecommunications services in the United States. As a result,
the United States and each foreign country share jurisdiction over policies
and regulations controlling international telecommunications services between
the two. Thus, the United States cannot unilaterally implement a regulatory
policy for international telecommunications, thereby limiting the impact a
domestic statute, such as the Telecommunications Act, can have in developing a
new structure for international telecommunications.
In the United States, our telecommunications services are subject to the
Communications Act of 1934, as amended by various statutes, including the
Telecommunications Act and the FCC's regulations promulgated thereunder, as
well as the applicable laws and regulations of the various states as
administered by the relevant PUCs. The recent trend in the United States, for
both federal and state regulation of telecommunications service providers, has
been in the direction of reduced regulation. Despite recent trends toward
deregulation, the FCC and relevant PUCs continue to exercise extensive
authority to regulate ownership of transmission facilities, telecommunications
services and the terms and conditions under which our services are provided.
In addition, we are required by federal and state laws and regulations to file
tariffs listing the rates, terms and conditions of the telecommunications
services we provide. Any failure to maintain proper federal and state tariffs
or certification or any finding by the federal or state agencies that we are
not operating under permissible terms and conditions may result in an
enforcement action or investigation, either of which could have a material
adverse effect on our business.
We and Saturn currently hold several FCC authorizations for
telecommunications services. These authorizations permit us to (1) acquire
interests in submarine cable and international satellite facilities previously
authorized by the FCC, (2) resell private lines that are not interconnected to
the public switched telephone network for communication services between the
United States and all other countries, other than those listed on the FCC's
exclusion list published from time to time and (3) offer switched service by
the use of private lines interconnected to the public switched telephone
network for service between the United States and a number of approved
countries.
State PUCs exercise jurisdiction over intrastate services which are
communications that originate and terminate in the same state. We hold a
certificate of public convenience and necessity to resell forms of telephone
service within New York State and have the appropriate authority to offer
intrastate service in a number of other states.
Regulatory requirements pertinent to our operations have recently changed
and will continue to change as a result of the WTO Agreement, federal
legislation, court decisions, and new and revised policies of the FCC and
PUCs. In particular, the FCC continues to refine its international service
rules to promote competition, reflect and encourage liberalization in foreign
countries. To the extent the FCC is successful in this endeavor, a more
competitive environment for international telecommunications services is
likely to develop. This may increase competition and alter our ability to
compete with other service providers. It also may impact our ability to
provide certain services, or introduce new services. The impact on our
operations of any changes in applicable regulatory requirements cannot be
predicted. As the regulatory regimes change in the United States and
elsewhere, our authorizations also may need to be adjusted.
62
<PAGE>
International Regulatory Considerations
Significant liberalization of telecommunications regulation in a number of
countries has provided us with greater flexibility to obtain authorizations to
provide service. The specific licensing approach or regulation of our services
has differed from country-to-country depending on the status of deregulation
and the development of competition in each country.
Canada. We were recently granted a Class A license in Canada that allows us
to provide international telecommunications services to the public in Canada
and operate telecommunications facilities used in transporting basic
telecommunications service traffic between Canada and another country.
United Kingdom. The United Kingdom generally permits competition in all
sectors of the telecommunications market, subject to licensing requirements
and license conditions. Individual licenses (with standard conditions) are
required for the provision of facilities-based services and for the resale of
leased lines. Our subsidiary holds both an IFBTL, International Facilities
Based Telecommunications License, and an ISVR, International Simple Voice
Resale, license in the United Kingdom. The IFBTL entitles us to acquire
indefeasible rights of use on international satellites and submarine cable
systems, to resell international private lines, as well as interconnect with,
and lease capacity at, wholesale rates from, facility-based carriers. The ISVR
license allows us to resell international private lines, as well as
interconnect with, and obtain capacity at wholesale rates from facility-based
carriers.
Other European Union Countries. Prior to January 1, 1998, a majority of the
EU, European Union, countries maintained the position that all or most
telecommunications services were under the exclusive jurisdiction of state-
sanctioned monopolies. Under that regulatory regime, provision of many
competitive telecommunications services was strictly limited to particular
services or banned to preserve the privileged position of the state-sanctioned
monopoly. Effective January 1, 1998, the EU required that member states
liberalize their telecommunications regulations to permit the introduction of
competition in all sectors of the telecommunications market. These regulatory
reforms have been implemented over the last year. Nonetheless, we initiated
service prior to these reforms. In some cases, we were able to take advantage
of a special status granted to CUGs, Closed User Groups. CUGs are communities
of interest that are common among a company and its subsidiaries or group of
companies. The EU definition of CUGs looks to see if the link between the
members of the group is a "common business activity." We and our subsidiaries
fit this definition of CUGs in several countries. In addition, in several EU
countries, we structured our service offerings to not require interconnection
to the local public switched telephone network. Based on CUG status and/or
lack of interconnection to the public switched network, we have been granted
licenses in Belgium, Ireland and Italy to provide voice and data services to
CUGs. Additionally, our subsidiaries are able to operate in France, Germany
and the Netherlands without the need for licenses in these countries. In these
cases, we provide private line and virtual private network voice services and
a full range of data services.
Switzerland. Although Switzerland is not part of the EU, it has followed
the EU's market liberalization approach. Even prior to the January 1, 1998
opening of the Swiss telecommunications market, we, through our subsidiaries,
have been able to provide private line and virtual private network voice
services and a full range of data services in Switzerland due to our status as
a CUG and our lack of interconnection to the Swiss public switched telephone
network.
Japan. On January 27, 1997, the Japanese Ministry of Post & Telephone
granted our Japanese subsidiary a Special Type II telecommunications carrier
license. This license allows us to provide virtual private network and private
line voice services, data transmission services, image transmission services,
packet switched data transmission and managed digital network services.
Hong Kong. On June 10, 1997, our subsidiary received from the Hong Kong
Government Office of the Telecommunications Authority a PNETS, Public Non-
Exclusive Telecommunications Service, license for the provision of virtual
private network services. This license allows us to provide virtual private
network services
63
<PAGE>
for customers for the purpose of carrying out telecommunications between
companies involved in the financial services industry.
Singapore. On October 21, 1997, the Telecommunications Authority of
Singapore granted our Singapore subsidiary a license to operate a network in
Singapore for CUGs actively involved in the financial services industry for
the provision of data services including bandwidth on demand, frame relay, ATM
and multi-protocol transport services.
Brazil. On April 28, 1998, Anatel, the Brazilian Agencia Nacional de
Telecomunicacoes, granted our Brazilian subsidiary a Brazilian Limited Service
License to offer specialized limited telecommunications services to and from
Brazil. This license allows us to provide virtual private network and private
line voice and data services to CUGs. Since the issuance of the Limited
Service License, Anatel has notified us that we must satisfy certain technical
requirements or face loss of our license. We are in the process of satisfying
these requirements.
Saturn Global Networks. Saturn offers telecommunications services in the
United Kingdom and Australia pursuant to class licenses. Saturn also holds a
Special Type II license in Japan, a public non-exclusive telecommunications
service license for the provision of international value added data services
and an international simple resale license in Hong Kong and a license to
provide intracompany voice and data services in Singapore.
We intend to expand our operations into other jurisdictions as such markets
deregulate and we are able to offer a full range of services to our customers.
However, in countries that enact legislation intended to deregulate the
telecommunications sector or that have made commitments to open their markets
to competition in the WTO Agreement, there may be significant delays in the
adoption of implementing regulations and uncertainties as to the
implementation of the deregulatory programs which could delay or make more
expensive our entry into such additional markets. Our ability to enter a
particular market and provide telecommunications services, particularly in
developing countries, is dependent upon the extent to which the regulations in
a particular market permit new entrants. In some countries, regulators may
make subjective judgments in awarding licenses and permits, without any legal
recourse for unsuccessful applicants. In the event we are able to gain entry
to such a market, no assurances can be given that we will be able to provide a
full range of services in such market, that we will not have to significantly
modify our operations to comply with changes in the regulatory environment in
such market, or that any such changes will not have a material adverse effect
on our business, results of operations or financial condition.
In those countries where we are strictly prohibited from offering service,
we may enter into a relationship with the state-sanctioned telecommunications
monopoly so that our services can be offered in that jurisdiction. In these
situations, the local telecommunications service provider would provide the
facilities and offer local services to our customers. It is likely that
services would cost more in these situations. There are, however, certain
countries which do not require licensing for the provision of
telecommunications network services.
Employees
As of March 31, 1999, IXnet and its subsidiaries employed 232 persons,
including 56 in sales and marketing, 19 in customer service and support, 18 in
finance and administration, 20 in engineering and 119 in network operations.
We believe that our future success will depend in part on our continued
ability to attract, hire, integrate, retain and motivate highly qualified
sales, technical, and managerial personnel, and upon the continued service of
our senior management and key sales and technical personnel. None of our
employees are represented by a labor union. We have never experienced a work
stoppage and believe our relationship with our employees is good.
64
<PAGE>
Properties
Our properties consist of a combination of real estate leases in our name
and certain real estate facilities we share with IPC, which will be governed
by our inter-company agreement with IPC. See "Certain Relationships and
Related Transactions--Real Estate."
We lease directly:
. 14,000 square feet in New York City where our New York NOC and primary
POP are located, under subleases expiring in March 2002;
. 9,400 square feet in Newark, New Jersey where our second New York area
POP is currently being built, under a lease expiring in April 2009;
. 5,300 square feet in Chicago, Illinois where our Chicago POP is located,
under a lease expiring in June 2002;
. Office space and telecommunications equipment housing in Sydney (4,900
square feet) and Melbourne (2,400 square feet), Australia; Hong Kong
(1,900 square feet); Singapore (1,340 square feet); and Tokyo, Japan
(1,330 square feet), through leases acquired as part of the Saturn
acquisition;
. 2,200, 450 and 175 square feet, primarily for telecommunications
equipment housing in Paris, France (2,200 square feet); and Zurich (450
square feet) and Geneva (175 square feet), Switzerland; and
. Various smaller spaces under lease or collocation agreements for
telecommunications equipment housing in Frankfurt, Milan, New York,
Chicago, Los Angeles and San Jose.
We occupy the following portions of IPC-leased space:
. 24,500 square feet in New York City where our executive and U.S. sales
headquarters is located, under leases expiring in November 2002;
. 8,400 square feet in London, England, where our European headquarters
and London NOC are located, under leases expiring in December 2010; and
. Various spaces, with square footage between 750 and 3,000 in Atlanta,
Georgia, Boston, Massachusetts, Chicago, Illinois, Houston, Texas, Los
Angeles and San Francisco, California and Toronto, Canada, where our
branch sales and operations personnel and telecommunications equipment
are located.
Our use of and the costs associated with the facilities occupied under IPC
leases are outlined under certain provisions of our inter-company agreement
with IPC. Typically, charges for such facilities are allocated pro-rata, based
upon the relative percentage of space occupied by us or IPC, with company-
specific charges applied directly to the respective company.
Legal Proceedings
Neither we nor any of our subsidiaries are involved in any material pending
legal proceedings.
65
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table shows information about our executive officers and
directors, including their ages as of March 31, 1999. Each person holds the
same positions with both IXnet, Inc. and International Exchange Networks, Ltd.
Each director began service as a director of International Exchange Networks
as indicated in such director's biography and began service as a director of
IXnet upon its formation in May 1999.
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Richard W. Smith 46 Chairman of the Board
(1)(2).................
David A. Walsh.......... 37 Chief Executive Officer and Director
Gerald E. Starr......... 45 President and Director
Charles F. Auster....... 47 Executive Vice President, Chief Operating Officer
and Director
Brian L. Reach.......... 44 Chief Financial Officer
Anthony M. Servidio..... 53 Senior Vice President, Sales
William E. Walsh........ 32 Senior Vice President, Marketing and
Strategic Planning
Robert D. Woog.......... 52 Senior Vice President, Network Development
John Faccibene.......... 53 Managing Director, Americas
Peter Hase.............. 41 Managing Director, Europe
Drew Kelton............. 40 Managing Director, Asia Pacific
Paul Pluschkell......... 34 Vice President, Liquidity Group
Richard M. Cashin, Jr. 46 Director
(2)....................
Douglas T. Hickey 43 Director
(1)(2).................
Douglas J. Mello ....... 56 Director
John T. Sharkey ........ 62 Director
Peter A. Woog (1)....... 56 Director
</TABLE>
- ---------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Richard W. Smith has served as our Chairman of the Board and a director
since May 1999. He is also a General Partner of the general partners of
Allegra Capital Partners III, L.P., Lawrence, Tyrrell, Ortale & Smith, L.P.
and Lawrence, Tyrrell, Ortale & Smith II, L.P. He is also a director of IPC,
as well as several private companies. He has participated in the private
equity industry since 1979 and was formerly employed by Citicorp Venture
Capital, Ltd.
David A. Walsh founded our company in May 1993. Mr. Walsh has served as our
Chief Executive Officer since April 1998 and as a director since May 1993.
From May 1993 to April 1999, he served as our President. Mr. Walsh has also
served as an Executive Vice President and director of IPC since May 1998. Mr.
Walsh also co-founded Voyager Networks in 1993 and served as its Chief
Executive Officer, President and director until June 1995, when International
Exchange Networks, Ltd. commenced operations. Voyager Networks was a New York
City based Internet and data communications company which was acquired by
GlobalCenter and then sold to Frontier Corporation in February 1998. Prior to
June 1993, Mr. Walsh held various technology related positions in the
financial community, including at the New York Commodities Exchanges (NYCE,
CSCE, NYMEX, COMEX), Garban/Garvin Guybutler, a interdealer broker of
government bonds, and Drexel Burnham Lambert Trading Corporation.
Gerald E. Starr has served as our President and a director since May 1999.
Mr. Starr has served as President and Chief Executive Officer and a director
of IPC since December 1998. From January 1997 to December 1998, he was IPC's
Executive Vice President, Turret Systems and from February 1996 to January
1997, he was IPC's Vice President of Manufacturing and Engineering. Since
April 1995, he has also served as President of IPC Bridge, Inc., a wholly-
owned subsidiary of IPC, which acquired the assets of Bridge Electronics, Inc.
in April 1995. Mr. Starr founded Bridge Electronics, Inc. in 1987 and built it
into a leading provider of digital open line
66
<PAGE>
speaker systems to the foreign exchange trading industry. Mr. Starr was the
President and a director of Bridge Electronics, Inc. from its founding until
it ended its operations in April 1995. Previously, Mr. Starr founded Turret
Equipment Corporation in 1980 and sold it to Tie Communications in 1984, where
he remained until 1990.
Charles F. Auster has served as our Executive Vice President and Chief
Operating Officer and has been a director since May 1998. Mr. Auster was a
founding beneficial stockholder of our Company, and from February 1994 to June
1995, Mr. Auster served as our Executive Vice President of Finance and
Operations and a director. From December 1995 until he negotiated the sale of
Voyager Networks, Inc. to GlobalCenter, in February 1998, he served as its
President and Chief Executive Officer and as one of its directors. From
September 1991 to March 1993, he served as Executive Vice President and a
director of Ameritrade, Inc., a Washington-based trade and investment banking
firm. Mr. Auster is a director of American Utilicraft, a design and
manufacturing aircraft company, Lucent Digital Video, an internal venture of
Lucent Corp. and several charitable organizations. Mr. Auster is a member of
the District of Columbia Bar and the Virginia Bar.
Brian L. Reach has served as our Chief Financial Officer since May 1997.
Mr. Reach has also served as Chief Financial Officer of IPC since May 1997, as
Vice President of IPC since November 1997 and as a director of IPC since
December 1998. Prior to joining IPC, Mr. Reach was employed by the Celadon
Group Inc., an international transportation company, as its Chief Financial
Officer from November 1993 to April 1996, and its Vice President--Special
Projects from April 1996 to April 1997. From September 1990 through November
1993, he served as Chief Financial Officer of Cantel Industries, Inc., an
international distributor of medical and scientific products and ergonomic
seating. Mr. Reach is a Certified Public Accountant.
Anthony M. Servidio was a founding stockholder of our company and has
served as our Senior Vice President, Sales since June 1995. From February 1990
to June 1995, Mr. Servidio served as Vice President of Sales of WorldCom's
Banking and Finance team. From June 1985 to February 1990, Mr. Servidio served
as Vice President, Sales with TRT/FTC Communications, a full service
telecommunications carrier. From July 1965 to June 1985, Mr. Servidio held
various sales responsibilities with RCA Global Communication, a larger inter-
exchange carrier, including Vice President of the Banking and Finance
Division.
William E. Walsh has served as our Senior Vice President, Marketing and
Strategic Planning since March 1999 and our Vice President of Marketing from
October 1995 to March 1999. From August 1990 through October 1995, Mr. Walsh
served as Director of Marketing, Director of New Business Development,
National Business Manager, and Product Manager with Kirschner Medical
Corporation, a medical device manufacturer with global sales and operations.
His responsibilities included marketing, product management and developing new
business. From July 1988 through August 1990, he held product management
positions with Thackray Reconstructive Systems and Osteonics Corporation.
Robert D. Woog has served as our Senior Vice President, Network Development
since April 1997 and our Vice President of Global Operations from July 1995 to
April 1997. From April 1988 to July 1995, Mr. Woog served as Vice President of
Trading Systems for Positron Industries, a trading turret manufacturer. He was
responsible for sales, installation, service and maintenance of all turret
products. From June 1986 to December 1987, Mr. Woog was Director of Quality
Assurance for Communications Techniques, Inc., a telecommunications equipment
manufacturer. He also served as Executive Vice President of Digital
Transervice Corporation from 1985 to 1986. Mr. Woog held various positions
with AT&T Long Lines from 1968 to 1985. Mr. Woog also served as Assistant
Director General for the Telecommunications Company of Iran from 1975 to 1978.
John Faccibene has served as our Managing Director, Americas since March
1999 and our Vice President of Network Implementation from December 1998 to
March 1999. From September 1997 until December 1998, Mr. Faccibene was an
executive director at CIBC Oppenheimer, Corp., an investment banking firm,
where he was responsible for all technology, management and expenses for
communications/market data services and trading floors. From June 1988 until
August 1997, he was a senior vice president of Garban plc, an interdealer
broker of government bonds, where he was also responsible for communications
and trading floors. Mr. Faccibene is a director of Avesta Technology, a
software start-up company, Timestep, a software security
67
<PAGE>
company, and Netrix, a network hardware company. He also served as a director
of several financial and telecommunications industry organizations, including
the Security Industry Association, the Wall Street Telecommunications
Executive Committee and NYNEX Executive Forum.
Peter Hase has served as our Managing Director, Europe since December 1998.
Prior to joining us, Mr. Hase was the Business Development Manager, Europe of
Saturn Global Network Services from November 1993 until we acquired it in
December 1998. His responsibilities included all network development
activities throughout the European Region, which included 13 countries. Mr.
Hase also served as a director of Saturn Global Network Services from 1997
until it was acquired.
Drew Kelton has served as our Managing Director, Asia Pacific since
December 1998. Prior to joining us, Mr. Kelton was a founder and the Managing
Director of Saturn Global Network Services from September 1992 until we
acquired it in December 1998. His responsibilities included sales and
operations in the Asia Pacific area.
Paul Pluschkell has served as our Vice President, Liquidity Group since
February 1998. From March 1997 until IPC acquired MXNet in February 1998, Mr.
Pluschkell served as President and Chief Executive Officer of MXNet. From
August 1995 to February 1997, Mr. Pluschkell was the Sales Manager of Open
Systems and IMS Technical Manager for the Northeast Region of Reuters America,
a provider of news and information. From August 1994 to August 1995, Mr.
Pluschkell served as the Chief Information Officer of Rumson Capital
Management, LLP, an asset management group. Prior to working at Rumson Capital
Management, LLP, he held various positions with Reuters.
Richard M. Cashin, Jr. has served as a director since April 1998. Mr.
Cashin has been employed by Citicorp Venture Capital, Ltd. since September
1980, and has been President since December 1994. Mr. Cashin is a director of
IPC, as well as Cable Systems International, Inc., Delco Remy International,
Delta Terminal Services, Inc., Euromax International plc, Fairchild
Semiconductor, FFC Holding, Inc., Gerber Childrenswear, Hoover Group,
Lifestyle Furnishings International, Ltd., Levitz Furniture Incorporated, MSX
International, Inc., Thermal Engineering International Corporation and Titan
Wheel International, Inc.
Douglas T. Hickey has served as a director since May 1999. Mr. Hickey
served as President and Chief Executive Officer and a director of Critical
Path Inc. since October 1998. From February 1998 to October 1998, Mr. Hickey
served as Executive Vice President of Frontier Corporation, a
telecommunications company, and as President of Frontier GlobalCenter. From
July 1996 to February 1998, Mr. Hickey served as President and Chief Executive
Officer of GlobalCenter, Inc., a web hosting company. In February 1998,
GlobalCenter was acquired by Frontier. From December 1994 to July 1996, Mr.
Hickey was President of Internet services at MFS Communications, a provider of
high-speed fiber-optic services. From September 1990 to November 1994, Mr.
Hickey was general manager of North American sales and field operations at
Ardis, a Motorola company.
Douglas J. Mello has served as a director since May 1999. Mr. Mello was
employed by Bell Atlantic, and its predecessor corporations, from 1965 to
March 1999. He served as President, Large Business Sales--North of Bell
Atlantic from August 1997 to March 1999. From March 1996 to August 1997, he
was NYNEX Vice President--Business Marketing & Sales, responsible for all
business customers in the New York and New England areas. From January 1994 to
March 1996, he served as Vice President--Sales for NYNEX Corporation. Prior to
1994, Mr. Mello was the Group Vice President--Manhattan Market Area for New
York Telephone, were he was responsible for the provisioning of
telecommunications technology from 1985 to 1991, Mr. Mello was President of
Business Information Systems Corp. Mr. Mello is a director of Telexis Co. and
Netrix Corporation.
John T. Sharkey has served as a director since May 1999. Mr. Sharkey served
in various positions with MCI WorldCom, including Vice President, from June
1986 to April 1999. He was responsible for assisting in the design and
implementation of their corporate large account program. From March 1985 to
June 1986, he was Vice President of Major Accounts at Southern New England
Telephone. From June 1982 to March 1985, Mr. Sharkey was Vice President of
National Accounts with Optimum Systems, Inc., a Silicon Valley start up voice-
68
<PAGE>
messaging company. Prior to June 1982, Mr. Sharkey held positions with General
Electric Company and ROLM Corporation. Mr. Sharkey is a director of Mutual of
America Institutional Funds and several charitable organizations.
Peter A. Woog has served as a director since May 1999. Mr. Woog has served
as President and Chief Executive Officer for Cable Systems International since
October 1995. From May 1989 to October 1995, Mr. Woog was AT&T's Copper Cable
Products Vice President, responsible for the copper cable products business
unit. Mr. Woog also serves as President and Chief Executive Officer and a
director of Cable Systems Holding Company. Mr. Woog is chairman of the board
of directors of IPC and is a director of Arizona Association of Industries and
The Samaritan Health Systems.
Under the terms of the Amended and Restated Investor Agreement, dated as of
April 9, 1998, by and among IPC, Cable Systems Holding, LLC, Cable Systems
International, Inc., Allegra Capital Partners III, L.P., Richard P.
Kleinknecht, David A. Walsh and Anthony M. Servidio, IPC agreed to vote for
David A. Walsh to be on the board of directors for as long as we remain a
wholly owned subsidiary of IPC. After this offering we will no longer be
wholly owned by IPC.
David A. Walsh and William E. Walsh are brothers. Peter A. Woog and Robert
D. Woog are brothers.
Information About Our Board of Directors
Composition. Our by-laws empower the board of directors to decide how many
directors we will have. Following this offering, our board of directors will
consist of nine members. Each director shall be elected at the annual meeting
of stockholders, and shall hold office until such director's successor is
elected and qualified or until such director's earlier resignation or removal.
Director Compensation. In the past we have not paid our directors any
compensation for their service as directors. We will pay each of our non-
employee directors a retainer of $20,000 for each fiscal year in which they
served as a director. We will only pay this retainer to our non-employee
directors who attended at least 75% of the total number of meetings of the
board of directors held in that fiscal year. We have also granted options to
purchase shares of our common stock to each of our non-employee directors
under our 1999 Stock Option Plan. These stock options have a ten-year term and
an exercise price of $ per share, and they vest at the rate of 25% on the
first anniversary of the grant plus an additional 2 1/12% per month for the
next 36 months. For additional information about the 1999 Stock Option Plan,
please refer to the discussion under the caption "Executive Compensation--
Stock Option Plan." For the purposes of director compensation, Messrs. Hickey,
Mello, Sharkey and Smith are considered non-employee directors. Mr. Smith has
elected not to receive the cash retainer. We do not pay additional
compensation for service as a member or as the chairman of a board committee.
Committees. Historically, our board of directors has not used a committee
structure in managing our affairs. However, it has now established standing
audit and compensation committees. Among other functions, the audit committee
will:
. make recommendations to the board of directors regarding the selection
of independent auditors;
. review the results and scope of the audit and other services provided by
our independent auditors;
. review our financial statements; and
. review and evaluate our internal control functions.
The compensation committee will establish a compensation philosophy to be
applied in making compensation decisions for our executive officers, set
executive officer salaries and administer our executive officer bonus plans as
well our 1999 Stock Option Plan.
69
<PAGE>
Compensation Committee Interlocks and Insider Participation
Prior to May 1998, our board was responsible for establishing executive
officer compensation. However, in practice S. Terry Clontz, the then serving
Chief Executive Officer, and Brian L. Reach, the Chief Financial Officer, were
responsible for establishing executive officer compensation. The compensation
of Messrs. Clontz and Reach was set by the compensation committee of IPC and
by employment agreement. Beginning in May 1998, David Walsh, in consultation
with the compensation committee of IPC, determined the compensation of our
executive officers. Mr. Walsh's compensation was set by the compensation
committee of IPC and by his employment agreement.
From October 1, 1997 to May 22, 1998, our board consisted of Messrs. David
A. Walsh, Anthony M. Servidio, Richard Kleinknecht, Peter Kleinknecht and
Russell Kleinknecht. From May 22, 1998 to September 30, 1998, our board
consisted of Messrs. David A. Walsh, Charles F. Auster and S. Terry Clontz.
Messrs. David A. Walsh, Anthony M. Servidio, Charles F. Auster and S. Terry
Clontz served as our executive officers during these periods. During our
fiscal year ended September 30, 1998, none of our executive officers served as
a director or member of the compensation committee (or equivalent body) of
another entity, except IPC, of which any of our directors was an executive
officer.
70
<PAGE>
Executive Compensation
The following table provides information about the compensation earned by
our Chief Executive Officer during the fiscal year ended September 30, 1998,
and by the four other most highly compensated persons serving as our executive
officers at September 30, 1998 whose total annual salary and bonus for the
fiscal year ended on September 30, 1998 was at least $100,000. The table also
provides information about an additional executive officer who would be
included as one of the four other most highly compensated persons serving at
September 30, 1998 if his salary for the period employed was included on an
annualized basis. We refer to these six executive officers as our Named
Executive Officers.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-term
Annual Compensation Compensation
---------------------------------- ------------
Securities
Underlying
Fiscal Other Annual Options All Other
Name and Principal Position Year Salary(4) Bonus(5) Compensation(6) Granted(7) Compensation
- --------------------------- ------ --------- -------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
David A. Walsh........... 1998 $199,423 $281,250 $44,745(8) 184,704 195,000(9)
Chief Executive
Officer(1) 1997 190,000 -- -- -- --
1996 190,000 128,938 -- -- --
Brian L. Reach........... 1998 186,153 370,000 8,400(8) 92,352 4,800(9)
Chief Financial
Officer(1)(2) 1997 58,462 23,100 2,000(8) -- 2,000(9)
1996 -- -- -- -- --
Anthony M. Servidio...... 1998 190,000 195,833 44,745(8) -- 136,252(9)
Senior Vice President,
Sales
Robert D. Woog........... 1998 138,918 202,500 -- 46,176 66,168(9)
Senior Vice President,
Network Development
William E. Walsh......... 1998 122,393 56,875 -- 46,176 64,227(9)
Senior Vice President,
Marketing and Strategic
Planning
Charles F. Auster(3)..... 1998 75,000 48,750 -- 92,352 37,687(9)
Chief Operating Officer
and
Executive Vice President
</TABLE>
- ---------------------
(1) The compensation reported for Messrs. David A. Walsh and Brian L. Reach
for the years ended September 30, 1996, 1997 and 1998 is the compensation
reported in the summary compensation table in the proxy statement for IPC
for the 1999 annual meeting of stockholders. Compensation for the years
ended September 30, 1996 and 1997 for the other Named Executive Officers
is not shown here because it has not previously been disclosed in any
filing with the Securities and Exchange Commission.
(2) The compensation reported for Mr. Reach includes compensation for services
to IPC. For the years ended September 30, 1998 and 1997, 20% and 12%,
respectively, of Mr. Reach's compensation was allocated to us for services
he performed as our chief financial officer. His compensation is charged
to us pursuant to the allocation of indirect General and Administrative
expenses by IPC, and may not reflect the actual portion of Mr. Reach's
time spent acting as our chief financial officer.
(3) Mr. Auster became an executive officer in May 1998. His compensation,
including a pro-rated bonus, reflects the period from May until September
1998.
(4) Includes the pre-tax deferrals, if any, made by the Named Executive
Officers under the IPC Information Systems, Inc. Retirement Savings Plan
and Trust (the "401(k) Plan") with respect to the year ended September 30,
1998 fiscal year.
(5) The cash bonus payments shown in the table for the year ended September
30, 1998 year with respect to all of the Named Executive Officers include
(i) except Mr. Servidio, cash bonus payments awarded to them under the IPC
Information Systems Management Performance Plan and (ii) cash payments
made in connection with the successful completion of IPC's
recapitalization transaction to Messrs. David A. Walsh, Servidio and Woog
of $150,000 each, Mr. Reach of $60,000 and Mr. William E. Walsh of $10,000
and (iii) in connection with IPC's recapitalization transaction, Mr. Reach
received a payment of $204,000 in lieu of a stock option grant by IPC. The
cash payments made to Mr. Servidio also include the minimum guaranteed
71
<PAGE>
commission payments required to be made to him pursuant to his Amended and
Restated Employment Agreement with IXnet dated December 18, 1997.
(6) Does not include certain perquisites and other personal benefits,
securities or property received by the Named Executive Officers where the
aggregate value does not exceed the lesser of $50,000 or 10% of any such
officer's salary and bonus disclosed in this table.
(7) Reflects stock options granted at an exercise price of $10.50 per share to
each of the Named Executive Officers to purchase shares of IPC Common
Stock under the IPC Information Systems, Inc. 1998 Stock Incentive Plan.
(8) Includes $44,745 paid by us on behalf of Messrs. David A. Walsh and
Anthony M. Servidio for legal fees incurred by them in connection with the
negotiation of their Amended and Restated Employment Agreements with us
and with respect to other company related matters. These amounts also
include a tax "gross-up" payment made by us to each officer in respect of
the payment of such legal fees. With respect to Mr. Reach, consists of
payments for automobile allowance.
(9) Includes (i) cash payments made pursuant to IPC's recapitalization
transaction to settle outstanding stock option grants made under the IPC
Information Systems, Inc. 1994 Stock Option Plan in the following amounts:
for David A. Walsh, $195,000; for Mr. Anthony M. Servidio, $130,000; for
Mr. Robert D. Woog, $62,000 and Mr. William E. Walsh, $62,000; (ii)
amounts paid by IXnet as matching and/or profit sharing contributions to
the 401(k) Plan; (iii) a $1,500 cash payment made to Mr. Anthony M.
Servidio for a successful employee referral and (iv) a consulting fee
totaling $37,687 paid to Mr. Charles F. Auster.
Employment Agreements
We are a party to employment agreements with Messrs. David Walsh, Servidio
and Auster. We expect to enter into new employment agreements prior to the
closing of this offering with each of these officers.
Employment Agreement with David A. Walsh. We are party to an amended and
restated employment agreement dated as of December 18, 1997 with David A.
Walsh pursuant to which he serves as Chief Executive Officer of IXnet. This
agreement has a five-year term and provides for Mr. Walsh to receive a minimum
annual base salary of $225,000 and a discretionary cash bonus target of no
less than $175,000 each year. Mr. Walsh also receives medical, insurance,
retirement and other types of fringe benefits and perquisites that are
commensurate with his position with the company. The employment agreement also
provides for Mr. Walsh to receive an automatic or "springing" stock option
grant of at least shares of our common stock in the event there is an
initial public offering of the stock during the term of his employment.
Mr. Walsh's employment agreement also requires IXnet to provide him with
severance pay and continued benefit coverages in the event his employment with
the company terminates during the five year term of his Agreement "without
cause" or if Mr. Walsh terminates his employment with IXnet for "good reason."
Employment Agreement with Anthony M. Servidio. We are party to an
employment agreement with Anthony M. Servidio dated as of December 18, 1997
pursuant to which he serves as Executive Vice President--Sales. Mr. Servidio's
employment agreement has a five-year term and provides for him to report
directly to Mr. David A. Walsh and our Board of Directors. Mr. Servidio is
entitled to receive a minimum annual base salary of $190,000 and a commission-
based bonus with a guaranteed minimum draw of $110,000 annually.
Employment Agreement with Charles F. Auster. We are party to an employment
agreement with Charles F. Auster dated and effective as of May 1, 1998
pursuant to which he serves as Executive Vice President and Chief Operating
Officer. Mr. Auster's employment agreement has an initial term of two years
and is renewable for successive one year terms. Under this agreement, Mr.
Auster reports solely to Mr. David A. Walsh and our Board of Directors and
also serves as a member of the Board. Mr. Auster is paid a base salary of
$195,000 and is eligible for an annual discretionary bonus, as determined by
the Board.
72
<PAGE>
Stock Option Grants
IPC Stock Option Plan. The following table shows information about options
granted during the year ended September 30, 1998 to our Named Executive
Officers under the IPC Information Systems, Inc. 1998 Stock Incentive Plan:
Option Grants in Year Ended September 30, 1998(1)
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates
of Share Price Appreciation
Individual Grants for Option Term(2)
---------------------------------------------- ---------------------------
Number of % of Total
Securities Options Exercise
Underlying Granted to or Base
Options Employees in Price Expiration 5% 10%
Granted Fiscal Year(3) ($/Share) Date ($) ($)
Name ---------- -------------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
David A. Walsh.......... 184,704 16.7 10.50 4/30/08 1,219,046 3,090,098
Brian L. Reach.......... 92,352 8.3 10.50 4/30/08 609,523 1,545,049
Anthony M. Servidio..... -- -- -- -- -- --
Robert D. Woog.......... 46,176 4.2 10.50 4/30/08 304,626 772,524
William E. Walsh........ 46,176 4.2 10.50 4/30/08 304,626 772,524
Charles F. Auster....... 92,352 8.3 10.50 4/30/08 609,523 1,545,049
</TABLE>
- ---------------------
(1) All options granted during the year ended September 30, 1998 were options
to purchase common stock of IPC and were granted under the IPC Information
Systems, Inc. 1998 Stock Incentive Plan. Options granted under this plan
have a ten-year term, vest in equal amounts on the first five
anniversaries of their grant date (with earlier vesting for (i) 75% of the
options if and when the average closing price for the IPC common stock
over any period of 30 consecutive trading days equals or exceeds 300% of
the exercise price, and (ii) 100% of the options if and when the average
closing price for the IPC common stock over any period of 30 consecutive
trading days equals or exceeds 450% of the exercise price) and are
exercisable at the fair market value of the IPC common stock on the date
of grant.
(2) Represents the potential value of options granted at assumed 5% and 10%
rates of compounded annual stock appreciation for ten years from the date
of grant of each such option.
(3) These percentages represent the percent of total options granted to our
employees and employees of IPC.
73
<PAGE>
Prior to April 30, 1998, our executive officers participated in the IPC
Information Systems, Inc. 1994 Stock Option Plan. Upon consummation of the IPC
recapitalization transaction, each option then outstanding under this plan was
cancelled in consideration of a cash payment equal to the product of (1) the
excess, if any, of $21.00 over the per share exercise price of such option and
(2) the number of shares of IPC common stock subject to such option. The
following table shows information about options granted to our Named Executive
Officers under this plan which were canceled and for which cash payments were
made:
Aggregated Option Exercises In Last Fiscal Year
and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Former Option Plan Stock Incentive Plan
-------------------------------- ---------------------------------------------------
Number of Securities
Options Underlying Unexercised Value of Unexercised In-
Canceled Value Options at Fiscal the-Money Options
under Former Realized on Year-End (#) at Fiscal Year-End ($)
Name Option Plan (#) Cancellation ($) Exercisable/Unexercisable Exercisable/Unexercisable
- ------------------------ --------------- ---------------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
David A. Walsh.......... 30,000 195,000 0/184,704 0/0
Brian L. Reach.......... 0 0 0/92,352 0/0
Anthony M. Servidio..... 20,000 130,000 0/0 0/0
Robert D. Woog.......... 13,000 62,000 0/46,176 0/0
William E. Walsh........ 13,000 62,000 0/46,176 0/0
Charles F. Auster....... 0 0 0/92,352 0/0
</TABLE>
- ---------------------
Except for such deemed exercises resulting in cash-out payments, no Named
Executive Officer exercised any stock options during the year ended September
30, 1998.
IXnet Stock Option Plan. We have adopted a 1999 Stock Option Plan for our
employees, officers, directors and consultants and for the employees,
officers, directors and consultants of our parent and subsidiary companies. We
have reserved authorized but unissued shares of our common stock for
issuance on exercise of stock options granted under this plan. We have granted
options to purchase shares of our common stock to the following
individuals and groups:
<TABLE>
<CAPTION>
Name Number of Shares
<S> <C>
David A. Walsh.................................................
Brian L. Reach.................................................
Anthony M. Servidio............................................
Robert D. Woog.................................................
William E. Walsh...............................................
Charles F. Auster..............................................
All executive officers as group (17 persons)...................
All non-employee directors (4 persons).........................
All others (120 persons).......................................
</TABLE>
All options are incentive stock options for federal income tax purposes up
to applicable limits, have a term of 10 years and are subject to earlier
expiration upon the option holder's termination of employment. All options
have an exercise price of $ per share. All options vest at the rate of 25% on
first anniversary of the grant date and an additional 2 1/12% per month for
the next 36 months. Options may not be exercised for 2 1/2 years after the
date of grant, unless, prior to that date, we stop filing consolidated income
tax returns with IPC or our compensation committee allows the exercise.
74
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table shows certain information with respect to the
beneficial ownership, as of May 1, 1999, of:
. our common stock by each person who we know beneficially owns more than
5% of our outstanding common stock;
. the common stock of our parent, IPC, by each of our directors and our
Named Executive Officers; and
. the common stock of our parent, IPC, by all of our directors and
executive officers as a group.
Except as otherwise noted, the persons named in the table have sole voting
and investment power with respect to all shares of common stock shown as
beneficially owned by them, subject to community property laws where
applicable. Share ownership includes shares issuable upon exercise of
outstanding options that are exercisable within 60 days of the date of this
prospectus as described in the footnotes below. Percentage of ownership is
calculated pursuant to SEC Rule 13d-3(d)(1). The calculation of the percentage
of beneficial ownership does not include shares to be issued if the
underwriter's over-allotment option is exercised. Unless otherwise indicated,
the address for each stockholder listed below is c/o IXnet, Inc., 88 Pine
Street, New York, New York 10005.
<TABLE>
<CAPTION>
Percentage of Class
Number of Beneficially Owned
Shares ------------------------
Beneficially Before After
Beneficial Owner Securities Owned Owned Offering Offering
- ------------------------ ------------------ ------------ ---------- ---------
<S> <C> <C> <C> <C>
Five Percent
Stockholder:
IPC Information Systems,
Inc. (1)............... IXnet Common Stock 100.00% %
Directors and Executive
Officers:
Richard W. Smith........ IPC Common Stock 381,904(2) 4.7(8)
David A. Walsh.......... IPC Common Stock 400,622(3) 5.0
Charles F. Auster....... IPC Common Stock 92,880(4) 1.2
Brian L. Reach.......... IPC Common Stock 73,264 1.0
Anthony M. Servidio..... IPC Common Stock 174,730 2.2
William E. Walsh........ IPC Common Stock 34,832(5) *
Robert D. Woog.......... IPC Common Stock 34,632(6) *
Richard M. Cashin, Jr... IPC Common Stock -- *
Douglas T. Hickey....... IPC Common Stock -- *
Douglas J. Mello........ IPC Common Stock 500 *
John T. Sharkey......... IPC Common Stock -- *
Peter A. Woog........... IPC Common Stock 38,632(7) *
All executive officers
and directors
as a group (17 per-
sons).................. IPC Common Stock 1,329,008 16.5
</TABLE>
- --------------------
* Indicates beneficial ownership of less than one percent of the outstanding
shares of IPC's Common Stock.
(1) The following persons reported, in Schedule 13D and 13G filings made with
the SEC, beneficial ownership of more than five percent of IPC's
outstanding common stock: Cable Systems Holding, LLC owns 4,829,584
shares, Chesapeake Partners Management Co., Inc. owns 939,400 shares and
Chesapeake Partners Limited Partnership owns 896,000 shares, or 59.80%,
11.63% and 11.09%, respectively. As a result of its control of IPC, Cable
Systems Holding, LLC may be deemed to beneficially own more than 5% of our
common stock. Cable Systems Holding, LLC, Cable Systems International,
Inc., Allegra Capital Partners III, L.P., Richard Kleinknecht, Charles F.
Auster, David A. Walsh and Anthony Servidio are parties to the Investors
Agreement, which, among other things, contains provisions concerning the
voting and transfer of shares of IPC common stock. Under applicable SEC
rules, this group of investors may be deemed to beneficially own more than
5% of our common stock as a result of the group's deemed beneficial
ownership of more than 50% of IPC's common stock. Citicorp Venture
Capital, Ltd, David Kirby and John O'Mara, members of Cable Systems
Holding, LLC, are entitled to exercise joint decision making authority
over the
75
<PAGE>
shares of IPC common stock held by it, and thus may also be deemed to
beneficially own more than 5% of our common stock.
(2) Consists of 381,904 shares beneficially owned by Allegra Capital Partners
III, L.P. Does not include 6,051,628 shares of IPC Common Stock owned by
other signatories of the Investors Agreement.
(3) Includes 138,528 shares issuable upon exercise of outstanding options that
are or become exercisable within 60 days of May 1, 1999. Does not includes
6,171,438 shares owned by other signatories of the Investors Agreement.
(4) Includes 3,000 shares jointly owned by Mr. Auster and his spouse and 300
shares owned by Mr. Auster's minor children. Also includes 69,264 shares
issuable upon exercise of outstanding options that are or become
exercisable within 60 days of May 1, 1999. Does not include 6,413,216
shares owned by other signatories of the Investors Agreement.
(5) Includes 34,632 shares issuable upon exercise of outstanding options that
are or become exercisable within 60 days of May 1, 1999.
(6) Consists of 34,632 shares issuable upon exercise of outstanding options
that are or become exercisable within 60 days after May 1, 1999.
(7) Includes 34,632 shares issuable upon exercise of outstanding options that
are or become exercisable within 60 days of May 1, 1999. Does not include
4,829,584 shares owned by Cable Systems Holding, LLC, of which Mr. Woog is
a member.
(8) Based on 8,076,188 shares of IPC Common Stock outstanding as reported in
the IPC Information Systems, Inc. proxy statement for the annual meeting
of stockholders as filed with the Securities and Exchange Commission.
76
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Agreements with IPC
We have entered into an inter-company agreement, a registration rights
agreement and a tax-sharing agreement with IPC. The inter-company agreement
contains provisions relating to the separation of our business operations from
IPC, as well as provisions governing the various interim and ongoing
relationships between us and IPC. The registration rights agreement provides
IPC with certain registration rights relating to the shares of our common
stock which it holds. The tax-sharing agreement contains provisions relating
to the allocation of tax liability and tax benefits between us and our
domestic subsidiaries and IPC and its other domestic subsidiaries.
We have set forth below a summary description of the inter-company
agreement, the registration rights agreement and the tax-sharing agreement.
These descriptions, which summarize the material terms of those agreements, do
not purport to be complete and are qualified in their entirety by reference to
the full text of those agreements which have been filed as exhibits to the
registration statement of which this prospectus is a part.
Inter-Company Agreement
Corporate support services. The inter-company agreement describes certain
corporate support services (including cash management, accounting, executive
management, legal, administrative, human resources, information systems and
insurance), that IPC will provide to us. Specified charges for these services
are generally intended to allow IPC to recover the costs of providing the
services to us without any profit. The indirect costs associated with IPC's
providing these services to us will be allocated to us based on the number of
employees employed by us in relation to the number of employees employed by
both IPC and us.
Financing arrangements. Under the inter-company agreement, IPC has agreed
to continue to provide us with ongoing financing and other forms of credit
enhancements such as letters of credit and guarantees of our obligations from
time to time, upon reasonable notice by us, up to the aggregate of $50 million
during the period beginning July 1, 1999 through June 30, 2001. 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 $55 million revolving
credit agreement. As of March 31, 1999, availability under the revolving
credit facility was limited to $26.6 million of which $24.9 million was
utilized for borrowings and letters of credit. However, IPC will not advance
funds to us, if at the time of any request for an advance, IPC (1) is not in
compliance with its obligations under the indenture for its senior discount
notes or (2) does not meet certain financial and other covenants in its
revolving credit agreement measuring operating performance. Amounts borrowed
from IPC may be used by us to fund our working capital, debt service and
operating losses.
Under the working capital facility, any working capital loans from IPC will
be made at a rate per annum equal to 2% over the base rate under IPC's
revolving credit agreement. The base rate under IPC's revolving credit
agreement 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 agreement.
The inter-company agreement provides that any letters of credit or other
forms of credit enhancement provided by IPC and with respect to which IPC is
liable under the revolving credit agreement or otherwise which are outstanding
on the date of the closing of this offering shall continue in full force and
effect at no cost to us on their same terms and conditions until their
expiration.
The cost to us of any letters of credit or other forms of credit
enhancement provided by IPC after this offering will be equal to IPC's cost of
obtaining letters of credit under the revolving credit agreement. All other
costs under the revolving credit agreement will continue to be borne by IPC.
Indenture obligations. In connection with its recapitalization transaction
on April 30, 1998, IPC issued and sold $247.4 million in principal amount of
10 7/8% senior discount notes due 2008 under an indenture. The
77
<PAGE>
indenture contains certain restrictive financial and operating covenants that
limit the discretion of the management of IPC and its restricted subsidiaries,
which includes all of IPC's material subsidiaries, including IXnet. Pursuant
to the inter-company agreement, we have agreed to be bound by the covenants
and other restrictions, limitations and other obligations of the indenture. A
copy of the indenture is filed as an exhibit to the registration statement of
which this prospectus is a part. The following summary of certain provisions
of the indenture does not purport to be complete and is qualified in its
entirety by reference to the full text of the indenture.
The notes are general unsecured senior obligations of IPC and rank on
parity with all other senior unsecured indebtedness of IPC.
The financial and operating covenants include the following:
. a limitation on incurring any indebtedness unless IPC and its restricted
subsidiaries, as a group, would not exceed a specified ratio of
indebtedness to earnings;
. a limitation on making any restricted payment, as defined in the
indenture, including payment of dividends, prepayment of subordinated
indebtedness and the repurchase of capital stock;
. a limitation on the ability of IPC to sell or to permit any subsidiary
to issue or sell capital stock of a subsidiary, unless the proceeds are
used for permitted capital expenditures;
. a limitation on entering into agreements or arrangements that could
limit any restricted subsidiary's ability to pay dividends or make other
payments or transfers to IPC;
. a limitation on making guarantees or entering into transactions with
affiliates;
. a limitation on incurring certain indebtedness secured by liens without
equally and ratably securing the notes;
. a limitation on entering into sale-leaseback transactions; and
. a limitation on selling non-current assets.
In addition, the indenture limits the ability of IPC to merge with, or to
transfer all or substantially all of its assets to, another person. The notes
provide for acceleration upon events of default.
Credit agreement obligations. In connection with its recapitalization
transaction, IPC entered into a five-year revolving credit agreement with a
syndicate of lenders (with General Electric Capital Corporation as
administrative agent and collateral agent to such lenders). The revolving
credit agreement provides access to up to $55 million of working capital
loans, including a sublimit of $10 million for the issuance of letters of
credit. The obligations under the revolving credit agreement are secured
senior obligations of IPC and its material subsidiaries. We are a guarantor
under the revolving credit agreement and have agreed to be bound by its
covenants and other restrictions, limitations and obligations. A copy of the
revolving credit agreement is filed as an exhibit to the registration
statement of which this prospectus is a part. The following summary of certain
provisions of the revolving credit agreement does not purport to be complete
and is qualified in its entirety by reference to the full text of the
revolving credit agreement.
The revolving credit agreement contains certain restrictive financial and
operating covenants that limit the discretion of the management of IPC and its
subsidiaries, including the following:
. a limitation on incurring indebtedness;
. a limitation on paying dividends, prepaying subordinated indebtedness,
repurchasing capital stock or making other restricted payments, as
defined in the agreement;
. a limitation on selling or issuing capital stock of a subsidiary, other
than the issuance of common stock in this offering and under the 1999
Stock Option Plan;
. a limitation on transactions with affiliates;
78
<PAGE>
. a limitation on investing in non-subsidiary companies or entities;
. a limitation on selling or otherwise disposing of assets, other than in
the ordinary course of business; and
. a limitation on merging or consolidating with any other entity or making
large capital expenditures.
In addition, the revolving credit agreement requires IPC and its
subsidiaries to provide financial information to the lenders, maintain
specified financial ratios relating to earnings and interest coverage and
maintain a first priority security interest, in favor of the lenders, over all
of its pledged collateral. Accordingly, all of our and our subsidiaries'
capital stock and real and personal property (including tangible and
intangible property) are pledged as collateral under IPC's revolving credit
agreement to support the borrowings of IPC. The lenders have the right to
cause the registration of shares of our common stock for public sale if we or
IPC default under the terms of the agreement and they foreclose on those
shares of our common stock owned by IPC. The revolving credit agreement
provides for acceleration upon events of default.
Real Estate.
Under the inter-company agreement, we have agreed with IPC regarding the
allocation of costs incurred for our occupancy of portions of IPC-leased
office facilities.
With respect to our largest occupied space, 88 Pine Street, New York, NY,
where our executive and sales offices are located, IPC has agreed, subject to
the consent of its landlord, to assign the lease, currently in the name of an
IPC subsidiary and covering the 6th floor and certain other space in that
building that we occupy to us. We will indemnify IPC for its continuing
liabilities to the landlord as assignor of this lease.
Our London, England executive, sales and network operations center occupies
two floors of a building under long-term lease to IPC. We will, in the future,
explore a formal sub-lease arrangement, if practicable. Until such time, and
also with respect to our occupancy of portions of IPC-leased branch office
facilities in Boston, Massachusetts, Chicago, Illinois, Los Angeles and San
Francisco, California, Philadelphia, Pennsylvania and Toronto, Canada, all
costs incurred by IPC for such space, for maintenance of it and for electric
and other utility costs, telephone system usage, etc. will be charged to us as
incurred for actual discernable costs and otherwise allocated between the
companies based upon the square footage occupied by each of us.
In the event that we elect, in the future, to relocate our portion of the
shared facilities in advance of the respective lease expiration, we will
indemnify IPC from costs that they subsequently incur for such vacant space to
the extent that IPC cannot efficiently absorb it for its needs.
Transfer of Internet Address.
We use the internet for both our internal needs and to provide service to
our customers. Currently, we use Internet Protocol (IP) address space
previously assigned to IPC. Under the inter-company agreement, we and IPC will
request that the American Registry for Internet Numbers ("ARIN"), the entity
which assigns IP address space to end-users, transfer to us the block of IP
addresses, previously assigned to IPC. We, in turn, will transfer to IPC the
smaller block of IP addresses that we own. ARIN's guidelines provide for the
transfer of IP address space as a result of mergers, acquisitions,
reorganizations and other corporate organizational changes.
Network services. We will continue to provide IPC with the IXPrime
dedicated voice service and its frame relay network at rates specified in the
inter-company agreement.
Installation and maintenance services. Under the inter-company agreement,
IPC will continue to provide us with installation services, which include
circuit testing and acceptance, line installations and DLIC installations at
the rates specified therein. IPC will also continue to provide us with
maintenance services, which include circuit transmission testing, equipment
replacement and DLIC support, at the response times and at the rates specified
in the inter-company agreement. IPC will also continue to provide us with
staging and integration
79
<PAGE>
services, which are utilized for large scale projects requiring customer
premises equipment, and include,staging facilities, engineers and technicians
to order, accept and assemble customer configurations at the rates specified
in the inter-company agreement. The inter-company agreement also provides for
our purchase from IPC of new, used and refurbished turret systems at the
purchase prices specified therein.
IPC enhanced compensation program. The inter-company agreement provides for
the continuation of the IPC Enhanced Compensation Program for years after
the closing of this offering. Under the IPC Enhanced Compensation Program IPC
account executives receive bonuses as an incentive to market our services and
attract new customers to IXnet.
Product Distribution. IPC has granted to us distribution rights for sales
by us of some of its products in connection with sales of our services.
Deconsolidation. Under the inter-company agreement, we are prohibited, for
two and one half years from May 1998, from taking any action that would result
in the deconsolidation for United States federal income tax purposes of us and
IPC, unless we receive the prior written consent from the board of directors
of IPC.
Registration Rights Agreement
After the closing of this offering, IPC will own % of our outstanding
shares of common stock or % if the underwriters exercise their over-allotment
option. IPC may not freely sell such shares to the public without registration
under the Securities Act. See "Shares Eligible for Future Sale--General."
Accordingly, we have entered into a registration rights agreement with IPC to
provide it with certain registration rights relating to the shares of our
common stock which it holds. These registration rights generally become
effective after 180 days following the date of this prospectus.
IPC may request up to two registrations (each, a "demand registration")
under the Securities Act of all or any portion of our shares covered by the
registration rights agreement, and we will be obligated to register such
shares as requested by IPC.
IPC will designate certain terms of each offering effected pursuant to a
demand registration, which may take any form, including an underwritten public
offering or a shelf registration. If a demand registration will be an
underwritten offering, IPC may select the investment banker(s) and manager(s),
subject to our reasonable objection, as well as any financial printer,
solicitation and/or exchange agent and counsel for the offering. We may select
our own outside counsel and independent auditors.
We would only be obligated to register shares as a result of a demand
registration if the reasonably anticipated aggregate public offering price was
at least $ million.
If we are eligible to utilize a "short form" registration statement on Form
S-3 (or successor form) to register an offering of our securities, IPC may
request that we file a registration statement on Form S-3 (an "S-3
registration"), covering all or a portion of our securities, provided that the
aggregate offering price is at least $ million. IPC may request one S-3
registration every two years. A request for an S-3 registration will not be
counted as a demand registration.
We are not required to undertake a demand registration within 120 days of
the effective date of a previous demand registration, other than a demand
registration that was effected as a shelf registration. Also, we have the
right to postpone the filing or effectiveness of any demand registration for
up to 120 days if, in the reasonable judgment of our board of directors, such
registration would reasonably be expected to have a material adverse effect on
any existing proposal or plans by our company to engage in certain material
transactions; provided, however, that we may exercise this right only once in
any 12-month period.
The registration rights agreement also provides for certain "piggyback"
registration rights for IPC. Whenever we propose to register any of our
securities under the Securities Act for ourselves or others, we shall
80
<PAGE>
provide prompt notice to IPC and include in such registration all shares of
our stock which IPC requests to be included, subject to customary cutback and
holdback provisions (each, a "piggyback registration").
The registration rights agreement contains indemnification and contribution
provisions by us for the benefit of IPC and by IPC for the benefit of us and
any underwriters with respect to information provided by IPC.
IPC may transfer shares covered by the registration rights agreement, and
the holders with a minimum amount of such transferred shares will be entitled
to the benefits of, and the obligations under, the registration rights
agreement. Such transferees will be entitled to the rights available to IPC
described above; provided, however, that the holder or holders of a majority
of the shares covered by the registration rights agreement will be entitled to
exercise certain of such rights.
The registration rights will remain in effect with respect to any shares of
our common stock for a period of five years from the closing of the offering,
or until:
. such shares have been sold pursuant to an effective registration
statement under the Securities Act;
. such shares have been sold to the public pursuant to Rule 144 under the
Securities Act, or any successor provision;
. such shares have been otherwise transferred and the new certificates
replacing them do not bear a legend restricting further transfer without
registration under the Securities Act or any similar state law;
. such shares have ceased to be outstanding; or
. in the case of shares held by a transferee of IPC that is not our
affiliate, when such shares become eligible for sale pursuant to Rule
144(k) under the Securities Act, or any successor provision.
Compensation for Use of Tax Losses and Tax-Sharing Agreement
We, IPC and our respective United States subsidiaries will continue to be
members of an affiliated group of corporations that file United States federal
income tax returns on a consolidated basis. We and our domestic subsidiaries
and IPC and its other domestic subsidiaries have entered into a tax-sharing
agreement under which the tax liability will be allocated between us and IPC.
Under the tax-sharing agreement, we or IPC may be required to pay compensation
to the other for tax losses which reduced the combined tax liability. The tax-
sharing agreement will provide for similar arrangements with respect to state,
local and foreign taxation.
IPC's Acquisition of IXnet
In June 1995, IPC invested $5.5 million in return for shares of our common
stock, which, following such issuance of shares, was equal to 80% of our
outstanding stock. Pursuant to installment and share purchase agreements and
as part of the acquisition of our stock by IPC, we purchased all of the common
stock held by three of our five stockholders, including those of Robert Mazer
and Charles Auster's spouse, for cash and other deferred consideration. The
deterred consideration may be made upon a change of control or if none occurs
in the year 2000. Payment is based upon a valuation formula. Following IPC's
investment, David Walsh and Anthony Servidio retained ownership of 20% of our
outstanding stock subject to an agreement which allowed IPC, or Messrs. Walsh
or Servidio, to force a sale of the shares held by Messrs. Walsh and Servidio
to IPC upon a change in control or in the year 2000. The installment and share
purchase agreements with Robert Mazer and a third party remain outstanding.
Based upon data as of March 31, 1999, we believe that any obligation under the
initial acquisition agreement is not material. Mr. Mazer is a partner of the
law firm of Vinson and Elkins, Washington D.C. and is our counsel for
regulatory matters.
In connection with IPC's recapitalization transaction, we, IPC and Messrs.
Walsh and Servidio entered into a share exchange and termination agreement,
dated as of December 18, 1997, whereby Messrs. Walsh and Servidio agreed to
exchange their shares of IXnet common stock for % and % of IPC common
stock, respectively. Ten percent of the shares were to be paid upon receipt by
IPC of a release of any obligation it may have had under the installment share
purchase agreements. The retained shares were forfeited to IPC on
81
<PAGE>
June 18, 1998. On April 30, 1998, pursuant to the terms of a stock transfer
agreement, Mr. Auster and his spouse released us and IPC from any obligation
to make a future payment to Mrs. Auster under the installment share purchase
agreement in exchange for % of IPC common stock, transferred to them by
Messrs. Walsh and Servidio.
Employment Agreements
We are party to employment agreements with a number of our executive
officers that provide for, among other terms, specified salaries and severance
arrangements. See "Management--Employment Agreements."
Ownership of IPC Stock by our Directors and some of our Executive Officers
Our directors and some of our executive officers own substantial amounts of
IPC stock and options to purchase IPC stock. The stock options were granted to
certain executive officers as compensation under the IPC Information Systems,
Inc. 1998 Stock Incentive Plan. See "Principal Stockholders." Such ownership
could create, or appear to create, potential conflicts of interest when
directors and officers are faced with decisions that could have different
implications for us and IPC.
Guarantees
IPC provides various forms of credit enhancement to us. These include
letters of credit, unconditional guarantees of equipment acquisitions and
financings and trade payables. We have guaranteed IPC borrowings under its
revolving credit agreement and we have pledged our assets to secure such
guarantee.
IPC's Contribution of Capital to IXnet
Since 1995, IPC has provided us with approximately $100 million to fund our
operations. Following the $73 million capital contribution from IPC, in March
1999, we remain indebted to them for approximately $25 million.
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, our authorized capital stock will
consist of shares of common stock, $0.01 par value per share. There were
shares of our common stock outstanding immediately prior to the offering,
held of record by one stockholder. We have reserved for issuance shares
pursuant to the 1999 Stock Option Plan.
The following summary of our capital stock and certain provisions of our
certificate of incorporation and bylaws is qualified in its entirety by the
provisions of the certificate of incorporation and bylaws, which are included
as exhibits to the registration statement of which this prospectus is a part.
Common Stock
Holders of our common stock are entitled to one vote per share on all
matters submitted to a vote of stockholders, including the election of
directors, and are entitled to receive any dividends that are declared by our
Board of Directors out of funds legally available therefor. See "Dividend
Policy." In the event of our liquidation, dissolution or winding up, holders
of our common stock are entitled to share ratably in all assets remaining
after we pay our liabilities. Holders of our common stock have no preemptive
or other subscription rights and no rights to convert their common stock into
any other securities, and there are no redemptive provisions with respect to
such shares. Each outstanding share of common stock is, and all shares of
common stock paid for in this offering will be, fully paid and non-assessable.
82
<PAGE>
Registration Rights
We have entered into an agreement with IPC to provide it with registration
rights relating to the shares of our common stock which it holds. We granted
the lenders under the revolving credit agreement registration rights which
they may exercise if we or IPC default under the terms of the revolving credit
agreement and the lenders foreclose on the shares of our stock owned by IPC.
See "Certain Relationships and Related Transactions--Registration Rights
Agreement," and for more information regarding the revolving credit agreement
see "Certain Relationships and Related Transactions--Revolving Credit
Agreement Obligations."
Delaware Anti-Takeover Law and Certain Charter Provisions
We have waived the provisions of Section 203 of the Delaware General
Corporation Law ("Section 203") in our certificate of incorporation. Section
203 prohibits a publicly held Delaware corporation from engaging in a
"business combination" transaction with any "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an "interested stockholder," unless the business combination is
approved in a prescribed manner. For purposes of Section 203, a "business
combination" includes a merger, asset sale or other transaction resulting in a
financial benefit to the interested stockholder, and an "interested
stockholder" is a person who, together with affiliates and associates, owns
(or within three years, did own) 15% or more of a corporation's voting stock.
Had the provision not been waived, or if, in the future, we elect to be
governed by Section 203, the statute could prohibit or delay the
accomplishment of mergers or other takeover or "change in control" attempts
with respect to us and, accordingly, may discourage attempts to acquire us.
Transfer Agent and Registrar
ChaseMellon Shareholder Services, L.L.C., New York, New York has agreed to
be the transfer agent and registrar for our common stock.
SHARES ELIGIBLE FOR FUTURE SALE
General
After this offering, we will have shares of common stock outstanding.
If the underwriters exercise the over-allotment option in full, we will have
shares of common stock outstanding. All of the shares of our common stock
sold in this offering will be freely tradable without restriction under the
Securities Act unless such shares are acquired by an "affiliate" of IXnet as
that term is defined in Rule 144 promulgated under the Securities Act, which
shares will remain subject to the resale limitations of Rule 144.
The shares of our common stock that will continue to be held by IPC after
this offering constitute "restricted securities" within the meaning of Rule
144, and will be eligible for sale by IPC in the open market after this
offering, subject to the applicable requirements of Rule 144 and certain
contractual lockup provisions, both of which are described below.
Rule 144
Generally, Rule 144 provides that a person who has beneficially owned
"restricted" shares for at least one year will be entitled to sell on the open
market in brokers' transactions within any three month period a number of
shares that does not exceed the greater of:
. 1% of the then outstanding shares of common stock; and
. the average weekly trading volume in the common stock on the open market
during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to certain post-sale notice
requirements and the availability of current public information about us.
83
<PAGE>
Under Rule 144(k), a stockholder who is not currently, and who has not been
for at least three months before the sale, an affiliate of ours who owns
restricted shares that have been outstanding for at least two years may resell
those restricted shares without compliance with the above requirements. The
one- and two-year holding periods described above do not begin to run until
the full purchase price is paid by the person acquiring the restricted shares
from us or an affiliate of ours.
If an affiliate currently owns shares of our common stock or otherwise
acquires shares of our common stock, the shares held by such person may only
be sold under Rule 144 in brokers' transactions and subject to the volume
limitations described above without regard to duration held. Shares properly
sold in reliance upon Rule 144 to persons who are not affiliates are
thereafter freely tradable without restriction unless subsequently acquired by
an affiliate.
Sales of substantial amounts of our common stock in the open market, or the
availability of such shares for sale, could adversely affect the price of our
common stock. Any shares distributed by IPC will be eligible for immediate
resale in the public market without restrictions by persons other than our
affiliates.
Rule 701
In general, under Rule 701 as promulgated under the Securities Act, any of
our employees, consultants or advisors who purchase shares from us in
connection with a compensatory stock or option plan or other written agreement
outstanding prior to the effective date of this offering is eligible to resell
such shares 90 days after the effective date of this offering in reliance on
Rule 144, but without compliance with certain restrictions, including the
holding period, contained in Rule 144. After the closing of this offering,
shares will be eligible for sale under Rule 701.
Registration Rights
Pursuant to the registration rights agreement, IPC and its transferees will
be entitled to certain registration rights with respect to the shares our of
common stock that IPC owns. See "Certain Relationships and Related
Transactions--Registration Rights Agreement." The lenders under the revolving
credit agreement are also entitled to certain registration rights. See
"Certain Relationships and Related Transactions--Revolving Credit Agreement
Obligations." After a sale of these shares pursuant to any such registration,
the registered shares will become freely tradable without restriction under
the Securities Act subject to restrictions imposed by lock-up agreements
described below. Any such sale of our common stock could have a material
adverse effect on the trading price of our common stock.
Lock-Up Agreements
IPC, the executive officers and directors of IXnet and IPC, and certain
stockholders of IPC have signed lock-up agreements under which they agree to
be restricted from the transfer or sale of any IXnet or IPC common stock for a
period of 180 days from the date of this prospectus, without prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation, which consent
may be granted from any time, or from time to time, without notice. See
"Underwriting."
Prior to the offering, there has been no market for our common stock. No
predictions can be made of the effect, if any, that market sales of shares of
common stock or the availability of such shares for sale will have on the
market price prevailing from time to time. Nevertheless, sales of significant
amounts of our common stock could adversely affect the prevailing market price
of the common stock, as well as impair our ability to raise capital through
the issuance of additional equity securities.
84
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
dated 1999, the underwriters named below, who are represented by
Donaldson, Lufkin & Jenrette Securities Corporation, Salomon Smith Barney
Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, First Union Capital
Markets Corp. and DLJdirect Inc., have severally agreed to purchase the number
of shares of our common stock shown opposite their names below.
<TABLE>
<CAPTION>
Number of
Underwriters: Shares
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation..................
Salomon Smith Barney Inc.............................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated...................
First Union Capital Markets Corp.....................................
DLJdirect Inc........................................................
---
Total..............................................................
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares included in this
offering are subject to approval of certain legal matters by their counsel and
to certain other conditions. The underwriters are obligated to purchase and
accept delivery of all the shares (other than those covered by the over-
allotment option described below) if they purchase any of the shares.
The underwriters propose to initially offer some of our shares directly to
the public at the public offering price shown on the cover page of this
prospectus and some of the shares to dealers at the public offering price less
a concession not in excess of $ per share. The underwriters may allow, and
such dealers may re-allow, a concession not in excess of $ per share on
sales to other dealers. After the initial offering of the shares to the
public, the representatives may change the public offering price and such
concessions. The Underwriters do not intend to confirm sales to any accounts
over which they exercise discretionary authority.
The following table shows the underwriting fees we will pay to the
underwriters in connection with this offering. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares of common stock.
<TABLE>
<CAPTION>
No Exercise Full Exercise
<S> <C> <C>
Per Share........................................
Total............................................
</TABLE>
We will pay the offering expenses, estimated to be $ million.
We have granted to the underwriters an option, exercisable for 30 days from
the date of the underwriting agreement, to purchase up to additional
shares at the public offering price less the underwriting fees. The
underwriter may exercise such option solely to cover over-allotments, if any,
made in connection with this offering. To the extent that the underwriters
exercise such option, each underwriter will become obligated, subject to
certain conditions, to purchase a number of additional shares approximately
proportionate to such underwriter's initial purchase commitment.
IXnet and IPC have agreed to indemnify the underwriters against certain
civil liabilities, including liabilities under the Securities Act of 1933, as
amended, or to contribute to payments that the underwriters may be required to
make in respect of any of those liabilities.
85
<PAGE>
IXnet, IPC, the executive officers and directors of IXnet and IPC, and
certain stockholders of IPC have agreed that, for a period of 180 days from
the date of this prospectus, they will not, without the prior written consent
of Donaldson, Lufkin & Jenrette Securities Corporation:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of IXnet or IPC common stock or any
securities convertible into or exercisable or exchangeable for such
common stock or
. enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any such
common stock
(regardless of whether any of the transactions described in clause (1) or (2)
is to be settled by the delivery of IXnet or IPC common stock, or such
securities, in cash or otherwise). In addition, during such period, IXnet and
IPC have agreed not to file any registration statement with respect to, and
each of its executive officers, directors and certain stockholders have agreed
not to make any demand for, or exercise any right with respect to, the
registration of any shares of IXnet or IPC common stock or any securities
convertible into or exercisable or exchangeable for IXnet or IPC common stock
without the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation.
The representatives may, from time to time, engage in transactions with and
perform services for IXnet in the ordinary course of this business.
Prior to the offering, there has been no established trading market for the
common stock. The initial public offering price for the common stock offered
here will be determined by negotiation among IXnet, and the representatives.
The factors to be considered in determining the initial public offering price
include the history of and the prospects for the industry in which IXnet's
past and present operations, historical results of operations, and prospects
for future earnings, the recent market prices of securities of generally
comparable companies and the general condition of the securities markets at
the time of the offering.
Application has been made to list the common stock on the Nasdaq National
Market.
Other than in the United States, no action has been taken by IXnet or the
underwriters that would permit a public offering of the shares of common stock
included in this offering in any jurisdiction where action for that purpose is
required. The shares included in this offering may not be offered or sold,
directly or indirectly, nor may this prospectus or any other offering material
or advertisement in connection with the offer and sale of any such shares be
distributed or published in any jurisdiction, except under circumstances that
will result in compliance with the applicable rule and regulations of such
jurisdiction. Persons who receive this prospectus are advised to inform
themselves about and to observe any restrictions relating to the offering of
the common stock and the distribution of this prospectus. This prospectus is
not an offer to sell or solicitation of an offer to buy any shares of common
stock included in this offering in any jurisdiction where that would not be
permitted or legal.
In connection with this offering, certain underwriters may engage in
transaction that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the underwriters may overallot this offering,
creating a syndicate short position. In addition, the underwriters may bid for
and purchase shares of common stock in the open market to cover syndicate
short positions or to stabilize the price of the common stock. These
activities may stabilize or maintain the market price of the common stock
above independent market levels. The underwriters are not required to engage
in these activities and may end any of these activities at any time.
Under Rule 2720 of the Conduct Rules of the NASD, Salomon Smith Barney Inc.
may be deemed to have a "conflict of interest" with us by virtue of the fact
that its affiliates may be deemed to beneficially own greater than 10% of our
outstanding common stock by virtue of its ownership of IPC common stock. In
such a situation,
86
<PAGE>
the NASD requires that, among other things, the price can be no higher than
that recommended by a "qualified independent underwriter" meeting certain
standards. In accordance with this requirement, Donaldson, Lufkin & Jenrette
Securities Corporation has agreed to act as a qualified independent
underwriter in the offering and will recommend a maximum offering price for
the shares of our common stock in compliance with the requirements of Rule
2720. In connection with its role as a qualified independent underwriter,
Donaldson, Lufkin & Jenrette Securities Corporation is performing due
diligence investigations and is reviewing and participating in the preparation
of this prospectus and the registration statement of which this prospectus
forms a part. We have agreed to pay $5,000 to Donaldson, Lufkin & Jenrette
Securities Corporation as a fee for its services as a qualified independent
underwriter.
LEGAL MATTERS
Our counsel, Thacher Proffitt & Wood, New York, New York, will pass upon
the validity of the common stock offered by this prospectus. Our special
counsel, Vinson & Elkins L.L.P., Washington, D.C., will pass upon certain
regulatory matters. Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts,
will pass upon certain legal matters related to this offering for the
underwriters.
EXPERTS
The combined and consolidated financial statements of IXnet, Inc. as of
September 30, 1997 and 1998 and for the years ended September 30, 1996, 1997
and 1998 and the financial statements of MXNet Inc. as of and for the year
ended May 31, 1997, included in this Prospectus, have been so included in
reliance on the reports of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The consolidated financial statements of Saturn Global Network Services
Holdings Limited as of April 30, 1997 and 1998 and for the years ended April
30, 1996, 1997 and 1998, included in this Prospectus, have been so included in
reliance on the report of PricewaterhouseCoopers, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
We filed with the Securities and Exchange Commission (the "Commission") a
registration statement on Form S-1 under the Securities Act of 1933, as
amended, with respect to the shares of common stock offered hereby. This
prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedule filed therewith. For
further information with respect to IXnet and the common stock offered hereby,
reference is made to the registration statement and the exhibits and schedule
filed therewith. Statements contained in this prospectus regarding the
contents of any contract or any other document to which reference is made are
not necessarily complete, and, in each instance, reference is made to a copy
of such contract or other document filed as an exhibit to the registration
statement, each such statement being qualified in all respects by such
reference.
You may inspect a copy of the registration statement and exhibits and
schedule filed therewith without charge:
. At the Public Reference Room of the Commission, Room 1024--Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549;
. At the public reference facilities as the Commission's regional offices
located at Seven World Trade Center, 13th Floor, New York, New York
10048 or Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661;
87
<PAGE>
. By writing to the Commission, Public Reference Section, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549;
. At the offices of The Nasdaq Stock Market, Reports Section, 1735 K
Street, N.W., Washington, D.C. 20006; or
. From the Internet site maintained by the Commission at
http://www.sec.gov, which contains reports, proxy and information
statements and other information regarding issuers that file
electronically with the Commission.
Some locations may charge prescribed or other fees for copies.
88
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Combined and Consolidated Financial Statements for IXnet, Inc.
Report of Independent Accountants...................................... F-2
Combined and Consolidated Balance Sheets at September 30, 1997 and 1998
and March 31, 1999 (unaudited)........................................ F-3
Combined and Consolidated Statements of Operations for the Years Ended
September 30, 1996, 1997 and 1998 and for the Six Months Ended March
31, 1998 and 1999 (unaudited)......................................... F-4
Combined and Consolidated Statements of Cash Flows for the Years Ended
September 30, 1996, 1997 and 1998 and for the Six Months Ended March
31, 1998 and 1999 (unaudited)......................................... F-5
Combined and Consolidated Statements of Changes in Stockholder's
(Deficit) Equity for the Years Ended September 30, 1996, 1997 and 1998
and for the Six Months Ended March 31, 1999 (unaudited)............... F-6
Notes to Combined and Consolidated Financial Statements................ F-7
Consolidated Financial Statements for Saturn Global Network Services
Holdings Limited
Condensed Consolidated Balance Sheets at April 30, 1998 and October 31,
1998 (unaudited)...................................................... F-22
Condensed Consolidated Statements of Operations for the Six Months
Ended October 31, 1997 and 1998 (unaudited)........................... F-23
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended October 31, 1997 and 1998 (unaudited)........................... F-24
Notes to Condensed Consolidated Financial Statements (unaudited)....... F-25
Report of Independent Accountants...................................... F-28
Consolidated Statements of Operations for the Years Ended April 30,
1996, 1997, and 1998.................................................. F-29
Consolidated Balance Sheets at April 30, 1997 and 1998................. F-30
Consolidated Statements of Cash Flows for the Years Ended April 30,
1996, 1997 and 1998................................................... F-31
Notes to Consolidated Financial Statements............................. F-32
Financial Statements for MXNet Inc.
Report of Independent Accountants...................................... F-45
Balance Sheets as of May 31, 1997 and November 30, 1997 (unaudited).... F-46
Statements of Operations for the Year Ended May 31, 1997 and for the
Six Months Ended November 30, 1996 and 1997 (unaudited)............... F-47
Statements of Cash Flows for the Year Ended May 31, 1997 and for the
Six Months Ended November 30, 1996 and 1997 (unaudited)............... F-48
Statement of Stockholder's Deficit for the Year Ended May 31, 1997..... F-49
Notes to Financial Statements.......................................... F-50
</TABLE>
F-1
<PAGE>
Report of Independent Accountants
To the Stockholder of
IXnet, Inc.:
In our opinion, the accompanying combined and consolidated balance sheets and
the related combined and consolidated statements of operations, cash flows and
changes in stockholder's (deficit) equity present fairly, in all material
respects, the financial position of IXnet, Inc. (the "Company") at September
30, 1997 and 1998, and the results of its operations and cash flows for the
years ended September 30, 1996, 1997, and 1998, in conformity with generally
accepted accounting principles. 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 generally accepted auditing
standards, 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 provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
May 14, 1999
F-2
<PAGE>
IXNET, INC.
COMBINED AND CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except per share amount)
---------------------
<TABLE>
<CAPTION>
September 30,
------------------ March 31,
1997 1998 1999
-------- -------- ----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $ 525 $ 1,255 $ 4,061
Trade receivables, less allowance for
doubtful accounts of $325, $621 and $1,046,
respectively................................ 4,997 9,844 14,814
Prepaid expenses and other current assets.... 2,581 2,707 2,966
-------- -------- --------
Total current assets....................... 8,103 13,806 21,841
Property, plant and equipment, net............. 18,581 36,351 47,595
Goodwill, net.................................. 860 9,023 54,761
Other assets................................... 102 1,152 1,247
-------- -------- --------
Total assets............................... $ 27,646 $ 60,332 $125,444
======== ======== ========
LIABILITIES AND STOCKHOLDER'S (DEFICIT) EQUITY
Current liabilities:
Accounts payable............................. $ 512 $7,028 $ 8,010
Accrued liabilities.......................... 3,344 9,007 18,893
Current portion of capital leases............ 2,723 4,057 4,885
Current portion of notes payable............. -- -- 4,941
-------- -------- --------
Total current liabilities.................. 6,579 20,092 36,729
Note payable to parent......................... 20,072 43,629 25,522
Lease obligations, net of current portion...... 9,576 11,570 13,907
Notes payable, net of current portion.......... -- -- 7,031
-------- -------- --------
Total liabilities.......................... 36,227 75,291 83,189
-------- -------- --------
Commitments and contingencies
Stockholder's (deficit) equity:
Common stock--$0.01 par value, authorized
2,000 shares; 1,000 shares issued and
outstanding................................. -- -- --
Paid-in capital.............................. 13,323 34,261 112,515
Accumulated deficit.......................... (22,070) (49,709) (69,826)
Cumulative translation adjustment............ 166 489 (434)
-------- -------- --------
Total stockholder's (deficit) equity....... (8,581) (14,959) 42,255
-------- -------- --------
Total liabilities and stockholder's
(deficit) equity.......................... $ 27,646 $ 60,332 $125,444
======== ======== ========
</TABLE>
See Notes to Combined and Consolidated Financial Statements.
F-3
<PAGE>
IXNET, INC.
COMBINED AND CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except per share amounts)
---------------------
<TABLE>
<CAPTION>
Six months ended
Year ended September 30, March 31,
--------------------------- ------------------
1996 1997 1998 1998 1999
------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue....................... $ 3,459 $ 17,838 $ 35,853 $ 15,318 $ 32,611
Cost of revenue............... 4,406 19,823 35,652 15,413 30,934
Sales and marketing expense... 1,057 4,172 8,455 3,213 4,878
General and administrative
expense...................... 2,868 3,439 5,001 2,331 2,815
Depreciation and
amortization................. 998 3,460 9,060 2,924 9,508
Special charge................ -- -- 1,350 -- --
------- -------- -------- -------- --------
Loss from operations...... (5,870) (13,056) (23,665) (8,563) (15,524)
Interest expense, net......... (247) (2,040) (3,527) (1,521) (4,318)
Other income (expense), net... -- 117 26 3 (18)
------- -------- -------- -------- --------
Loss before provision for
income taxes............. (6,117) (14,979) (27,166) (10,081) (19,860)
Provision for income taxes.... 62 229 473 171 257
------- -------- -------- -------- --------
Net loss.................. $(6,179) $(15,208) $(27,639) $(10,252) $(20,117)
======= ======== ======== ======== ========
Basic and diluted loss per
share........................ $(6,179) $(15,208) $(27,639) $(10,252) $(20,117)
======= ======== ======== ======== ========
Basic and diluted weighted
average number of shares
outstanding.................. 1,000 1,000 1,000 1,000 1,000
======= ======== ======== ======== ========
</TABLE>
See Notes to Combined and Consolidated Financial Statements.
F-4
<PAGE>
IXNET, INC.
COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
---------------------
<TABLE>
<CAPTION>
Year ended Six months ended
September 30, March 31,
--------------------------- ------------------
1996 1997 1998 1998 1999
------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss..................... $(6,179) $(15,208) $(27,639) $(10,252) $(20,117)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization.............. 817 3,279 6,865 2,508 6,226
Amortization of goodwill... 181 181 2,195 416 3,282
Provision for doubtful
accounts.................. -- 325 1,674 378 529
Changes in operating assets
and liabilities:
Trade receivables........ (2,162) (3,178) (5,957) (2,370) (2,016)
Prepaid expenses and
other current assets.... (188) (2,435) 38 432 616
Other assets............. (16) (36) (173) (139) 85
Accounts payable......... 584 (108) 2,217 172 (1,653)
Accrued liabilities...... 723 2,511 5,687 2,689 1,441
------- -------- -------- -------- --------
Net cash used in
operating activities.... (6,240) (14,669) (15,093) (6,166) (11,607)
------- -------- -------- -------- --------
Cash flows from investing
activities:
Capital expenditures......... (4,858) (3,495) (12,930) (5,680) (7,683)
Acquisition of Saturn Global
Network Holdings Services
Limited, net of cash
acquired.................... -- -- -- -- (34,713)
Other........................ -- -- (842) -- --
------- -------- -------- -------- --------
Net cash used in investing
activities................ (4,858) (3,495) (13,772) (5,680) (42,396)
------- -------- -------- -------- --------
Cash flows from financing
activities:
Financings from parent,
net......................... 5,552 12,887 23,476 9,333 54,893
Paid-in capital.............. 2,260 5,535 9,478 3,977 5,254
Principal payments on
capital leases.............. (221) (1,818) (3,125) (1,376) (2,152)
Repayment of notes payable... -- -- -- -- (555)
------- -------- -------- -------- --------
Net cash provided by
financing activities...... 7,591 16,604 29,829 11,934 57,440
------- -------- -------- -------- --------
Effect of exchange rate
changes on cash.............. (36) 469 (234) (156) (631)
------- -------- -------- -------- --------
Net (decrease) increase in
cash......................... (3,543) (1,091) 730 (68) 2,806
Cash and cash equivalents,
beginning of period.......... 5,159 1,616 525 525 1,255
------- -------- -------- -------- --------
Cash and cash equivalents, end
of period.................... $ 1,616 $ 525 $ 1,255 $ 457 $ 4,061
======= ======== ======== ======== ========
Cash paid during the period
for-
Interest..................... $ 352 $ 2,040 $ 3,527 $ 1,521 $ 4,318
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 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...................... 4,633 9,685 6,414 3,489 5,345
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 Combined and Consolidated Financial Statements.
F-5
<PAGE>
IXNET, INC.
COMBINED AND CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S (DEFICIT)
EQUITY
(Dollar amounts in thousands)
---------------------
<TABLE>
<CAPTION>
Common Stock Cumulative
------------- Paid-in Accumulated translation Comprehensive
Shares Amount capital deficit adjustment Total loss
------ ------ -------- ----------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30,
1995................... 1,000 $-- $ 5,528 $ (683) $ -- $ 4,845
Paid-in capital........ -- -- 2,260 -- -- 2,260
Net loss............... -- -- -- (6,179) -- (6,179) $ (6,179)
Translation
adjustment............ -- -- -- -- (36) (36) (36)
----- ---- -------- -------- ----- ------- --------
Total comprehensive
loss................ $ (6,215)
========
Balance, September 30,
1996................... 1,000 -- 7,788 (6,862) (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................... 1,000 -- 13,323 (22,070) 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................... 1,000 -- 34,261 (49,709) 489 (14,959)
Paid-in capital
(unaudited)........... -- -- 78,254 -- -- 78,254
Net loss (unaudited)... -- -- -- (20,117) -- (20,117) $(20,117)
Translation adjustment
(unaudited)........... -- -- -- -- (923) (923) (923)
----- ---- -------- -------- ----- ------- --------
Total comprehensive
loss (unaudited).... $(21,040)
========
Balance, March 31, 1999
(unaudited)............ 1,000 $-- $112,515 $(69,826) $(434) $42,255
===== ==== ======== ======== ===== =======
</TABLE>
See Notes to Combined and Consolidated Financial Statements.
F-6
<PAGE>
IXNET, INC.
NOTES TO COMBINED AND CONSOLIDATED 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.
In connection with an anticipated public offering of the businesses
comprising IXnet, the Company was incorporated in Delaware on May 4, 1999, as a
wholly owned subsidiary of IPC Information Systems, Inc. ("IPC"). On May 12,
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) 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 on April 30, 1998. On March 31, 1999, IEXN
capitalized to paid-in capital $73.0 million of its then outstanding note
payable to IPC.
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) authorized and 100 shares issued and
outstanding. 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, 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.
The Company is currently incurring operating losses, which are expected to
continue into the foreseeable future. In addition, as the business grows,
additional working capital may be required along with the funding of the
Company's capital requirements. IPC has committed to fund such requirements
from its cash flows and its Revolving Credit Facility (see Note 9) through
September 2000.
The combined and consolidated financial statements may not be representative
of the financial position, results of operations, changes in stockholder's
(deficit) equity and cash flows of the Company under future operating
agreements with IPC.
F-7
<PAGE>
IXNET, INC.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
---------------------
2. Summary of Significant Accounting Policies:
Principles of Combination and Consolidation
The financial statements as of September 30, 1997 and for the years ended
September 30, 1996 and 1997, include the historical financial information of
IEXN and its consolidated subsidiaries. The financial statements as of
September 30, 1998 and March 31, 1999, and for the year ended September 30,
1998 and for the six months ended March 31, 1998 and 1999, 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.
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.
Revenue Recognition
Revenue is recognized as services are provided. Installation revenue is
deferred and recognized ratably over the average contract term.
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 is placed into service. Direct
costs related to the installation of network equipment are capitalized and
depreciated over the life of the asset, while on-going maintenance is expensed
as incurred.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of
the identifiable net assets acquired in acquisitions accounted for as purchase
acquisitions. Goodwill is amortized on a straight-line basis over the periods
benefited. The Company reviews for the impairment of goodwill when events and
circumstances indicate the carrying amount of an asset may not be recoverable,
based on estimated undiscounted future cash flows compared with the carrying
value of goodwill. Goodwill includes the push down of amounts recorded in
connection with IPC's acquisitions of IEXN and MXNet.
F-8
<PAGE>
IXNET, INC.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
---------------------
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 has been reimbursed
currently 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.
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
stockholder's (deficit) equity.
Unaudited Interim Financial Statements
In the opinion of management, the accompanying unaudited interim financial
statements include all necessary adjustments for a fair presentation of the
financial position of the Company as of March 31, 1999, and the results of its
operations and its cash flows for the six months ended March 31, 1998 and 1999,
in conformity with generally accepted accounting principles applied on a
consistent basis. The results of operations for the six months ended March 31,
1998 and 1999 are not necessarily indicative of the results to be expected for
the full year.
F-9
<PAGE>
IXNET, INC.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
---------------------
Earnings Per Share
Basic and diluted loss per share is computed by dividing net loss by the
weighted average number of common shares outstanding during each period.
Historical per share data has been computed to reflect the shares of IXnet
issued on May 4, 1999 as if they had been issued and outstanding for all
periods presented.
Effects of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 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. The disclosures prescribed by SFAS No. 131 will be effective for the
Company's year ending September 30, 1999. Financial statement disclosures for
prior periods are required to be restated. The Company is in the process of
evaluating the disclosure requirements. The adoption of SFAS No. 131 will have
no impact on the Company's 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. The Company
does not currently use derivative financial instruments.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("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. 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.
F-10
<PAGE>
IXNET, INC.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
---------------------
The Company's total comprehensive loss for the six months ended March 31,
1998 and 1999 was as follows (in thousands):
<TABLE>
<CAPTION>
Six months ended
March 31,
------------------
1998 1999
-------- --------
(unaudited)
<S> <C> <C>
Net loss................................................ $(10,252) $(20,117)
Translation adjustment.................................. 163 (923)
-------- --------
Total comprehensive loss................................ $(10,089) $(21,040)
======== ========
</TABLE>
4. 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 of which $860,000 and $679,000 remains
at September 30, 1997 and 1998, respectively. 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 March 31, 1999, the Company's obligation
calculated under this agreement is not material. In April 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. The
acquisition of the remaining interest was accounted for using the purchase
method of accounting and resulted in $4.8 million of goodwill of which $4.4
million remains at September 30, 1998. IEXN 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 of which $4.0 million remains at September
30, 1998.
In conjunction with the MXNet acquisition, the fair value of MXNet's assets,
net of cash acquired, of $1.8 million and liabilities assumed of $731,000 were
excluded from the 1998 combined and consolidated statement of cash flows.
F-11
<PAGE>
IXNET, INC.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
---------------------
The following unaudited pro forma statement of operations data for the years
ended September 30, 1997 and 1998, gives effect to the acquisition of MXNet as
if it had occurred on October 1, 1996 and 1997, respectively (in thousands):
<TABLE>
<CAPTION>
Year ended
September 30,
------------------
1997 1998
-------- --------
<S> <C> <C>
Revenue................................................. $ 18,663 $ 36,386
Loss before provision for income taxes.................. $(18,804) $(28,669)
</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 "Saturn Acquisition"). 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").
Saturn, a UK holding company, owns telecommunication network operating
subsidiaries in the United Kingdom, USA, Hong Kong, Australia, Japan and
Singapore. It had an established business of selling managed premium grade
voice and data communication services to the financial community, similar to
IXnet, but focused in Europe and the Asia/Pacific region. The acquisition was
accounted for using the purchase method of accounting and resulted in $49.2
million of goodwill.
The following unaudited pro forma statement of operations data for the six
months ended March 31, 1998 and 1999 gives effect to the Saturn Acquisition as
if it had occurred on October 1, 1997 and 1998, respectively (in thousands):
<TABLE>
<CAPTION>
Six months ended
March 31,
------------------
1998 1999
-------- --------
(unaudited)
<S> <C> <C>
Revenue................................................. $ 27,977 $ 37,370
Loss before provision for income taxes.................. $(15,414) $(22,547)
</TABLE>
F-12
<PAGE>
IXNET, INC.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
---------------------
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 U.S. bank prime rate plus one
quarter of one percent. The pro forma financial information presented above is
not necessarily indicative of the operating results which would have been
achieved had the Saturn Acquisition occurred on October 1, 1997 or 1998, or of
the results to be achieved thereafter.
5. IPC Merger and Special Charge:
On April 30, 1998, Arizona Acquisition Corp. ("AAC") 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
($475,000) and the cancellation of IPC stock options ($875,000) related to its
employees.
6. Property, Plant and Equipment:
Property, plant and equipment is comprised of the following (in thousands):
<TABLE>
<CAPTION>
September 30, March 31,
--------------- -----------
Useful Lives 1997 1998 1999
------------ ------- ------- -----------
(unaudited)
<S> <C> <C> <C> <C>
Network equipment..................... 2 to 5 years $ 3,871 $15,893 $25,150
Network equipment under capital
leases............................... 5 years 14,303 20,717 26,062
Indefeasible rights of use............ IRU term 434 4,448 4,658
Machinery and equipment............... 5 years 1,331 3,321 4,627
Furniture and fixtures................ 5 years 389 550 760
Leasehold improvements................ Lease term 1,592 2,127 2,349
------- ------- -------
Total depreciable property, plant
and equipment...................... 21,920 47,056 63,606
Less accumulated depreciation and
amortization....................... 3,864 10,719 16,567
------- ------- -------
18,056 36,337 47,039
Construction in progress............ 525 14 556
------- ------- -------
$18,581 $36,351 $47,595
======= ======= =======
</TABLE>
F-13
<PAGE>
IXNET, INC.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
---------------------
Included in accumulated depreciation and amortization at September 30, 1997
and 1998, and March 31, 1999 was $2.4 million, $5.8 million, and $8.2 million,
respectively, representing accumulated depreciation of network equipment under
capital leases.
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 up to 15% of their annual compensation. The Company
was charged $16,000, $48,000 and $103,000 in connection with IPC's
contributions to the plan on behalf of the Company's employees for the years
ended September 30, 1996, 1997 and 1998, respectively.
IPC's Stock Option and Incentive Plans
Under IPC's 1994 Stock Option and Incentive Plan (the "1994 Option Plan")
and 1998 Stock Option Plan (the "1998 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, 1996, 1997 and 1998 and for the years then ended is
presented below.
<TABLE>
<CAPTION>
Weighted
Average
Option Exercise
Shares Price
-------- --------
<S> <C> <C>
Beginning balance (1994 Option Plan)...................... 133,000 $ 7.14
Options granted......................................... 102,000 $ 9.02
Options forfeited....................................... (4,000) $ 9.50
-------- ------
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
======== ======
</TABLE>
F-14
<PAGE>
IXNET, INC.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
---------------------
There were 77,000 and 53,445 options exercisable at September 30, 1996 and
1997, respectively. No options were exercisable at September 30, 1998.
The weighted average fair value per share of options granted was $4.28,
$3.31 and $4.10 for the years ended September 30, 1996, 1997 and 1998,
respectively.
The weighted average contractual life of stock options outstanding at
September 30, 1998 was 9.7 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.
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 either stock option plan. The Company has adopted the
disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation". However, in connection with the 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 IPC's 1994 and 1998 Option Plans been determined
based on the fair value at the grant date for awards in the years ended
September 30, 1996, 1997, and 1998, consistent with the provisions of SFAS No.
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,
---------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Net loss--as reported.......................... $(6,179) $(15,208) $(27,639)
Net loss--pro forma............................ $(6,250) $(15,859) $(28,114)
</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: zero dividend yield and expected
volatility of 50% for the years ended September 30, 1996, 1997 and 1998;
weighted average risk-free interest rate of 6.45%, 6.01% and 5.61% for the
years ended September 30, 1996, 1997 and 1998, respectively; and expected lives
of 4 years for the years ended September 30, 1996 and 1997 and 3 years for the
year ended September 30, 1998.
F-15
<PAGE>
IXNET, INC.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
---------------------
8. Supplemental Financial Data:
Prepaid expenses and other current assets include the following (in
thousands):
<TABLE>
<CAPTION>
September 30,
-------------
1997 1998
------ ------
<S> <C> <C>
Value added tax recoverable................................... $1,802 $1,211
Prepaid telecommunication transport lines and circuits........ 598 376
Deposits...................................................... -- 750
Other......................................................... 181 370
------ ------
$2,581 $2,707
====== ======
</TABLE>
Accounts payable include the following (in thousands):
<TABLE>
<CAPTION>
September
30,
-----------
1997 1998
---- ------
<S> <C> <C>
Installment purchase of IRU..................................... $-- $3,600
Trade accounts payable.......................................... 512 3,428
---- ------
$512 $7,028
==== ======
</TABLE>
Accrued liabilities include the following (in thousands):
<TABLE>
<CAPTION>
September 30, March 31,
------------- -----------
1997 1998 1999
------ ------ -----------
(unaudited)
<S> <C> <C> <C>
Carrier costs...................................... $1,323 $3,815 $10,849
Compensation and benefits.......................... 591 2,206 2,178
Deferred revenue................................... 535 615 935
Other.............................................. 895 2,371 4,931
------ ------ -------
$3,344 $9,007 $18,893
====== ====== =======
</TABLE>
9. IPC's Revolving Credit Facility:
All of the Company's capital stock and real and personal property (including
tangible and intangible property), are pledged as collateral under IPC's
revolving credit agreement.
In April 1998, IPC entered into a five-year $55.0 million senior
collateralized revolving credit agreement, as amended, (the "Revolving Credit
Facility"), with Morgan Stanley Senior Funding, Inc., as syndication agent,
General Electric Capital Corporation, as Administration Agent, and other lender
parties, to be used for working capital and other general corporate purposes.
The Revolving Credit Facility is subject to borrowing base limitations based
upon eligible accounts receivable and inventory. At September 30, 1998, the
borrowing base under the Revolving Credit Facility
F-16
<PAGE>
IXNET, INC.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
---------------------
approximated $33.6 million of which $29.6 million was available to be borrowed.
The Revolving Credit Facility provides a $10.0 million sublimit for the
issuance of letters of credit, of which $4.0 million was outstanding as of
September 30, 1998. As of March 31, 1999, the borrowing base was $26.6 million
of which $1.7 million was available to be borrowed.
The Revolving Credit Facility contains 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) issuance of equity, and (x)
requires maintenance of various financial ratios.
10. Commitments and Contingencies:
Operating Leases
The Company has entered into various operating leases for real estate,
equipment, and telecommunication transport lines and circuits.
Future minimum lease payments required under noncancellable operating leases
at September 30, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal
------
<S> <C>
1999................................................................. $ 8,344
2000................................................................. 6,510
2001................................................................. 4,904
2002................................................................. 2,294
2003................................................................. 1,858
Thereafter........................................................... 2,511
-------
$26,421
=======
</TABLE>
Expenses under operating leases were $756,000, $8.3 million and $13.3
million for the years ended September 30, 1996, 1997 and 1998, respectively.
Indefeasible Rights of Use
In June 1998, IEXN entered into a 25 year IRU agreement for participation in
an international submarine cable system. The purchase price of this IRU was
$4.0 million with $400,000 paid during the year ended September 30, 1998, and
the remainder due in equal monthly installments of $300,000 commencing in
October 1998. As of September 30, 1998, $3.6 million was outstanding. In
addition, the agreement provides for the payment of annual operation and
maintenance charges.
Capital Leases
The Company has entered into capital lease agreements for certain network
equipment.
F-17
<PAGE>
IXNET, INC.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
---------------------
Future minimum lease payments required under noncancellable capital leases
at September 30, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal
------
<S> <C>
1999................................................................ $ 5,258
2000................................................................ 4,892
2001................................................................ 4,678
2002................................................................ 2,670
2003................................................................ 1,126
-------
18,624
Less, amounts representing interest................................. 2,997
-------
Net present value of minimum lease payments under capital leases.... $15,627
=======
</TABLE>
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 $3.6 million at September 30, 1998.
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 $534,000, $853,000 and $1.5 million for the years
ended September 30, 1996, 1997 and 1998, respectively. Amounts due to IPC for
these expenses are included in note payable to parent.
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 $91,000, $1.1 million and $2.2 million for the years ended September 30,
1996, 1997 and 1998, was charged based on a U.S. bank prime rate plus one
quarter of one 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, 1996, 1997 and 1998 were $29,000, $250,000 and $325,000, 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 $18,000, $165,000, and $170,000 for the
years ended September 30, 1996, 1997, and 1998, respectively.
F-18
<PAGE>
IXNET, INC.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
---------------------
12. Income Taxes:
Pre tax earnings consisted of the following (in thousands):
<TABLE>
<CAPTION>
Year ended September 30,
---------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
United States................................... $(6,263) $(15,425) $(28,218)
Foreign......................................... 146 446 1,052
------- -------- --------
Total pretax earnings........................... $(6,117) $(14,979) $(27,166)
======= ======== ========
The provision for income taxes consisted of the following (in thousands):
<CAPTION>
Year ended September 30,
---------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Current:
Federal....................................... $ -- $ -- $ --
State and local............................... -- -- --
Foreign....................................... -- -- 358
------- -------- --------
$ -- $ -- $ 358
======= ======== ========
Deferred:
Federal....................................... $ -- $ -- $ --
State and local............................... -- -- --
Foreign....................................... 62 229 115
------- -------- --------
62 229 115
------- -------- --------
Income tax provision............................ $ 62 $ 229 $ 473
======= ======== ========
</TABLE>
The components of net deferred tax liabilities are as follows (in
thousands):
<TABLE>
<CAPTION>
September 30,
----------------------------------------------------------------------
1997 1998
--------------------------------- -----------------------------------
United States United States
---------------- -----------------
Federal State Foreign Total Federal State Foreign Total
------- ------- ------- ------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Deferred tax assets:
Amortization of
intangibles........... $ -- $ -- $ -- $ -- $ 481 $ 80 $ -- $ 561
Accounts receivable.... 114 19 -- 133 217 36 -- 253
Accrued expenses....... 30 5 -- 35 477 80 -- 557
Net operating loss..... 8,034 1,344 58 9,436 17,512 2,927 -- 20,439
------- ------- ----- ------- -------- ------- ----- --------
Total deferred tax
assets.............. 8,178 1,368 58 9,604 18,687 3,123 -- 21,810
Deferred tax
liabilities:
Amortization of
intangibles........... 23 4 -- 27 -- -- -- --
Excess book over tax
depreciation.......... 473 79 349 901 1,402 234 406 2,042
------- ------- ----- ------- -------- ------- ----- --------
Net deferred tax
(liability) asset..... 7,682 1,285 (291) 8,676 17,285 2,889 (406) 19,768
Less valuation
allowance........... (7,682) (1,285) -- (8,967) (17,285) (2,889) -- (20,174)
------- ------- ----- ------- -------- ------- ----- --------
Net deferred tax
liability........... $ -- $ -- $(291) $ (291) $ -- $ -- $(406) $ (406)
======= ======= ===== ======= ======== ======= ===== ========
</TABLE>
F-19
<PAGE>
IXNET, INC.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
--------------------
IEXN and MXNet are 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 in respect of these benefits have been
recorded as capital contributions. Such income tax benefits will be recognized
in the future 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,
---------------------
1996 1997 1998
----- ----- -----
<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...................... 40.9 41.3 41.2
Other.............................................. 1.0 1.1 1.4
----- ----- -----
1.0 % 1.5 % 1.7 %
===== ===== =====
</TABLE>
13. Geographic Information:
The Company operates principally in one industry which involves the
operation of an international voice and data network providing a variety of
dedicated private line, managed data and switched voice services, which has
been specifically designed to meet the specialized telecommunications
requirements of the financial trading community.
Information about the Company's operations by geographic area is as follows
(in thousands):
<TABLE>
<CAPTION>
Year ended September 30,
---------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
Revenue:
United States................................. $ 683 $ 7,733 $ 21,261
United Kingdom................................ 2,776 9,736 12,632
Other......................................... -- 369 1,960
------- -------- --------
$ 3,459 $ 17,838 $ 35,853
======= ======== ========
Operating loss:
United States................................. $(6,040) $(13,648) $(25,272)
Foreign....................................... 170 592 1,607
------- -------- --------
$(5,870) $(13,056) $(23,665)
======= ======== ========
</TABLE>
F-20
<PAGE>
IXNET, INC.
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
---------------------
<TABLE>
<CAPTION>
September 30,
---------------
1997 1998
------- -------
<S> <C> <C>
Assets:
United States.............................................. $16,488 $45,362
United Kingdom............................................. 8,737 8,339
Other...................................................... 2,421 6,631
------- -------
$27,646 $60,332
======= =======
</TABLE>
For the years ended September 30, 1996 and 1997, 68% and 45%, respectively,
of total revenue was from one customer. For the year ended September 30, 1998,
two customers accounted for 37% (23% and 14%, respectively) of total revenue.
For the six months ended March 31, 1999, two customers accounted for 25% (14%
and 11%, respectively) of total revenue.
F-21
<PAGE>
SATURN GLOBAL NETWORK SERVICES HOLDINGS LIMITED
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(U.S. dollars in thousands)
---------------------
<TABLE>
<CAPTION>
April 30, October 31,
1998 1998
--------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 323 $ 1,136
Accounts receivable.................................... 3,688 3,581
Prepayment............................................. 248 116
Sales taxes recoverable................................ 72 30
------ -------
Total current assets................................. 4,331 4,863
------ -------
Non-current assets:
Property and equipment, net............................ 4,936 5,226
Other assets........................................... 20 --
------ -------
Total non-current assets............................. 4,956 5,226
------ -------
Total Assets............................................. $9,287 $10,089
====== =======
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Related party payables................................. $5,261 $ 5,651
Current portion of long term debt...................... 88 177
Accounts payable....................................... 4,912 3,016
Accrued liabilities.................................... 3,120 6,636
Taxation liabilities................................... 86 36
------ -------
Total current liabilities............................ 13,467 15,516
------ -------
Non-current liabilities:
Long term debt......................................... 190 325
Deferred taxation...................................... 44 25
------ -------
Total non-current liabilities........................ 234 350
------ -------
Commitments and contingencies
Shareholder's deficit
Common shares (par value Pound Sterling 1; authorized
500,000 shares; issued and outstanding 483,100
shares)............................................... 784 784
Accumulated deficit.................................... (6,618) (8,165)
Contributed capital.................................... 1,041 1,236
Cumulative foreign currency translation adjustments.... 379 368
------ -------
Total shareholder's deficit.......................... (4,414) (5,777)
------ -------
Total Liabilities and Shareholder's Deficit.............. $9,287 $10,089
====== =======
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
F-22
<PAGE>
SATURN GLOBAL NETWORK SERVICES HOLDINGS LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(U.S. dollars in thousands)
---------------------
<TABLE>
<CAPTION>
Six Months
Ended
October 31,
----------------
1997 1998
------- -------
<S> <C> <C>
Revenue...................................................... $12,457 $13,966
Cost of products and services................................ 10,564 12,074
------- -------
Gross profit................................................. 1,893 1,892
Selling, general and administrative.......................... 2,936 3,492
------- -------
Operating loss............................................... (1,043) (1,600)
Interest income.............................................. 11 7
Interest expense............................................. -- (19)
------- -------
Loss before income taxes..................................... (1,032) (1,612)
Income tax provision (benefit)............................... 91 (65)
------- -------
Net loss..................................................... $(1,123) $(1,547)
======= =======
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
F-23
<PAGE>
SATURN GLOBAL NETWORK SERVICES HOLDINGS LIMITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(U.S. dollars in thousands)
---------------------
<TABLE>
<CAPTION>
Six Months
Ended
October 31,
----------------
1997 1998
------- -------
<S> <C> <C>
Cash flows provided by operating activities:
Net loss..................................................... $(1,123) $(1,547)
Adjustments to reconcile net loss to operating cash flow:
Depreciation and amortization.............................. 610 792
Changes in other assets and liabilities:
Accounts receivable...................................... (13) 107
Prepayment and other current assets...................... 74 175
Accounts payable......................................... (1,366) (1,896)
Accrued liabilities and other liabilities................ 2,828 3,467
------- -------
Net cash flows provided by operating activities........ 1,010 1,098
------- -------
Cash flows used in investing activities:
Purchase of property and equipment......................... (1,002) (1,082)
------- -------
Net cash flows used in investing activities............ (1,002) (1,082)
------- -------
Cash flows provided by financing activities:
(Repayment of) proceeds from Marshalls funding............. (158) 389
Contributed capital........................................ 186 195
Net long term borrowing.................................... -- 224
------- -------
Net cash flows provided by financing activities........ 28 808
------- -------
Effect of exchange rate changes.............................. 423 (11)
------- -------
Increase in cash and cash equivalents........................ 459 813
Cash and cash equivalents at beginning of period............. 309 323
------- -------
Cash and cash equivalents at end of period................... $ 768 $ 1,136
======= =======
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
F-24
<PAGE>
SATURN GLOBAL NETWORK SERVICES HOLDINGS LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
---------------------
1. In the opinion of management, the accompanying unaudited condensed
consolidated 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 Saturn Global
Network Services Holdings Limited ("Saturn", or the "Company") as of October
31, 1998, and the results of its operations and its cash flows for the six
months ended October 31, 1998 and 1997, in conformity with United States
generally accepted accounting principles for interim financial information
applied on a consistent basis. The results of operations for the six months
ended October 31, 1998 and 1997 are not necessarily indicative of the results
to be expected for the full year. These financial statements should be read in
conjunction with Saturn's audited financial statements for the fiscal year
ended April 30, 1998.
2. Effect of Recently Issued Accounting Standards
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. The Company
does not currently use derivative financial instruments.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("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 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. Comprehensive Income
Effective October 1, 1998, the Company adopted Statement of Financial
Accounting Standards 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 income includes net income
and foreign currency translation adjustments.
Total comprehensive loss, net of taxes, was $801,000 and $1.6 million for
the six months ended October 31, 1997 and 1998, respectively.
4. Major Suppliers and Customers
The Company is dependent on a limited number of suppliers of equipment for
its telecommunication network. Certain key items of equipment, including
routers and data switches are purchased from a single source due to technology,
availability, price, quality and other considerations. In the event that a
supply of key single-sourced equipment was suddenly delayed or curtailed the
Company's ability to develop the common network could be adversely affected in
the short term. The Company attempts to mitigate this risk by working closely
with key suppliers.
F-25
<PAGE>
SATURN GLOBAL NETWORK SERVICES HOLDINGS LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
---------------------
5. Segmental Information
The Company has adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information" which affects the way the Company reports
certain information about its operating segments.
Factors management use to identify the Group reportable segments
The Group is managed on a regional basis. Management considers each region
to be a separate reportable segment. The regions are managed separately because
each segment requires different product and marketing strategies and operates
under different regulatory environments.
Measurement of segment profit (loss) and segment assets
The accounting policies adopted by each segment are the same as those
described in the summary of significant accounting policies. Saturn's
management evaluates performance based on profit (loss) from operations before
interest, exchange differences and income taxes.
Segmental analysis
Summarized financial information concerning the Group's reportable segments
is shown in the following table. The "Corporate" column includes corporate
related items and income and expense not allocated to reportable segments and
is included to reconcile segmental data to total company data.
The following table presents revenue by geographical region based on billing
location and long-lived assets by geographical region based on the location of
the assets.
Segmental analysis for the six months ended October 31, 1997 and 1998:
<TABLE>
<CAPTION>
Europe Australia USA Asia Corporate Total
------ --------- ------ ------ --------- -------
(U.S. Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
1997
- ----
Revenues from customers.. $2,127 $7,690 $1,266 $1,374 $ -- $12,457
Depreciation and
amortization............ 140 458 54 44 -- 696
Operating profit (loss).. (28) 171 32 (89) (1,129) (1,043)
Total segment assets..... 2,677 3,882 1,032 767 -- 8,358
Capital expenditures..... 1,796 462 431 226 -- 2,915
<CAPTION>
Europe Australia USA Asia Corporate Total
------ --------- ------ ------ --------- -------
(U.S. Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
1998
- ----
Revenues from customers.. $5,013 $4,840 $1,510 $2,603 $ -- $13,966
Depreciation and
amortization............ 338 363 72 95 -- 868
Operating profit (loss).. (203) 55 (496) (278) (678) (1,600)
Total segment assets..... 4,105 2,965 1,409 1,610 -- 10,089
Capital expenditures..... 427 440 24 232 -- 1,123
</TABLE>
F-26
<PAGE>
SATURN GLOBAL NETWORK SERVICES HOLDINGS LIMITED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
---------------------
6. Subsequent Events
(a) Sale of the Company
On December 18, 1998, Marshalls Finance Limited ("Marshalls"), the parent
company, completed the sale of the Company to International Exchange Networks
Limited ("IEXN"), a subsidiary of IPC Information Systems, Inc.
(b) Commercial Disputes
Since the sale of the Company by Marshalls, certain claims have been made by
suppliers of telecommunications circuits in relation to alleged payables under
commercial arrangements. These claims are being vigorously contested and are in
the process of negotiation; costs relating to these claims will be recorded on
an actual or estimated basis in the Company's financial statements for the
current financial year. The directors believe that the maximum payment that
could arise as a result of claims currently in negotiation is approximately
$220,000. Had this amount been recorded as an expense in the year in which the
related services were allegedly received, cost of sales would have increased
for the six month periods ended October 31, 1997 and 1998 by $88,000 and
$75,000, respectively.
(c) Amounts Payable to Marshalls
At April 30, 1998, the Company owed Marshalls $5.3 million which had
increased to $5.7 million at the date of disposal of the Company by Marshalls.
Since the disposal of the Company by Marshalls:
(1) An amount of $730,000 was paid on the Company's behalf by IEXN in
consideration for the agreement by the Company to reassign this payable
amount to IEXN.
(2) An amount of approximately $5 million was converted into a loan note
repayable by the Company to Marshalls in 24 equal monthly installments of
$222,000, an effective rate of interest of 9.25%.
F-27
<PAGE>
SATURN GLOBAL NETWORK SERVICES HOLDINGS LIMITED
Report of Independent Accountants
To the Shareholders of Saturn Global Network Services Holdings Limited:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and of cash flows present fairly, in all
material respects, the financial position of Saturn Global Network Services
Holdings Limited and its subsidiaries at April 30, 1997 and 1998, and the
results of their operations and their cash flows for each of the three years
in the period ended April 30, 1998, in conformity with generally accepted
accounting principles in the United States of America. 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
generally accepted auditing standards in the United Kingdom, which are
substantially consistent with those of the United States of America. Those
standards 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.
PricewaterhouseCoopers
London, United Kingdom
May 11, 1999
F-28
<PAGE>
SATURN GLOBAL NETWORK SERVICES HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
---------------------
<TABLE>
<CAPTION>
Years Ended April 30,
-------------------------
1996 1997 1998
------- ------- -------
(U.S. Dollars in
thousands)
<S> <C> <C> <C>
Revenues............................................ $18,304 $22,386 $25,116
Cost of products and services....................... 17,302 20,322 22,063
------- ------- -------
Gross profit........................................ 1,002 2,064 3,053
Selling............................................. 504 858 982
General and administrative.......................... 782 2,474 4,177
------- ------- -------
Operating loss...................................... (284) (1,268) (2,106)
Interest income..................................... 32 34 22
Interest expense.................................... -- -- (2)
------- ------- -------
Loss before income taxes............................ (252) (1,234) (2,086)
Income taxes........................................ 56 (32) (110)
------- ------- -------
Net loss............................................ $ (196) $(1,266) $(2,196)
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-29
<PAGE>
SATURN GLOBAL NETWORK SERVICES HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS
---------------------
<TABLE>
<CAPTION>
April 30,
----------------------------
1997 1998
------------- -------------
(U.S. Dollars in thousands)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents....................... $ 309 $ 323
Accounts receivable--British Telecommunications
plc............................................ -- 282
- --Others......................................... 2,773 3,406
Prepayment--British Telecommunications plc...... 124 --
- --Others......................................... 364 248
Sales and other taxes recoverable............... 10 72
------------- -------------
Total current assets........................ 3,580 4,331
------------- -------------
Non-current assets
Property and equipment net...................... 3,989 4,936
Deferred taxation............................... -- 20
------------- -------------
Total non-current assets.................... 3,989 4,956
------------- -------------
Total assets................................ $ 7,569 $ 9,287
============= =============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Related party payables (refer Note 11).......... $ 6,558 $ 5,261
Current portion of long term debt............... -- 88
Accounts payable--British Telecommunications
plc............................................ 92 815
- --Others......................................... 2,055 4,097
Accrued liabilities--British Telecommunications
plc............................................ -- 97
- --Others......................................... 1,259 1,427
Deferred revenue................................ 1,209 1,337
Employee liabilities............................ 223 243
Taxation liabilities............................ 27 86
Other liabilities............................... 24 16
------------- -------------
Total current liabilities................... 11,447 13,467
------------- -------------
Non-current liabilities
Long term debt.................................. -- 190
Deferred taxation............................... -- 44
------------- -------------
Total non-current liabilities............... -- 234
------------- -------------
Commitments and Contingencies (refer Note 10)
Shareholder's Deficit
Common shares (par value (Pounds)1; authorized
500,000 shares; issued and outstanding 100 at
April 30, 1997, and 483,100 at April 30,
1998).......................................... -- 784
Accumulated deficit............................. (4,422) (6,618)
Contributed Capital............................. 657 1,041
Cumulative foreign currency translation
adjustments.................................... (113) 379
Divisional deficit.............................. -- --
------------- -------------
Total shareholder's deficit................. (3,878) (4,414)
------------- -------------
Total Liabilities and Shareholder's
Deficit.................................... $ 7,569 $ 9,287
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-30
<PAGE>
SATURN GLOBAL NETWORK SERVICES HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
---------------------
<TABLE>
<CAPTION>
Years Ended April 30,
-------------------------
1996 1997 1998
------- ------- -------
(U.S. Dollars in
thousands)
<S> <C> <C> <C>
Cash flows used in operating activities:
Net loss.......................................... $ (196) $(1,266) $(2,196)
Adjustments to reconcile net loss to operating
cash flow:
Loss on sale of equipment....................... -- -- 6
Depreciation and amortisation................... 678 1059 1,392
Deferred Taxation............................... -- -- 24
Changes in other assets and liabilities
Accounts receivable--Marshalls................ -- 1,742 (2,791)
--British Telecommunications plc.............. -- -- (292)
--Others...................................... 914 (742) (961)
Prepayment--British Telecommunications plc.... 174 141 92
--Others...................................... (113) (128) 61
Sales and other taxes recoverable............. 4 37 (67)
Accounts payable--British Telecommunications
plc.......................................... -- 93 735
--Others...................................... (3,716) 1,897 2,344
Accrued liabilities--British
Telecommunications plc....................... -- -- 95
--Others...................................... 2,150 (1,026) 256
Deferred revenue.............................. -- 1,216 274
Employee liabilities.......................... 88 133 44
Taxation liabilities.......................... (11) 27 54
Other liabilities............................. -- 27 (8)
------- ------- -------
Net cash flows (used)/provided by operating
activities.................................. (28) 3,210 (938)
------- ------- -------
Cash flows used in investing activities:
Purchase of property and equipment................ (1,236) (2,119) (2,456)
Proceeds from disposal and retirement of
equipment........................................ -- 4 6
------- ------- -------
Net cash flows used in investing activities.. (1,236) (2,115) (2,450)
------- ------- -------
Cash flows provided by financing activities:
Proceeds from Marshalls funding................... 1,521 (645) 2,925
Repayment of long term borrowing.................. -- -- (14)
------- ------- -------
Net cash provided/(used) by financing
activities.................................. 1,521 (645) 2,911
------- ------- -------
Effect of exchange rate changes.................... 42 (745) 491
Increase/(decrease) in cash and cash equivalents... 299 (295) 14
Cash and cash equivalents at beginning of year..... 305 604 309
------- ------- -------
Cash and cash equivalents at end of year........... $ 604 $ 309 $ 323
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income taxes.................................... $ 6 $ 1 $ 26
Interest........................................ $ -- $ -- $ 2
Non-cash investing and financing activities:
Property acquired under capital leases.......... $ -- $ -- $ 292
Intercompany balance settled by issuance of
common stock................................... $ -- $ -- $ 784
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-31
<PAGE>
SATURN GLOBAL NETWORK SERVICES HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
---------------------
1. Principal Activities
Saturn Global Network Services Holdings Limited ("the Company" or "SGNS
Limited") was restructured in 1997 as the holding company for the Saturn Global
Network Services ("SGN") group of companies. Prior to the formation of SGNS
Limited, the SGN group of companies were wholly owned subsidiaries of the
Marshalls Finance Limited Group ("Marshalls" or "parent company"). SGN is a
provider of international managed services for end to end non switched voice,
data and video telecommunications. The extensive international network
currently comprises points of presence in over 30 countries, with a worldwide
network management center in the United Kingdom.
2. Significant Accounting Policies
The financial statements of the Company have been prepared under generally
accepted accounting principles in the United States. The accounting policies
are stated below.
Basis of Presentation
The origins of the Company began in Australia in August 1992 with the first
SGN company, SGN Pty Limited, a subsidiary of M W Marshall Pty ("MWM") to
leverage MWM's experience in addressing complex telecommunication networking
needs within the financial services sector. In order to separately identify its
telecommunication line of business from its finance activities, in May 1997
Marshalls established a fully recognizable group structure for SGN under the
holding company, SGNS Limited.
Marshalls provides the Company with general and administrative services
including legal, finance and other services. These expenses are allocated to
the Company based on incremental costs. Management believe these costs
allocations were made on a reasonable basis.
The consolidated financial statements for the 1996 and 1997 fiscal years
include the accounts of the SGN group of companies. The consolidated financial
statements for the 1998 fiscal year include the accounts of the company and its
wholly-owned subsidiaries (the "Group") and reflect the results of operations
for the Group from May 1, 1997. All significant inter-company accounts and
transactions have been eliminated.
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 at the
balance sheet date and the reported amounts of revenues and expenses in the
reporting period. Actual results may differ from the estimates used in the
financial statements.
F-32
<PAGE>
SATURN GLOBAL NETWORK SERVICES HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
---------------------
Translation of Foreign Currencies
The functional currency is the currency of the country in which the
operations are conducted. Assets and liabilities of those operations where the
functional currency is not US dollars are translated into US dollars at the
exchange rate in effect at the balance sheet date. Non US entity revenues and
expenses are translated into US dollars at the average rates that prevailed
during the period. The resultant net translation gains and losses are reported
as foreign currency translation adjustments in shareholder's deficit.
Other transactions denominated in foreign currency are translated at the
rate prevailing at the time of the transaction. Monetary assets and liabilities
denominated in foreign currencies have been translated at rates in effect at
the balance sheet date. Gains and losses resulting from transactions in other
than the functional currency are reflected in the net loss.
Income taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in future years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is recorded to reduce the deferred tax
asset if it is more likely than not that some portion of the asset will not be
realised.
Cash and cash equivalents
Cash and cash equivalents are defined as highly liquid investments with
original maturities of 90 days or less.
Property and Equipment
Property and equipment are stated at historical cost less depreciation
calculated on a straight-line basis over the expected useful lives of the
relevant assets. Major renewals and improvements are capitalised while
maintenance and repairs are expensed when incurred. The cost and related
accumulated depreciation applicable to assets retired are removed from the
accounts and the gain or loss on disposition is recognized in income.
F-33
<PAGE>
SATURN GLOBAL NETWORK SERVICES HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
---------------------
Depreciation is calculated with reference to expected useful lives, which
are generally as follows:
<TABLE>
<S> <C>
Leased buildings............................................... 2 to 10 years
Network assets................................................. 3 to 5 years
Office equipment and furniture................................. 3 to 5 years
Computer equipment and software applications................... 3 to 5 years
</TABLE>
The Company evaluates the carrying value of fixed assets not held for sale
by considering the future undiscounted cash flow expected to arise from the use
of that asset. At the time such evaluations indicate that future cash flows are
insufficient to recover the carrying value of such assets the assets are
adjusted to their fair value.
Revenue Recognition
Communications revenues are recognized when services are rendered in
accordance with usage of the Company's network. Certain network services are
billed in advance in accordance with the contractual agreement and related
revenues are initially deferred and recognized as services are provided.
Employee Benefits
The Group operates defined contribution pension plans. Such plans vary
according to the customary plan prevailing in the country concerned and the
contributions to the schemes are charged in results of operations.
Financial Instruments
The Company does not use derivative financial instruments for the purpose of
hedging currency risk and managing interest rate exposures which exist as part
of ongoing business operations. As a policy, the Company does not engage in
speculative or leveraged transactions, nor does the Company hold or issue
financial instruments for trading purposes.
Dividends
Dividends paid are recognized when declared by the Supervisory Board.
Dividends are payable in Pounds Sterling. No dividends have been paid to date.
Recent Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income", which requires that all elements of changes in equity
arising from events and transactions with non-owner sources are reported with
equal prominence within the financial statements. The Company will adopt
F-34
<PAGE>
SATURN GLOBAL NETWORK SERVICES HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
---------------------
SFAS No. 130 in the financial year ending April 30, 1999, as it is effective
for years beginning after December 15, 1997.
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. The Company
does not currently use derivative financial instruments.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("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 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. Income taxes
Income tax expense consists of:
<TABLE>
<CAPTION>
Years Ended
April 30,
----------------
1996 1997 1998
---- ---- -----
(U.S. Dollars
in thousands)
<S> <C> <C> <C>
Currently payable
United Kingdom............................................ $51 $(31) $ (23)
International............................................. 5 (1) (63)
--- ---- -----
Total currently receivable/(payable)...................... 56 (32) (86)
--- ---- -----
Deferred
United Kingdom............................................ -- -- (24)
International............................................. -- -- --
--- ---- -----
Total deferred............................................ -- -- (24)
--- ---- -----
Total Benefit/(Provision) for Income Taxes................ $56 $(32) $(110)
=== ==== =====
</TABLE>
A reconciliation between income tax credit/(expense) at the mainstream
corporation tax rate of 33% for the years ended April 30, 1996 and 1997, and
31% for the year ended April 30, 1998 to the Group's effective tax rate is as
follows:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
% % %
<S> <C> <C> <C>
UK Statutory tax rate...................................... 33 33 31
Differences in tax rates................................... 9 4 5
Deferred tax valuation allowance adjustments............... 21 (42) (20)
Permanent differences...................................... (35) 5 (14)
Other Differences.......................................... (6) (3) (7)
--- --- ---
Effective tax credit/(expense)............................. 22 (3) (5)
=== === ===
</TABLE>
F-35
<PAGE>
SATURN GLOBAL NETWORK SERVICES HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
---------------------
The tax effects of the temporary differences and carry forwards that give
rise to significant portions of deferred tax assets and liabilities at April
30, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
April 30,
--------------
1997 1998
----- -------
(U.S. Dollars
in thousands)
<S> <C> <C>
Deferred tax assets:
Operating losses carried forward............................ $ 747 $ 960
Other temporary differences................................. 121 345
----- -------
Total deferred tax asset.................................. 868 1,305
Less: valuation allowances.................................. (868) (1,285)
----- -------
-- 20
===== =======
Deferred tax liabilities:
Temporary differences on property and equipment............. -- (24)
Other temporary differences................................. -- (20)
----- -------
Total deferred tax liability.............................. -- (44)
----- -------
Net deferred tax liability.................................. $ -- $ (24)
===== =======
</TABLE>
Estimated net operating loss carry forwards at April 30, 1997 and 1998 and
their expiration dates are shown below.
<TABLE>
<CAPTION>
1997 1998
----------------------- -----------------------
Net Net
Expiration Operating Expiration Operating
Country of tax jurisdiction Dates loss Dates loss
- --------------------------- ------------- --------- ------------- ---------
(U.S. Dollars in thousands)
<S> <C> <C> <C> <C>
Australia...................... No expiration $1,570 No expiration $2,140
Hong Kong...................... No expiration 166 No expiration 166
30 April 2002
to 30 April
Japan.......................... 30 April 2002 293 2003 300
Singapore...................... No expiration 14 No expiration 29
------ ------
$2,043 $2,635
====== ======
</TABLE>
F-36
<PAGE>
SATURN GLOBAL NETWORK SERVICES HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
---------------------
4. Accounts Receivable--Others
Accounts receivable--others consist of the following:
<TABLE>
<CAPTION>
At April 30,
--------------
1997 1998
------ ------
(U.S. Dollars
in thousands)
<S> <C> <C>
Accounts receivable--others.................................. $2,775 $3,339
Less: allowance for doubtful accounts........................ (16) (50)
------ ------
2,759 3,289
Other receivables............................................ 14 117
------ ------
$2,773 $3,406
====== ======
</TABLE>
5. Property and Equipment
Property and equipment, which is stated at cost, consists of the following:
<TABLE>
<CAPTION>
At April 30,
----------------
1997 1998
------- -------
(U.S. Dollars
in thousands)
<S> <C> <C>
Leased land and buildings.................................. $ 65 $ 132
Network assets............................................. 5,777 7,067
Computer equipment and software applications............... 241 217
Office equipment and furniture............................. 112 199
------- -------
6,195 7,615
Less: accumulated depreciation............................. (2,206) (2,679)
------- -------
Property and equipment, net................................ $ 3,989 $ 4,936
======= =======
</TABLE>
Total depreciation and amortisation expense for the years ended April 30,
1997 and 1998 amounted to $1.1 million and $1.4 million, respectively.
Accumulated depreciation pertaining to leased assets for the years ended April
30, 1997 and 1998 amounted to $nil and $14,000, respectively.
F-37
<PAGE>
SATURN GLOBAL NETWORK SERVICES HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
---------------------
6. Capital Lease Commitments
The Company leases certain telecommunications equipment under long-term
capital leases.
Future minimum lease payments for assets held under capital lease
arrangements at April 30, 1998 are as follows:
<TABLE>
<CAPTION>
(U.S. Dollars in thousands)
---------------------------
<S> <C>
1999.................................................................. $113
2000.................................................................. 113
2001.................................................................. 98
----
Total minimum lease payments.......................................... 324
Less: amount representing interest.................................... (46)
----
Present value of minimum lease payments............................... 278
Less capital lease obligations included in current portion of long-
term debt............................................................ (88)
----
Long term capital lease obligations................................... $190
====
</TABLE>
7. Financial Instruments
Fair Value of Financial Instruments
The carrying amount of accounts receivable and accounts payable,
approximates fair value due to the short-term maturity of these instruments.
The Company invests its excess cash in deposits with major banks throughout
the world. The Company has a policy of making investments only with commercial
banks that have at least an "A" (or equivalent) credit rating.
Concentration of Credit Risk
Concentration of credit risk with respect to trade receivables is limited
due to the large number of customers comprising the Company's customer base.
Ongoing credit evaluations of customers' financial conditions are performed and
generally, no collateral is required. The company maintains reserves for
potential credit losses and such losses in the aggregate have not exceeded
management's expectations.
F-38
<PAGE>
SATURN GLOBAL NETWORK SERVICES HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
---------------------
8. Statement of Shareholder's Equity
<TABLE>
<CAPTION>
Common Stock Cumulative
-------------- foreign
Number currency Total
of Contributed Accumulated translation Divisional shareholder's
Shares Amount Capital deficit adjustment deficit deficit
------- ------ ----------- ----------- ----------- ---------- -------------
(U.S. Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at May 1, 1995.. -- $ -- $ -- $ -- $ -- $(2,210) $(2,210)
Net loss................ -- -- -- -- -- (196) (196)
Foreign currency
translation
adjustment............. -- -- -- -- -- (153) (153)
Shareholder
contribution........... -- -- -- -- -- 284 284
------- ----- ------ ------- ----- ------- -------
Balance at April 30,
1996................... -- -- -- -- -- (2,275) (2,275)
Net loss................ -- -- -- (1,266) -- -- (1,266)
Foreign currency
translation
adjustment............. -- -- -- -- 25 -- 25
Effect of reorganization
(i).................... 100 -- 284 (3,156) (138) 2,275 (735)
Shareholder
contribution........... -- -- 373 -- -- -- 373
------- ----- ------ ------- ----- ------- -------
Balance at April 30,
1997................... 100 -- 657 (4,422) (113) -- (3,878)
New issue............... 483,000 784 -- -- -- -- 784
Net loss................ -- -- (2,196) -- -- (2,196)
Foreign currency
translation
adjustment............. -- -- -- -- 492 -- 492
Shareholder
contribution........... -- -- 384 -- -- -- 384
------- ----- ------ ------- ----- ------- -------
Balance at April
30,1998................ 483,100 $ 784 $1,041 $(6,618) $ 379 -- $(4,414)
======= ===== ====== ======= ===== ======= =======
</TABLE>
- ---------------------
(i) Refer to Note 2: Basis of Presentation
Authorised Share Capital
There is only one class of share--Ordinary Shares of (Pounds)1 each. The
rights attaching to these shares are set out in the Articles of Association and
The Companies (Tables A to F) Regulations 1985.
There are no unusual or special rights conferred upon the shares. The only
rights ascribed to the shares are those exercisable under UK Company Law.
Foreign Currency Translation Adjustment
The equity account includes the results of translating all balance sheet
assets and liabilities at current exchange rates. Income statement items are
translated at the average exchange rate for the
F-39
<PAGE>
SATURN GLOBAL NETWORK SERVICES HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
---------------------
period. The foreign currency translation adjustment is $(153,000), $25,000 and
$492,000 for the years ended April 30, 1996, 1997 and 1998, respectively.
Net currency transaction loss/(gain) included in net loss for the years
ended April 30, 1996, 1997 and 1998 were $(682,000), $447,000 and $1.0 million
respectively.
9. Employee Benefits
Defined contribution plans
The Group sponsors various defined contribution schemes that cover the
majority of world-wide employees. The percentage contribution rate varies
according to seniority, age, length of service and local country standards.
Total Group contributions charged to income for defined contribution plans for
the years ended April 30, 1996, 1997 and 1998 were $15,000, $34,000 and
$68,000, respectively.
10. Commitments and Contingent Liabilities
Rentals for office space and commitments under supplier contracts amounted
to approximately $15.9 million, $18.2 million and $19.9 million in the years
ended April 30, 1996, 1997 and 1998 respectively.
At April 30, 1998 the approximate future minimum lease payments under non-
cancellable operating leases that have initial or remaining non-cancellable
lease terms in excess of one year were as follows:
<TABLE>
<CAPTION>
(U.S. Dollars in thousands)
---------------------------
<S> <C>
1999................................................................. $4,224
2000................................................................. 431
------
$4,655
======
</TABLE>
There are no material contingent liabilities that have not been provided for
in these financial statements.
11. Related Party Transactions
In the normal course of business, the Company engaged in several
transactions with Marshalls. The Company received revenues of $10.8 million,
$9.3 million and $7.7 million from Marshalls for providing network services for
the years ended April 30, 1996, 1997 and 1998. Trade receivables from Marshalls
in respect of these services at April 30, 1996, 1997 and 1998 were $1.4
million, $1.5 million and $1.7 million, respectively.
F-40
<PAGE>
SATURN GLOBAL NETWORK SERVICES HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
---------------------
The Company occupies certain office space where the lessee is Marshalls. The
Company reimbursed Marshalls rent expense of $39,000, $126,000 and $151,000 for
the years ended April 30, 1996, 1997 and 1998, respectively. Had the Company
sub-leased the office space as an unaffiliated entity, management estimates
that additional rent expense would have been $210,000, $227,000 and $229,000
for the years ended April 30, 1996, 1997 and 1998, respectively, which has been
reflected in these accounts. In respect of office space under a non-cancellable
sub-lease with a Marshalls Group related entity, the Company reimbursed charges
of $102,000 for the year ended April 30, 1998 and under the terms of the lease
there is no renewal option.
As disclosed in Note 2, Marshalls provides the Company with general and
administrative services including legal, finance and other services. For the
years ended April 30, 1996, 1997 and 1998 the costs amounted to $74,000,
$146,000 and $225,000, respectively.
In 1995, the Company received an advance from Marshalls in the form of a
non-interest bearing loan. The loan has no formal repayment term.
Details of amounts outstanding under the loan, and the net trading balance
with Marshalls are shown below:
<TABLE>
<CAPTION>
Non interest Net trading
bearing loan balance Total
------------ ----------- ------
(U.S. dollars in thousands)
<S> <C> <C> <C>
Balance at April 30, 1996..................... $5,157 $ 780 $5,937
Repayment of funds advanced................. (645) -- (645)
Amounts invoiced to Marshalls companies..... -- (9,347) (9,347)
Settlements/other transactions.............. -- 10,245 10,245
Effect of exchange rate changes............. 368 -- 368
------ ------- ------
Balance at April 30, 1997..................... 4,880 1,678 6,558
Additional funds advanced................... 2,925 -- 2,925
Capitalisation of new issue of common
stock...................................... (784) -- (784)
Amounts invoiced to Marshalls companies..... -- (7,648) (7,648)
Settlements/other transactions.............. -- 4,473 4,473
Effect of exchange rate changes............. 49 (312) (263)
------ ------- ------
Balance at April 30, 1998..................... $7,070 $(1,809) $5,261
====== ======= ======
Average quarterly inter-company balance
during year April 30, 1998................. $6,217 $ (416) $5,801
====== ======= ======
</TABLE>
F-41
<PAGE>
SATURN GLOBAL NETWORK SERVICES HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
---------------------
During the period covered by these financial statements, substantially all
of the Company's assets were pledged as collateral under certain financing
agreements entered into by Marshalls. These financing agreements limited the
Company from incurring additional indebtedness and liens on assets. The Company
was released from these obligations on December 18, 1998.
British Telecommunications, plc ("BT") had until December 18,1998, an
indirect interest in the Company through its 30.7% shareholding interest in
Marshalls. In 1996, 1997 and 1998, the Company received revenues of $nil, $nil
and $645,000, respectively, from BT for providing network management services
to its customers. In addition the cost of services provided by BT for network
services to the company was $2.9 million, $2.8 million and $2.6 million for the
years ended April 30, 1996, 1997 and 1998, respectively. In the normal course
of business, the Company leases circuits under non-cancellable operating leases
from BT. The future rental payments of approximately $729,000 under the leases
are included in the table of future minimum lease payments (see Note 10).
12. Segmental Information
The Company has adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information", which affects the way the Company reports
certain information about its operating segments.
Factors management use to identify the Group reportable segments
The Group is managed on a regional basis. Management considers each region
to be a separate reportable segment. The regions are managed separately because
each segment requires different product and marketing strategies and operates
under different regulatory environments.
Measurement of segment profit (loss) and segment assets
The accounting policies adopted by each segment are the same as those
described in the summary of significant accounting policies. Saturn's
management evaluates performance based on profit (loss) from operations before
interest, exchange differences and income taxes.
Segmental analysis
Summarised financial information concerning the Group's reportable segments
is shown in the following table. The "Corporate" column includes corporate
related items and income and expense not allocated to reportable segments and
is included to reconcile segmental data to total company data.
The following table presents revenue by geographical region based on billing
location and long-lived assets by geographical region based on the location of
the assets.
F-42
<PAGE>
SATURN GLOBAL NETWORK SERVICES HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
---------------------
Segmental analysis for the year ended April 30, 1996
<TABLE>
<CAPTION>
Europe Australia USA Asia Corporate Total
------ --------- ------ ------ --------- -------
(U.S. Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues from customers.. $ -- $17,546 $ 758 $ -- $ -- $18,304
Depreciation and
amortization............ 17 625 36 -- -- 678
Operating profit (loss).. (89) 43 (206) (52) 20 (284)
Total segment assets..... 114 6,180 257 60 -- 6,611
Capital expenditures..... 40 995 184 17 -- 1,236
Segmental analysis for the year ended April 30, 1997
<CAPTION>
Europe Australia USA Asia Corporate Total
------ --------- ------ ------ --------- -------
(U.S. Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues from customers.. $ -- $20,972 $1,706 $ (292) $ -- $22,386
Depreciation and
amortization............ 34 923 86 16 -- 1,059
Operating profit (loss).. 57 363 (76) (409) (1,203) (1,268)
Total segment assets..... 116 6,279 632 542 -- 7,569
Capital expenditures..... 51 1,743 117 208 -- 2,119
Segmental analysis for the year ended April 30, 1998
<CAPTION>
Europe Australia USA Asia Corporate Total
------ --------- ------ ------ --------- -------
(U.S. Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues from customers.. $9,309 $10,026 $2,717 $3,064 $ -- $25,116
Depreciation and
amortization............ 332 806 123 117 14 1,392
Operating profit (loss).. 296 167 26 (162) (2,433) (2,106)
Total segment assets..... 3,452 3,269 1,113 1,413 40 9,287
Capital expenditures..... 726 707 537 483 3 2,456
</TABLE>
13. Major Suppliers and Customers
The Company is substantially dependent on a limited number of suppliers of
equipment for its telecommunication network. Certain key items of equipment,
including routers and data switches are purchased from a single source due to
technology, availability, price, quality and other considerations. In the event
that a supply of key single-sourced equipment was suddenly delayed or curtailed
the Company's ability to develop its common network could be adversely affected
in the short term. The Company attempts to mitigate this risk by working
closely with key suppliers.
The Company is also substantially dependent on sales to Marshalls, in the
years ended April 30, 1996, 1997 and 1998, approximately 58%, 42% and 30%,
respectively, of total revenues were generated from sales to Marshalls.
F-43
<PAGE>
SATURN GLOBAL NETWORK SERVICES HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
---------------------
14. Subsequent events
(a) Sale of the Company
On December 18, 1998 Marshalls Finance Limited, the parent company,
completed the sale of the Company to International Exchange Networks Limited, a
subsidiary of IPC Information Systems Inc.
(b) Commercial disputes
Since the sale of the company by Marshalls certain claims have been made by
suppliers of telecommunications circuits in relation to amounts allegedly
payable under commercial arrangements. These claims are being vigorously
contested and are in the process of negotiation; costs relating to these claims
will be recorded on an actual or estimated basis in the Company's financial
statements for the current financial year. The directors believe that the
maximum payment that could arise as a result of claims currently in negotiation
is approximately $220,000. Had this amount been recorded as an expense in the
year in which the related services were allegedly received, cost of sales would
have increased in the year ended April 30, 1997 by $45,000 and in the year
ended April 30, 1998 by $175,000.
(c) Amounts payable to Marshalls
At April 30, 1998, the company owed Marshalls $5.3 million, and this amount
increased to $5.7 million at the date of disposal of the company by Marshalls.
Since the disposal of the company by Marshalls;
(1) An amount of $730,000 was paid on the company's behalf by iXnet in
consideration for the agreement by the company to reassign this payable
amount to iXnet.
(2) An amount of $5.0 million was converted into a Loan Note repayable
by the Company to Marshalls in 24 equal monthly instalments of $222,000, an
effective rate of interest of 9.25%.
F-44
<PAGE>
Report of Independent Accountants
To the Stockholder of
MXNet Inc.:
In our opinion, the accompanying balance sheet and the related statements of
operations, cash flows and stockholder's deficit present fairly, in all
material respects, the financial position of MXNet Inc. (the "Company") at May
31, 1997, and the results of its operations and cash flows for the year then
ended, in conformity with generally accepted accounting principles. 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 audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards, 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 audit provides a reasonable basis for our
opinion.
PricewaterhouseCoopers LLP
New York, New York
April 15, 1999
F-45
<PAGE>
MXNET INC.
BALANCE SHEETS
(Dollar amounts in thousands, except per share amounts)
---------------------
<TABLE>
<CAPTION>
May 31, 1997 November 30, 1997
------------ -----------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash.......................................... $ 275 $ 137
Accounts receivable........................... -- 180
Rebilled expenses............................. 35 147
Prepaid expenses.............................. 55 50
Officer loan receivable....................... -- 60
------- -------
Total current assets........................ 365 574
Fixed assets, net............................... 1,323 1,604
Other assets.................................... 10 10
------- -------
Total assets................................ $ 1,698 $ 2,188
======= =======
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable and accrued expenses......... $ 106 $ 185
Due to affiliates, net........................ 2,380 3,200
------- -------
Total current liabilities................... 2,486 3,385
------- -------
Commitments and contingencies
Stockholder's deficit:
Common stock, par value $.01, 3,000 shares
authorized, 100 shares issued and
outstanding.................................. -- --
Contributed capital........................... 450 685
Accumulated deficit........................... (1,238) (1,882)
------- -------
Total stockholder's deficit................. (788) (1,197)
------- -------
Total liabilities and stockholder's
deficit.................................... $ 1,698 $ 2,188
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-46
<PAGE>
MXNET INC.
STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except per share amounts)
---------------------
<TABLE>
<CAPTION>
Six
Year Ended Months Ended
May 31, November 30,
1997 1996 1997
---------- ------ ------
(unaudited)
<S> <C> <C> <C>
Revenues:
Web site design and consulting.................... $ 347 $ 116 $ 153
Subscription and royalties........................ 8 -- 433
------- ------ ------
Total revenues.................................. 355 116 586
------- ------ ------
Operating expenses:
Payroll and related costs......................... 808 354 534
Selling, general and administrative............... 448 159 390
Depreciation and amortization..................... 318 81 306
------- ------ ------
Total operating expenses........................ 1,574 594 1,230
------- ------ ------
Net loss........................................ $(1,219) $ (478) $ (644)
======= ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-47
<PAGE>
MXNET INC.
STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
---------------------
<TABLE>
<CAPTION>
Six Months
Year Ended Ended
May 31, November 30,
1997 1996 1997
---------- ------- -----
(unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $(1,219) $ (478) $(644)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization................... 318 81 306
Changes in operating assets and liabilities:
Accounts receivable........................... -- -- (180)
Rebilled expenses............................. (35) -- (112)
Prepaid expenses.............................. (54) 1 5
Other assets.................................. (10) (13) --
Accounts payable and accrued expenses......... 102 54 79
------- ------- -----
Net cash used in operating activities...... (898) (355) (546)
------- ------- -----
Cash flows from investing activities:
Purchase of fixed assets.......................... (1,641) (1,099) (587)
------- ------- -----
Net cash used in investing activities...... (1,641) (1,099) (587)
------- ------- -----
Cash flows from financing activities:
Due to affiliates................................. 2,372 1,319 820
Contributed capital............................... 442 167 235
Loan to officer................................... -- -- (60)
------- ------- -----
Net cash provided by financing activities.. 2,814 1,486 995
------- ------- -----
Net increase (decrease) in cash for the
period.................................... 275 32 (138)
Cash, beginning of period........................... -- -- 275
------- ------- -----
Cash, end of period................................. $ 275 $ 32 $ 137
======= ======= =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-48
<PAGE>
MXNET INC.
STATEMENT OF STOCKHOLDER'S DEFICIT
(Dollar amounts in thousands, except share amounts)
---------------------
<TABLE>
<CAPTION>
Common Stock
------------- Contributed Accumulated
Shares Amount Capital Deficit Total
------ ------ ----------- ----------- -------
<S> <C> <C> <C> <C> <C>
Balance at June 1, 1996......... 100 $-- $ 8 $ (19) $ (11)
Contributed capital............. -- -- 442 -- 442
Net loss........................ -- -- -- (1,219) (1,219)
--- ---- ---- ------- -------
Balance at May 31, 1997......... 100 $-- $450 $(1,238) $ (788)
=== ==== ==== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-49
<PAGE>
MXNET INC.
NOTES TO FINANCIAL STATEMENTS
---------------------
1. Organization and Basis of Presentation:
MXNet Inc. (the "Company") was incorporated in the State of New Jersey on
May 24, 1996, as a wholly-owned subsidiary of the Sherwood Group, Inc. ("SGI")
which is a wholly-owned subsidiary of National Discount Brokers Group, Inc.
("NDB") under the name Market Distribution Concepts, Inc., which was
subsequently changed to MXNet Inc. The Company is engaged in the business of
the delivery of certain licensed information through its network as well as
design and consultation work associated with the development and maintenance of
a web site for NDB.
The financial statements include certain corporate expenses (see Note 4)
incurred by SGI that have been charged to the Company on a direct or allocated
basis. Management believes these allocations are reasonable. The financial
statements may not necessarily reflect the results of operations, financial
position, changes in stockholder's deficit and cash flows of the Company had it
been a separate, stand-alone entity during the periods presented.
As discussed in Note 8, all of the outstanding shares of the Company were
acquired by IPC Information Systems, Inc. in February 1998. The accompanying
financial statements do not reflect any adjustments in connection with the
sale.
2. Significant Accounting Policies:
Revenue Recognition
The Company's revenue has been derived primarily from consulting fees earned
in connection with web site design and subscription and royalty fees earned in
connection with the delivery of licensed information on the Company's network.
Revenue from consulting and design work is recognized as services are provided.
Royalty and subscription revenue are recognized monthly based on contractual
royalty fees per number of subscribers.
Fixed Assets
Computer equipment and furniture and fixtures are depreciated using the
straight-line method over their estimated useful lives ranging from two to
three years. The cost of additions and betterments are capitalized, and repairs
and maintenance costs are charged to selling, general and administrative
expense in the period incurred. Leasehold improvements are amortized over the
shorter of their useful life or the lease term.
Cash
The Company maintains its cash balance in a high-credit quality financial
institution.
F-50
<PAGE>
MXNET, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
---------------------
Rebilled Expenses
Rebilled expenses represent expenses incurred by the Company on behalf of
its customers that are subsequently reimbursed by customers. Rebilled expenses
are excluded from the statements of operations.
Concentration of Credit Risk
For the year ended May 31, 1997 and the six months ended November 30, 1996
(unaudited), revenue earned from NDB accounted for all of the Company's revenue
(see Note 4). For the six months ended November 30, 1997, revenue earned from
NDB accounted for approximately 26% (unaudited) of the Company's revenue and
one unrelated customer accounted for approximately 74% (unaudited) of the
Company's revenue.
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 amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting periods. Actual results could differ from those estimates.
Significant estimates made by the Company include the useful lives and
recoverability of fixed assets.
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 NDB
and computes its federal income tax provision on a separate return basis.
Unaudited Interim Financial Statements
In the opinion of management, the accompanying unaudited interim financial
statements include all necessary adjustments for a fair presentation of the
financial position of the Company as of November 30, 1997, and the results of
its operations and its cash flows for the six months ended November 30, 1996
and 1997, in conformity with generally accepted accounting principles
F-51
<PAGE>
MXNET, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
---------------------
applied on a consistent basis. The results of operations for the six months
ended November 30, 1996 and 1997 are not necessarily indicative of the results
to be expected for the full year.
3. Fixed Assets:
Fixed assets consist of the following (in thousands):
<TABLE>
<CAPTION>
May 31, 1997 November 30, 1997
------------ -----------------
(unaudited)
<S> <C> <C>
Computer equipment.......................... $1,434 $2,007
Furniture, fixtures and leasehold
improvements............................... 207 221
------ ------
1,641 2,228
Less, accumulated depreciation and
amortization............................... 318 624
------ ------
$1,323 $1,604
====== ======
</TABLE>
4. Related-Party Transactions:
In addition to the revenue earned from NDB, discussed in Note 1, SGI has
funded the operations of the Company through cash advances made to the Company.
Beginning in September 1996, in connection with certain administrative duties
performed by SGI, including accounting, human resources and other functions,
the Company was charged approximately $13,000 per month or approximately
$120,000 during the year ended May 31, 1997. For the six months ended November
30, 1996 and 1997, such charges amounted to approximately $40,000 (unaudited)
and $80,000 (unaudited), respectively. These expenses were allocated to MXNet
based on its direct and indirect utilization of specific services.
5. Commitments:
Leases
The Company leases office space in Jersey City, New Jersey, under a non-
cancelable operating lease expiring in July 1999. Future minimum lease payments
under this lease at May 31, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
1998.................................................................. $ 70
1999.................................................................. 70
2000.................................................................. 12
----
$152
====
</TABLE>
Rent expense was approximately $64,000 for the year ended May 31, 1997.
F-52
<PAGE>
MXNET, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
---------------------
6. Employee Savings Plan:
The Company's employees are covered by a savings plan administered by SGI of
the Company that qualifies as a deferred salary arrangement under Section
401(k) of the Internal Revenue Code (the "Savings Plan"). Under the Savings
Plan, participating employees may defer a portion of their pretax earnings up
to the Internal Revenue Service's annual contribution. For the year ended May
31, 1997, the Company contributed approximately $2,000 to the Savings Plan.
7. Income Taxes:
The components of net deferred tax assets, consist of the following at May
31, 1997 (in thousands):
<TABLE>
<S> <C>
Operating loss carryforwards.......................................... $ 450
Depreciation and amortization......................................... (51)
-----
Net deferred tax asset................................................ 399
Less, valuation allowance............................................. (399)
-----
Net deferred tax asset.............................................. $ --
=====
</TABLE>
The valuation allowance increased $391,000 during the year ended May 31,
1997 in conjunction with the increase in the net deferred tax asset resulting
from the Company's continuing operating losses.
MXNet is included in NDB's consolidated income tax returns and the benefits
of its net operating losses have been realized on such returns. Amounts
received from NDB in respect of these benefits, $442,000 and $235,000 for the
year ended May 31, 1997 and for the six months ended November 30, 1997,
respectively, have been recorded as a capital contribution. Such income tax
benefits will be recognized in the future to the extent they would be realized
on a separate return basis. As a result, the Company has no provision/benefit
for income taxes.
8. Subsequent Event:
In February 1998, the Company was acquired by IPC Information Systems, Inc.
for $6.7 million. In connection with the sale of the Company, the amounts due
to affiliates were settled.
F-53
<PAGE>
[Graphic: A statement at the top of the diagram reads, "Access to High
Quality Communications Services and Multiple Trading Partners Through a Single
High Speed Connection." Below this statement there is a diagram of a cloud
representing the IXnet Extranet. The following descriptions are arranged
around the cloud and are connected to the cloud with straight lines
representing network connections: Broker/Dealers, Asset Managers, Exchanges,
Interdealer Brokers, Securities firms, Electronic Trading Firms, Real Time
Content providers, and Commodities Trading Firms. Extending downward from the
cloud is a representation of a high speed customer site connection. The
connection illustrates various securities, content and applications (dedicated
voice, market data, switched voice, managed bandwidth, electronic trading,
frame relay, and hoot & holler) that we deliver to the customer site. The
diagram of the customer site includes representations of various customer
access codes, CANs. These include a bandwidth manager, a router, and a DLIC.
In addition, there are representations of various customer owned equipment
including a turret system, a turret, a workstation, a PBX, and a telephone.
Services are shown as they flow from the Extranet, down the high speed
connection and through a CAN or CANs to an end-user device on the customer's
desktop or on his corporate wide area network. A legend on the left side of
the page associates individual service types with their commercial names.
These include: Dedicated Voice Lines--MetroLink, Electronic Trading, Market
Data Delivery--Liquidity, Managed Frame Relay--IXFrame, Switched Voice--
IXPrime, Voice GUPN--IXGlobal, Managed Bandwidth--IXLink, and Hoot & Holler--
DigiHoot.]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
, 1999
[IXnet LOGO]
Shares of Common Stock
----------------
PROSPECTUS
----------------
Donaldson, Lufkin & Jenrette
Salomon Smith Barney
Merrill Lynch & Co.
First Union Capital Markets Corp.
DLJdirect Inc.
- -------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as
to matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where
that would not be permitted or legal. Neither the delivery of this prospectus
nor any sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of the
company have not changed since the date hereof.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Until , 1999 (25 days after the date of this prospectus), all dealers that
effect transactions in these shares of common stock may be required to deliver
a prospectus. This is in addition to the dealer's obligation to deliver a
prospectus when acting as an underwriter in this offering and when selling
previously unsold allotments or subscriptions.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
IXnet will pay all of the expenses incurred in connection with the offering
described in this registration statement. Such expenses, other than
underwriting commissions and discounts, are estimated to be as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee(1)............ $ 41,700
National Association of Securities Dealers filing fee(1).......... 19,044
Nasdaq National Market listing fee(1)............................. *
Legal fees and expenses........................................... *
Blue Sky fees and expenses........................................ 15,000
Accounting fees and expenses...................................... *
Transfer agent's fees and expenses................................ *
Printing and engraving fees....................................... *
Miscellaneous..................................................... *
--------
Total........................................................... *
========
</TABLE>
- ---------------------
* To be filed by amendment.
<TABLE>
<S> <C>
---
</TABLE>
(1) Actual expenses based upon the registration and sale of shares at $
per share. All other expenses are estimated.
Item 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law ("DGCL"), inter alia,
empowers a Delaware corporation to indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding (other than an action by or in the right of the
corporation) by reason of the fact that such person is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of
another corporation or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding
if he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interest of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. Similar indemnity is authorized for such person against expenses
(including attorneys' fees) actually and reasonably incurred in connection
with the defense or settlement of any such threatened, pending or completed
action or suit if such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and provided further that (unless a court of competent
jurisdiction otherwise provides) such person shall not have been adjudged
liable to the corporation. Any such indemnification may be made only as
authorized in each specific case upon a determination by the stockholders or
disinterested directors or by independent legal counsel in a written opinion
that indemnification is proper because the indemnitee has met the applicable
standard of conduct.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation
or enterprise, against any liability asserted against him, and incurred by him
in any such capacity, or arising out of his status as such, whether or not the
corporation would otherwise have the power to indemnify him under Section 145.
Section 6 of IXnet's Certificate of Incorporation provides that a director
shall not be personally liable to IXnet or its shareholders for damages for
breach of his fiduciary duty as a director, except to the extent such
exemption from liability or limitation thereof is expressly prohibited by the
DGCL. Article IV, Section 1 of IXnet's By-laws requires IXnet, among other
things, to indemnify to the fullest extent permitted by the DGCL,
<PAGE>
any person who is or was or has agreed to become a director or officer of
IXnet, who was or is made a party to, or is threatened to be made a party to,
or is otherwise involved in, any threatened, pending or completed action, suit
or proceeding, including actions or suits by or in the right of IXnet, by
reason of such agreement or service or the fact that such person is, was or
has agreed to serve as a director, officer, employee or agent of another
corporation or organization at the request of IXnet.
Article IV, Section 5 of IXnet's By-laws also empowers IXnet to purchase
and maintain insurance to protect itself and its directors and officers, and
those who were or have agreed to become directors or officers, against any
liability, regardless of whether or not IXnet would have the power to
indemnify those persons against such liability under the law. IXnet intends to
purchase directors' and officers' liability insurance policies which insure
its directors and officers and the directors and officers of its subsidiaries
in certain instances as soon as practicable.
Item 15. Recent Sales of Unregistered Securities.
Since its date of incorporation, IXnet has had only one transaction in
which it issued or sold its securities. IXnet issued 1,000 shares of its
common stock, par value $.01 per share, in May 1999, to IPC Information
Systems, Inc. in exchange for all of the stock of International Exchange
Networks, Ltd. IPC is currently the sole holder of the outstanding stock of
IXnet. The transaction was intended to be exempt from the registration
requirements of the Securities Act of 1933, as amended, by virtue of Section
4(2) thereunder because the securities were not offered to the public. No
underwriters were involved in connection with the sale of these securities.
International Exchange Networks, Ltd. has not issued or sold any of its
securities within the three years preceding the filing of this registration
statement.
Item 16. Exhibits and Financial Statement Schedules.
The exhibits filed as a part of this Registration Statement are as follows:
(a) List of Exhibits. (Filed herewith unless otherwise noted.)
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
1.1 Form of Underwriting Agreement, by and among IXnet, Inc., IPC
Information Systems, Inc., Donaldson, Lufkin & Jenrette Securities
Corporation, Salomon Smith Barney Inc., Merrill Lynch, Pierce,
Fenner & Smith Incorporated and First Union Capital Markets Corp.*
2.1 Agreement for the Sale/Purchase of the Issued Share Capital of
Saturn Global Network Services Holdings Limited dated August 7,
1998 (as amended on December 18, 1998) among Marshalls 106
Limited, Marshalls Finance Limited, International Exchanges
Networks, Ltd and IPC Information Systems, Inc. (1)
2.1.1 Deed constituting unsecured Guaranteed Subordinated Loan Notes
2000/2002, dated December 18, 1998, made between Saturn Global
Network Services Holdings Limited, International Exchange
Networks, Ltd. and IPC Information Systems, Inc.
2.1.2 Deed constituting unsecured Guaranteed Subordinated Loan Note
2000/2002, dated December 18, 1998, made between International
Exchange Networks Ltd. and IPC Information Systems, Inc.
2.2 Stock Purchase Agreement, dated February 13, 1998, by and between
IPC, MXNet and National Discount Brokers Group, Inc.
3.1 Certificate of Incorporation of IXnet, Inc.*
3.2 Bylaws of IXnet, Inc.*
4.1 Specimen Stock Certificate.*
5.1 Opinion of Thacher Proffitt & Wood regarding legality of shares.*
10.1 Inter-Company Agreement, dated , 1999, between IPC Information
Systems, Inc. and IXnet, Inc.*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.2 Tax Sharing Agreement, dated , 1999, by and between IPC
Communications, Inc. and IXnet, Inc.*
10.3 Registration Rights Agreement, dated , 1999, by and between
IPC Communications, Inc. and IXnet, Inc.*
10.4 Share Exchange and Termination Agreement, dated as of December 18,
1997, by and among International Exchange Networks, Ltd, IPC
Communications, Inc., David Walsh and Anthony Servidio. (2)
10.5 Employment Agreement, dated as of , 1999, by and between
International Exchange Networks, Ltd. and David A. Walsh.*
10.6 Employment Agreement, dated as of , 1999, by and between
International Exchange Networks, Ltd. and Charles F. Auster.*
10.7 Employment Agreement, dated as of , 1999, by and between
International Exchange Networks, Ltd. and Anthony Servidio.*
10.8 Employment Agreement, dated as of , 1999, by and between
International Exchange Networks, Ltd. and William E. Walsh.*
10.9 Employment Agreement, dated as of , 1999, by and between
International Exchange Networks, Ltd. and John Faccibene.*
10.10 Employment Agreement, dated as of , 1999, by and between
International Exchange Networks, Ltd. and Paul Pluschkell.*
10.11 Employment Agreement, dated as of August 6, 1998, by and between
Saturn Global Network Services (UK) Limited and Peter Hase.*
10.12 Employment Agreement, dated as of August 6, 1998, by and between
Saturn Global Network Services Pty Ltd. and Drew Kelton.*
10.13 IXnet, Inc. 1999 Stock Option Plan.*
10.14 IPC Information Systems, Inc. 1998 Stock Incentive Plan. (3)
10.15 Indenture, dated as of April 30, 1998, between IPC Information
Systems, Inc. and the United States Trust Company of New York, as
indenture trustee. (4)
10.16 Credit Agreement, dated as of April 30, 1998, among IPC
Information Systems, Inc., IPC Funding Corp., Morgan Stanley
Senior Funding, Inc. ("MSSF"), as syndication agent and arranger,
Goldman Sachs Credit Partners L.P., as documentation agent,
General Electric Capital Corporation, as collateral agent, and
MSSF, as administrative agent. (4)
10.17 International Purchase and Sale Agreement, date as of July 23,
1996, by and between International Exchange Networks, Ltd. and
Newbridge Networks Inc.
21.1 Subsidiaries of IXnet, Inc.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of PricewaterhouseCoopers.
23.3 Consent of Thacher Proffitt & Wood (included in Exhibit 5.1).*
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule for year ended September 30, 1996.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
27.2 Financial Data Schedule for year ended September 30, 1997.
27.3 Financial Data Schedule for year ended September 30, 1998.
27.4 Financial Data Schedule for six months ended March 31, 1999.
</TABLE>
- ---------------------
* To be filed by amendment.
(1) Previously filed as an exhibit to IPC Information Systems' Report on Form
8-K, filed January 4, 1999, and incorporated herein by reference.
(2) Previously filed as an exhibit to IPC Information Systems' Report on Form
8-K, filed December 24, 1997, and incorporated herein by reference.
(3) Previously filed as an exhibit to IPC Information Systems' Registration
Statement on Form S-4, filed February 13, 1998, and incorporated herein by
reference.
(4) Previously filed as an exhibit to IPC Information Systems' Report on Form
8-K, filed May 15, 1998, and incorporated herein by reference.
(b) Financial Statement Schedules.
All schedules have been omitted as not applicable or not required under the
rules of Regulation S-X or the information has been provided in the Combined
and Consolidated Financial Statements or the Notes thereto.
Item 17. Undertakings.
IXnet hereby undertakes:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by IXnet pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To provide to the underwriters at the closing specified in the
underwriting agreement, certificates in such denominations and
registered in such names as required by the underwriters to permit
prompt delivery to each purchaser.
Insofar as indemnification by IXnet for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of IXnet pursuant to the foregoing provisions, or otherwise, IXnet has
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by IXnet of
expenses incurred or paid by a director, officer or controlling person of
IXnet in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, IXnet will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, IXnet has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in New York, New York, on May , 1999.
IXnet, Inc.
/s/ David A. Walsh
By:
----------------------------------
David A. Walsh
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints David A. Walsh and Charles F. Auster, and each
of them, as the true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities to sign the Form S-1 Registration Statement and any and
all amendments thereto, including post effective amendments, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the U.S. Securities and Exchange Commission, granting unto said attorney-
in-fact and agent full power and authority to do and perform each and every
act and thing requisite and necessary to be done as fully to all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ David A. Walsh Chief Executive Officer May 21, 1999
______________________________________ and Director (Principal
David A. Walsh executive officer)
/s/ Gerald E. Starr President and Director May 21, 1999
______________________________________
Gerald E. Starr
/s/ Charles F. Auster Executive Vice President, May 21, 1999
______________________________________ Chief Operating Officer
Charles F. Auster and Director
/s/ Brian L. Reach Chief Financial Officer May 21, 1999
______________________________________ (Principal accounting
Brian L. Reach officer)
Director May , 1999
______________________________________
Richard M. Cashin, Jr.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
Director May , 1999
______________________________________
Douglas T. Hickey
/s/ John T. Sharkey Director May 21, 1999
______________________________________
John T. Sharkey
/s/ Douglas J. Mello Director May 21, 1999
______________________________________
Douglas J. Mello
/s/ Richard W. Smith Director May 21, 1999
______________________________________
Richard W. Smith
Director May , 1999
______________________________________
Peter A. Woog
</TABLE>
II-6
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
1.1 Form of Underwriting Agreement, by and among IXnet, Inc., IPC
Information Systems, Inc., Donaldson, Lufkin & Jenrette Securities
Corporation, Salomon Smith Barney Inc., Merrill Lynch, Pierce,
Fenner & Smith Incorporated and First Union Capital Markets Corp.*
2.1 Agreement for the Sale/Purchase of the Issued Share Capital of
Saturn Global Network Services Holdings Limited dated August 7,
1998 (as amended on December 18, 1998) among Marshalls 106
Limited, Marshalls Finance Limited, International Exchanges
Networks, Ltd and IPC Information Systems, Inc. (1)
2.1.1 Deed constituting unsecured Guaranteed Subordinated Loan Notes
2000/2002, dated December 18, 1998, made between Saturn Global
Network Services Holdings Limited, International Exchange
Networks, Ltd. and IPC Information Systems, Inc.
2.1.2 Deed constituting unsecured Guaranteed Subordinated Loan Note
2000/2002, dated December 18, 1998, made between International
Exchange Networks Ltd. and IPC Information Systems, Inc.
2.2 Stock Purchase Agreement, dated February 13, 1998, by and between
IPC, MXNet and National Discount Brokers Group, Inc.
3.1 Certificate of Incorporation of IXnet, Inc.*
3.2 Bylaws of IXnet, Inc.*
4.1 Specimen Stock Certificate.*
5.1 Opinion of Thacher Proffitt & Wood regarding legality of shares.*
10.1 Inter-Company Agreement, dated , 1999, between IPC Information
Systems, Inc. and IXnet, Inc.*
10.2 Tax Sharing Agreement, dated , 1999, by and between IPC
Communications, Inc. and IXnet, Inc.*
10.3 Registration Rights Agreement, dated , 1999, by and between
IPC Communications, Inc. and IXnet, Inc.*
10.4 Share Exchange and Termination Agreement, dated as of December 18,
1997, by and among International Exchange Networks, Ltd, IPC
Communications, Inc., David Walsh and Anthony Servidio. (2)
10.5 Employment Agreement, dated as of , 1999, by and between
International Exchange Networks, Ltd. and David A. Walsh.*
10.6 Employment Agreement, dated as of , 1999, by and between
International Exchange Networks, Ltd. and Charles F. Auster.*
10.7 Employment Agreement, dated as of , 1999, by and between
International Exchange Networks, Ltd. and Anthony Servidio.*
10.8 Employment Agreement, dated as of , 1999, by and between
International Exchange Networks, Ltd. and William E. Walsh.*
10.9 Employment Agreement, dated as of , 1999, by and between
International Exchange Networks, Ltd. and John Faccibene.*
10.10 Employment Agreement, dated as of , 1999, by and between
International Exchange Networks, Ltd. and Paul Pluschkell.*
10.11 Employment Agreement, dated as of August 6, 1998, by and between
Saturn Global Network Services (UK) Limited and Peter Hase.*
10.12 Employment Agreement, dated as of August 6, 1998, by and between
Saturn Global Network Services Pty Ltd. and Drew Kelton.*
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.13 IXnet, Inc. 1999 Stock Option Plan.*
10.14 IPC Information Systems, Inc. 1998 Stock Incentive Plan. (3)
10.15 Indenture, dated as of April 30, 1998, between IPC Information
Systems, Inc. and the United States Trust Company of New York, as
indenture trustee. (4)
10.16 Credit Agreement, dated as of April 30, 1998, among IPC
Information Systems, Inc., IPC Funding Corp., Morgan Stanley
Senior Funding, Inc. ("MSSF"), as syndication agent and arranger,
Goldman Sachs Credit Partners L.P., as documentation agent,
General Electric Capital Corporation, as collateral agent, and
MSSF, as administrative agent. (4)
10.17 International Purchase and Sale Agreement, date as of July 23,
1996, by and between International Exchange Networks, Ltd. and
Newbridge Networks Inc.
21.1 Subsidiaries of IXnet, Inc.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of PricewaterhouseCoopers.
23.3 Consent of Thacher Proffitt & Wood (included in Exhibit 5.1).*
24.1 Power of Attorney (included on signature page).
27.1 Financial Data Schedule for year ended September 30, 1996.
27.2 Financial Data Schedule for year ended September 30, 1997.
27.3 Financial Data Schedule for year ended September 30, 1998.
27.4 Financial Data Schedule for six months ended March 31, 1999.
</TABLE>
- ---------------------
* To be filed by amendment.
(1) Previously filed as an exhibit to IPC Information Systems' Report on Form
8-K, filed January 4, 1999, and incorporated herein by reference.
(2) Previously filed as an exhibit to IPC Information Systems' Report on Form
8-K, filed December 24, 1997, and incorporated herein by reference.
(3) Previously filed as an exhibit to IPC Information Systems' Registration
Statement on Form S-4, filed February 13, 1998, and incorporated herein by
reference.
(4) Previously filed as an exhibit to IPC Information Systems' Report on Form
8-K, filed May 15, 1998, and incorporated herein by reference.
II-9
<PAGE>
EXHIBIT 2.1.1
DATED 18 December 1998
----------------------
SATURN GLOBAL NETWORK
SERVICES HOLDINGS LIMITED (1)
INTERNATIONAL EXCHANGE
NETWORKS LTD. (2)
and
IPC INFORMATION SYSTEMS, INC. (3)
----------------------------
DEED
constituting Unsecured Guaranteed Subordinated
Loan Notes 1999/2000
----------------------------
Norton Rose
London
<PAGE>
THIS DEED is dated 18 December, 1998 and made BETWEEN:
(1) SATURN GLOBAL NETWORK SERVICES HOLDINGS LIMITED, a company incorporated in
England and Wales with registered no. 2176144 whose registered office is at
Lloyds Chambers, 1 Portsoken Street, London El 8DF ("Saturn");
(2) INTERNATIONAL EXCHANGE NETWORKS LTD, a company incorporated in the State of
Delaware, USA, whose principal place of business is at Wall Street Plaza,
88 Pine Street, New York, New York 1005, USA ("IXNet"); and
(3) IPC INFORMATION SYSTEMS, INC. a company incorporated in the State of
Delaware, USA, whose principal place of business is at Wall Street Plaza,
88 Pine Street, New York, New York 1005, USA ("IPC").
WHEREAS:
(A) Saturn by Resolution of a duly authorized committee of its Board of
Directors passed on 18th December 1998 in exercise of the powers conferred
on the Directors by the Memorandum and Articles of Association has created
Loan Notes 1999/2000 (the "Notes") and has determined to constitute the
same in manner hereinafter appearing;
(B) IPC has issued 10 7/8% Senior Discount Notes due 2008 pursuant to an
indenture dated as of 30th April, 1998 and supplemented by the First
Supplemental Indenture dated as of 30th September, 1998, made between IPC
as Issuer and United States Trust Company of New York as Trustee;
(C) IPC has a five year secured revolving credit facility of up to $55,000,000
made pursuant to a credit agreement dated as of 30th April, 1998, as
amended, made between IPC (1), IPC Funding Corp. (2), the Initial Lenders
(as defined therein) (3), the Initial Issuing Bank (as defined therein)
(4), Morgan Stanley Senior Funding, Inc. as Syndication Agent and Arranger
(5), Goldman Sachs Credit Partners L.P. as Documentation Agent (6) and
General Electric Capital Corporation as Administrative Agent and Collateral
Agent (together with any subsequent Administrative Agent, hereinafter
referred to as the "Agent") (7);
(D) IXNet and IPC have agreed to indemnify each Noteholder (as defined below)
in the manner contained in the Conditions to the Notes.
NOW THIS DEED WITNESSES as follows:
1 Definitions
-----------
In this Deed and each Note:
"Credit Agreement" means the credit agreement referred to in Recital (C)
and includes that agreement as amended, restated, supplemented, increased
or otherwise modified or renewed, replaced or refinanced from time to time
provided and to the extent only that entry into
1
<PAGE>
and/or performance of such agreement does not breach Section 4.03 of the
indenture referred to in Recital (B) in its original form (as amended by
the First Supplemental Indenture referred to in such Recital) as at the
date hereof.
2 Issue of Notes and application of proceeds
------------------------------------------
2.1 Saturn may issue Notes in denominations of (Pounds)1 or more, up to a
maximum aggregate principal amount of (Pounds)3,244,466.64. The Notes shall
be issued on the terms contained in this Deed and in the Certificate and
Conditions appearing in schedule 1 hereto and a "Noteholder" is a person
entered in the register as the holder of any Note. The proceeds of issue
thereof shall be receivable by Saturn and shall be applicable as the
Directors in their absolute discretion shall determine.
2.2 Every Noteholder shall be entitled to receive free of charge one
Certificate for the Note held by him but so that joint Noteholders shall be
entitled to only one Certificate in respect of the Note held jointly by
them which Certificate shall be delivered to that one of the joint
Noteholders whose name stands first in the register of Noteholders.
3 Company to maintain Register
----------------------------
Saturn shall at all times keep at its principal place of business in London
or at such other place as may be approved by the Noteholder(s) an accurate
register of the Notes showing the number(s) of the issued Note(s), the
name(s) and address(es) of the Noteholders from time to time, the nominal
amount of Note(s) held by every Noteholder and the dates of issue of such
Note(s).
4 Counterparts
------------
This Deed may be executed in any number of counterparts, all of which taken
together shall constitute one and the same instrument. Any party to this
Deed may enter into this Deed by executing any such counterpart.
5 Notices
-------
Any notice or other document shall be given to Saturn (with a copy to IPC
and IXNET by registered mail or confirmed facsimile) or each Noteholder
either by sending it by post in a first-class prepaid envelope or by
delivering it to its registered office. Any notice so given shall be deemed
to have been served on the day following that on which it is posted.
6 Proper Law
----------
6.1 This Deed and each Note is governed by English law. The parties irrevocably
submit to the jurisdiction of the English courts in relation to any matter
arising in connection with this Deed and any Note. A party may, however,
bring proceedings in connection with this Deed and any Note in any court of
competent jurisdiction. The Indemnifiers irrevocably appoint Titmuss Sainer
Dechert at present of No. 2 Serjeants' Inn, London EC4Y 1LT, Attention:
2
<PAGE>
Head of Business Law Department, to receive on their behalf process issued
out of the English courts in connection with this Agreement.
6.2 Each party to this Deed and each Noteholder hereby expressly waives any
right to a trial by jury in any action or proceeding to enforce or defend
any rights under this Deed or the Note.
IN WITNESS whereof this Deed has been executed the day and year first above
written.
3
<PAGE>
Schedule 1
----------
Form of Note Certificate
------------------------
CERTIFICATE NO. AMOUNT
(Pounds)
SATURN GLOBAL NETWORK SERVICES
HOLDINGS LIMITED
(Incorporated in England with registered No. 2176144)
Unsecured Guaranteed Subordinated Loan Notes 1999/2000
Issued pursuant to the Company's Memorandum
and Articles of Association
and created pursuant to a Resolution of the Board of Directors
passed on 18th December 1998
- --------------------------------------------------------------------------------
THIS IS TO CERTIFY that
(the "Noteholder(s)")
- -----------------------------------------------------------
of
------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
is/are the holder(s) of (Pounds) of the above-mentioned Notes which are
constituted by a Deed dated l8th December 1998 made between Saturn Global
Network Services Holdings Limited ("Saturn"), International Exchange Networks
Ltd. ("IXnet") and IPC Information Systems, Inc. ("IPC"). The Notes are issued
subject to and with the benefit of the provisions contained in the Deed and the
Conditions endorsed hereon. Expressions defined in the Deed shall have the same
meaning when used in this Certificate and Conditions. The Notes together with
the Deed are hereinafter referred to as the "Note Documents", IXNet and IPC are
hereinafter referred to as the "Indemnifiers" and Saturn, IXNet and IPC as the
"Obligors".
EXECUTED and DELIVERED as a DEED )
by SATURN GLOBAL NETWORK )
SERVICES HOLDINGS LIMITED )
----------------------------
Director
----------------------------
Director/Secretary
4
<PAGE>
EXECUTED and DELIVERED as a DEED )
by INTERNATIONAL EXCHANGE )
NETWORKS, LTD. )
----------------------------
Authorized Officer
----------------------------
Authorized Officer
EXECUTED and DELIVERED as a DEED )
by IPC INFORMATION SYSTEMS, INC. )
----------------------------
Authorized Officer
----------------------------
Authorized Officer
EXECUTED and DELIVERED as a DEED )
by MARSHALLS 106 LIMITED )
----------------------------
Director
----------------------------
Director/Secretary
EXECUTED and DELIVERED as a DEED )
by GENERAL ELECTRIC CAPITAL )
CORPORATION as ADMINISTRATIVE )
AGENT )
----------------------------
Authorized Signatory
5
<PAGE>
The Conditions
--------------
1 Redemption
----------
Saturn will repay the principal amount outstanding under this Note in 24
equal monthly instalments of (Pounds) 135,186.11. The first payment is to
be made on 29th, January 1999 (with each subsequent instalment, subject to
Condition 5.2 below, payable on the last day of each month thereafter) and
the last payment shall be made on 29th December 2000 (the "Repayment
Date").
2 Interest for late payment
-------------------------
2.1 If Saturn fails to pay any amount payable under this Note on the due date
for payment, it will pay interest on that amount from the due date until
the date of payment. Interest shall be paid on (i) the last day of the
calendar month in which the due date fell and on the last day of each
subsequent calendar month or (ii) if earlier, on the date on which the
relevant amount payable is paid in full and if not so paid it shall be
compounded on the last day of the relevant calendar month.
2.2 Interest shall be calculated by applying a rate of 3.0 per cent per annum
over the Sterling base lending rate of Barclays Bank plc in force from time
to time to:
(a) the Notional Principal Amount of each instalment which is due but
unpaid; and
(b) in the event of a request for repayment following an Event of Default
under Condition 7, the aggregate of all Notional Principal Amounts in
respect of each unpaid instalment (but so that there should be no
double counting with Condition 2.2(a)).
2.3 The Notional Principal Amount of an instalment is the amount set out in
respect of that instalment in the schedule.
3 Indemnity
---------
The Indemnifiers jointly and severally undertake to procure that Saturn
will perform all of its obligations under this Note; and, subject to
Condition 4, they jointly and severally agree to indemnify the
Noteholder(s) against all liabilities, losses and expenses of whatever
nature which any of them may incur or sustain as a result of any failure by
Saturn to do so. The Indemnifiers further agree that each Noteholder is at
liberty to compound with or grant indulgence or relief to Saturn or to any
other person, or to vary this Note, or to do any other matter or thing
which, but for this provision, might exonerate either of them, without in
any way prejudicing or affecting its rights against them.
4 Subordination
-------------
6
<PAGE>
4.1 For so long as an Event of Default (as that expression is defined in the
Credit Agreement) has occurred and is continuing, unremedied or unaided
under the Credit Agreement, none of the Obligors shall make any payment
under this Note to the Noteholder(s) and no Noteholder may take any action
to enforce its rights under or accelerate this Note provided that if:
(a) there is an acceleration of the entire indebtedness under the Credit
Agreement, the Noteholder(s) may, subject to Condition 4.2, enforce
their rights under this Note except to the extent that such
enforcement is inconsistent with the enforcement of the rights of the
agents (in their capacity as such) on behalf of the Lender Parties (as
defined in the Credit Agreement) and the lenders under the Credit
Agreement; and/or
(b) an event of default under Condition 7(b) and/or (c) has occurred, the
Noteholder(s) may only, subject to Condition 4.2, make a claim as an
unsecured creditor in the insolvency, winding-up, bankruptcy or
liquidation of any Obligor and take any and all steps necessary to
preserve that claim or ranking.
Notwithstanding any term of this Note postponing, subordinating or
preventing any payment by any Obligors under this Note or the Deed, as
between the Obligors and the Noteholder(s), the relevant payment obligation
shall be deemed to remain due, owing and payable in accordance with the
terms of this Note and the Deed in order that interest and indemnity
payments will accrue thereon in accordance with the terms of this Note and
the Deed.
4.2 In the event that any payment is made in the circumstances contemplated in
Condition 4.1, either by the Obligors or otherwise, including by reason of
or in connection with any insolvency, winding-up, bankruptcy or liquidation
proceedings relating to any Obligors (and notwithstanding that such payment
results from an action which is permitted under Condition 4.1(a) or (b)),
the Noteholder(s) shall receive such payment in trust for and turn over
such payment to General Electric Capital Corporation, or subsequent
Administrative Agent, on behalf of the Lenders under the Credit Agreement.
4.3 The limitation on the exercise of the Noteholder(s) rights and performance
of the Obligors' obligations under Conditions 4.1 and 4.2 shall cease to
apply in relation to any continuing Event of Default (other than an Event
of Default of the type described in Section 6.01(f) of the Credit Agreement
as in force as at the date hereof) if, on the expiry of 120 days from the
date on which that Event of Default first occurred, the entire indebtedness
under the Credit Agreement has not been accelerated.
4.4 The Lender Parties and Agents (as defined in the Credit Agreement) may
enforce the provisions of this Condition 4 directly in their own name.
7
<PAGE>
5 Payments
--------
5.1 All payments to the Noteholder(s) under this Note shall be made in full
(without any withholding or other deduction) in Sterling in immediately
available and freely transferable funds on the due date to such account as
the Noteholder may specify. Subject to Condition 8.1, if an Obligor is
compelled by law to make any deduction or withholding it will pay the
relevant Noteholder(s) such additional amounts as are required to ensure
that after the making of such deduction or withholding the Noteholder
receives on the relevant date and retains (free from any liability) the
amount which would have been received had no such withholding or deduction
been required.
5.2 If the date for payment of any amount due in respect of any Note is not a
day (a "Business Day") on which banks are open for business in London and
New York, then such payment shall be made on the next succeeding day which
is a Business Day. No adjustment will be made to the payment in respect of
any such modification of the date on which payment is made.
6 Representations and Warranties
------------------------------
6.1 Each Obligors (in respect of itself only) hereby represents and warrants to
the Noteholder(s) that at the date of this Note:
(a) Saturn is a company duly incorporated in England and Wales, IPC and
IXNet are duly incorporated in the State of Delaware, USA and each
Obligors has full power and authority to execute, deliver and perform
its obligations under the Note Documents;
(b) the execution, delivery and performance of the Note Documents has not
resulted, nor will result, in a breach of any provision of, or
constitute a default (so that the same could have a Material Adverse
Effect as defined in Condition 6.2) under (i) each Obligors's
constitutional documents or (ii) any statute, law, order, rule or
regulation of any Governmental Authority (as defined in Condition 6.2)
applicable to it as at the date hereof;
(c) each of the Note Documents has been duly and validly authorized,
executed and delivered by the Obligors and is the legal, valid and
binding obligations of each Obligor enforceable against each Obligor
in accordance with its terms, subject to any applicable bankruptcy,
insolvency (including, without limitation, all laws relating to
fraudulent transfers), reorganization, moratorium or similar law
affecting creditors' rights generally;
(d) no registration with, or consent or approval of, or any other action
by, any person or Governmental Authority is required in connection
with the execution, delivery and performance of each of the Note
Documents by the Obligors;
8
<PAGE>
(e) no proceedings have been commenced or, to the best of each Obligor's
knowledge, are pending or threatened against or affecting such Obligor
before any Governmental Authority which, in aggregate and if adversely
determined, could materially and adversely affect the rights, title
and interest of each Obligor under the Note Documents.
6.2 In Condition 6.1:
"Governmental Authority" means any federal, state or other governmental
agency or body, authority, administrative or regulatory body, arbitrator,
court or other tribunal, foreign or domestic; and
"Material Adverse Effect" means a material adverse effect on (a) the
business, condition, operations, performance, assets, liabilities or
prospects of the Obligors taken as a whole, (b) the rights and remedies of
any Noteholder under either of the Note Documents or (c) the ability of any
Obligor to perform its obligations under either of the Note Documents.
7 Events of Default
-----------------
Subject to Condition 4, a Noteholder may require immediate repayment of
this Note in any of the following circumstances:
(a) if any Obligor is in breach of any of Conditions 1, 5 and/or 6;
(b) if any Obligor becomes insolvent or generally unable to pay its debts
as they become due;
(c) if any Obligor is dissolved or enters into bankruptcy, reorganization
liquidation, administration, administrative receivership,
receivership, a voluntary arrangement, or scheme of arrangement with
creditors, any analogous or similar procedure in any jurisdiction
other than England or any form of procedure relating to insolvency,
reorganization or dissolution in any jurisdiction; or a petition is
presented or other step is taken by any person with a view to any of
those things unless dismissed within 30 days;
(d) if an Event of Default (as defined in the Credit Agreement), or if an
event (having a similar effect in any amended version of the Credit
Agreement), occurs and is continuing.
8 Transfer
--------
8.1 Subject to Condition 8.2, a Noteholder may transfer, in whole or in part,
the benefit of this Note and its rights hereunder to any third party
without the consent of the Obligors provided that no Obligor shall be
liable to make any increased payment hereunder which it would not have
incurred but for such transfer under any circumstances.
9
<PAGE>
8.2 Notes may only be transferred in minimum amounts, or integral multiples, of
(Pounds)500,000 and there shall not at any time be more than 4 Noteholders.
Accordingly, Saturn shall not enter more than 4 Noteholders on the register
to be maintained by it pursuant to clause 3 of the Deed at any one time.
Other than Marshalls 106 Limited, each Noteholder shall be a financial
institution and, at the time it becomes a Noteholder, shall have (by
reference to its latest audited accounts) or, if part of a group, its
ultimate parent shall have (by reference to the latest consolidated audited
accounts of such group) shareholders funds of at least US $250,000,000 or
its equivalent in other currencies.
8.3 To transfer this Note, the Noteholder(s) shall deliver to Saturn the
relevant Certificate together with a form of transfer, executed by the
transferor (such form to include the name(s) and address(es) of the
transferee(s) and the amount(s) of Note(s) transferred). Upon receipt by
Saturn of the same, it shall amend the register in accordance with the form
of transfer. Title to this Note shall pass by such registration in the
register.
8.4 Saturn shall, within 7 business days after each registration, deliver to
the transferee a new Certificate for the Note(s) transferred and deliver to
the transferor a new Certificate for any Note(s) retained by the
transferor.
9 Surrender of Note
-----------------
9.1 Subject to Condition 9.2, upon receipt in full of all amounts due under
this Note, this Note shall be cancelled and the Noteholder(s) shall return
it to Saturn.
9.2 Any release, cancellation or discharge of this Note shall be conditional
upon no disposition or payment to the Noteholder(s) in respect of an
Obligors's obligations hereunder being void, set aside or ordered to be
refunded for any reason.
10 No set-off
----------
10.1 Each Noteholder hereby waives any right (whether in law, equity or
otherwise)to set-off any moneys owing by it to any Obligor against any
amount payable under this Note.
10.2 Each Obligor hereby waives any right (whether in law, equity or otherwise)
to set-off any amount payable under this Note against any moneys owing to
it from any Noteholder.
11 Counterparts
------------
This Note may be executed in any number of counterparts, all of which taken
together shall constitute one and the same instrument. Any party to this
Note may enter into this Note by executing any such counterpart.
10
<PAGE>
12 Notices
-------
Any notice or other document may be given hereunder either personally or by
sending it by post in a first-class prepaid envelope or by delivering it to
him at the recipient's registered address. In the case of joint registered
holders of any Note a notice given to the Noteholder whose name stands
first in the register in respect of such Note shall be sufficient notice to
all the joint holders. Any notice so given shall be deemed to have been
served on any day following that on which it is posted.
13 Proper Law
----------
13.1 This Note is governed by English law. The parties irrevocably submit to the
jurisdiction of the English courts in relation to any matter arising in
connection with this Note. A party may, however, bring proceedings in
connection with this Note in any court of competent jurisdiction. The
Indemnifiers irrevocably appoint Titmuss Sainer Dechert at present of No. 2
Serjeants' Inn, London EC4Y 1LT, Attention: Head of Business Law
Department, to receive on their behalf process issued out of the English
courts in connection with this Agreement.
13.2 Each party to this Note and each Noteholder hereby expressly waives any
right to a trial by jury in any action or proceeding to enforce or defend
any rights under this Note.
11
<PAGE>
The Schedule
<TABLE>
<CAPTION>
- -----------------------------------------------------
Instalment Due end Notional Principal
Number of Amount ((Pounds))
- -----------------------------------------------------
- -----------------------------------------------------
<C> <S> <C>
1 January, 1999 113,263.29
- -----------------------------------------------------
2 February, 1999 114,101.40
- -----------------------------------------------------
3 March, 1999 114,945.71
- -----------------------------------------------------
4 April, 1999 115,796.26
- -----------------------------------------------------
5 May, 1999 116,653.11
- -----------------------------------------------------
6 June, 1999 117,516.30
- -----------------------------------------------------
7 July, 1999 118,385.00
- -----------------------------------------------------
8 August, 1999 119,261.89
- -----------------------------------------------------
9 September, 1999 120,144.38
- -----------------------------------------------------
10 October, 1999 121,033.41
- -----------------------------------------------------
11 November, 1999 121,929.01
- -----------------------------------------------------
12 December, 1999 122,831.24
- -----------------------------------------------------
13 January, 2000 123,740.15
- -----------------------------------------------------
14 February, 2000 124,655.78
- -----------------------------------------------------
15 March, 2000 125,578.18
- -----------------------------------------------------
16 April, 2000 126,507.42
- -----------------------------------------------------
17 May, 2000 127,443.52
- -----------------------------------------------------
18 June, 2000 128,386.56
- -----------------------------------------------------
19 July, 2000 129,336.57
- -----------------------------------------------------
20 August, 2000 130,293.62
- -----------------------------------------------------
21 September, 2000 131,257.74
- -----------------------------------------------------
22 October, 2000 132,229.00
- -----------------------------------------------------
23 November, 2000 133,207.44
- -----------------------------------------------------
24 December, 2000 134,193.13
- -----------------------------------------------------
</TABLE>
12
<PAGE>
EXECUTED and DELIVERED as a DEED )
by SATURN GLOBAL NETWORK )
SERVICES HOLDINGS LIMITED )
--------------------------
Director
--------------------------
Director/Secretary
EXECUTED and DELIVERED as a DEED )
by INTERNATIONAL EXCHANGE )
NETWORKS, LTD. )
--------------------------
Authorized Officer
--------------------------
Authorized Officer
EXECUTED and DELIVERED as a DEED )
by IPC INFORMATION SYSTEMS, INC. )
--------------------------
Authorized Officer
--------------------------
Authorized Officer
EXECUTED and DELIVERED as a DEED )
by MARSHALLS 106 LIMITED )
--------------------------
Director
--------------------------
Director/Secretary
EXECUTED and DELIVERED as a DEED )
by GENERAL ELECTRIC CAPITAL )
CORPORATION as ADMINISTRATIVE )
AGENT )
--------------------------
Authorized Signatory
13
<PAGE>
EXHIBIT 2.1.2
DATED 18 December 1998
INTERNATIONAL EXCHANGE
NETWORKS LTD. (1)
and
lPC INFORMATION SYSTEMS,
INC. (2)
-------------------------
DEED
constituting Unsecured Guaranteed Subordinated
Loan Note 2000/2002
-------------------------
Norton Rose
London
<PAGE>
THIS DEED is dated 18 December 1998 and made BETWEEN:
(1) INTERNATIONAL EXCHANGE NETWORKS LTD, a company incorporated in the State of
Delaware, USA, whose principal place of business is at Wall Street Plaza,
88 Pine Street, New York, New York 10005, USA ("IXNet"); and
(2) IPC INFORMATION SYSTEMS, INC. a company incorporated in the State of
Delaware, USA, whose principal place of business is at Wall Street Plaza,
88 Pine Street, New York, New York 10005, USA ("IPC").
WHEREAS:
(A) IXNet by Resolution of its Board of Directors passed on 14 December 1998 in
exercise of the powers conferred on the Directors by the By-laws has
created a Loan Note 2000/2002 (the "Note") and has determined to constitute
the same in manner hereinafter appearing;
(B) IPC, IXNet's parent company, has agreed to indemnify the Noteholder (as
defined below) in the manner contained in the Conditions to the Note;
(C) IPC has issued 10 7/8% Senior Discount Notes due 2008 pursuant to an
indenture dated as of 30th April, 1998 and supplemented by the First
Supplemental Indenture dated as of 30th September, 1998 made between IPC as
Issuer and United States Trust Company of New York as Trustee;
(D) EPC has a five year secured revolving credit facility of up to $55,000,000
made pursuant to a credit agreement dated as of 30th April, 1998, as
amended, made between IPC (1), IPC Funding Corp. (2), the Initial Lenders
(as defined therein)(3), the Initial Issuing Bank (as defined therein)(4),
Morgan Stanley Senior Funding, Inc. as Syndication Agent and Arranger (5),
Goldman Sachs Credit Partners L.P. as Documentation Agent (6) and General
Electric Capital Corporation as Administrative Agent and Collateral Agent
(together with any subsequent Administrative Agent, hereinafter referred to
as the "Agent")(7).
NOW THIS DEED WITNESSES as follows:
1 Definitions
-----------
In this Deed and the Note:
"Credit Agreement" means the credit agreement referred to in Recital (D)
and includes that agreement as amended, restated, supplemented, increased
or otherwise modified or renewed, replaced or refinanced from time to time
provided and to the extent only that entry into and/or performance of such
agreement does not breach Section 4.03 of the indenture referred to in
Recital (C) in its original form (as amended by the First Supplemental
Indenture referred to in such Recital) as at the date hereof, and
1
<PAGE>
"Sale and Purchase Agreement" means the sale and purchase agreement dated 7
August, 1998 made between Marshalls 106 Limited, Marshalls Finance Limited,
IXNet and IPC, as amended as of the date hereof.
2 Issue of Note and application of proceeds
-----------------------------------------
2.1 IXNet may issue a Note in an aggregate principal amount of
(Pounds)4,500,000. The Note shall be issued on the terms contained in this
Deed and in the Certificate and Conditions appearing in schedule 1 hereto
and a "Noteholder" is a person entered in the register as the holder of the
Note. The proceeds of issue thereof shall be receivable by IXNet and shall
be applicable as the Directors in their absolute discretion shall
determine.
2.2 The Noteholder shall be entitled to receive free of charge one Certificate
for the Note held by him.
3 Company to maintain Register
----------------------------
IXNet shall at all times keep at its principal place of business in London
or at such other place as may be approved by the Noteholder an accurate
register of the Note showing the number of the issued Note, the name and
address of the Noteholder from time to time, the nominal amount of Note
held by the Noteholder and the date of issue of such Note.
4 Counterparts
------------
This Deed may be executed in any number of counterparts, all of which taken
together shall constitute one and the same instrument. Any party to this
Deed may enter into this Deed by executing any such counterpart.
5 Notices
-------
Any notice or other document shall be given to IXNet (with a copy to IPC by
registered mail or confirmed facsimile) or the Noteholder either by sending
it by post in a first-class prepaid envelope or by delivering it to its
registered office. Any notice so given shall be deemed to have been served
on the day following that on which it is posted.
6 Proper Law and jury trial
-------------------------
6.1 This Deed and the Note is governed by English law. The parties irrevocably
submit to the jurisdiction of the English courts in relation to any matter
arising in connection with this Deed and the Note. A Party may, however,
bring proceedings in connection with this Deed and the Note in any court of
competent jurisdiction. IXNet and IPC each irrevocably appoint Titmuss
Sainer Dechert at present of No. 2 Serjeants' Inn, London EC4Y 1LT,
Attention: Head of Business Law Department, to receive on their behalf
process issued out of the English courts in connection with this Deed.
2
<PAGE>
6.2 Each party to this Deed and the Noteholder hereby expressly waives any
right to a trial by jury in any action or proceeding to enforce or defend
any rights under this Deed or the Note.
IN WITNESS whereof this Deed has been executed the day and year first above
written.
3
<PAGE>
Schedule I
----------
Form of Note Certificate
------------------------
CERTIFICATE NO. AMOUNT
(Pounds)4,500,000
INTERNATIONAL EXCHANGE NETWORKS LIMITED
(Incorporated in the state of Delaware, USA
whose principal place of business is at
Wall Street Plaza, 88 Pine Street
New York, New York 10005, USA)
Unsecured Guaranteed Subordinated Loan Note 2000/2002
Issued pursuant to a Resolution of the Board of Directors
passed on 14 December 1998
- --------------------------------------------------------------------------------
THIS IS TO CERTIFY that
(the "Noteholder") of
- --------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
is the holder of (Pounds)4,500,000 of the above-mentioned Note which is
constituted by a Deed dated 18th December 1998 made between International
Exchange Networks Ltd. ("IXNet") and IPC Information Systems, Inc. ("IPC"). The
Note is issued subject to and with the benefit of the provisions contained in
the Deed and the Conditions endorsed hereon. Expressions defined in the Deed
shall have the same meaning when used in this Certificate and Conditions.
The Note together with the Deed are hereinafter referred to as the "Note
Documents", IXNet and IPC are hereinafter referred to as the "Obligors",
Marshalls 106 Limited as "106" and Marshalls Finance Limited as "MFL". Words and
expressions defined in the Sale and Purchase Agreement and not otherwise defined
herein shall have the same meaning when used in this Note.
4
<PAGE>
EXECUTED and DELIVERED as a DEED )
by INTERNATIONAL EXCHANGE )
NETWORKS, LTD. )
-------------------------------
Authorised Officer
-------------------------------
Authorised Officer
EXECUTED and DELIVERED as a DEED )
by IPC INFORMATION SYSTEMS, INC. )
-------------------------------
Authorised Officer
-------------------------------
Authorised Officer
EXECUTED and DELIVERED as a DEED )
by MARSHALLS 106 LIMITED )
-------------------------------
Director
-------------------------------
Director/Secretary
EXECUTED and DELIVERED as a DEED )
by GENERAL ELECTRIC CAPITAL )
CORPORATION as ADMINISTRATIVE )
AGENT )
-------------------------------
Authorised Signatory
5
<PAGE>
The Conditions
--------------
1 Redemption
----------
Subject to Conditions 5.3 and 10, IXNet will repay the principal amount of
(Pounds)4,500,000 under this Note in three instalments (each a "Tranche"),
as follows: (Pounds)1,125,000 on 31st January 2000, (Pounds)1,575,000 on
31st January, 2001 and (Pounds)1,800,000 on 31st January 2002 (each being a
"Payment Date" and the last being the "Final Payment Date").
2 Interest
--------
2.1 Subject to Conditions 5.3 and 10, IXNet shall pay interest on each Tranche
on the relevant Payment Date or, if different, the date on which IXNet pays
the full amount of such Tranche; such interest shall accrue from the date
of this Note until the date of payment thereof and shall be compounded
monthly. The rate of interest shall be at a rate per annum of 3.0 per cent.
per annum over the Sterling base lending rate of Barclays Bank plc in force
from time to time.
3 Indemnity
---------
IPC undertakes to procure that IXNet will perform all of its obligations
under this Note; and, subject to Condition 4, it agrees to indemnify the
Noteholder against all liabilities, losses and expenses of whatever nature
which such Noteholder may incur or sustain as a result of any failure by
IXNet to do so. IPC further agrees that the Noteholder is at liberty to
compound with or grant indulgence or relief to IXNet or to any other
person, or to vary this Note, or to do any other matter or thing which, but
for this provision, might exonerate it, without in any way prejudicing or
affecting its rights against it.
4 Subordination
-------------
4.1 For so long as an Event of Default (as that expression is defined in the
Credit Agreement) has occurred and is continuing, unremedied or unwaived
under the Credit Agreement, neither of the Obligors shall make any payment
under this Note to the Noteholder or deposit into any escrow account under
Condition 10.3 and the Noteholder may not take any action to enforce its
rights under or accelerate this Note, provided that if
(a) there is an acceleration of the entire indebtedness under the Credit
Agreement, the Noteholder may, subject to Condition 4.2, enforce its rights
under this Note except to the extent that such enforcement is inconsistent
with the enforcement of the rights of the agents (in their capacity as
such) on behalf of the Lender Parties (as defined in the Credit Agreement)
and the lenders under the Credit Agreement; and/or
(b) an event of default under Condition 7(b) and/or (c) has occurred, the
Noteholder may only, subject to Condition 4.2, make a claim as an unsecured
creditor in the insolvency, winding-up, bankruptcy or liquidation of
either Obligor and take any and all steps necessary to preserve that claim
or ranking.
6
<PAGE>
Notwithstanding any term of this Note postponing, subordinating or
preventing any payment by either Obligor under this Note or the Deed, as
between the Obligors and the Noteholder, the relevant payment obligation
shall be deemed to remain due, owing and payable in accordance with the
terms of this Note and the Deed in order that interest and indemnity
payments will accrue thereon in accordance with the terms of this Note and
the Deed.
4.2 In the event that any payment is made in the circumstances contemplated in
Condition 4. 1, either by the Obligors, the Solicitors (as defined in
Condition 10.3) or otherwise, including by reason of or in connection with
any insolvency, winding-up, bankruptcy or liquidation proceedings relating
to either Obligor (and notwithstanding that such payment results from an
action which is permitted under Condition 4.1 (a) or (b)), the Noteholder
shall receive such payment in trust for and turn over such payment to
General Electric Capital Corporation, or subsequent Administrative Agent,
on behalf of the Lenders under the Credit Agreement.
4.3 The limitation on the exercise of the Noteholder's rights and performance
of the Obligors' obligations under Conditions 4.1 and 4.2 shall cease to
apply in relation to any continuing Event of Default (other than an Event
of Default of the type described in Section 6.01(f) of the Credit Agreement
as in force as at the date hereof) if, on the expiry of 120 days from the
date on which that Event of Default first occurred, the entire indebtedness
under the Credit Agreement has not been accelerated.
4.4 The Lender Parties and Agents (as defined in the Credit Agreement) may
enforce the provisions of this Condition 4 directly in their own name.
5 Payments
--------
5.1 Subject to Conditions 5.3 and 10, all payments to the Noteholder under this
Note shall be made in full (without any withholding or other deduction) in
Sterling in immediately available and freely transferable funds on the due
date to such account as the Noteholder may specify. Subject to Condition
8.1, if an Obligor is compelled by law to make any deduction or withholding
it will pay the Noteholder such additional amounts as are required to
ensure that after the making of such deduction or withholding the
Noteholder receives on the relevant date and retains (free from any
liability) the amount which would have been received had no such
withholding or deduction been required.
5.2 If the date for payment of any amount due in respect of the Note is not a
day (a "Business Day") on which banks are open for business in London and
New York, then such payment shall be made on the next succeeding day which
is a Business Day. No adjustment will be made to the payment in respect of
any such modification of the date on which payments is made.
5.3 In the event of:
7
<PAGE>
(a) the direct or indirect sale or transfer of all or substantially all of
the assets of MFL; or
(b) the dissolution or winding up of MFL; or
(c) an Insolvency Event (as defined in the Marshalls Contract known as the
Framework Agreement) occurring with respect to 106 or MFL, or
(d) MFL failing to pay a Shortfall (as defined in the Marshalls Contract
known as the Framework Agreement) in excess of (Pounds)100,000 when due
provided that it shall not be a failure to pay a Shortfall or portion
of such Shortfall to the extent that the same remains subject to a Bona
Fide Dispute (as defined below),
then, subject to Condition 7, the due date for all principal and interest
payments hereunder shall be deferred until the Final Payment Date. For the
purposes of Condition 5.3(a), substantially all of the assets of MFL shall
mean assets constituting 80% or more of the assets of the Marshalls Group
(excluding the Group) on a consolidated basis, either on the basis of book
value or fair market value and for the purposes of Condition 5.3(d):
"Bona Fide Dispute" means a bona fide dispute between MFL and IXNet in
relation to whether a Shortfall is due or in relation to the provision of
Services resulting in MFL being entitled not to pay monies otherwise due
under the Marshalls Contract known as the Operating Contract (as defined in
the Telecommunications Framework Agreement).
6 Warranties
----------
6.1 Each Obligor (in respect of itself only) hereby represents and warrants to
the Noteholder that at the date of this Note:
(a) IPC and IXNet are duly incorporated in the State of Delaware, USA and
each Obligor has full power and authority to execute, deliver and
perform its obligations under the Note Documents;
(b) the execution, delivery and performance of the Note Documents has not
resulted, nor will result, in a breach of any provision of, or
constitute a default (so that the same could have a Material Adverse
Effect as defined in Condition 6.2) under (i) each Obligor's
constitutional documents or (ii) any statute, law, order, rule or
regulation of any Governmental Authority (as defined in Condition 6.2)
applicable to it;
(c) each of the Note Documents has been duly and validly authorised,
executed and delivered by the Obligors and is the legal, valid and
binding obligations of each Obligor enforceable against each Obligor in
accordance with its terms, subject to any applicable bankruptcy,
insolvency (including, without limitation, all laws relating to
fraudulent transfers), reorganisation, moratorium or similar laws
affecting creditors' rights generally;
8
<PAGE>
(d) no registration with, or consent or approval of, or any other action
by, any person or Governmental Authority is required in connection with
the execution, delivery and performance of each of the Note Documents
by the Obligors;
(e) no proceedings have been commenced or, to the best of each Obligor's
knowledge, are pending or threatened against or affecting such Obligor
before any governmental authority which, in aggregate and if adversely
determined, could materially and adversely affect the rights, title and
interest of each Obligor under the Note Documents.
6.2 In Condition 6.1:
"Governmental Authority" means any federal, state or other governmental
agency or body, authority, administrative or regulatory body, arbitrator,
court or other tribunal, foreign or domestic; and
"Material Adverse Effect" means a material adverse effect on (a) the
business, condition, operations, performance, assets, liabilities or
prospects of the Obligors taken as a whole, (b) the rights and remedies of
the Noteholder under either of the Note Documents or (c) the ability of any
Obligor to perform its obligations under either of the Note Documents.
7 Events of Default
-----------------
Subject to Condition 4 and 10.3, the Noteholder may require immediate
repayment of this Note in any of the following circumstances:
(a) if any Obligor is in breach of any of Conditions 1, 2, 5.1, 5.2 and/or
6 of this Note;
(b) if any Obligor becomes insolvent or generally unable to pay its debts
as they become due;
(c) if any Obligor is dissolved or enters into bankruptcy, reorganisation
liquidation, administration, administrative receivership, receivership,
a voluntary arrangement, or scheme of arrangement with creditors, any
analogous or similar procedure in any jurisdiction other than England
or any form of procedure relating to insolvency, reorganisation or
dissolution in any jurisdiction; or a petition is presented or other
step is taken by any person with a view to any of those things unless
dismissed within 30 days;
(d) if an Event of Default (as defined in the Credit Agreement), or if an
event (having a similar effect in any amended version of the Credit
Agreement), occurs and is continuing.
9
<PAGE>
8 Transfer
--------
8.1 Subject to the other provisions of this Condition 8, the Noteholder may
transfer this Note in whole, but not part.
8.2 Such transfer may be made without the consent of any Obligor provided that
the transferee (i) is a member of the Marshalls Group and (ii) will take
the Note subject to any rights of set-off which either Obligor may have
against MFL in relation to that Marshalls Contract known as the Framework
Agreement.
8.3 The Note may be transferred otherwise than in accordance with Condition 8.2
with the prior written consent of the Obligors and provided that the
transferee is a financial institution which, at the time it becomes the
Noteholder has (by reference to its latest audited accounts) or, if it is
part of a group, its ultimate parent company shall have (by reference to
the latest consolidated audited accounts of such group), shareholders funds
of at least US$250,000,000 or its equivalent in other currencies.
8.4 To transfer this Note, the Noteholder shall deliver to IXNet the
Certificate together with a form of transfer, executed by the transferor
(such form to include the name and address of the transferee and the amount
of the Note transferred). Upon receipt by IXNet of the same, it shall amend
the register in accordance with the form of transfer. Title to this Note
shall pass by such registration in the register.
8.5 IXNet shall, within 7 business days after each registration, deliver to the
transferee a new Certificate for the Note transferred.
9 Surrender of Note
-----------------
9.1 Subject to Condition 9.2, upon receipt in full of all amounts due under
this Note, this Note shall be cancelled and the Noteholder shall return it
to IXNet.
9.2 Any release, cancellation or discharge of this Note shall be conditional
upon no disposition or payment to the Noteholder in respect of an Obligor's
obligations hereunder being void, set aside or ordered to be refunded for
any reason.
10 Set-off and Relevant Claims
---------------------------
10.1 Except as set out in Condition 10.2:
(a) the Noteholder hereby waives any right (whether in law, equity or
otherwise) to set-off any moneys owing by it to any Obligor against any
amount payable under this Note; and
(b) each Obligor hereby waives any right (whether in law, equity or
otherwise) to set-off any amount payable under this Note against any
moneys owing to it from the Noteholder.
10
<PAGE>
10.2 If on any Payment Date there shall be outstanding any Relevant Claims (as
hereinafter defined), IXNet may deduct from such payment an amount equal to
the amount of the Relevant Claim plus interest accrued or previously paid
on such amount at the rate specified in Condition 2 from the date of this
Note (less any amount previously deducted in connection with any such
Relevant Claim); provided, however, promptly upon the settlement,
resolution or withdrawal of any such Relevant Claim (as described below)
with respect to which a deduction was made, IXNet shall pay to the
Noteholder the then remaining amount of such Relevant Claim, together with
accrued interest at the rate specified in Condition 2. LXNet further agrees
that, to the extent there are any payments to the Group under the Marshalls
Contracts from any member of the Marshalls Group (the "Marshalls Contract
Obligations"), and for so long as (and only for so long as) this Note is
then held by a member of the Marshalls Group, the Noteholder, on behalf of
such member of the Marshalls Group, including the Noteholder as a member of
such Marshalls Group, may offset against any of the Marshalls Contract
Obligations any principal, interest or other amounts payable under this
Note which remain outstanding beyond their respective due dates. Upon
settlement or resolution of a Relevant Claim in favour of IXNet pursuant to
Condition 10.2(c) or (d) of this Note or in the event of any Working
Capital Offset (such amount as described in Condition 10.2(c) or (d) and/or
the amount of the Working Capital Offset being the "Settled Amount"), the
principal amount of this Note shall be reduced by the Settled Amount, and
the amount of any accrued interest on this Note shall be reduced for the
amount of accrued interest with respect to the Settled Amount. Any such
reduction of principal shall first be applied as a reduction of the
principal amount of the Tranche that is next payable under this Note.
For the purpose of this Note:
(a) "Relevant Claims" shall mean claims made by IXNet (taking account of
all applicable vendor protection provisions) pursuant to the provisions
of the Sale and Purchase Agreement, the Taxation Deed or the Marshalls
Contracts in respect of which MFL or 106 shall have received notice in
writing, specifying in reasonable detail with supporting evidence the
events, matter or default which gives rise to the claim and an estimate
of the amount claimed and which have not been settled, resolved or
withdrawn and, in addition shall include the amount of the difference
between the Working Capital Adjustment and the Estimated Working
Capital Adjustment payable by 106 to IXNet as provided for by clause
6.3(e) of the Sale and Purchase Agreement (the "Working Capital
Offset");
(b) any claim notified shall be deemed to have been withdrawn on the
expiration of 365 Relevant Days after the date of the claim being so
notified unless Court proceedings have been commenced against the
appropriate parties. For the purposes of the foregoing, "Relevant Day"
shall mean any day which is (i) a day on which the aggregate amount of
all successful claims and pending claims (excluding the Working Capital
Offset) exceeds the cumulative threshold specified in Schedule 5 to the
Sale and Purchase Agreement, or (ii) any day after the third
anniversary of the Completion Date;
11
<PAGE>
(c) a claim shall be deemed to be settled upon MFL or 106 and IXNet
agreeing a final settlement thereof and a claim shall be deemed to be
resolved upon an order or decree of a Court of competent jurisdiction
being given in proceedings in respect of the claim and such order or
decree being final and not or no longer appealable;
(d) the amount determined to be payable upon the settlement or resolution
of the claim shall be the amount agreed by MFL or 106 and IXNet under
any such settlement or determined by any such order or decree (as the
case may be) to be payable by MFL or 106 in respect thereof.
10.3 Subject to Condition 4, on the earlier of the Final Payment Date and the
date on which this Note is accelerated pursuant to Condition 7, IXNet shall
deposit into an escrow account to be established in the name of IXNet's and
the Noteholder's solicitors (together, the "Solicitors") an amount equal to
the amount of the Relevant Claims with respect to which IXNet had
previously made deduction from the principal payments due hereunder (and
which has not been previously resolved or settled), together with accrued
interest at the rate specified in Condition 2 hereof ("Existing Interest").
The Solicitors shall hold such monies pending the settlement, resolution or
withdrawal of any Relevant Claim (as determined under Conditions 10.2(b),
(c) and (d) respectively), at which time they shall pay to the Noteholder
the amount so agreed or determined in respect of such Relevant Claim
together with:
(a) the Existing Interest; and
(b) interest accrued from the date of deposit in the escrow account until
the date of payment,
thereon and any remaining amounts, after all Relevant Claims have been
settled, resolved or withdrawn, shall be distributed to IXNet.
11 Counterparts
------------
This Note may be executed in any number of counterparts, all of which taken
together shall constitute one and the same instrument. Any party to this
Note may enter into this Note by executing any such counterpart.
12 Notices
-------
Any notice or other document may be given hereunder either personally or by
sending it by post in a first-class prepaid envelope or by delivering it to
him at the recipient's registered address. Any notice so given shall be
deemed to have been served on any day following that on which it is posted.
12
<PAGE>
13 Marshalls
---------
Nothing contained in these Conditions shall prevent MFL, or any other
member of the Marshalls Group which is or becomes a transferee of this Note
in compliance with Condition 8, from having its rights under this Note
charged in favour of its banks if it is required to do so under its working
capital credit agreement and/or existing charges given in respect thereof
provided that, notwithstanding the foregoing, any transfer in connection
with the exercise of such charge shall remain subject to the transfer
restrictions and other provisions of Condition 8.
14 Proper Law and jury trial
-------------------------
14.1 This Note is governed by English law. The parties irrevocably submit to the
jurisdiction of the English courts in relation to any matter arising in
connection with this Note. A party may, however, bring proceedings in
connection with this Note in any court of competent jurisdiction. Each
Obligor irrevocably appoint Titmuss Sainer Dechert at present of No. 2
Serjeants' Inn, London EC4Y 1LT, Attention: Head of Business Law
Department, to receive on their behalf process issued out of the English
courts in connection with this Agreement.
14.2 Each party to this Note and the Noteholder hereby expressly waives any
right to a trial by jury in any action or proceeding to enforce or defend
any rights under this Deed or the Note.
13
<PAGE>
EXECUTED and DELIVERED as a DEED )
by INTERNATIONAL EXCHANGE )
NETWORKS, LTD. )
------------------------------
Authorised Officer
------------------------------
Authorised Officer
EXECUTED and DELIVERED as a DEED )
by IPC INFORMATION SYSTEMS, INC. )
------------------------------
Authorised Officer
------------------------------
Authorised Officer
EXECUTED and DELIVERED as a DEED )
by MARSHALLS 106 LIMITED )
------------------------------
Director
------------------------------
Director/Secretary
EXECUTED and DELIVERED as a DEED )
by GENERAL ELECTRIC CAPITAL )
CORPORATION as ADMINISTRATIVE )
AGENT )
------------------------------
Authorised Signatory
14
<PAGE>
10.10. Entire Agreement. This Agreement (including the exhibits and
----------------
schedules hereto) constitutes the entire agreement between the parties with
respect to the subject matter hereof and supersedes all prior agreements,
understandings and negotiations, whether written or oral, between the parties
with respect to the subject matter hereof. No representation, inducement,
promise, understanding, condition or warranty not set forth herein has been made
or relied upon by either party hereto. Neither this Agreement nor any provision
hereof is intended to confer upon any Person other than the parties hereto any
rights or remedies hereunder.
10.11. Captions. The captions herein are included for convenience of
--------
reference only and shall be ignored in the construction or interpretation
hereof.
10.12. Survival of Representations and Warranties. The representations and
------------------------------------------
warranties of the Company shall not survive the Closing.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
IPC INFORMATION SYSTEMS, INC.
By:
--------------------------------------------
Name:
------------------------------------------
Title:
-----------------------------------------
MXNET, INC.
By:
--------------------------------------------
Name:
------------------------------------------
Title:
-----------------------------------------
NATIONAL DISCOUNT BROKERS GROUP, INC.
By:
--------------------------------------------
Name:
------------------------------------------
Title:
-----------------------------------------
<PAGE>
EXHIBIT 10.17
INTERNATIONAL PURCHASE AND LICENSE AGREEMENT
This Product Sales Agreement (the "Agreement") is made effective this _______
day of ________, 1996, by and between:
NEWBRIDGE NETWORKS INC., a corporation organized and existing under the laws of
the State of Delaware (hereinafter called "Newbridge"), with its principal
office at 593 Herndon Parkway, Herndon, Virginia 22070, and
International Exchange Networks, Ltd., a corporation organized and existing
- -------------------------------------
under the laws of the State of Delaware, with its principal office at Wall
--------
Street Plaza, 88 Pine St., 15th Floor, New York, New York, 10005, by and on
behalf of itself and its affiliates listed on Exhibit A (hereinafter
collectively called "Customer"). For purposes hereof, affiliates shall be
defined as entities which control, are controlled by or are under common control
with International Exchange Networks, Ltd.
WHEREAS, Newbridge desires to sell hardware and license software products
(hereinafter "Products") to Customer and perform the related installation and
support services (hereinafter "Services") ordered by Customer; and
WHEREAS, Customer desires to purchase and/or license Products for its own use in
accordance with the terms of this Agreement;
NOW THEREFORE, in consideration of the mutual premises and agreements
hereinafter contained, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties do
mutually covenant and agree as follows:
1. TERM
This Agreement shall remain in effect for an initial period of two (2) years
from its effective date, unless otherwise terminated pursuant to Article
___________ herein. Thereafter, it shall remain in effect for successive one (1)
year terms, as established by written acknowledgments exchanged by the parties
prior to the end of each successive one (1) year term, unless terminated by
either party upon at least ninety (90) days prior written notice.
Notwithstanding the expiration or termination of this Agreement, Article 8,
(Warranties), Article 11, (Patent, Copyright and Trade Secret Infringement), and
Article 17 (Confidentiality), shall survive such termination or expiration.
2. GOVERNING TERMS AND CONDITIONS OF SALE, LICENSE AND SERVICES
A. The terms and conditions of this Agreement constitute the exclusive and
binding agreement between the parties concerning the purchase of the
Products, the licensing of the software, and the performance of services
ordered from Newbridge. The goods and/or services set forth on Customer's
purchase order shall be supplied subject only to these terms and
conditions, or such amended terms and conditions as the parties may
mutually agree upon in writing, notwithstanding any contrary terms
contained in any purchase order issued by Customer and accepted by
Newbridge.
<PAGE>
B. All software provided pursuant to this Agreement shall be licensed to
Customer subject to the terms set forth in the "shrink-wrap" license packed
with the Product or, as applicable, the terms of Newbridge's End User
Software License. The terms of said Newbridge End User Software License
are set forth in Exhibit B herein and are hereby incorporated into this
Agreement by reference.
C. Unless the parties have executed an appropriate maintenance or service
agreement, all such work not covered by the Warranty or other terms of this
Agreement shall be performed at, and in accordance with, Newbridge's then
current time, expense and materials rates, terms and policies. Such current
rates, terms and policies, may be subject to change, unless a formal
Newbridge quotation is requested and provided for specific work and such
work is scheduled within the term of the quotation's validity. Copies of
current applicable rates, terms and policies will be provided upon request.
D. If Customer orders installation services from Newbridge, Newbridge will
perform the same in a good and workmanlike manner, in accordance with all
applicable codes and regulations and according to a mutually agreeable
installation schedule. Installation shall include the performance of
Newbridge's standard suite of on-site tests to ensure performance of the
Product in accordance with its applicable specifications and documentation.
3. ACCEPTANCE OF ORDERS BY NEWBRIDGE
A. All Purchase Orders must originate from Customer's US corporate office as
listed above and must be sent to Newbridge's regional office location
specified below. Newbridge reserves the right to reject orders from
Customer for reasonable cause, subject to the terms and conditions of this
Agreement. All orders are conditioned upon the execution and delivery of a
Guaranty of the payment obligations due under this Agreement by IPC
Information Systems, Inc. and are subject to acceptance by Newbridge's
regional office in Herndon, Virginia. Within five (5) business days after
receipt of the written order from Customer at Newbridge's Herndon, Virginia
office, Newbridge shall notify Customer of acceptance or rejection of the
order, and if rejected, the reasons therefor. The ordering address is as
follows:
Newbridge Networks Inc.
593 Herndon Parkway
Herndon, VA 22070
TEL: 703-834-3600
B. It is expressly agreed that all orders received from Customer under this
Agreement for subsequent delivery of the Products outside of the United
States will be subject to all applicable export/import laws and regulations
imposed or administered by the US Department of Commerce (or other
appropriate Governmental Agency) and/or the Country of final destination,
including but not limited to the export/import of technical data,
equipment, software and know how. In addition to the above laws, certain
Countries, including but not limited to, Brazil, Peru, China, Korea and/or
the former Soviet Union,
<PAGE>
impose separate local import requirements and all orders which require
shipment of the products to such Countries must be approved in advance by
Newbridge.
C. Customer may purchase Products and Services hereunder by means of written
purchase orders referencing this Agreement. Purchase orders may also be
placed by facsimile, followed by a written original document within five
(5) working days. Stenographic, typographical and clerical errors are
subject to correction within a reasonable period of time. This Agreement
does not constitute a purchase order.
4. PRICING / PAYMENT
A. Pricing for the Products shall be in accordance with the price list set
forth in Exhibit C. Customer acknowledges that the purchase price will be
determined by the ultimate Regional location in which the Products will be
installed, (i. e. orders for Products to be installed in the Asia Pacific
Region will be based on the Asia Pacific Price list).
B. Payment terms for all Products shall be Net Thirty (30) days from receipt
of invoice, which date shall not precede the latter of the date requested
for receipt or the date of actual receipt of the Product unless Customer
and Newbridge otherwise agree in writing.
C. Installation charges, if applicable, are invoiced after completion of
Newbridge's installation activities. Payment terms for all installation
charges shall be Net Thirty (30) days from the date of completion of
installation.
D. All prices quoted are payable in US funds and shall be exclusive of taxes
(including without limitation any added value, use, sales, or similar
tax).Customer shall pay any and all such taxes, except for taxes imposed on
Newbridge's income, and shall hold Newbridge harmless therefrom, provided
that if Newbridge, at its sole discretion, chooses to make any such
payment, Customer shall reimburse Newbridge in full. All transactions
pursuant to this Agreement shall be considered taxable unless Customer
provides Newbridge with appropriate verification of exemption. All prices
quoted shall likewise be exclusive of any import duties or any other
charges imposed by the country of final destination upon shipments from
Newbridge to Customer.
E. Prices quoted are for Product only and do not confer upon Customer any
rights to Newbridge's technical data or proprietary information of any
kind, except as specifically set forth in such applicable software license
agreements as may be executed between the parties. Prices quoted do not
contemplate packaging other than Newbridge's normal commercial packaging
unless expressly agreed to in writing by Newbridge.
5. SHIPPING AND RISK OF LOSS
A. To US Locations
All US orders shall be shipped F.O.B. Origin; transportation charges shall
be at the expense of Customer, and separately billed. Newbridge reserves
the right to select the means of
<PAGE>
transportation and routing unless otherwise advised. Title to the hardware
Products and risk of loss for all Products shall pass to the Customer upon
delivery by Newbridge to the carrier.
B. To Non-US Locations
Delivery of the Products hereunder will be FCA, Newbridge shipping point
(in accordance with INCOTERMS, 1990) with freight and insurance charges (if
insurance is separately obtained by Newbridge through the carrier) prepaid
by Newbridge and added to the invoice. Title to the hardware Products and
risk of loss for all Products shall pass to the Customer upon delivery by
Newbridge to the carrier. Customer will be responsible for payment of
duties, taxes (including any VAT) and other official charges payable on
importation as well as the costs and risks of carrying out customs
formalities, including the completion of all necessary import licenses and
any risks and costs which may arise if any customs formalities, for any
reason, are not, or cannot be completed.
6. TERMINATION
A. The occurrence of any of the following acts or events shall constitute a
material breach of this Agreement and shall be cause for the affected party
to terminate this Agreement or any purchase order issued in accordance
herewith:
(1) Newbridge fails to ship or install the Product within thirty (30) days
of the scheduled shipment date, unless delayed by reason of Force
Majeure.
(2) Either party fails to substantially perform any of its other material
obligations under this Agreement and does not cure such failure within
thirty (30) days of written notice of the same. If the party whose
breach has been claimed fails to cure such breach within the allotted
time, the other party may terminate any undelivered purchase order
issued or accepted hereunder, or this entire Agreement, without
further delay. In the event of such termination by Customer, Customer
shall be obligated to pay only the contract price for conforming
Product delivered prior to the effective date of termination.
(3) Either party becomes insolvent, admits in writing its inability to pay
its debts as they mature, files an involuntary petition of bankruptcy,
makes an assignment for the benefit of creditors or has petition under
any bankruptcy laws filed against it and such petition is not
dismissed within thirty (30) days.
(4) Customer assigns this Agreement or any purchase order hereunder
without prior written consent of Newbridge, which consent shall not be
unreasonably withheld.
B. Customer may terminate this Agreement and/or any purchase order issued
hereunder for any reason of its own convenience upon no less than thirty
(30) days prior written notification to Newbridge. Customer's maximum
liability to Newbridge for such termination shall be:
<PAGE>
(1) Any unpaid balance for conforming Product ordered by Customer and
delivered to Customer prior to Newbridge's receipt of the termination
notice.
(2) A restocking charge not to exceed twenty percent (20%) of the purchase
price of the terminated order, excluding software and services.
(3) Any direct costs Newbridge may have incurred in the course of
fulfilling Customer's requirements for a specific purchase
order(including but not limited to the ordering of third-party
equipment and services). Such costs will be reimbursed provided they
are reasonable and are submitted to Customer within thirty (30) days
after receipt of the purchase order cancellation.
7. FORCE MAJEURE
Except for the payment of funds, neither Newbridge nor Customer shall be liable
for any failure or delay in performing its obligations hereunder during any
period in which such performance is prevented or delayed by causes beyond its
reasonable control, including without limitation, flood, war, embargo, strike or
other labor dispute, riot, or the intervention of any government authority.
8. WARRANTIES
8.1 HARDWARE PRODUCT WARRANTY
A. Newbridge warrants the following with respect to the Hardware Product:
(1) that the Hardware Product is free from defects in material and
workmanship;
(2) that upon payment in full all Hardware Product shall be delivered
free and clear of liens, claims or encumbrances of any kind.
B. (1) For Products purchased and installed in the United States, the above
warranties shall extend to the Customer for the 3624 and 3630 series
Hardware Product for a period of sixty (60) months from the date of
shipment; the above warranties shall extend to the Customer for all other
Hardware Product for a period of fourteen (14) months from the date of
shipment.
(2). For Products installed outside of the United States, the above
warranties shall extend to the Customer for all Hardware Products for a
period of fourteen (14) months from the date of shipment.
C. With respect to products sold but not manufactured by Newbridge, Newbridge
will assign to Customer all warranties allowed by the manufacturer.
D. If Newbridge installs the Hardware Product in the United States, Newbridge
will warrant the installation against defects in material and workmanship
for a period of sixty (60) days from the date of installation and provide
all parts and on-site labor (including transportation costs
<PAGE>
of Newbridge's technician(s)) necessary to restore the Hardware Product to
proper operating condition at no charge to Customer. The warranty period
for repair parts and labor and for replaced Hardware Product shall be the
remainder of the original warranty period for the repaired or replaced item
or ninety (90) days, whichever is greater.
E. Except as specifically provided under section D above, Newbridge's
liability under warranty shall be limited to either repair or replacement
of the defective Product in accordance with Article 9 below. Newbridge
shall incur no obligation under this warranty if (i) the allegedly
defective Product is returned to Newbridge more than thirty (30) days after
the expiration of the applicable warranty period, or if (ii) Newbridge's
verifiable tests disclose that the alleged defect is not due to defects in
material or workmanship.
8.2 LIMITED SOFTWARE WARRANTIES
Newbridge warrants for a period of 90 days from the date of shipment that the
Licensed Software as originally shipped to Customer, when used in accordance
with the user manual supplied with the Licensed Software, will operate
substantially in accordance with applicable functional descriptions set forth in
such manual. Newbridge's sole liability and Customer's sole remedy pursuant to
this warranty shall be Newbridge's good faith efforts to rectify the
nonconformity or, if after repeated efforts Newbridge is unable to rectify the
non-conformity, Newbridge shall accept return of the Licensed Software and shall
refund to Customer all amounts paid to Newbridge in respect thereof. This
warranty is available only once in respect of any Licensed Software, and is not
renewed by the payment of fees for additional equivalent nodes or other
increased or enhanced use.
8.3 REPAIR SERVICE AND MAINTENANCE WARRANTY
The maintenance and repair services provided under this agreement shall be
performed in a workmanlike manner, using qualified maintenance technicians,
familiar with the product and its operation and, upon timely payment in full, no
liens or encumbrances shall accrue from the performance of the maintenance or
repair services provided hereunder. In the event that, within ninety (90) days
from the provision of any service hereunder, the maintenance material or
services provided are found not to conform to any Newbridge specification,
Newbridge will correct or replace the defective maintenance material or repair
service provided hereunder at no charge to the Customer.
8.4 WARRANTY LIMITATIONS AND EXCLUSIVITY
THE WARRANTIES SET FORTH ABOVE FOR THE PRODUCTS AND SERVICES PROVIDED HEREUNDER
ARE COMPLETE AND ARE IN LIEU OF ALL OTHER WARRANTIES, CONDITIONS OR
REPRESENTATIONS, EXPRESS OR IMPLIED, BY STATUTE, USAGE, CUSTOM OF THE TRADE OR
OTHERWISE. NOTWITHSTANDING ANY OTHER OR PRIOR STATEMENT, WRITTEN OR ORAL,
NEWBRIDGE MAKES NO OTHER WARRANTIES REGARDING THE QUALITY OF ITS PRODUCT(S) OR
THE MATERIALS AND SERVICES CONTEMPLATED HEREUNDER. WITHOUT LIMITING THE
GENERALITY OF THE FOREGOING, NEWBRIDGE EXPRESSLY DISCLAIMS WARRANTIES OR
REPRESENTATIONS OF WORKMANSHIP, MERCHANTABILITY,
<PAGE>
FITNESS FOR A PARTICULAR PURPOSE, DURABILITY, THAT A LICENSED PROGRAM WILL MEET
ALL OF CUSTOMER'S NEEDS OR THAT THE OPERATION OF THE LICENSED SOFTWARE WILL BE
ERROR FREE.
8.5 NO HIGH RISK USE
Customer acknowledges and agrees that the Products supplied under this contract
are intended for standard commercial uses and are not specifically designed,
manufactured or intended for use or resale in critical applications or hazardous
environments, requiring fail-safe performance and in which the failure of
Products could lead directly to death, personal injury, or severe physical or
environmental damage (including, without limitation, the operation or on-line
control of nuclear facilities, aircraft navigation or communication systems, air
traffic control systems, direct life support machines, or weapons systems). Such
undertakings are considered "High Risk Activities". Suitability of Products for
use in one or more High Risk Activities would require additional appropriate
development and design engineering by Newbridge including but not limited to the
addition of appropriate redundancy and/or contingency procedures. Newbridge and
its suppliers explicitly disclaim any express or implied warranty of fitness for
High Risk Activities and customer hereby agrees to release and hold Newbridge
harmless from liability resulting out of or in connection with implementation of
these Products in High Risk Activities.
9. REPAIR AND RETURN PROCEDURES
Newbridge will process requests for the repair of Product according to the
following policy:
A. No Product shall be returned without prior Newbridge authorization.
Customer shall provide Newbridge's Service Representatives with all
necessary information to allow processing of the return and issuance of a
Return Authorization (RA) number.
B. Damaged, inoperative or malfunctioning Products must be returned by
Customer in static protective material, securely packaged to prevent damage
in transit with the RA Number written on the outside of the package, and
shipped prepaid to:
In the United States:
Newbridge Networks Inc.
810 Commerce Park Dr.
Ogdensburg, NY 13669
Attn.: Repair Services
Phone: (315) 393-9981
In Europe:
Newbridge Networks Limited
Coldra Woods
Chepstow Road
Newport, Gwent
United Kingdom, NP6 lJB
Attention: NTAC
<PAGE>
In Canada, the Asia Pacific Region and the former Soviet Union:
Newbridge Networks Corporation
P. O. Box 13600
600 March Road
Kanata, Ontario
Canada K2K2E6
C. Newbridge will either repair or, at its option, replace defective Product
under warranty within fifteen (15) working days of receipt. Newbridge will
return repaired Product via surface freight at Newbridge's expense. The
cost of expedited freight, if provided, shall be at Customer's expense.
D. Product found to be operable after testing (e.g. no trouble found "NTF"),
according to Newbridge's current manufacturing standards, shall be subject
to Newbridge's then-current handling charge. (Current charges for NTF both
in and out of warranty are $100.00.)
E. Repairable out-of-warranty Product will be repaired at Newbridge's then-
current repair charges within fifteen (15) working days of receipt of the
Product and Customer's applicable purchase order or other written
authorization to repair.
F. When used and handled in accordance with the manufacturer's instructions
the Hardware Product (including any laser device) is safe in normal use and
transportation. Newbridge is available to answer inquiries regarding the
proper use, recycling or disposal of any product or component.
10. DAMAGES AND LIABILITY
EXCEPT FOR PERSONAL INJURY OR TANGIBLE PROPERTY DAMAGES WHICH DIRECTLY RESULTS
FROM THE NEGLIGENT OR INTENTIONALLY WRONGFUL ACTS OR OMISSIONS OF EITHER PARTY;
(A) UNDER NO CIRCUMSTANCES WILL EITHER PARTY BE LIABLE FOR INCIDENTAL,
CONSEQUENTIAL, INDIRECT, SPECIAL OR PUNITIVE DAMAGES OF ANY KIND (INCLUDING
WITHOUT LIMITATION LOSS OF PROFITS OR DAMAGE TO BUSINESS OR BUSINESS RELATIONS),
HOWEVER CAUSED, ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS AGREEMENT OR
ANY ORDER FOR PRODUCT ARISING HEREUNDER OR THE PURCHASE OR USE OF PRODUCT OR
SERVICES FURNISHED BY NEWBRIDGE TO CUSTOMER; and (B) WITH THE EXCEPTION OF
DAMAGES FOR THE BREACH OF OBLIGATIONS FOR WILLFUL MISUSE OR MISAPPROPRIATION OF
SOFTWARE AND/OR CONFIDENTIAL OR PROPRIETARY INFORMATION IN NO EVENT WILL EITHER
PARTY'S TOTAL LIABILITY, IN DAMAGES OR OTHERWISE, EXCEED THE AMOUNTS ACTUALLY
PAID OR OWED FOR THE PARTICULAR SERVICE OR UNIT OF PRODUCT WHICH IS THE SUBJECT
OF A CLAIM OR DISPUTE. NO ACTION, REGARDLESS OF FORM, ARISING OUT OF OR IN ANY
WAY CONNECTED WITH THE PRODUCT OR SERVICES FURNISHED BY NEWBRIDGE MAY BE BROUGHT
BY CUSTOMER MORE THAN TWO (2) YEARS AFTER THE
<PAGE>
CAUSE OF ACTION HAS ACCRUED OR SUCH SHORTER STATUTORY PERIOD AS MAY BE
APPLICABLE.
11. PATENT, COPYRIGHT AND TRADE SECRET INFRINGEMENT
A. Newbridge shall defend, indemnify and hold harmless Customer from any
suitor claim which is brought against Customer alleging the use of any
Newbridge Manufactured Products, in accordance with its intended purpose
and Newbridge specifications, to be an infringement of any patent,
copyright or trade secret and New bridge shall pay all reasonable legal
costs and expenses incurred by Customer in conjunction with such an action
and shall satisfy any final judgment against Customer provided, Customer
notifies Newbridge promptly upon discovery of the existence or imminent
pendancy of any such claim, that Newbridge shall have sole control of the
defense or settlement of such actions, and that Customer provides such
assistance and cooperation to Newbridge as is reasonably requested. The
foregoing shall not include, and further Customer shall provide like
defense and protection to Newbridge for, any alleged infringement which
results from the use of Newbridge Products in combination with any item or
process not supplied by Newbridge or officially approved by Newbridge for
use with the Newbridge Products. For purposes herein, "Newbridge
Manufactured Products" excludes third party products identified in Exhibit
C as "OEM" products.
B. In the event Customer is enjoined from its use of Newbridge's Product due
to a proceeding based upon infringement of any patent, copyright or trade
secret, Newbridge shall, at its option:
(1) promptly render the Product non-infringing functionally equivalent,
and capable of providing services as intended, or
(2) procure for Customer the right to continue using the Product, or
(3) replace the Product with a non-infringing functionally equivalent
version, or
(4) remove the Product and refund the purchase price, any applicable
license fees, and transportation costs thereof, less a monthly usage
fee equal to one sixtieth (1/60) of the purchase price for each month
that Customer enjoyed beneficial use of the Product.
C. The foregoing constitutes the entire liability of Newbridge to Customer
with respect to the infringement of patents, copyrights, and trade secrets
for Product purchased or licensed pursuant to this Agreement.
12. TRAINING
Training, customized to Customer's requirements, will be provided at Newbridge's
then-prevailing rates and at Newbridge's training facility. Any costs for
transportation, lodging, meals and associated expenses of Customer's trainees'
shall be borne by Customer. At Customer's request, Newbridge shall provide price
quotations for customized on-site training at Customer's facility.
<PAGE>
13. PUBLICITY
Neither party will use the name of the other in any advertising, press release,
or similar public statement without the prior written consent of the other,
which consent shall not be unreasonably delayed or withheld.
14. CUSTOMER'S PROTECTION-SITE WORK
Newbridge shall take such steps as may be reasonably necessary to prevent
personal injury or property damage and shall indemnify and hold Customer
harmless from any loss, claim for personal injury (including death) or property
damage to the extent any such claim directly results from the negligent or
willful acts or omissions of Newbridge, or its employees or agents or
contractors during any work hereunder that may be performed at any of Customer's
sites including Customer's end user sites. Newbridge shall maintain mutually
agreeable levels of insurance against general liability and property damage and
such levels of Workman's Compensation or similar insurance as may be required by
applicable statute and shall provide a Certificate of Insurance thereof to
Customer.
15. END USE AGREEMENT
The parties acknowledge that products and services ordered or delivered pursuant
to this Agreement are for final end use by Customer and are not sold for
distribution and/or resale to third parties. Customer certifies that, unless
otherwise negotiated, no resale or redistribution of Newbridge products is
intended or contemplated prior to end use of products by the Customer.
16. THIRD PARTY SOFTWARE
The Products herein may include software and documentation that are owned by
third parties and distributed by Newbridge under license from the owner.
Newbridge represents that it has: (i) a valid license to use the third party
software; (ii) no knowledge of any adverse claim of infringement relating to the
third party software; and (iii) the right and authority to grant a valid
sublicense to Customer to use such third party software as provided for in this
Agreement.
17. CONFIDENTIALITY
A. Either party may disclose to the other confidential and proprietary
information concerning its inventions, know-how and trade secrets as may be
necessary to further the performance of this Agreement ("Confidential
Information"). Confidential Information will only be used by the receiving
party, its Affiliates and its and their respective employees,
representatives and/or agents (collectively "Receiving Party") or its
employees having a need to know such information for the purposes set forth
in this Agreement. Written information intended to be treated as
confidential shall be marked"confidential" or "proprietary". Oral and or
intangible information, subject to this Agreement shall be so identified
prior to disclosure and summarized in written form and appropriately
labeled as proprietary or confidential within fifteen (15) days of
disclosure. All such Confidential Information, disclosed hereunder whether
knowingly or otherwise shall remain the sole property of the party
disclosing the
<PAGE>
same, and the Receiving Party shall have no interest in or rights with
respect thereto except as set forth herein.
B. Each Receiving Party who obtains access to Confidential Information of the
other agrees to maintain all such Confidential Information in strict
confidence and to use at least the same measures to protect such
Confidential Information as it uses to protect its own Confidential
Information, and further agrees to take all reasonable precautions to
prevent any unauthorized disclosure of such information during the Term of
this Agreement any extensions, and for three (3) years thereafter.
C. The obligation to protect Confidential Information as set forth in this
Agreement shall not apply to any Confidential Information that:
(1) was already known to the Receiving Party at the time of disclosure
under this Agreement;
(2) was known or was generally available to the public at the time of
disclosure hereunder;
(3) becomes known or generally available to the public (other than by act
of the Receiving Party) subsequent to its disclosure hereunder;
(4) is disclosed or made available in writing to the Receiving Party by a
third party having an apparent bona fide right to do so;
(5) is independently developed by the Receiving Party without the use of
the proprietary information; or
(6) is required by law to be released.
D. All Confidential Information provided by disclosing party to the Receiving
Party is expressly provided for the purpose of this Agreement only and
cannot be used for any other purpose, and must be returned to disclosing
party or destroyed upon termination of this Agreement. All copying of any
documentation provided by the disclosing party to the Receiving Party must
include copyright notices.
18. AFFILIATES
Exhibit A provides a list of International Exchange Networks, Ltd.'s affiliates.
International Exchange Networks, Ltd. may amend Exhibit A from time to time as
needed. Such affiliates listed in Exhibit A shall have the right to order
Products subject to the provisions of Article 3(A) herein. International
Exchange Networks, Ltd. represents and warrants that is has the authority to
execute this Agreement on behalf of its affiliates listed on Exhibit A and that
such affiliates will be bound by the terms and conditions of this Agreement.
19. DISPUTES RESOLUTION PROCEDURE
A. The parties will attempt in good faith to resolve any controversy or claim
arising out of or relating to this Agreement or any amendments thereto
("Claim") promptly by negotiation between senior executives of the parties
who have authority to settle the Claim. The disputing party ("Claimant")
shall give the other party written notice of the Claim and its
<PAGE>
request for negotiation ("Notice"). Within ten (10) days after receipt of
the Notice, the receiving party shall submit to the other a written
response. The Notice and the response shall include (a) a statement of each
party's position and a brief summary of the evidence and arguments
supporting its position, and (b) the name and title of the executive who
will represent that party. The executives shall meet at a mutually
acceptable time and place within thirty (30) days from the date of the
Notice and thereafter as they reasonably deem necessary to exchange
relevant information and to attempt to resolve the Claim.
B. If the Claim has not been resolved within forty five (45) days of the
Notice, or if the party receiving the Notice will not meet within thirty
days of the Notice, either party may initiate mediation of the Claim in
accordance with the Center for Public Resources Model ADR Procedures and
Practices or such other procedures mutually agreed upon by the parties. The
mediation proceeding shall be conducted before a mediator from the Center
for Dispute Settlement in Washington, D.C. who is mutually acceptable to
the parties. The mediator's compensation and expenses shall be shared
equally by the parties. The parties agree that the mediation shall take
place in Baltimore, Maryland unless the parties mutually agree to hold the
mediation in another location. If the matter is not resolved within sixty
(60) days of the initiation of such mediation procedure, either party is
free to commence legal action in accordance with this Agreement.
20. GENERAL PROVISIONS
A. This Agreement shall be interpreted and governed exclusively by the laws of
the Commonwealth of Virginia and the United States of America, excluding
conflict of law rules and principles. Any action or proceeding for relief
initiated by the parties shall be filed in the United States District Court
for the District of Maryland in Baltimore, Maryland, and if that court does
not have jurisdiction, in the courts of the State of Maryland in the City
of Baltimore, provided that the foregoing submissions to jurisdiction shall
not limit the availability of any other forum with respect to any suit in
rem or otherwise for the enforcement of any judgment. Newbridge and
Customer, to the extent permitted by law irrevocably; (1) waive and agree
not to assert by way of motion, as a defense or otherwise, any right, claim
or power under the doctrine of forum non conveniens to transfer any such
action filed by any party to any other court; (2) waive the right to object
that such courts lack personal jurisdiction over the parties or that venue
is not proper in said court(s); and (3) waive any right to a jury trial
with respect to such action or proceeding.
B. The provisions Of this Agreement shall be deemed severable. If any
provision of this Agreement shall be held unenforceable by any court of
competent jurisdiction, the remaining provisions shall remain in full force
and effect.
C. This Agreement shall not be amended or modified except by a writing duly
executed by the authorized representatives of Newbridge and Customer. No
course of dealing or usage of trade by or between the parties shall be
deemed to cause or constitute any amendment or modification of the terms
hereof.
<PAGE>
D. All headings and captions employed herein are for convenience and ease of
reference only and are not to be considered in the construction or
interpretation of any provision of this Agreement. Any notice required to
be sent or given to Newbridge or Customer shall be sent via US mail or
overnight carrier to the address shown below; notices may be sent via
facsimile if followed by an original copy, sent via US mail or overnight
carrier.
E. Any notice required to be sent or given to Newbridge or Customer shall be
sent via US mail or overnight carrier to the address shown below; notices
may be sent via facsimile if followed by an original copy, sent via US mail
or overnight carrier.
To Newbridge: Newbridge Networks Inc.
593 Herndon Parkway
Herndon, VA 22070-5421
Attention: Contracts and Administration
To Customer: International Exchange Networks Ltd.
Wall Street Plaza, 88 Pine St. 15 Floor
New York, New York 1005
Attention: Contracts Manager
F. Any consent by either party to, or waiver of any breach by the other,
whether express or implied, shall not constitute a consent to, or waiver of
any other, different or subsequent breach.
G. Newbridge, and Customer agree to cooperate fully and in good faith in order
to achieve the purposes of this Agreement. If a problem should arise, the
parties shall immediately discuss the issue, ascertain the facts, and work
together to arrive at an equitable and mutually acceptable solution.
H. This Agreement may not be assigned by either party without the prior
written consent of the other.
I. This Agreement, together with its Exhibits, constitutes the entire
agreement between Newbridge, and Customer with respect to its subject
matter; all prior agreements, representations, statements, negotiations or
undertakings, whether oral or written, are specifically superseded hereby.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their duly authorized representatives identified below.
NEWBRIDGE NETWORKS INC. INTERNATIONAL EXCHANGE NETWORKS, LTD.
By: By:
---------------------- ----------------------------------
Name: Name:
-------------------- --------------------------------
Title: Title:
------------------- -------------------------------
Date: Date:
-------------------- --------------------------------
<PAGE>
Exhibit 21.1
Subsidiaries of IXnet, Inc.
<TABLE>
<CAPTION>
Name: Place of Incorporation:
- ---- ----------------------
<S> <C>
International Exchange Networks, Ltd. Delaware
International Exchange Network Corp. Delaware
IXNET UK LTD. United Kingdom
IXNET Japan Co., Ltd. Japan
IXNET PTE LTD. Singapore
International Exchange Networks (Hong Kong) Limited Hong Kong
IXnet Hong Kong, Limited (1) Hong Kong
International Exchange Network SAS France
International Exchange Network GmbH Germany
IXNET Brasil Comercio E Participacoes Ltda. Brazil
International Exchange Networks (Mexico), S.A. de C.V. Mexico
MXNet, Inc. Delaware
Saturn Global Network Services Holdings Ltd. United Kingdom
Saturn Global Network Services (U.K.) Ltd. (1) United Kingdom
Saturn Global Network Services Pty Ltd. (1) Australia
Saturn Systems Pte Limited (1) Singapore
Saturn Global Network Services (USA) Inc. (1) New York
Saturn Global Network Services (Singapore) Pte Ltd. (1) Singapore
Saturn Global Network Services (Japan) Ltd. (1) Japan
Saturn Employee Trustee (Jersey) Limited (1) Jersey Channel Islands
</TABLE>
(1) Subsidiary of Saturn Global Network Services Holdings Ltd.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our reports dated May 14, 1999 relating to the combined and consolidated
financial statements of IXnet, Inc. and April 15, 1999 relating to the
financial statements of MXNet Inc., which appear in such Registration
Statement. We also consent to the references to us under the headings
"Experts" and "Selected Combined and Consolidated Financial Data" in such
Registration Statement.
PricewaterhouseCoopers LLP
New York, New York
May 21, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated May 11, 1999 relating to the consolidated financial
statements of Saturn Global Network Services Holdings Limited, which appear in
such Registration Statement. We also consent to the reference to us under the
heading "Experts" in such Registration Statement.
PricewaterhouseCoopers
London, United Kingdom
May 21, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE COMBINED AND
CONSOLIDATED BALANCE SHEETS AND COMBINED AND CONSOLIDATED STATEMENTS OF
OPERATIONS OF THE COMPANY AS OF SEPTEMBER 30, 1998 AND MARCH 31, 1999 AND EACH
OF THE YEARS IN THE THREE YEAR PERIOD ENDED SEPTEMBER 30, 1998 AND THE SIX MONTH
PERIOD ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 1,616,000
<SECURITIES> 0
<RECEIVABLES> 2,162,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,966,000
<PP&E> 9,419,000
<DEPRECIATION> (789,000)
<TOTAL-ASSETS> 13,703,000
<CURRENT-LIABILITIES> 2,358,000
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 890,000
<TOTAL-LIABILITY-AND-EQUITY> 13,703,000
<SALES> 3,459,000
<TOTAL-REVENUES> 3,459,000
<CGS> 0
<TOTAL-COSTS> (9,329,000)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (247,000)
<INCOME-PRETAX> (6,117,000)
<INCOME-TAX> (62,000)
<INCOME-CONTINUING> (6,179,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,179,000)
<EPS-PRIMARY> (6,179)
<EPS-DILUTED> (6,179)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE COMBINED AND
CONSOLIDATED BALANCE SHEETS AND COMBINED AND CONSOLIDATED STATEMENTS OF
OPERATIONS OF THE COMPANY AS OF SEPTEMBER 30, 1998 AND MARCH 31, 1999 AND EACH
OF THE YEARS IN THE THREE YEAR PERIOD ENDED SEPTEMBER 30, 1998 AND THE SIX MONTH
PERIOD ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 525,000
<SECURITIES> 0
<RECEIVABLES> 5,322,000
<ALLOWANCES> (325,000)
<INVENTORY> 0
<CURRENT-ASSETS> 8,103,000
<PP&E> 22,445,000
<DEPRECIATION> (3,864,000)
<TOTAL-ASSETS> 27,646,000
<CURRENT-LIABILITIES> 6,579,000
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (8,581,000)
<TOTAL-LIABILITY-AND-EQUITY> 27,646,000
<SALES> 17,838,000
<TOTAL-REVENUES> 17,838,000
<CGS> 0
<TOTAL-COSTS> (30,894,000)
<OTHER-EXPENSES> 117,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,040,000)
<INCOME-PRETAX> (14,979,000)
<INCOME-TAX> (229,000)
<INCOME-CONTINUING> (15,208,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,208,000)
<EPS-PRIMARY> (15,208)
<EPS-DILUTED> (15,208)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE COMBINED AND
CONSOLIDATED BALANCE SHEETS AND COMBINED AND CONSOLIDATED STATEMENTS OF
OPERATIONS OF THE COMPANY AS OF SEPTEMBER 30, 1998 AND MARCH 31, 1999 AND EACH
OF THE YEARS IN THE THREE YEAR PERIOD ENDED SEPTEMBER 30, 1998 AND THE SIX MONTH
PERIOD ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 1,255,000
<SECURITIES> 0
<RECEIVABLES> 10,465,000
<ALLOWANCES> (621,000)
<INVENTORY> 0
<CURRENT-ASSETS> 13,806,000
<PP&E> 47,070,000
<DEPRECIATION> (10,719,000)
<TOTAL-ASSETS> 60,332,000
<CURRENT-LIABILITIES> 20,092,000
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (14,959,000)
<TOTAL-LIABILITY-AND-EQUITY> 60,332,000
<SALES> 35,853,000
<TOTAL-REVENUES> 35,853,000
<CGS> 0
<TOTAL-COSTS> (59,518,000)
<OTHER-EXPENSES> 26,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (3,527,000)
<INCOME-PRETAX> (27,166,000)
<INCOME-TAX> (473,000)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27,639,000)
<EPS-PRIMARY> (27,639)
<EPS-DILUTED> (27,639)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE COMBINED AND
CONSOLIDATED BALANCE SHEETS AND COMBINED AND CONSOLIDATED STATEMENTS OF
OEPRATIONS OF THE COMPANY AS OF SEPTEMBER 30, 1998 AND MARCH 31, 1999 AND EACH
OF THE YEARS IN THE THREE YEAR PERIOD ENDED SEPTEMBER 30, 1998 AND THE SIX MONTH
PERIOD ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 4,061,000
<SECURITIES> 0
<RECEIVABLES> 15,860,000
<ALLOWANCES> (1,046,000)
<INVENTORY> 0
<CURRENT-ASSETS> 21,841,000
<PP&E> 64,162,000
<DEPRECIATION> (16,567,000)
<TOTAL-ASSETS> 125,444,000
<CURRENT-LIABILITIES> 36,729,000
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 42,255,000
<TOTAL-LIABILITY-AND-EQUITY> 125,444,000
<SALES> 32,611,000
<TOTAL-REVENUES> 32,611,000
<CGS> 0
<TOTAL-COSTS> (48,135,000)
<OTHER-EXPENSES> (18,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (4,318,000)
<INCOME-PRETAX> (19,860,000)
<INCOME-TAX> (257,000)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,117,000)
<EPS-PRIMARY> (20,117)
<EPS-DILUTED> (20,117)
</TABLE>
