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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
Commission file number 000-26959
IXnet, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-4060000
(state or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
Wall Street Plaza
88 Pine Street
New York, New York
10005
(Address of principal executive offices)
(Zip Code)
212-412-6400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
The number of shares of the Registrant's Common Stock outstanding as of January
28, 2000 was 51,103,160.
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<TABLE>
<CAPTION>
INDEX
PART I. FINANCIAL INFORMATION
Page
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Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at December 31, 1999 and September 30, 1999 ................................... 1
Consolidated and Combined Statements of Operations for the Three Months ended December 31, 1999 and 1998 .. 2
Consolidated and Combined Statements of Cash Flows for the Three Months ended December 31, 1999 and 1998 .. 3
Notes to Consolidated and Combined Financial Statements ................................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ..................... 9
Item 3. Quantitative and Qualitative Disclosure about Market Risk ................................................. 16
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PART II. OTHER INFORMATION
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Item 1. Legal Proceedings ......................................................................................... 17
Item 2. Changes in Securities and Use of Proceeds ................................................................. 17
Item 3. Defaults Upon Senior Securities ........................................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders ....................................................... 17
Item 5. Other Information ......................................................................................... 17
Item 6 Exhibits and Reports on Form 8-K .......................................................................... 17
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Disclosure regarding forward-looking statements
Statements contained in this Interim Report on Form 10-Q that are not historical
facts are forward-looking statements within the meaning of section 21E of the
Securities Exchange Act of 1934, as amended. Section 21E provides a "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information about themselves so long as they identify these
statements as forward-looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected results. Investors are cautioned that forward-looking statements are
inherently uncertain and that undue reliance should not be placed on such
forward looking statements. Actual performance and results may differ materially
from that projected or suggested herein due to certain risks and uncertainties.
You can identify these statements by forward-looking words such as "may,"
"will," "expect," "anticipate," "believe," "estimate" and "continue" or similar
words. Among the factors that could cause actual results, performance, or
achievement to differ materially from any future results, performance, or
achievements expressed, described, or implied by such forward looking statements
are general economic conditions, key employee factors, competition, potential
technology changes, changes in or the lack of anticipated changes in the
regulatory environment in various countries, the ability to secure partnership
or joint venture relationships with other entities, the ability to raise
additional capital to finance expansion, the risks inherent in new product and
service introductions and the entry into new geographic markets and other
factors discussed in the Company's other filings with the Securities and
Exchange Commission.
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IXNET, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Amounts in thousands, except per share amount)
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 7,397 $ 39,020
Marketable securities........................................ 48,553 28,357
Marketable securities, restricted............................ 15,051 20,435
Accounts receivable, net..................................... 23,948 17,824
Prepaids and other current assets............................ 4,418 5,505
--------- ---------
Total current assets..................................... 99,367 111,141
Long term marketable securities, restricted..................... 6,065 6,065
Property and equipment, net..................................... 87,809 80,170
Goodwill, net................................................... 47,614 49,773
Other assets.................................................... 860 889
--------- ---------
Total assets............................................. $ 241,715 $ 248,038
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................. $ 9,249 $ 10,198
Accrued liabilities.......................................... 21,671 22,445
Current portion of capital leases............................ 6,365 5,636
Current portion of notes payable............................. 11,376 14,502
--------- ---------
Total current liabilities................................ 48,661 52,781
Note payable to parent.......................................... 70,661 52,122
Lease obligations, less current portion......................... 16,522 15,412
Notes payable, less current portion............................. 4,233 4,854
--------- ---------
Total liabilities........................................ 140,077 125,169
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock--$0.01 par value, authorized 100,000 shares;
51,075 and 51,075 shares issued and outstanding at
December 31, 1999 and September 30, 1999, respectively... 511 511
Paid-in capital.............................................. 251,953 249,080
Accumulated deficit.......................................... (132,024) (109,176)
Deferred compensation........................................ (17,720) (16,797)
Accumulated other comprehensive loss......................... (1,082) (749)
--------- ---------
Total stockholders' equity............................... 101,638 122,869
--------- ---------
Total liabilities and stockholders' equity............... $ 241,715 $ 248,038
========= =========
</TABLE>
See Notes to Consolidated and Combined Financial Statements
1
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IXNET, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended December 31,
-----------------------------------------------
1999 1998
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Revenue $ 23,125 $ 12,752
Cost of revenue (exclusive of depreciation and
amortization shown separately below) 24,745 12,458
Sales and marketing expense 5,805 2,092
General and administrative expense 4,476 1,215
Depreciation and amortization 8,211 3,922
Stock compensation charge 1,363 -
--------------------- --------------------
Loss from operations (21,475) (6,935)
Interest expense, net (1,160) (1,825)
Other income, net 99 46
--------------------- --------------------
Loss before provision for income taxes (22,536) (8,714)
Provision for income taxes 312 123
--------------------- --------------------
Net loss $ (22,848) $ (8,837)
===================== ====================
Basic and diluted loss per share $ (0.45) $ (0.21)
===================== ====================
Basic and diluted weighted average number of
shares outstanding 51,075 43,100
===================== ====================
</TABLE>
See Notes to Consolidated and Combined Financial Statements.
2
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<TABLE>
<CAPTION>
IXNET, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollar amounts in thousands)
Three Months ended December 31,
-------------------------------
1999 1998
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Cash flows from operating activities:
Net loss .................................................................. $(22,848) $ (8,837)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ........................................... 6,052 2,676
Amortization of goodwill ................................................ 2,159 1,246
Provision for doubtful accounts ......................................... 744 124
Deferred compensation charges ........................................... 1,363 --
Changes in operating assets and liabilities:
Trade receivables ................................................... (6,868) 575
Prepaids and other assets ........................................... 1,116 1,344
Accounts payable and accrued liabilities ............................ (1,598) (3,408)
-------- --------
Net cash used in operating activities ................................... (19,880) (6,280)
-------- --------
Cash flows from investing activities:
Capital expenditures .................................................... (10,487) (3,549)
Acquisition of Saturn, net of cash acquired ............................. -- (34,713)
Net increase in investments in marketable securities .................... (14,812) --
-------- --------
Net cash used in investing activities ................................... (25,299) (38,262)
-------- --------
Cash flows from financing activities:
Financing from parent, net .............................................. 18,539 45,183
Principal payments on capital leases .................................... (1,365) (1,026)
Capital transactions with parent ........................................ 587 2,897
Repayment of notes payable .............................................. (3,872) --
-------- --------
Net cash provided by financing activities ............................... 13,889 47,054
-------- --------
Effect of exchange rate changes on cash .................................... (333) (75)
Net (decrease)/increase in cash ............................................ (31,623) 2,437
Cash and cash equivalents, beginning of period ............................. 39,020 1,255
-------- --------
Cash and cash equivalents, end of period ................................... $ 7,397 $ 3,692
======== ========
Cash paid during the period for interest ................................... $ 780 $ 142
Non-cash investing and financing activities-
Capital lease obligations entered into during the period .................. $3,204 $2,146
Deferred compensation in connection with grants of stock options .......... 2,286
Acquisition of Saturn:
Fair value of assets acquired ............................................. $ 58,456
Less: Fair value of liabilities assumed and note issued ................... 23,743
--------
Acquisition of Saturn, net of cash acquired ............................... $ 34,713
========
</TABLE>
See Notes to Consolidated and Combined Financial Statements.
3
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IXNET, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. Background and Basis of Presentation
IXnet, Inc. ("IXnet" or the "Company") provides communications services tailored
to the specialized needs of the worldwide financial services community. The
Company has built and operates an Extranet, a global network connecting members
of the financial services community as well as multiple offices within the same
firm. The Company'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.
IXnet started its business as International Exchange Networks, Ltd. ("IEXN"),
which was incorporated in Delaware on March 8, 1993. On June 23, 1995, IPC
Information Systems, Inc. ("IPC"), acquired 80% of the outstanding common stock
of IEXN and acquired the remaining 20% on April 30, 1998. On March 31, 1999, IPC
contributed $73 million of IEXN's then outstanding note payable to IPC into
IEXN's paid-in capital.
MXNet, Inc. ("MXNet") was incorporated in Delaware on May 24, 1996, as a wholly
owned subsidiary of National Discount Brokers Group, Inc. On February 13, 1998,
IPC acquired the outstanding common stock of MXNet, which was contributed to
IEXN in May 1999.
On May 4, 1999, IPC contributed 100% of the outstanding common stock of IEXN to
the Company. In addition, on May 4, 1999, the Company was incorporated in
Delaware as a wholly owned subsidiary of IPC with 2,000 shares of common stock,
par value $0.01 per share, authorized, and 1,000 shares issued to IPC. Effective
July 1, 1999, the Company amended its certificate of incorporation to increase
its authorized shares to 100,000,000. On June 30, 1999, the Company declared a
43,100 for one stock split effective July 1, 1999, resulting in 43,100,000
shares issued and outstanding.
The Company completed an initial public offering (the "Offering") of 6,500,000
shares of common stock at $15 per share on August 12, 1999. On August 30, 1999,
the underwriters exercised their over-allotment option and purchased an
additional 975,000 shares of common stock at $15 per share.
The financial statements as of and for the quarter ended December 31, 1999, as
well as September 30, 1999, include the accounts of IXnet and its consolidated
subsidiaries. The financial statements for the quarter ended December 31, 1998,
combine the historical financial information of IEXN and its consolidated
subsidiaries with the historical financial information of MXNet. Intercompany
balances and transactions between IEXN and MXNet have been eliminated.
Additionally, the financial statements present the issued and outstanding shares
of IXnet as if they had been in place for the quarter ended December 31, 1998.
The financial statements include certain corporate expenses incurred by IPC that
have been charged to the Company. Management believes these allocations are
reasonable.
In the opinion of management, the accompanying unaudited financial statements
include all necessary adjustments (consisting of normal recurring accruals and
appropriate inter-company elimination adjustments) for a fair presentation of
the financial position of IXnet, Inc. as of December 31, 1999, and the results
of its operations for the three months ended December 31, 1999 and 1998, in
conformity with generally accepted accounting principles, commonly referred to
as GAAP, for interim financial information applied on a consistent basis. The
results of operations for the three months ended December 31, 1999, are not
necessarily indicative of the results to be expected for the full year. Certain
information and note disclosures normally included in financial statements
prepared in accordance with GAAP have been omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. These financial
statements should be read in conjunction with IXnet's Annual Report on Form 10-K
for the year ended September 30, 1999.
2. Summary of Significant Accounting Policies
Accounts Receivable
Accounts receivable relate to the billing of communication services and are net
of allowance for doubtful accounts of $2.8 million and $2.1 million for the
three months ended December 31, 1999 and September 30, 1999.
4
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IXNET, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
(UNAUDITED)
Earnings Per Share
Basic loss per share is computed using the weighted average number of common
shares outstanding during the year. Diluted loss per share is computed using the
weighted average number of shares of common stock adjusted for the dilutive
effect of common stock equivalent shares of common stock options. Common stock
equivalent shares are calculated using the treasury stock method. All stock
options outstanding have been excluded from the computation of diluted loss per
share, as their effect would be antidilutive. Accordingly, there is no
difference between basic and diluted EPS.
3. Comprehensive Loss
Comprehensive loss includes the Company's net loss and foreign currency
translation adjustments. The tax effect and reclassifications are not
significant. The Company's total comprehensive loss for the three months ended
December 31, 1999 and 1998 was as follows (in thousands):
Three Months Ended December 31,
-------------------------------------------
1999 1998
---- ----
Net loss $(22,848) $(8,837)
Translation adjustment (333) (75)
---------------- ------------------
Total comprehensive loss $(23,181) $(8,912)
================ ==================
4. Acquisitions and Strategic Agreement
IEXN
During June 1995, IPC acquired an 80% interest in IEXN for $5.5 million in cash.
The acquisition was accounted for using the purchase method of accounting and
resulted in $1.3 million of goodwill. Under the initial acquisition agreement,
the Company is obligated to pay additional consideration to former shareholders
using a formula based upon operating results and market capitalization through
fiscal 2000. Based upon data as of December 31, 1999, the Company's obligation
calculated under this agreement is not material. On April 30, 1998, IPC acquired
the remaining 20% interest in IEXN held by two management shareholders in
exchange for 457,140 shares of IPC common stock, valued at $4.8 million based
upon the IPC closing share price on that date. The acquisition of the remaining
interest was accounted for using the purchase method of accounting and resulted
in $4.8 million of goodwill. 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. This
acquisition was accounted for using the purchase method of accounting and
resulted in $5.5 million of goodwill. MXNet goodwill is being amortized over
2.25 years from the date of acquisition.
Saturn Global Network Services Holdings Ltd.
On December 18, 1998, the Company acquired all of the issued and outstanding
common shares of Saturn Global Network Services Holdings Limited ("Saturn") from
Marshalls 106 Limited ("Marshalls"). The purchase price included the payment of
cash in the amount of $35.7 million (paid by the Company through borrowings from
IPC) and the issuance by the Company of a promissory note, guaranteed by IPC, in
the amount of $7.5 million bearing interest at the UK Sterling Base Rate, as
defined, plus three percent and payable over three years (the "Marshalls Note").
In addition, the Company assumed indebtedness of Saturn due to Marshalls in the
amount of $5 million payable over 24 months with interest at 9.25% (the "Saturn
Note"). Under this agreement, the Marshalls note is subject to a working capital
adjustment and right of offset. The working capital adjustment was settled in
June 1999 resulting in a reduction approximately $2 million.
5
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IXNET, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
(UNAUDITED)
Saturn, a UK holding company, owns telecommunication network operating
subsidiaries in the United Kingdom, USA, Hong Kong, Australia, Japan and
Singapore which sell managed premium grade voice and data communication services
to the financial community. The acquisition was accounted for using the purchase
method of accounting and resulted in $49.2 million of goodwill. Saturn goodwill
is being amortized over 10 years from the date of the acquisition.
Strategic Agreement
On September 24, 1999, IXnet entered into a $20 million strategic agreement,
including the licensing of certain software products to enhance the intelligence
of the network, for a purchase price consisting of $10.0 million in cash,
payable within the next twelve months, and 500,000 shares of restricted IXnet
common stock valued at an average closing price prior to the agreement date. The
strategic agreement is intended to create a unique network infrastructure with
embedded intelligence, delivering financial enterprise integration,
subject-based addressing, trading turret integration and application management
capabilities.
5. Stock Compensation Charge
In May 1999, IXnet recorded $26.4 million in non-cash deferred stock
compensation reflecting the issuance by the Company of options to purchase
6,530,184 shares of common stock of IXnet at $13.96 per share. The deferred
stock compensation is based upon the deemed fair market value of IXnet's common
stock and the exercise price of such options issued on the date of grant. The
Company recorded an additional $2.3 million of non-cash deferred stock
compensation during the quarter which represents the charge for the issuance of
options in May 1999 which are treated as variable options for accounting
purposes. Approximately $1.4 million of deferred stock compensation is included
as expense for the three months ended December 31, 1999. The remaining deferred
compensation will be amortized over the remaining vesting period of the options.
In addition, certain of these options may be treated as variable options and may
result in additional compensation expense in future periods.
6. Property and Equipment
Property and equipment is comprised of the following (in thousands):
<TABLE>
<CAPTION>
December 31, September 30,
Useful Lives 1999 1999
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<S> <C> <C> <C>
Network equipment..................................... 2 to 5 years $37,406 $39,700
Network equipment under capital leases................ 5 years 38,980 28,637
Indefeasible rights of use............................ IRU term 9,423 6,571
Network software...................................... 3 years 23,405 21,485
Office equipment and furniture........................ 5 years 6,551 6,227
Leasehold improvements................................ Lease term 3,070 2,524
------- -------
Total depreciable property and equipment......... 118,835 105,144
Less accumulated depreciation and amortization... 31,026 24,974
------- -------
$87,809 $80,170
======= =======
</TABLE>
Accumulated depreciation of network equipment under capital leases at December
31, 1999 and September 30, 1999, was $12.4 million and $10.8 million,
respectively.
6
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IXNET, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
(UNAUDITED)
7. Disclosures about Segments of an Enterprise and Related Information
The Company is focused on providing a seamless global network providing a
variety of voice, data, and content distribution services which has been
specifically designed to meet the specialized requirements of the financial
services industry. All of our revenue is derived from our global network. All
operating expenses and assets of the Company are combined and reviewed by the
chief operating decision makers on an enterprise wide-basis, resulting in no
additional discrete financial information or reportable segment information.
Our network connects customers in 37 countries around the world and we have
major offices in New York, London and Sydney from which we coordinate our sales
and marketing, finance and administrative functions in North America, Europe and
the Asia Pacific countries. We refer to these areas as regions. We focus on the
global needs of the financial services community. There is a high degree of
similarity across our customer base, products and services in each region.
Enterprise wide information is provided in accordance with SFAS 131 "Disclosures
about Segments of an Enterprise and Related Information". Geographic sales
information is based on the currency in which the customer is billed. Long-lived
asset information is based on the physical location of the assets. The following
is revenue and long-lived asset information for geographic areas (in thousands):
Three Months ended December 31,
-------------------------------
1999 1998
---- ----
Long-Lived Long-Lived
Revenue Assets Revenue Assets
------- ------ ------- ------
North America.. $11,653 $ 77,394 $ 8,431 $36,883
Europe......... 6,499 11,703 3,758 15,073
Asia/Pacific... 4,973 47,186 563 --
------- -------- ------- -------
$23,125 $136,283 $12,752 $51,956
======= ======== ======= =======
For the three months ended December 31, 1999, revenue from the United States,
United Kingdom, and Australia represented 49.1%, 22.7%, and 11.6% of total
revenue, respectively. For the three months ended December 31, 1998, revenue was
generated primarily from the United States and the United Kingdom.
Long-lived assets primarily located within the United States, represent 34.6%,
and 70.0% of total assets, as of December 31, 1999, and 1998, respectively.
For the three months ended December 31, 1999, one customer accounted for 11.3%
of total revenue. For the three months ended December 31, 1998, two customers
accounted for 17.5% and 14.7% of total revenue.
8. Commitments and Contingencies:
Intercompany Agreement
As of July 1, 1999, the Company, IPC and IEXN entered into an intercompany
agreement which provides, among other matters, for IPC to furnish up to $50.0
million of credit, including the provision of letters of credit, guarantees and
other forms of credit enhancements limited to $6.25 million per quarter,
commencing July 1, 1999 and continuing through the quarter ending June 30, 2001.
Outstanding notes payable on July 1, 1999 and additional amounts borrowed under
the agreement bear interest at the Base Rate, as defined, plus 2%. Any and all
amounts advanced by IPC which are outstanding on June 30, 2001 shall be
immediately due and payable.
7
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IXNET, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
(UNAUDITED)
The amount due IPC at December 31, 1999 and September 30, 1999, respectively,
was $70.7 million and $52.1 million. During each quarter presented in this
Interim Report on form 10-Q, the $6.25 million limitation had been exceeded
representing a delay in reimbursement of quarterly funding by IPC and interest
expense on the outstanding amounts, as well as the transfer of a UK VAT
receivable from IPC to the Company in the quarter ended September 30, 1999. The
amounts were subsequently reimbursed and the balances are now consistent with
the intercompany agreement.
9. Subsequent Events
Effective January 1, 2000, IXnet acquired all of the issued and outstanding
common shares of Business Networks of New York, Inc. ("BNNY"). The $26.5 million
purchase price consisted of $24.5 million in cash and 45,707 shares of IXnet
common stock.
BNNY is a leader in providing voice and data services to the financial
community, primarily in the New York Metropolitan Area.
On January 25, 2000, IXnet acquired all of the issued and outstanding common
shares of Systems Programming & Network Computing, Inc. ("SPNC"). The purchase
price was approximately $1.5 million and consisted of $300,000 in cash, a
$100,000 promissory note issued by the Company and 6,080 shares of IXnet common
stock.
SPNC is a leader in providing and integrating sophisticated multi-system,
multi-platform applications for the financial services community.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read together with our
Consolidated and Combined Financial Statements, and related notes to these
statements appearing elsewhere in this interim report.
Overview
IXnet is a leading provider of communications services to the worldwide
financial services community. We have built and operate a global seamless
communications network connecting financial services firms and their business
partners, as well as multiple offices within the same firm. We refer to this
network as our Extranet. Through our Extranet, our customers obtain highly
reliable, secure and fully managed voice and data connectivity without having to
access multiple disparate public networks or rely on multiple customer service
organizations.
The Company provides a variety of voice, data, and content distribution
services, which has been specifically designed to meet the specialized
requirements of the financial services industry. All of our revenue is derived
from our global network.
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 Information Systems, Inc. ("IPC"). As of December 31, 1999, our
Extranet was comprised of two network operations centers, 3 data centers, 71
points of presence, 1,457 customer access nodes placed on customer premises and
high capacity bandwidth facilities. Our Extranet connects approximately 550
customers in 37 countries in financial centers around the world, including New
York, Chicago, Los Angeles, London, Frankfurt, Paris, Zurich, Hong Kong, Tokyo,
Sydney and Singapore.
We provide services to meet the specialized needs of the financial services
community, including managed voice and data services, virtual private network
services and fully outsourced network solutions. In addition, we aggregate, host
and distribute financial content, such as news, research, analytics and market
data, for information service providers.
We have incurred operating losses, net losses and negative operating cash flow
for each month since our formation. As of December 31, 1999, we had an
accumulated deficit of approximately $132.0 million. We expect to substantially
increase our expenditures and operating expenses as we continue the buildout of
our Extranet. We expect to incur substantial operating losses, net losses, and
negative cash flow during the network buildout and as we penetrate new markets
for the foreseeable future.
On August 12, 1999, the Company completed its initial public offering ("IPO") of
6,500,000 shares at price of $15 per share. On August 30, 1999, the underwriters
exercised their over-allotment option and purchased an additional 975,000 shares
at $15 per share.
Total proceeds received by the Company net of commissions and expenses were
approximately $102.1 million. The proceeds of the IPO are to be used to finance
the continued expansion of our network and for possible acquisitions, strategic
alliances, or investments in IXnet's business.
As of December 31, 1999, IXnet had 51,075,000 shares of common stock
outstanding, of which 43,100,000 shares are owned by IPC.
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 lines;
. Managed bandwidth--fully managed dedicated bandwidth facilities;
. Outsourcing--end-to-end management of a communications networks;
. Switched voice--high quality voice communications services;
9
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. Shared internet protocol--network delivery and hosting of third party
market data, research, analytics, news and other trading information to
the desktop, also known as our Liquidity service; and
. Frame relay--dedicated transport of data applications.
We currently derive a majority of our revenues from sales of premium voice,
managed bandwidth and outsourcing services, and to a lesser extent switched
voice, shared internet protocol and other services. Our services are billed on a
monthly basis in advance of customer utilization, except for switched voice
services, which are billed monthly after service is provided. Revenue is
recorded as services are provided. We expect future revenues will include
software revenue recognition, however, this amount is not expected to be
significant to our overall revenue.
Pricing Policies
Rates for our premium voice, managed bandwidth and frame relay services are
determined by geographic location and bandwidth utilization. For frame relay
service, there is frequently an additional pricing component for optional
telecommunications equipment deployed on customers' premises. These fees may be
adjusted for customer volume commitments and term of contract.
The primary components of pricing for switched voice are duration of call and
geographic location, which may be adjusted for customer volume commitment, term
of contract and connections to an on-net customer.
Rates for our outsourcing service are determined by geographic location,
bandwidth utilization, telecommunications equipment deployed on the customers'
premises, level of service requested and any custom requirements. The rate may
be adjusted for customer volume commitments and term of contract.
The components of pricing shared internet protocol may include the following
charges paid by content providers:
. an access fee to connect to our Extranet;
. a fee to deliver service to end-users; and
. fees associated with housing of equipment and customer application
support.
The access and delivery fees are determined by geographic location and bandwidth
utilization. The hosting fee is determined by amount of space and level of
required service. The other component of pricing, paid either by the end-user or
the content provider, is a fee for end-user access to our Extranet. This fee is
determined by geographic location and bandwidth utilization and may be adjusted
for volume commitment and term of contract. The Company also expects to charge
fees in connection with the use of licensed software for the delivery of content
over our network.
Long Term Agreements
The terms of our sales agreements typically range from one to five years and are
determined based on the level of service requested. Customers who outsource
their network needs to us tend to have longer term agreements, up to five years.
Our ability to obtain fixed term agreements from our customers provides us with
a certain level of predictability as to revenue generation. We continue to
penetrate our customer base by marketing additional services to existing
customers, adding new customer locations and renewing the term of our existing
customer agreements. We also provide services to some of our customers on a
month-to-month basis.
Components of Costs and Expenses
Cost of revenue
Cost of revenue consists primarily of leased local and long distance circuit
costs, personnel and related operating expenses associated with network
operations, customer support and field service support. Depreciation and
amortization related to the cost of our network operations centers, points of
presence, customer access nodes, and indefeasible rights to use cable and
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fiber optic lines, are included in depreciation and amortization expense. The
increase in these expenses relates primarily to the expansion of our network and
resulting increases in leased circuit, maintenance, personnel, facilities, and
customer support costs. Although we expect that cost of revenue will continue to
increase as our customer base increases, we anticipate that such expenses as a
percentage of revenues will decrease over time. These expenses may be incurred
prior to the realization of anticipated revenue. We intend to lease or buy
higher capacity local and long distance circuits. As a result of these lease
agreements and purchases, we expect to realize the associated benefits of lower
unit costs as the use of our network increases. In addition, as revenues grow,
we expect to realize economies of scale associated with a relatively fixed
operating infrastructure.
Sales and marketing expense
Sales and marketing expense consists primarily of personnel costs, commissions,
bad debt, travel and entertainment, marketing and advertising. We market our
services to the financial services community primarily through our direct
salesforce. We intend to significantly expand our salesforce within the U.S.,
Europe and the AsiaPacific region through the hiring of personnel who have
backgrounds 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, integrating and
retaining these new hires requires substantial expenditures in advance of any
revenue realization that may arise from the sales efforts of new hires. We
estimate that an average of three months elapses between the hiring of a new
sales employee and the realization of recognizable productivity, and
approximately another two months elapses before any significant revenues result.
We expect that sales and marketing expenses will increase in the future as we
expand our sales and marketing staffs to keep pace with our rapid growth both
domestically and internationally but that such expenses will decrease over time
as a percent of revenue.
General and administrative expense
General and administrative expense consists primarily of salaries and occupancy
costs for executive, financial, and management information systems personnel.
Certain accounting and management information systems functions, human
resources, legal, executive and administrative services have been performed
under an inter-company agreement with our parent, IPC. The related costs of
providing such services have been, and will continue to be, allocated based upon
utilization of the specific services. 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 and equipment and goodwill over their expected useful lives. Property
and equipment, excluding indefeasible rights of use, leasehold improvements and
network software, are depreciated over two to five years. The cost of
indefeasible rights of use are amortized over the leased term, generally 20 to
25 years, leasehold improvements are amortized over the life of the lease term,
generally five years, network software is amortized over 3 years, and goodwill
is amortized over periods ranging from 2.25 to 10 years.
Network expansion
Since the beginning of our operations, we have undertaken a program of
developing and expanding our Extranet. We have made significant investments in
network capacity and telecommunications equipment, including routers, customer
access nodes, transmission electronics, switches, circuits and other equipment
to produce a technologically advanced global Extranet. Historically, a large
portion of our network expense was associated with the development of our
Extranet and was only undertaken based on customer demand. Subsequent to our
initial public offering, we have begun to make greater network investments in
certain strategic areas in anticipation of increased customer demand.
Investments in customer access nodes and network capacity through acquisitions
of indefeasible rights of use and the buildout of our points of presence will
continue to represent significant capital expenditures and are expected to be
substantially above historical levels.
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Deferred Compensation
During May 1999, our board of directors and our sole stockholder, IPC, approved
the IXnet, Inc. 1999 Stock Option Plan (the "Plan"), authorizing the grant of
options to purchase up to 7,053,409 shares of our common stock. At that time,
options to purchase 6,530,184 shares were granted to employees, directors and
others at an exercise price of $13.96 per share. Except for 1,763,352 options
granted to our Chief Executive Officer which vested immediately, such options
vest over four years. All such options become exercisable, to the extent then
vested, 30 months from the date the Plan was adopted, subject to certain
exceptions.
In connection with this issuance of stock options, we have recorded deferred
compensation in the aggregate amount of approximately $26 million, based upon
the deemed fair market value of our common stock at the date of grant. The
Company recorded an additional $2.3 million of non-cash deferred stock
compensation during the quarter which represents the charge for the issuance of
options in May 1999 which are treated as variable options for accounting
purposes. During the three month period ended December 31, 1999, $1.4 million of
expense was recorded. The remaining deferred compensation will be amortized over
the remaining vesting period of the options. In addition, certain of these
options are treated as variable options and may result in additional deferred
compensation expense in future periods as the value of our shares changes over
the vesting period.
Results of Operations
Comparison of the three year ended December 31, 1999 to the three month period
ended December 31, 1998
Revenue. Revenue was $23.1 million for the three months ended December 31, 1999,
an increase of $10.3 million, or 80.5%, from $12.8 million for the three months
ended December 31, 1998. Of this increase, $7.7 million related to revenues from
Saturn which was acquired in December 1998. The balance of the increase was
primarily due to increased revenue from the growth in our overall customer base
and additional revenue from our existing customer base.
Cost of revenue. Cost of revenue was $24.7 million for the three months ended
December 31, 1999, an increase of $12.2 million, or 97.6%, from $12.5 million
for the three month ended December 31, 1998. The increase was primarily due to
increased leased circuit costs and, to a lesser extent, the increase in
operations personnel. Leased circuit costs increased due to the expansion of our
points of presence, increased engineering support and the build out of the
network ahead of revenue growth.
Sales and marketing expense. Sales and marketing expense was $5.8 million for
the year ended December 31, 1999, an increase of $3.7 million, or 176.2%, from
$2.1 million for the three months ended December 31, 1998. This increase was
primarily due to the growth in our sales force, related support personnel,
consulting fees, advertising, and product marketing program.
General and administrative expense. General and administrative expense was $4.5
million for the three months ended December 31, 1999, an increase of $3.3
million, or 275%, from $1.2 million for the three months ended December 31,
1998. This increase was primarily due to an increase in personnel costs, higher
occupancy fees and professional fees as we build and expand in European and
Asia/Pacific markets.
Depreciation and amortization. Depreciation and amortization was $8.2 million
for the three months ended December 31, 1999, an increase of $4.3 million, or
110.3%, from $3.9 million for the year ended December 31, 1999. This increase
was primarily due to the increase in property and equipment in connection with
the expansion of our network and includes the amortization of our TIBCO software
license, as well as $4.6 million of amortization of goodwill associated with the
Saturn acquisition.
Stock compensation charge. The Company recognized approximately $1.4 million in
stock compensation expense during the three month period ended December 31, 1999
related to stock options issued in connection with the initial public offering.
The deferred compensation balance in equity, $17.7 million, will be amortized
over the remaining vesting period which is approximately 40 months.
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Interest expense, net. Interest expense, net was $1.2 million for the three
months ended December 31, 1999, a decrease of $.6 million, or 33.3%, from $1.8
million for the three months ended December 31, 1998. This decrease was
primarily due to an offset of interest expense by higher interest income
resulting from the investment of the IPO proceeds in short-term marketable
securities. We expect interest expense to increase in future periods as we use
the proceeds of the offering for acquisition and expansion of the network and
increase our borrowings from IPC and our capital lease obligations.
Provision for income taxes. The provision for income taxes consisted of
primarily foreign taxes in 1999 and 1998. The Company is included in the IPC
consolidated tax return and the benefits of the NOL's realized on the
consolidated return are recorded as capital contributions.
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 and equipment
expenditures, debt service payments and acquisitions. We have also obtained
financing for certain of our network equipment, which is either guaranteed by
IPC and/or partially supported by letters of credit issued under IPC's credit
agreement. In addition, we obtained certain seller financing for the Saturn
acquisition, which has been guaranteed by IPC. From inception to December 31,
1999, the aggregate net amount of intercompany funding, exclusive of guarantees
and letters of credit, was approximately $143.7 million, of which $73.0 million
was contributed to equity effective March 31, 1999.
Initial Public Offering. On August 12, 1999 we completed our initial public
offering of 6,500,000 shares at a price of $15 per share. On August 30, 1999,
the underwriters exercised their over-allotment option and purchased an
additional 975,000 shares at $15 per share. Total proceeds received by IXnet net
of commissions and expenses were approximately $102.1 million. The proceeds of
the initial public offering are to be used to finance the continued expansion of
IXnet's network and for possible acquisitions, strategic alliances, or
investments in IXnet's business.
Financing arrangements. Subject to the terms and conditions of the intercompany
agreement, IPC has agreed to continue to provide us with ongoing financing and
to obtain letters of credit on our behalf. The amount available under the
intercompany agreement starts at $6.25 million and increases by that amount
quarterly thereafter, up to an aggregate of $50 million during the period
beginning July 1, 1999 through June 30, 2001. On June 30, 2001, all amounts
loaned and outstanding under the inter-company agreement will become immediately
due and payable. In addition, IPC, in its sole discretion, will continue to
provide guarantees of our obligations. During each quarter presented in this
Interim Report on Form 10-Q, the $6.25 million limitation had been exceeded
representing a delay in reimbursement of quarterly funding by IPC and interest
expense on the outstanding amounts, as well as the transfer of a UK VAT
receivable from IPC to the Company in the quarter ended September 30, 1999. The
amounts were subsequently reimbursed and the balances are now consistent with
the intercompany agreement.
IPC has primarily two sources of funds from which it can fund our working
capital needs. The first is from its cash flow and the second is through its $65
million secured credit facility, consisting of a $20 million term loan facility
and a revolving credit facility of up to $45 million. However, IPC will not make
loans to us, obtain letters of credit on our behalf or provide us with
guarantees if, such requests would be prohibited under IPC's credit agreement;
would result in a default or event of default under IPC's agreement; or would
result in a default or event of default under the indenture for IPC's senior
discount notes. The company expects that available cash, marketable securities,
and existing funding from IPC as well as third-party vendor financing will be
sufficient to meet its normal operating requirements, including increased
expenditures in property and equipment, over the near term.
All borrowings under the intercompany agreement will be evidenced by demand
notes. However IPC has agreed not to demand payment on those notes until June
30, 2001, unless a default or an event of default under IPC's credit agreement
or a change in control occurs. In either case, all amounts owing under the
intercompany agreement will be immediately due and payable upon demand. A change
in control will occur if IPC ceases to own at least 50% of our voting
securities.
Under the intercompany agreement, all currently outstanding and any future loans
from IPC will be made at a rate per annum equal to 2% over the base rate under
IPC's credit agreement. The base rate under IPC's credit agreement is equal to
the higher of the rate of interest announced publicly by Citibank, N.A. at its
head office in New York as its base rate or 1/2 of 1% per annum above the
federal funds rate.
In addition, any amounts loaned by IPC to us which are outstanding on July 1,
1999 will bear interest at a rate equal to 2% over the base rate and will not
reduce the amount of funding that will be available to us.
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The intercompany agreement provides that the letters of credit or guarantees
provided by IPC which were outstanding on July 1, 1999 of $5.75 million shall
continue in full force and effect on their same terms and conditions until their
expiration. Loans from IPC and letters of credit procured by IPC, which were
outstanding on July 1, 1999, do not reduce the amounts available to us under the
intercompany agreement.
We will reimburse IPC for the applicable costs, fees and charges incurred by IPC
in obtaining letters of credit or for providing guarantees to us after July 1,
1999 or payments made by IPC in connection with any enforcement by third parties
of such letters of credit and guarantees. All other costs under IPC's credit
agreement will continue to be borne by IPC.
The intercompany agreement also provides for the allocation between us and IPC
of certain allowances and limitations provided for in IPC's credit agreement,
which include sales of assets, investments and the amount of debt that may be
incurred.
Cash Flows
Cash flows from operating activities can vary significantly from period to
period depending upon the timing of operating cash receipts and payments,
particularly accounts receivable, prepaid expenses and other assets, and
accounts payable and accrued liabilities. During the three months ended December
31, 1999 and 1998, our net losses were the primary components of net cash used
in operating activities. Net cash used in operating activities was $19.9 million
for the three months ended December 31, 1999, as compared to $6.3 million for
the three months ended December 31, 1998.
Cash used in investing activities was $25.3 million for the three months ended
December 31, 1999, compared to $38.3 million for the same period ended December
31, 1998. The components of cash used in investing activities during the three
month period ended December 31, 1999, resulted from $10.5 million used for
capital expenditures, as well as a net investment of $14.8 million in marketable
securities using proceeds from government grade commercial paper which were
classified as cash equivalents at September 30, 1999. For the three months ended
December 31, 1998, components of cash used in investing activities were $3.5
million in capital expenditures, as well as $34.7 million used for the Saturn
acquisition.
Cash provided by financing activities was $13.9 million for the three months
ended December 31, 1999, compared to $47.1 million for the three months ended
December 31, 1998. The largest component of cash provided from financing
activities for the three months ended December 31, 1999 and 1998, resulted from
net borrowings from our parent, IPC, in the amount of $19.1 million and $45.2
million, respectively. Borrowings increased each period to fund losses from
operations, debt service payments, costs associated with our initial public
offering, and capital expenditures. In addition, borrowings increased during the
quarter ended December 31, 1998, due to the funding of the Saturn acquisition.
Commitments, Capital Expenditures and Future Financing Requirements
As of December 31, 1999, we had capital lease commitments to certain
telecommunications vendors totaling $22.9 million payable in various years
through 2004 of which $6.4 million plus finance charges were due within one
year.
Capital expenditures, funded through IPO proceeds and borrowings from IPC, were
$10.5million for the three months ended December 31, 1999. In addition, we had
notes in the aggregate amount of $15.6 million outstanding as of December 31,
1999 consisting of $8.6 million due to the former shareholders of Saturn and
$7.0 million in connection with the strategic agreement entered into in
September 1999. As of December 31, 1999, $11.4 million is payable within one
year.
Installation of customer access nodes, acquisition of indefeasible rights of use
and the buildout of our points of presence are expected to be our most
significant capital expenditure items over the next 12 months. We expect to
continue to acquire high capacity bandwidth to enhance our global network
capabilities in North America, Europe and the Asia/Pacific region which would be
accompanied by capital expenditures in the deployment of points of presence. We
expect that our purchase of property and equipment will increase substantially
from historic levels and that the net proceeds from the initial public offering,
along with third party equipment financing arrangements, should be sufficient to
meet our near term needs for property and equipment.
As of December 31, 1999, we had available cash and cash equivalents of $7.4
million and restricted cash of $21.1 million in connection with the strategic
agreement and future payments for IRU's. We are currently generating operating
losses and expect to continue to do so for the foreseeable future. Under the
indenture for IPC's senior discount notes, the net proceeds from our initial
public offering is limited in its use to fund our working capital needs. We
believe that we will need additional working capital, along with the funding of
our debt obligations, which consist of capital lease obligations, installment
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payments for indefeasible rights to use international cable systems, and
payments on the notes to Saturn. Payments in connection with the strategic
agreement installment note and payments for certain IRU's are made against the
restricted cash balance. Under IPC's credit agreement and our inter-company
agreement with IPC, there are some restrictions from seeking additional debt or
equity financing other than debt financing from IPC for working capital and
other operating costs. Accordingly we expect to continue to rely upon IPC to
fund these requirements.
We have purchased or committed to purchase interests in or indefeasible rights
to use international cable systems on projects such as TAT12/13, TAT14, Gemini,
Southern Cross, CANTAT3, Germany-U.K.6, Japan-U.S. and NTL. Further, we expect
to continue to enter into commitments to purchase similar interests and rights
using the proceeds from our initial public offering.
Other Possible Strategic Relationships and Acquisitions
We intend to make strategic acquisitions as appropriate opportunities arise to
expand our service offerings, expand our Extranet and/or increase our customer
base. See "Overview" located in the beginning of this section.
Effects 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. The effective date of this
standard was deferred to all fiscal quarters of fiscal years beginning after
June 15, 2000 by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133"
which was issued on June 30, 1999. The Company does not currently use derivative
financial instruments.
Year 2000 Update
Even though the date is now past January 1, 2000 and we have not experienced any
immediate adverse impact on our operations from the transition to the Year 2000,
we cannot provide complete assurance that our operations have not been affected
in a manner that is not yet apparent or that will arise in the future. In
addition, certain computer programs that were date sensitive to the Year 2000
may not have been programmed to process the Year 2000 as a leap year, and any
negative consequential effects remain unknown. As a result, we will continue to
monitor our Year 2000 compliance and the Year 2000 compliance of our suppliers.
However, we anticipate no Year 2000 problems that are reasonably likely to have
a material adverse effect on our operations.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Exchange Rate Risk
We conduct our business in more than 37 countries, and transactions from these
foreign operations are denominated in local currencies. With respect to these
foreign operations, we are exposed to foreign currency fluctuations for our net
working capital positions. Foreign currency fluctuations historically have not
had a significant impact on our revenues or operating results. We currently do
not have a foreign exchange hedging program; however, we may implement a program
to mitigate foreign currency transaction risk in the future. Although our
foreign operations are subject to economic, fiscal and monetary policy of
foreign governments, to date these factors have not had a material effect on our
results of operations or liquidity. A significant and growing portion of our
business is from our international operations, and changes in the global
economy, foreign tax laws, international business practices and currency
exchange rates could adversely affect our business.
On January 1, 1999, several members of the European Union established fixed
conversion rates between their existing sovereign currencies and adopted the
Euro as their new legal currency. Since its adoption, the Euro has not had a
material adverse effect on the Company's business or financial condition.
Interest Rate Risk
The Company is exposed to changes in interest rates primarily from its
outstanding debt and its investments in certain marketable securities. The
interest rate for all outstanding debt is variable and therefore will fluctuate
with market conditions. As a result, the Company is exposed to interest rate
fluctuations, which could have a negative impact on our results of operations.
Historically, interest rate fluctuations have not had a significant impact on
our results of operations. We currently do not have an interest rate hedging
program, however, we may implement a program to mitigate future fluctuations in
interest rates. The Company's marketable securities consist of fixed income
investments in the form of short-term commercial paper. The Company continually
monitors its exposure to changes in interest rates from its marketable
securities. Accordingly, the Company believes that the effects of changes in
interest rates are limited, however, it is possible that the Company would be at
risk if interest rates change in an unfavorable direction. The magnitude of any
gain or loss will be a function of the difference between the fixed rate of the
financial instrument and the market rate, which could have a material affect on
financial condition and results of operations.
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IXNET, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except for claims and lawsuits arising in the normal course of business, the
Company and its subsidiaries are not involved in any pending material legal
proceedings.
ITEM 2. CHANGES IN SECURITIES & USE OF PROCEEDS
The common stock of IXnet, Inc, has been traded on the NASDAQ National Market
(NASDAQ Symbol: EXNT) since the completion of our initial public offering
("IPO") on August 12, 1999 (Registration Statement on Form S-1 No. 333-79079).
Prior to that date, IPC owned 100% of the outstanding common stock. In
connection with the IPO, IPC retained 43,100,000 restricted shares of common
stock as of September 30, 1999. Furthermore, IPC issued 500,000 restricted
shares of its common stock as part of the purchase price for a strategic
agreement.
We sold 6,500,000 common shares through our IPO on August 12, 1999. On August
30, 1999, the over-allotment option was exercised and an additional 975,000
shares were sold. Total aggregate proceeds, net of underwriting commissions of
approximately $7.6 million and offering expenses of approximately $2.5 million,
were approximately $102 million. The net offering proceeds have the following
intended uses:
. Approximately $70 million has been invested in U.S. investment grade and
government securities and approximately $4 million is held in cash
equivalent accounts. These amounts will be used for continued deployment
and expansion of our Extranet, as well as possible future acquisitions,
strategic alliances or investments in property or assets used in our
business.
. Approximately $3 million has been spent and $7 million committed to a
strategic agreement including the license of certain software products to
enhance our network intelligence.
. Approximately $3 million has been spent and $13 million committed to
investments in IRU's and bandwidth capacity.
. $21 million has been spent to fund investments in network
telecommunications equipment in our continuing expansion of our network
and build-out of our points of presence.
None of the payments indicated above were direct or indirect payments to
entities that were (i) directors, officers or their associates, (ii) greater
than 10% owners of any of our equity securities or (iii) our affiliates.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits. The following exhibits are filed as a part of the Interim Report
on Form 10-Q or are incorporated by reference to exhibits previously filed
with the Commission:
Exhibit No. Description
- ----------- -----------
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 Exchange
Networks, Ltd. and IPC Information Systems, Inc. (incorporated
by reference to Exhibit 2.1 to Form S-1, Registration No. 333-
70979).
2.2 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. (incorporated
by reference to Exhibit 2.1.1 to Form S-1, Registration No.
333-79079).
2.3 Deed constituting unsecured Guaranteed Subordinated Loan Note
2000/2002, dated December 18, 1998, between International
Exchange Networks Ltd. and IPC Information Systems, Inc.
(incorporated by reference to Exhibit 2.1.2 to Form S-1,
Registration No. 333-79079).
2.4 Stock Purchase Agreement, dated February 13, 1998, between IPC
Information Systems, Inc., MXNet, Inc. and National Discount
Brokers Group, Inc. (incorporated by reference to Exhibit 2.2
to Form S-1, Registration No. 333-79079).
3.1 Amended and Restated Certificate of Incorporation of IXnet,
Inc. (incorporated by reference to Exhibit 3.1 to Form S-1,
Registration No. 333-79079).
3.2 Bylaws of IXnet, Inc. (incorporated by reference to Exhibit
3.2 to Form S-1, Registration No. 333-79079).
4.1 Specimen Stock Certificate (incorporated by reference to
Exhibit 4.1 to Form S-1, Registration No. 333-79079).
10.1 Form of Inter-Company Agreement among IXnet, Inc.,
International Exchange Networks, Ltd. and IPC Information
Systems, Inc. (incorporated by reference to Exhibit 10.1 to
Form S-1, Registration No. 333-79079).
10.2 Form of Tax Sharing Agreement between IPC Communications, Inc.
and IXnet, Inc. (incorporated by reference to Exhibit 10.2 to
Form S-1, Registration No. 333-79079).
10.3 Form of Registration Rights Agreement between IPC Information
Systems, Inc. and IXnet, Inc. (incorporated by reference to
Exhibit 10.3 to Form S-1, Registration No. 333-79079).
10.4 Form of Maintenance Agreement between International Exchange
Networks, Ltd. and IPC Information Systems, Inc. (incorporated
by reference to Exhibit 10.4 to Form S-1, Registration
No. 333-79079).
10.5 Share Exchange and Termination Agreement, dated as of December
18, 1997, among International Exchange Networks, Ltd., IPC
Communications, Inc., David A. Walsh and Anthony M. Servidio
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(incorporated by reference to Exhibit 10.5 to Form S-1,
Registration No. 333-79079).
10.6 Amended and Restated Employment Agreement, dated as of
December 18, 1997, between David A. Walsh and International
Exchange Networks, Ltd. (incorporated by reference to Exhibit
10.6 to Form S-1, Registration No. 333-79079).
10.7 Amendment No. 1, dated as of June 1, 1999, to the Amended and
Restated Employment Agreement between David A. Walsh and
International Exchange Networks, Ltd. (incorporated by
reference to Exhibit 10.7 to Form S-1, Registration No. 333-
79079).
10.8 Waiver letter, dated as of June 9, 1999, from David A. Walsh
regarding provisions in the Amended and Restated Employment
Agreement by and between David A. Walsh and International
Exchange Networks, Ltd. (incorporated by reference to Exhibit
10.8 to Form S-1, Registration No. 333-79079).
10.9 Amended and Restated Employment Agreement, dated as of
December 18, 1997, between International Exchange Networks,
Ltd. and Anthony M. Servidio (incorporated by reference to
Exhibit 10.11 to Form S-1, Registration No. 333-79079).
10.10 Waiver letter, dated as of June 9, 1999, from Anthony Servidio
regarding provisions in the Amended and Restated Employment
Agreement between Anthony M. Servidio and International
Exchange Networks, Ltd. (incorporated by reference to Exhibit
10.12 to Form S-1, Registration No. 333-79079).
10.11 Employment Agreement, dated as of July 1, 1999, between
International Exchange Networks, Ltd. and Gerald E. Starr
(Incorporated by reference to exhibit 10.11 to form 10-K at
September 30, 1999).
10.12 Form of Employment Agreement for certain Senior Executives
(Incorporated by reference to exhibit 10.12 to form 10-K at
September 30, 1999).
10.13 IXnet, Inc. 1999 Stock Option Plan (incorporated by reference
to Exhibit 10.19 to Form S-1, Registration No. 333-79079).
10.14 IPC Information Systems, Inc. 1998 Stock Incentive Plan
(incorporated by reference to Exhibit 10.20 to Form S-1,
Registration No. 333-79079).
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 (incorporated by reference to Exhibit
10.21 to Form S-1, Registration No. 333-79079).
10.16 Amended and Restated Credit Agreement, dated as of June 21,
1999, among IPC Information Systems, Inc., IPC Funding Corp.,
IPC Communications, Inc., General Electric Capital
Corporation, as collateral agent and administrative agent,
Morgan Stanley Senior Funding, Inc., as syndication agent, and
the lenders and the issuing bank named therein (incorporated
by reference to Exhibit 10.22 to Form S-1, Registration No.
333-79079).
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10.17 International Purchase and Sale Agreement, dated as of July
23, 1996, between International Exchange Networks, Ltd. and
Newbridge Networks Inc. (incorporated by reference to Exhibit
10.23 to Form S-1, Registration No. 333-79079).
10.18 Strategic Agreement, dated as of September 24, 1999 among
IXnet, Inc., International Exchange Networks, Ltd. and TIBCO
Finance Technology, Inc. (incorporated by reference to Exhibit
10.24 to the Company's Report on Form 8-K, dated September 24,
1999).
21.1 Subsidiaries of IXnet, Inc. (incorporated by reference to
Exhibit 21.1 to Form S-1, Registration No. 333-79079).
27.1 Financial Data Schedule (filed only electronically with
Securities and Exchange Commission)
(b) Reports on Form 8-K. None.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IXnet, Inc.
Date: February 14, 2000 /s/ James M. Demitrieus
-----------------------
Executive Vice-President and
Chief Financial Officer
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
FDS FOR FIRST QUARTER 10-Q
</LEGEND>
<CIK> 0001086606
<NAME> IXNET, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 7,397
<SECURITIES> 69,669
<RECEIVABLES> 23,948
<ALLOWANCES> (2,755)
<INVENTORY> 0
<CURRENT-ASSETS> 99,367
<PP&E> 87,809
<DEPRECIATION> (31,026)
<TOTAL-ASSETS> 241,715
<CURRENT-LIABILITIES> (48,661)
<BONDS> 0
0
0
<COMMON> 511
<OTHER-SE> 101,127
<TOTAL-LIABILITY-AND-EQUITY> (241,715)
<SALES> 23,125
<TOTAL-REVENUES> 23,125
<CGS> (24,745)
<TOTAL-COSTS> (44,600)
<OTHER-EXPENSES> 99
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,160)
<INCOME-PRETAX> (22,536)
<INCOME-TAX> 312
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,848)
<EPS-BASIC> (.45)
<EPS-DILUTED> (.45)
</TABLE>
