<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 6, 1998.
REGISTRATION NO. 333-46296
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
IPC INFORMATION SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 3661 58-1636502
(STATE OF INCORPORATION) (PRIMARY STANDARD (I.R.S. EMPLOYER
INDUSTRIAL IDENTIFICATION NO.)
CLASSIFICATION CODE NO.)
WALL STREET PLAZA
88 PINE STREET
NEW YORK, NEW YORK 10005
(212)825-9060
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
DANIEL UTEVSKY, ESQ.
VICE PRESIDENT AND GENERAL COUNSEL
IPC INFORMATION SYSTEMS, INC.
WALL STREET PLAZA
88 PINE STREET
NEW YORK, NEW YORK 10005
(212) 825-9060
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE
OF AGENT FOR SERVICE)
WITH COPIES TO:
THOMAS N. TALLEY, ESQ. PHILIP H. WERNER, ESQ.
THACHER PROFFITT & WOOD MORGAN, LEWIS & BOCKIUS LLP
TWO WORLD TRADE CENTER 101 PARK AVENUE
NEW YORK, NEW YORK 10048 NEW YORK, NEW YORK 10178
(212) 912-7400 (212) 309-6000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effectiveness of this Registration Statement and the
effective time ("Effective Time") of the merger (the "Merger") of Arizona
Acquisition Corp. ("AAC") with and into IPC Information Systems, Inc. (the
"Registrant") as described in the attached Proxy Statement/Prospectus.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
----------------
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 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.
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<PAGE>
IPC INFORMATION SYSTEMS, INC.
WALL STREET PLAZA
88 PINE STREET
NEW YORK, NEW YORK 10005
(212) 825-9060
----------------
PROXY STATEMENT/PROSPECTUS
----------------
This Proxy Statement/Prospectus is being furnished to the holders of common
stock, par value $.01 per share ("IPC Common Stock"), of IPC Information
Systems, Inc. ("IPC" or the "Company") in connection with the solicitation of
proxies by the Board of Directors of IPC (the "IPC Board") for use at an
annual
meeting of IPC's stockholders and at any adjournment or postponement thereof
(the "Annual Meeting"), to be held at [ ] on [ ], 1998, at the [ ]
New York, New York.
At the Annual Meeting, in addition to the election of directors and the
ratification of the appointment of the firm of Coopers & Lybrand L.L.P.
("Coopers & Lybrand") as independent accountants, holders of IPC common stock
will consider and vote upon (i) a proposal to approve and adopt the Agreement
and Plan of Merger between Arizona Acquisition Corp. ("AAC") and IPC, dated as
of December 18, 1997 as amended and restated (the "Merger Agreement")
(including an amendment to the Certificate of Incorporation of the Surviving
Corporation to permit the election of directors without a written ballot the
("Ballot Amendment")), (ii) a proposal to approve certain other amendments to,
and the restatement of, IPC's Certificate of Incorporation (the "Certificate
Amendment") and (iii) a proposal to approve and adopt the IPC Information
Systems, Inc. 1998 Stock Incentive Plan for selected employees, directors and
consultants of the Surviving Corporation and its subsidiaries (the "New Stock
Incentive Plan").
The Merger Agreement provides, among other things, for the merger of AAC
with and into the Company (the "Merger"), with the Company as the surviving
corporation (the "Surviving Corporation"). Pursuant to the Merger, each share
of IPC Common Stock issued and outstanding immediately prior to the effective
time of the Merger (the "Effective Time") (other than (i) shares of IPC Common
Stock held by IPC or any subsidiary thereof as treasury stock or owned by AAC,
which shares shall be canceled, and (ii) shares as to which appraisal rights
have been exercised) will be converted, at the election of the holder thereof
and subject to the terms described herein, into either (a) the right to
receive $21.00 in cash, or (b) the right to retain one fully paid and
nonassessable share of common stock of the Surviving Corporation ("Surviving
Corporation Common Stock"). Because the number of shares of Surviving
Corporation Common Stock to be retained by existing IPC stockholders in the
aggregate must be no less than 10%, or 380,952 shares (the "Minimum Stock
Election Number") nor more than 46% or 1,752,381 shares (the "Maximum Stock
Election Number") of the number of shares of Surviving Corporation Common
Stock outstanding after the Merger, the right to receive $21.00 in cash or
retain Surviving Corporation Common Stock is subject to proration as set forth
in the Merger Agreement and described in this Proxy Statement/Prospectus.
However, because Richard P. Kleinknecht, the current Chairman and a principal
stockholder of the Company, has agreed to elect to retain 10% of the
outstanding shares of Surviving Corporation Common Stock after the Merger, any
other stockholders of the Company who choose to convert their shares into cash
will receive the full amount of the merger consideration in cash and will not
be required, by virtue of proration, to retain shares of Surviving Corporation
Common Stock.
If all stockholders elect to retain a number of shares of Surviving
Corporation Common Stock equal to or less than the Maximum Stock Election
Number, all stockholders will be able to convert all such shares of IPC Common
Stock into shares of Surviving Corporation Common Stock. In such case, a
stockholder who owns 100 shares of IPC Common Stock and elects to retain all
such shares will be able to retain 100 shares of Surviving Corporation Common
Stock.
To the extent that stockholders elect to retain more shares of Surviving
Corporation Common Stock than the Maximum Stock Election Number in the
aggregate, then all such stockholders will be subject to proration and will
receive some cash and some shares of Surviving Corporation Common Stock. In
the case of maximum proration (i.e., the number of Stock Electing Shares
equals 10,715,119, which is equal to the number of outstanding shares of IPC
Common Stock as of December 17, 1997), all stockholders would generally be
able to
<PAGE>
[LETTERHEAD OF IPC INFORMATION SYSTEMS, INC.]
Dear Stockholder: April , 1998
You are cordially invited to attend the Annual Meeting of Stockholders of
IPC Information Systems, Inc. ("IPC" or the "Company"), which will be held on
[ , 1998] at [ ] (the "Annual Meeting"). As you may be aware, IPC and
Arizona Acquisition Corp. ("AAC") entered into an Agreement and Plan of
Merger, dated as of December 18, 1997, as amended and restated (the "Merger
Agreement"), pursuant to which AAC will be merged with and into IPC (the
"Merger") with IPC continuing as the surviving corporation (the "Surviving
Corporation"). At the Annual Meeting, in addition to the election of two
directors and the ratification of the appointment of Coopers & Lybrand L.L.P.
("Coopers & Lybrand") as independent accountants, you will be asked to
consider and vote upon a proposal to approve the Merger Agreement (including
an amendment to the Certificate of Incorporation of the Surviving Corporation
to permit the election of directors without a written ballot), a proposal to
approve certain other amendments to, and the restatement of, IPC's Certificate
of Incorporation (the "Certificate Amendment") and a proposal to approve and
adopt the IPC Information Systems, Inc. 1998 Stock Incentive Plan for selected
employees, directors and consultants of the Surviving Corporation and its
subsidiaries (the "New Stock Incentive Plan") in connection with the Merger.
The Merger Agreement provides that each share of IPC common stock, par value
$.01 per share ("IPC Common Stock"), issued and outstanding immediately prior
to the effective time of the Merger (other than treasury shares and shares as
to which appraisal rights have been exercised) will be converted at the
election of the holder thereof and subject to the terms described in the Proxy
Statement/Prospectus into either (i) the right to receive $21.00 in cash or
(ii) the right to retain one fully paid and nonassessable share of common
stock of the Surviving Corporation following the Merger ("Surviving
Corporation Common Stock"), subject to proration in certain circumstances.
Under the terms of the Merger Agreement, cash will be paid in lieu of
fractional shares of Surviving Corporation Common Stock. A copy of the Merger
Agreement is included as Annex A to the Proxy Statement/Prospectus, which you
are urged to read carefully.
For those stockholders who elect to retain Surviving Corporation Common
Stock, proration may be required because the Merger Agreement contemplates
that stockholders of IPC must elect to convert a minimum number of shares of
IPC Common Stock into the right to retain not less than 380,952 shares of
Surviving Corporation Common Stock ("Minimum Stock Election Number") and a
maximum number of shares of IPC Common Stock into the right to retain not more
than 1,752,381 shares of Surviving Corporation Common Stock ("Maximum Stock
Election Number"). Pursuant to the Stockholders Agreement, Richard P.
Kleinknecht, the current Chairman and a principal stockholder of the Company,
has agreed to elect to retain an aggregate of 380,952 shares of Surviving
Corporation Common Stock, which is equal to the Minimum Stock Election Number.
As a result, IPC stockholders who choose to convert their shares into cash
will receive the full amount in cash and will not be required to retain any
shares of Surviving Corporation Common Stock. However, stockholders who elect
to retain shares of Surviving Corporation Common Stock may receive a lesser,
prorated number of shares of Surviving Corporation Common Stock than such
stockholders elected to retain, plus cash in lieu of shares of Surviving
Corporation Common Stock, if the aggregate number of shares of Surviving
Corporation Common Stock elected to be retained exceeds the Maximum Stock
Election Number.
If all stockholders elect to retain a number of shares of Surviving
Corporation Common Stock equal to or less than the Maximum Stock Election
Number, all stockholders will be able to convert all such shares of IPC Common
Stock into shares of Surviving Corporation Common Stock. In such case, a
stockholder who owns 100 shares of IPC Common Stock and elects to retain all
such shares will be able to retain 100 shares of Surviving Corporation Common
Stock.
To the extent that stockholders elect to retain more shares of Surviving
Corporation Common Stock than the Maximum Stock Election Number in the
aggregate, then all such stockholders will be subject to proration and will
receive some cash and some shares of Surviving Corporation Common Stock. In
the case of maximum proration (i.e., the number of Stock Electing Shares
equals 10,715,119, which is equal to the number of outstanding shares of IPC
Common Stock as of December 17, 1997), all stockholders would generally be
able to retain approximately 16% of their shares and would receive cash for
approximately 84% of their shares. In such
<PAGE>
case, a stockholder who owns 100 shares of IPC Common Stock and elects to
retain all such shares will be able to retain only 16 shares of Surviving
Corporation Common Stock and would receive $1,764 in cash (84 shares at $21
per share, including cash paid in lieu of fractional shares).
The Kleinknecht Stockholders (as defined below) who, in the aggregate own
approximately 64% of the outstanding shares of IPC Common Stock, have informed
management that they intend to convert all shares of IPC Common Stock owned by
them into cash at $21 per share, other than Richard P. Kleinknecht who has
agreed to elect to retain 10% of the outstanding shares of Surviving
Corporation Common Stock. Assuming all the Kleinknecht Stockholders who have
indicated their intent to convert their shares of IPC Common Stock into cash
at $21 per share so elect and assuming all other stockholders elect to retain
shares of Surviving Corporation Common Stock, such stock-electing stockholders
will generally be able to retain approximately 41% of their shares and will
receive cash at $21 per share for approximately 59% of their shares.
Stockholders of IPC who elect to retain shares of Surviving Corporation
Common Stock should note that, immediately following the Merger, Cable Systems
Holding, LLC ("CSH LLC") will own, directly or indirectly, not less than
50.25% nor more than 86.25% of the outstanding shares of the Surviving
Corporation Common Stock (prior to giving effect to the IXnet Exchange (as
defined below)). CSH LLC is a Delaware limited liability company which engages
in certain telecommunication businesses through its subsidiaries. David Kirby,
a private investor and U.S. citizen, will own 25.5% of the voting interests
relating to the units of CSH LLC attributable to CSH LLC's ownership of IPC
(the "IPC Units"), John O'Mara, a private investor and U.S. citizen, will own
25.5% of the voting interests relating to the IPC Units and Citicorp Venture
Capital, Ltd., a New York corporation ("CVC"), will own 49% of the voting
interests relating to the IPC Units. In addition, as a result of the Merger,
the Surviving Corporation Common Stock may no longer meet the listing
requirements of the Nasdaq National Market and, as a result, stockholders may
experience difficulty trading Surviving Corporation Common Stock or obtaining
prices that reflect the value thereof. Also, the Company will incur
substantial indebtedness in connection with the Merger and will have
substantially more indebtedness than it has historically.
In connection with the Merger, the minority stockholders of International
Exchange Networks, Ltd. ("IXnet"), an 80% owned subsidiary of the Company,
have agreed to exchange all of their shares of IXnet common stock for shares
of Surviving Corporation Common Stock immediately following the effective time
of the Merger, and as a result, such individuals will receive approximately
6.2% of the shares of Surviving Corporation Common Stock (the "IXnet
Exchange").
The Certificate Amendment provides for the removal of certain anti-takeover
provisions including (i) the elimination of classification of, and the filling
of vacancies on, the Board of Directors of IPC and (ii) the elimination of
supermajority voting requirements for certain future amendments to the
certificate of incorporation of the Surviving Corporation. Consummation of the
Merger is not contingent on approval of the Certificate Amendment; however,
approval of the Certificate Amendment is contingent on approval of the Merger.
The Certificate Amendment is included as Annex B to the Proxy
Statement/Prospectus.
The New Stock Incentive Plan provides for the grant of options to purchase
Surviving Corporation Common Stock to selected employees, directors and
consultants of the Surviving Corporation and its subsidiaries. The New Stock
Incentive Plan is contingent on approval of the Merger Agreement and will
become effective only upon consummation of the Merger. The New Stock Incentive
Plan is included as Annex C to the Proxy Statement/Prospectus.
Approval and adoption of the Merger Agreement requires the affirmative vote
of a majority of the outstanding shares of IPC Common Stock held by
stockholders of record on , 1998 (the "Record Date"). Peter J.
Kleinknecht, Vice Chairman of IPC, and certain family members and affiliated
parties and Richard P. Kleinknecht, Chairman of IPC, and certain family
members and affiliated parties (collectively, the "Kleinknecht Stockholders")
owned, beneficially and/or of record, an aggregate of 6,906,554 shares of IPC
Common Stock on the Record Date, constituting approximately 64% of the
outstanding shares of IPC Common
<PAGE>
Stock entitled to vote at the Annual Meeting. Pursuant to a Stockholders
Agreement by and among AAC and the Kleinknecht Stockholders, dated as of
December 18, 1997 (the "Stockholders Agreement"), the Kleinknecht
Stockholders, in their capacity as such, have agreed, among other things, to
vote their shares in favor of the Merger and the adoption of the Merger
Agreement. The Stockholders Agreement is included as Annex D to the Proxy
Statement/Prospectus. The summaries of portions of the Stockholders Agreement
set forth in the Proxy Statement/Prospectus describe the material provisions
of the Stockholders Agreement but are subject to, and are qualified by
reference to, the text of the Stockholders Agreement.
Holders of IPC Common Stock will be entitled to dissenters' rights under
Delaware General Corporation Law in connection with the Merger, as described
in the accompanying Proxy Statement/Prospectus.
THE MERGER AGREEMENT, THE CERTIFICATE AMENDMENT AND THE NEW STOCK INCENTIVE
PLAN HAVE BEEN UNANIMOUSLY APPROVED BY THE BOARD OF DIRECTORS OF IPC. YOUR
BOARD HAS DETERMINED THAT THE MERGER IS FAIR AND IN THE BEST INTERESTS OF IPC
AND ITS STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR APPROVAL OF
THE MERGER AGREEMENT, THE CERTIFICATE AMENDMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY.
The investment banking firm of Deutsche Morgan Grenfell Inc. ("DMG") has
advised the Board of Directors that, in its opinion, as of December 17, 1997
and as subsequently confirmed as of April 6, 1998, the consideration to be
received by the holders of IPC Common Stock is fair from a financial point of
view to the holders of such shares. DMG's opinion and subsequent confirmation
are included as Annexes E-1 and E-2 to the Proxy Statement/Prospectus. You are
urged to read the opinion in its entirety for further information with respect
to the assumptions made, matters considered and limits of the reviews
undertaken by DMG.
Consummation of the Merger is subject to certain conditions, including the
approval of the Merger Agreement by the requisite vote of IPC stockholders and
the approval of the Merger by various regulatory agencies.
The enclosed Notice of Annual Meeting of Stockholders and Proxy
Statement/Prospectus describe the Merger and provide information regarding the
Annual Meeting. Please read these materials carefully.
A Form of Stock Election, which contains instructions on how stockholders
can convert their shares of IPC Common Stock into cash, shares of Surviving
Corporation Common Stock or both, will be mailed separately to all IPC
stockholders. In order to make a valid election to convert all or some of a
stockholder's shares of IPC Common Stock into shares of Surviving Corporation
Common Stock, a stockholder must return a properly completed Form of Stock
Election together with all certificates for shares of IPC Common Stock to the
Exchange Agent by the business day next preceding the date of the Annual
Meeting. "See THE MERGER--Stock Election Procedure" in the Proxy
Statement/Prospectus.
YOUR VOTE IS VERY IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. THE
AFFIRMATIVE VOTE OF THE HOLDERS OF AT LEAST A MAJORITY OF THE OUTSTANDING
SHARES OF IPC COMMON STOCK ELIGIBLE TO VOTE IS REQUIRED TO APPROVE THE MERGER
AGREEMENT, THE AFFIRMATIVE VOTE OF AT LEAST 80% OF THE OUTSTANDING SHARES OF
IPC COMMON STOCK ELIGIBLE TO VOTE IS REQUIRED TO APPROVE THE CERTIFICATE
AMENDMENT, AND THE AFFIRMATIVE VOTE OF AT LEAST A MAJORITY OF THE VOTES
PRESENT IN PERSON OR BY PROXY AND ENTITLED TO VOTE IS REQUIRED TO APPROVE THE
NEW STOCK INCENTIVE PLAN. A FAILURE TO RETURN A PROPERLY EXECUTED PROXY CARD
OR TO VOTE IN PERSON WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE MERGER
AGREEMENT AND THE CERTIFICATE AMENDMENT. THEREFORE, I URGE YOU TO FILL IN,
SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED POSTAGE
PAID ENVELOPE AS SOON AS POSSIBLE TO ASSURE THAT YOUR SHARES WILL BE VOTED AT
THE ANNUAL MEETING.
<PAGE>
On behalf of the Board of Directors, we thank you for your support and urge
you to vote FOR approval of the Merger Agreement, FOR approval of the
Certificate Amendment, FOR approval of the New Stock Incentive Plan, FOR the
election of two directors and FOR ratification of the appointment of Coopers &
Lybrand.
If you have any questions, please call us at (212) 825-9060. I look forward
to seeing you on [ , 1998].
Sincerely,
S. Terry Clontz
President and Chief Executive
Officer
<PAGE>
IPC INFORMATION SYSTEMS, INC.
WALL STREET PLAZA
88 PINE STREET
NEW YORK, NEW YORK 10005
(212) 825-9060
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
An Annual Meeting of Stockholders (the "Annual Meeting") of IPC Information
Systems, Inc. ("IPC" or the "Company") will be held on [ ], 1998 at
[ ], New York, New York, at [ ] [ ].m., for the following purposes:
1. To consider and vote on a proposal to approve and adopt an Agreement
and Plan of Merger, dated as of December 18, 1997, as amended and restated
(the "Merger Agreement"), by and between IPC and Arizona Acquisition Corp.
("AAC") pursuant to which AAC will be merged with and into IPC (the
"Merger") with IPC continuing as the surviving corporation (the "Surviving
Corporation"). Pursuant to the Merger, each share of common stock, par
value $.01 per share, of IPC ("IPC Common Stock") issued and outstanding
immediately prior to the effective time of the Merger (other than (i)
shares of IPC Common Stock held by IPC or any subsidiary thereof as
treasury stock or owned by AAC, which shares shall be canceled and (ii)
shares as to which appraisal rights have been exercised) will be converted
at the election of the holder thereof and subject to the terms described
herein, into either (a) the right to receive $21.00 in cash, or (b) the
right to retain one fully paid and nonassessable share of common stock of
the Surviving Corporation following the Merger ("Surviving Corporation
Common Stock"), subject to proration in certain circumstances. However,
because Richard P. Kleinknecht has agreed to elect to retain 10% of the
outstanding shares of Surviving Corporation Common Stock after the Merger,
any other stockholders of the Company who choose to convert their shares
into cash will receive the full amount of the Merger Consideration in cash
and will not be required, by virtue of proration, to retain shares of
Surviving Corporation Common Stock. Under the terms of the Merger
Agreement, cash will be paid in lieu of fractional shares of Surviving
Corporation Common Stock. The Merger Agreement is included as Annex A to
the Proxy Statement/Prospectus.
2. To consider and vote on a proposal to approve certain amendments to,
and the restatement of, IPC's Certificate of Incorporation (the
"Certificate Amendment") included as Annex B to the Proxy
Statement/Prospectus. The Certificate Amendment provides for the removal of
certain anti-takeover provisions including (i) the elimination of
classification of, and the filling of vacancies on, the Board of Directors
of IPC and (ii) the elimination of supermajority voting requirements for
certain future amendments to the certificate of incorporation of the
Surviving Corporation. Consummation of the Merger is not contingent upon
approval of the Certificate Amendment; however, approval of the Certificate
Amendment is contingent on approval of the Merger.
3. To consider and vote upon a proposal to approve and adopt the IPC
Information Systems, Inc. 1998 Stock Incentive Plan for selected employees,
directors and consultants of the Surviving Corporation and its subsidiaries
(the "New Stock Incentive Plan"). Adoption of the New Stock Incentive Plan
is contingent upon approval of the Merger Agreement and will become
effective only upon consummation of the Merger. The New Stock Incentive
Plan is included as Annex C to the Proxy Statement/Prospectus.
4. To elect two directors to hold office until the 2001 annual meeting
and until their respective successors have been duly elected or appointed
(as the case may be) and qualified, provided, that, as further described in
the Proxy Statement/Prospectus, if the Merger is approved by the IPC
stockholders, the composition of the Board of Directors of the Surviving
Corporation will change.
5. To ratify the appointment by the Board of Directors of the firm of
Coopers & Lybrand L.L.P. as independent accountants for the Company for the
fiscal year ending September 30, 1998.
<PAGE>
6. To consider and vote upon a proposal to authorize the Board of
Directors of IPC, in its discretion, to vote upon such other business as
may properly come before the Annual Meeting and any adjournment or
postponement thereof, including, without limitation, a motion to adjourn
the Annual Meeting to another time or place for the purpose of soliciting
additional proxies in order to approve and adopt the Merger Agreement, or
otherwise.
Pursuant to IPC's bylaws, IPC's Board of Directors has fixed the close of
business on [ ], 1998 as the record date (the "Record Date") for the
determination of stockholders entitled to notice of, and to vote at, the
Annual Meeting. Only holders of record of IPC Common Stock at the close of
business on that date are entitled to notice of, and to vote at, the Annual
Meeting.
YOUR VOTE IS VERY IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN. THE
AFFIRMATIVE VOTE OF THE HOLDERS OF AT LEAST A MAJORITY OF THE OUTSTANDING
SHARES OF IPC COMMON STOCK ELIGIBLE TO VOTE IS REQUIRED TO APPROVE THE MERGER
AGREEMENT, THE AFFIRMATIVE VOTE OF AT LEAST 80% OF THE OUTSTANDING SHARES OF
IPC COMMON STOCK IS REQUIRED TO APPROVE THE CERTIFICATE AMENDMENT AND THE
AFFIRMATIVE VOTE OF AT LEAST A MAJORITY OF THE VOTES PRESENT IN PERSON OR BY
PROXY AND ENTITLED TO VOTE IS REQUIRED TO APPROVE THE NEW STOCK INCENTIVE
PLAN.
Approval and adoption of the Merger Agreement requires the affirmative vote
of a majority of the outstanding shares of IPC Common Stock held by
stockholders on the Record Date. Peter J. Kleinknecht, Vice Chairman of IPC,
and certain family members and affiliated parties and Richard P. Kleinknecht,
Chairman of IPC, and certain family members and affiliated parties
(collectively, the "Kleinknecht Stockholders") owned, beneficially and/or of
record, an aggregate of 6,906,554 shares of IPC Common Stock on the Record
Date, constituting approximately 64% of the outstanding shares of IPC Common
Stock entitled to vote at the Annual Meeting. Pursuant to a Stockholders
Agreement by and among AAC and the Kleinknecht Stockholders, dated as of
December 18, 1997 (the "Stockholders Agreement"), the Kleinknecht
Stockholders, in their capacity as such, have agreed, among other things, to
vote their shares in favor of the Merger and the adoption of the Merger
Agreement. The Stockholders Agreement is included as Annex D to the Proxy
Statement/Prospectus. The summaries of portions of the Stockholders Agreement
set forth in the Proxy Statement/Prospectus describe the material provisions
of the Stockholders Agreement but are subject to, and are qualified by
reference to, the text of the Stockholders Agreement.
In connection with the proposed Merger, those stockholders of IPC who meet
and comply with the requirements of Section 262 of Delaware General
Corporation Law ("DGCL"), a copy of which is included as Annex F to the Proxy
Statement/Prospectus, will be entitled to dissenters' rights. Reference is
made to the section entitled "THE MERGER--Dissenters' Rights" in the Proxy
Statement/Prospectus for a discussion of the procedures to be followed by
dissenting stockholders in asserting appraisal rights under Section 262 of the
DGCL in connection with the proposed Merger.
A Form of Stock Election, which contains instructions on how stockholders
can convert their shares of IPC Common Stock into cash, shares of Surviving
Corporation Common Stock or both, will be mailed separately to all IPC
stockholders. In order to make a valid election to convert all or some of a
stockholder's shares of IPC Common Stock into shares of Surviving Corporation
Common Stock, a stockholder must return a properly completed Form of Stock
Election together with all certificates for shares of IPC Common Stock to the
Exchange Agent by the business day next preceding the date of the Annual
Meeting. "See THE MERGER--Stock Election Procedure" in the Proxy
Statement/Prospectus.
A FAILURE TO RETURN A PROPERLY EXECUTED PROXY CARD OR TO VOTE IN PERSON WILL
HAVE THE SAME EFFECT AS A VOTE AGAINST THE MERGER AGREEMENT AND THE
CERTIFICATE AMENDMENT. PLEASE FILL IN, SIGN, DATE AND PROMPTLY RETURN THE
<PAGE>
ENCLOSED PROXY CARD IN THE ENCLOSED POSTAGE-PAID ENVELOPE. IF YOU DECIDE TO
ATTEND THE ANNUAL MEETING, YOU CAN REVOKE YOUR PROXY AND VOTE PERSONALLY ON
EACH MATTER BROUGHT BEFORE THE ANNUAL MEETING.
By Order of the Board of Directors,
Daniel Utevsky
Vice President, General Counsel and
Corporate Secretary
New York, New York
April , 1998
<PAGE>
IPC INFORMATION SYSTEMS, INC.
WALL STREET PLAZA
88 PINE STREET
NEW YORK, NEW YORK 10005
(212) 825-9060
----------------
PROXY STATEMENT/PROSPECTUS
----------------
This Proxy Statement/Prospectus is being furnished to the holders of common
stock, par value $.01 per share ("IPC Common Stock"), of IPC Information
Systems, Inc. ("IPC" or the "Company") in connection with the solicitation of
proxies by the Board of Directors of IPC (the "IPC Board") for use at an
annual
meeting of IPC's stockholders and at any adjournment or postponement thereof
(the "Annual Meeting"), to be held at [ ] on [ ], 1998, at the [ ]
New York, New York.
At the Annual Meeting, in addition to the election of directors and the
ratification of the appointment of the firm of Coopers & Lybrand L.L.P.
("Coopers & Lybrand") as independent accountants, holders of IPC common stock
will consider and vote upon (i) a proposal to approve and adopt the Agreement
and Plan of Merger between Arizona Acquisition Corp. ("AAC") and IPC, dated as
of December 18, 1997 as amended and restated (the "Merger Agreement")
(including an amendment to the Certificate of Incorporation of the Surviving
Corporation to permit the election of directors without a written ballot the
("Ballot Amendment")), (ii) a proposal to approve certain other amendments to,
and the restatement of, IPC's Certificate of Incorporation (the "Certificate
Amendment") and (iii) a proposal to approve and adopt the IPC Information
Systems, Inc. 1998 Stock Incentive Plan for selected employees, directors and
consultants of the Surviving Corporation and its subsidiaries (the "New Stock
Incentive Plan").
The Merger Agreement provides, among other things, for the merger of AAC
with and into the Company (the "Merger"), with the Company as the surviving
corporation (the "Surviving Corporation"). Pursuant to the Merger, each share
of IPC Common Stock issued and outstanding immediately prior to the effective
time of the Merger (the "Effective Time") (other than (i) shares of IPC Common
Stock held by IPC or any subsidiary thereof as treasury stock or owned by AAC,
which shares shall be canceled, and (ii) shares as to which appraisal rights
have been exercised) will be converted, at the election of the holder thereof
and subject to the terms described herein, into either (a) the right to
receive $21.00 in cash, or (b) the right to retain one fully paid and
nonassessable share of common stock of the Surviving Corporation ("Surviving
Corporation Common Stock"). Because the number of shares of Surviving
Corporation Common Stock to be retained by existing IPC stockholders in the
aggregate must be no less than 10%, or 380,952 shares (the "Minimum Stock
Election Number") nor more than 46% or 1,752,381 shares (the "Maximum Stock
Election Number") of the number of shares of Surviving Corporation Common
Stock outstanding after the Merger, the right to receive $21.00 in cash or
retain Surviving Corporation Common Stock is subject to proration as set forth
in the Merger Agreement and described in this Proxy Statement/Prospectus.
However, because Richard P. Kleinknecht, the current Chairman and a principal
stockholder of the Company, has agreed to elect to retain 10% of the
outstanding shares of Surviving Corporation Common Stock after the Merger, any
other stockholders of the Company who choose to convert their shares into cash
will receive the full amount of the merger consideration in cash and will not
be required, by virtue of proration, to retain shares of Surviving Corporation
Common Stock.
If all stockholders elect to retain a number of shares of Surviving
Corporation Common Stock equal to or less than the Maximum Stock Election
Number, all stockholders will be able to convert all such shares of IPC Common
Stock into shares of Surviving Corporation Common Stock. In such case, a
stockholder who owns 100 shares of IPC Common Stock and elects to retain all
such shares will be able to retain 100 shares of Surviving Corporation Common
Stock.
To the extent that stockholders elect to retain more shares of Surviving
Corporation Common Stock than the Maximum Stock Election Number in the
aggregate, then all such stockholders will be subject to proration and will
receive some cash and some shares of Surviving Corporation Common Stock. In
the case of maximum proration (i.e., the number of Stock Electing Shares
equals 10,715,119, which is equal to the number of outstanding shares of IPC
Common Stock as of December 17, 1997), all stockholders would generally be
able to
I
<PAGE>
retain approximately 16% of their shares and would receive cash for
approximately 84% of their shares. In such case, a stockholder who owns 100
shares of IPC Common Stock and elects to retain all such shares will be able
to retain only 16 shares of Surviving Corporation Common Stock and would
receive $1,764 in cash (84 shares at $21 per share including cash paid in lieu
of fractional shares).
The Kleinknecht Stockholders (as defined below) who, in the aggregate own
approximately 64% of the outstanding shares of IPC Common Stock, have informed
management that they intend to convert all shares of IPC Common Stock owned by
them into cash at $21 per share, other than Richard P. Kleinknecht who has
agreed to elect to retain 10% of the outstanding shares of Surviving
Corporation Common Stock. Assuming all the Kleinknecht Stockholders who have
indicated their intent to convert their shares of IPC Common Stock into cash
at $21 per share so elect, and assuming all other stockholders elect to retain
shares of Surviving Corporation Common Stock, such stock- electing
stockholders will generally be able to retain approximately 41% of their
shares and will receive cash at $21 per share for approximately 59% of their
shares.
Stockholders of IPC who elect to retain shares of Surviving Corporation
Common Stock should note that immediately following the Merger, Cable Systems
Holding, LLC ("CSH LLC"), will own, directly or indirectly, not less than
50.25% nor more than 86.25% of the outstanding shares of the Surviving
Corporation Common Stock (prior to giving effect to the IXnet Exchange (as
defined below)). CSH LLC is a Delaware limited liability company which engages
in certain telecommunication businesses through its subsidiaries. David Kirby,
a private investor and U.S. citizen, will own 25.5% of the voting interests
relating to the units of CSH LLC attributable to CSH LLC's ownership of IPC
(the "IPC Units"), John O'Mara, a private investor and U.S. citizen, will own
25.5% of the voting interests relating to the IPC Units and Citicorp Venture
Capital, Ltd. ("CVC"), will own 49% of the voting interests relating to the
IPC Units. In addition, as a result of the Merger, the Surviving Corporation
Common Stock may no longer meet the listing requirements of the Nasdaq
National Market and, as a result, stockholders may experience difficulty
trading Surviving Corporation Common Stock or obtaining prices that reflect
the value thereof. Also, the Company will incur substantial indebtedness in
connection with the Merger and will have substantially more indebtedness than
it has historically.
In connection with the Merger, minority stockholders of International
Exchange Networks, Ltd. ("IXnet"), an 80% majority owned subsidiary of the
Company, have agreed to exchange all of their shares of IXnet common stock
("IXnet Common Stock") for shares of Surviving Corporation Common Stock
immediately following the effective time of the Merger. As a result, such
individuals will receive approximately 6.2% of the shares of Surviving
Corporation Common Stock (the "IXnet Exchange"). See "THE MERGER--Merger
Consideration." For a description of the Merger Agreement, which is included
in its entirety as Annex A to this Proxy Statement/Prospectus, see "THE
MERGER."
The Certificate Amendment provides for the removal of certain anti-takeover
provisions including (i) the elimination of classification of, and the filling
of vacancies on, the IPC Board and (ii) the elimination of supermajority
voting requirements for certain future amendments to the Certificate of
Incorporation of the Surviving Corporation. The Certificate Amendment is
included as Annex B to this Proxy Statement/Prospectus. Approval of the Merger
is not contingent upon approval of the Certificate Amendment; however,
approval of the Certificate Amendment is contingent on approval of the Merger.
See "PROPOSAL 2--CERTIFICATE AMENDMENT."
The New Stock Incentive Plan provides for grants of options to purchase
Surviving Corporation Common Stock to selected employees, directors and
consultants of the Surviving Corporation and its subsidiaries. The New Stock
Incentive Plan is included as Annex C to this Proxy Statement/Prospectus.
Adoption of the New Stock Incentive Plan is contingent upon approval of the
Merger Agreement and will become effective only upon consummation of the
Merger. See "PROPOSAL 3--NEW STOCK INCENTIVE PLAN."
Each stockholder of IPC entitled to vote at the Annual Meeting will also
consider and vote upon a proposal to authorize the IPC Board, in its
discretion, to vote upon such other business as may properly come before the
Annual Meeting and any adjournment or postponement thereof, including, without
limitation, a motion to adjourn the Annual Meeting to another time or place
for the purpose of soliciting additional proxies to approve the Merger
Agreement, or otherwise (the "Additional Proposal"). See "PROPOSAL 6--
ADDITIONAL PROPOSAL."
II
<PAGE>
The Company has filed a registration statement on Form S-4 (together with
all amendments, exhibits and schedules thereto, the "Registration Statement")
under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the 3,809,524 shares of Surviving Corporation Common Stock which
may be retained pursuant to the Merger. This Proxy Statement/Prospectus also
constitutes a prospectus of the Company with respect to the 3,809,524 shares
of Surviving Corporation Common Stock which may be retained pursuant to the
Merger.
This Proxy Statement/Prospectus does not cover any resales of Surviving
Corporation Common Stock to be received by the stockholders of the Surviving
Corporation upon consummation of the Merger, and no person is authorized to
make any use of this Proxy Statement/Prospectus in connection with any such
resale.
Approval and adoption of the Merger Agreement requires the affirmative vote
of a majority of the outstanding shares of IPC Common Stock held by
stockholders of record on , 1998 (the "Record Date"). Peter J.
Kleinknecht, Vice Chairman of IPC, and certain family members and affiliated
parties and Richard P. Kleinknecht, Chairman of IPC, and certain family
members and affiliated parties (collectively, the "Kleinknecht Stockholders")
owned, beneficially and/or of record, an aggregate of 6,906,554 shares of IPC
Common Stock on the Record Date, constituting approximately 64% of the
outstanding shares of IPC Common Stock entitled to vote at the Annual Meeting.
Pursuant to a Stockholders Agreement by and among AAC and the Kleinknecht
Stockholders, dated as of December 18, 1997 (the "Stockholders Agreement"),
the Kleinknecht Stockholders, in their capacity as such, have agreed, among
other things, to vote their shares in favor of the Merger and the adoption of
the Merger Agreement. The Stockholders Agreement is included as Annex D to
this Proxy Statement/Prospectus. The summaries of provisions of the
Stockholders Agreement set forth in this Proxy Statement/Prospectus describe
the material portions of the Stockholders Agreement but are subject to, and
are qualified by reference to, the text of the Stockholders Agreement.
In addition to the foregoing matters, at the Annual Meeting, the
stockholders of IPC will be asked to consider and vote on proposals to elect
two directors and to ratify the selection of Coopers & Lybrand as independent
accountants of the Company.
IPC Common Stock is listed for trading on The Nasdaq National Market
("Nasdaq") under the symbol "IPCI." On December 18, 1997, the last trading day
before public announcement of the execution of the Merger Agreement, the
closing price of IPC Common Stock on the Nasdaq was $18.375 per share. If the
Merger is approved, there will be a substantial decrease in the number of
outstanding shares of Surviving Corporation Common Stock, and the volume of
shares of Surviving Corporation Common Stock traded following the Merger will
be substantially smaller than the trading volume of IPC Common Stock prior to
the Merger. Therefore, no assurance can be given that the Surviving
Corporation Common Stock will continue to be listed on Nasdaq. See "RISK
FACTORS--Risks Associated with the Merger-- Potential Delisting and Loss of
Liquidity."
This Proxy Statement/Prospectus, the accompanying proxy card and, under
separate cover, the Form of Stock Election are first being mailed to
stockholders of IPC on or about [ ], 1998. The Form of Stock Election
contains instructions on how stockholders can convert their shares of IPC
Common Stock into cash, shares of Surviving Corporation Common Stock, or both.
In order to make a valid election to convert all or some of a stockholder's
shares of IPC Common Stock into shares of Surviving Corporation Common Stock,
a stockholder must return a properly completed Form of Stock Election together
with all certificates for shares of IPC Common Stock to the Exchange Agent by
the business day next preceding the date of the Annual Meeting (the "Election
Date"). See "THE MERGER--Stock Election Procedure."
STOCKHOLDERS ARE URGED TO READ THE INFORMATION SET FORTH UNDER "RISK
FACTORS" BEGINNING ON PAGE 19 OF THIS PROXY STATEMENT/PROSPECTUS.
NEITHER THIS TRANSACTION NOR THESE SECURITIES HAVE BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") OR
ANY STATE SECURITIES COMMISSION. NEITHER THE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS PASSED UPON THE FAIRNESS OR MERITS OF THIS
TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN
THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
----------------
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS APRIL , 1998.
III
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
AVAILABLE INFORMATION..................................................... 1
SUMMARY................................................................... 3
Parties to the Merger................................................... 3
The Annual Meeting...................................................... 4
Special Factors......................................................... 5
The Merger.............................................................. 8
Merger Financing........................................................ 14
Ancillary Agreements.................................................... 14
Conversion of AAC Stock................................................. 15
STOCK PRICE AND DIVIDEND INFORMATION...................................... 16
SUMMARY SELECTED HISTORICAL AND UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL DATA........................................................... 17
RISK FACTORS.............................................................. 19
Risks Associated with Operations........................................ 19
Risks Associated with the Merger........................................ 23
Cautionary Statement Concerning Forward-Looking Statements.............. 26
THE COMPANY............................................................... 27
General................................................................. 27
The Company's Three Major Operating Units............................... 27
Business Strategy....................................................... 28
Industry Background..................................................... 30
Products and Services................................................... 31
Year 2000 Compliance.................................................... 36
Sales and Marketing..................................................... 36
Customers............................................................... 37
Backlog................................................................. 38
Research and Development................................................ 38
Manufacturing........................................................... 38
Competition............................................................. 39
Regulatory Environment.................................................. 40
Intellectual Property................................................... 43
Employees............................................................... 43
Environmental Matters................................................... 43
Properties.............................................................. 43
Legal Proceedings....................................................... 43
THE ANNUAL MEETING........................................................ 44
General................................................................. 44
Recommendation of the IPC Board......................................... 44
Record Date............................................................. 44
Voting of Proxies....................................................... 44
Solicitation of Proxies................................................. 45
Revocability of Proxies................................................. 45
Vote Required........................................................... 45
Dissenters' Rights...................................................... 46
</TABLE>
IV
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SPECIAL FACTORS............. 46
Background of the Merger.. 46
Recommendation of the IPC
Board; Reasons for the
Merger................... 53
Opinion of Financial
Advisor.................. 57
Effects of the Merger;
Effective Time of the
Merger................... 62
Federal Income Tax
Consequences............. 63
Accounting Treatment...... 67
Resale of Surviving
Corporation Common Stock
Following the Merger..... 67
Interests of Certain
Persons in the Merger.... 67
Effect on IPC Employee
Benefit Plans............ 68
THE MERGER.................. 69
Parties to the Merger..... 69
Merger Consideration...... 69
Stock Election............ 70
Possible Effects of
Proration................ 71
Stock Election Procedure.. 72
Conversion/Retention of
Shares; Procedures for
Exchange of Certificates. 72
Fractional Shares......... 73
Conduct of Business
Pending the Merger....... 73
No Solicitation........... 74
Conditions to the
Consummation of the
Merger................... 75
Ancillary Agreements...... 76
Regulatory
Considerations/Approvals. 82
Representations and
Warranties............... 82
Amendment and Waiver...... 83
Termination............... 83
Termination Fee........... 83
Certain Fees and Expenses. 84
Merger Financing.......... 84
Conversion of AAC Stock... 86
Dissenters' Rights........ 86
PROPOSAL 2--CERTIFICATE
AMENDMENT.................. 88
Classification of the
Board.................... 88
Vacancies................. 89
Supermajority Voting...... 89
PROPOSAL 3--NEW STOCK
INCENTIVE PLAN............. 89
General Plan Information.. 89
Vote Required............. 89
Purpose of the New Stock
Incentive Plan........... 90
Description of the New
Stock Incentive Plan..... 90
Termination or Amendment
of the New Stock
Incentive Plan........... 92
Federal Income Tax
Consequences............. 92
New Plan Benefits......... 93
IPC ANNUAL MEETING--OTHER
MATTERS.................... 94
General................... 94
PROPOSAL 4--ELECTION OF
DIRECTORS.................. 96
Information with Respect
to Nominees and
Continuing Directors..... 96
Nominees for Election as
Directors................ 97
Continuing Directors...... 97
</TABLE>
V
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Board Meetings and Committees........................................... 98
Directors' Compensation................................................. 98
Compensation Committee Interlock and Insider Participation.............. 98
Report of the Compensation Committee on Executive Compensation.......... 98
Executive Officer Compensation.......................................... 99
Chairman and Vice Chairman Compensation................................. 100
President and Chief Executive Officer Compensation...................... 100
Other Executive Officers' Compensation.................................. 100
Employee Retention and Incentive Arrangements--Change of Control........ 100
Federal Tax Considerations Under Section 162(m)......................... 101
Performance Graph....................................................... 102
MANAGEMENT................................................................ 103
Executive Compensation.................................................. 103
Employment Agreements................................................... 105
Stock Option Plan....................................................... 108
Stock Purchase Plan..................................................... 109
Certain Relationships and Related Transactions.......................... 110
Compliance with Section 16(a) of the Securities Exchange Act of 1934.... 111
PROPOSAL 5--RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS........ 112
PROPOSAL 6--ADDITIONAL PROPOSAL........................................... 112
MANAGEMENT FOLLOWING THE MERGER........................................... 113
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 114
Overview................................................................ 114
Results of Operations................................................... 115
Liquidity and Capital Resources......................................... 118
Quarterly Fluctuations and the Effects of Inflation..................... 119
Foreign Exchange........................................................ 119
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION.................... 120
DESCRIPTION OF IPC CAPITAL STOCK.......................................... 128
Common Stock............................................................ 128
Preferred Stock......................................................... 128
Delaware Anti-Takeover Law and Certain Charter Provisions............... 128
Capital Stock of the Surviving Corporation.............................. 129
Transfer Agent and Registrar............................................ 129
COMPARISON OF CERTAIN RIGHTS OF STOCKHOLDERS.............................. 130
General................................................................. 130
Election of Directors Without a Written Ballot.......................... 130
Special Meetings of Stockholder......................................... 130
Classification of the Board; Removal of Directors....................... 130
Bylaw Amendments........................................................ 130
LEGAL MATTERS............................................................. 131
EXPERTS................................................................... 131
INDEX TO FINANCIAL STATEMENTS............................................. F-1
</TABLE>
VI
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
ANNEXES
AMerger Agreement........................................................ A-1
BCertificate Amendment................................................... B-1
CNew Stock Incentive Plan................................................ C-1
DStockholders Agreement.................................................. D-1
EOpinion of IPC's Financial Advisor...................................... E-1
FSection 262 of Delaware General Corporation Law......................... F-1
</TABLE>
VII
<PAGE>
AVAILABLE INFORMATION
IPC is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and in accordance therewith
files reports, proxy statements and other information with the Commission.
Copies of IPC's reports, proxy statements and other information can be
obtained, upon payment of prescribed fees, from the public reference
facilities of the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549. In addition, such reports, proxy statements and other information
can be inspected at the Commission's facilities referred to above and at the
Commission's Regional Offices at 7 World Trade Center, Suite 1300, New York,
New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. If available, such information may also be accessed
through the Commission's Electronic Data, Gathering, Analysis and Retrieval
System via electronic means, including the Commission's website on the
Internet (http://www.sec.gov).
The shares of IPC Common Stock are included for quotation on Nasdaq, and
such reports, proxy statements and other information concerning IPC are
available for inspection and copying at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.
Statements contained in this Proxy Statement/Prospectus as to the contents
of any contract or other document referred to herein or therein are not
necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement or such other document, each such statement being qualified in all
respects by such reference.
THIS PROXY STATEMENT/PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS
WITH RESPECT TO THE FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF
THE SURVIVING CORPORATION FOLLOWING THE CONSUMMATION OF THE MERGER. SEE
"SUMMARY," "SPECIAL FACTORS--BACKGROUND OF THE MERGER," AND "--RECOMMENDATION
OF THE IPC BOARD; REASONS FOR THE MERGER" AND "UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL INFORMATION."
COPIES OF IPC'S FORM 10-K FOR THE YEAR ENDED SEPTEMBER 30, 1997, AS AMENDED
ON JANUARY 28, 1998 (EXCLUDING CERTAIN EXHIBITS THERETO), ARE AVAILABLE UPON
REQUEST FROM THE INVESTOR RELATIONS DEPARTMENT, IPC INFORMATION SYSTEMS, INC.,
WALL STREET PLAZA, 88 PINE STREET, NEW YORK, NEW YORK 10005, TELEPHONE NUMBER
(212) 858-7969. IN ORDER TO ENSURE TIMELY DELIVERY OF SUCH DOCUMENT, ANY
REQUEST SHOULD BE MADE BY [ ].
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATIONS OTHER THAN AS CONTAINED IN THIS PROXY
STATEMENT/PROSPECTUS IN CONNECTION WITH THE SOLICITATION OF PROXIES OR THE
OFFERING OF SECURITIES MADE HEREBY, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY IPC. THIS
PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES, OR THE SOLICITATION OF A
PROXY, BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS
NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR
ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER
<PAGE>
SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF IPC SINCE THE DATE HEREOF OR THAT THE INFORMATION
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
The information herein contains forward-looking statements that involve a
number of risks and uncertainties. A number of factors could cause actual
results, performance, achievements of the Surviving Corporation and its
subsidiaries, or industry results to be materially different from any future
results, performance or achievements expressed or implied by such forward-
looking statements. These factors include, but are not limited to, the
competitive environment in the telecommunications industry in general and in
the Surviving Corporation's and its subsidiaries' specific market areas;
changes in prevailing interest rates and the availability of and terms of
financing to fund the anticipated growth of the Surviving Corporation's and
its subsidiaries' respective businesses; inflation; changes in costs of goods
and services; economic conditions in general and in the Surviving
Corporation's and its subsidiaries' specific market areas; demographic
changes; changes in or failure to comply with federal, state and/or local
government regulations; liability and other claims asserted against the
Surviving Corporation or its subsidiaries; changes in operating strategy or
development plans; the ability to attract and retain qualified personnel; the
significant indebtedness of the Surviving Corporation and its subsidiaries;
labor disturbances; changes in the Surviving Corporation's and its
subsidiaries' acquisition and capital expenditure plans; and other factors
referenced herein. In addition, such forward-looking statements are
necessarily dependent upon assumptions, estimates and dates that may be
incorrect or imprecise and involve known and unknown risks uncertainties and
other factors. Accordingly, any forward-looking statements included herein do
not purport to be predictions of future events or circumstances and may not be
realized. Forward-looking statements can be identified by, among other things,
the use of forward-looking terminology such as "believes," "expects," "may,"
"will," "should," "seeks," "pro forma," "anticipates," "intends" or the
negative of any thereof, or other variations thereon or comparable
terminology, or by discussions of strategy or intentions. Given these
uncertainties, prospective investors are cautioned not to place undue reliance
on such forward-looking statements. The Company and the Surviving Corporation
disclaim any obligations to update any such factors or to publicly announce
the results of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
Tradenet MX(R) and Exchangefone(R) are registered trademarks of the Company,
and VS-MX(TM), TraderConnect(TM), MX Compact(TM), TradePhone MX(TM), The
WorldTurret(TM), IXLink(TM), DigiHoot(TM), MetroLink(TM), IXFrame(TM),
IXGlobal(TM) and IXPrime(TM) are trademarks of the Company. Other trademarks
or trade names referred to in this Proxy Statement/Prospectus are the property
of their respective owner[s].
2
<PAGE>
SUMMARY
The following summary is not intended to be a complete description of all
material facts regarding IPC, AAC and the matters to be considered at the
Annual Meeting and is qualified in all respects by the information appearing
elsewhere in this Proxy Statement/Prospectus, the Annexes hereto and the
documents referred to herein.
For a discussion of certain important factors that should be considered by
holders of IPC Common Stock in connection with their consideration of the
Merger, including certain risks related to retaining Surviving Corporation
Common Stock, see "RISK FACTORS."
PARTIES TO THE MERGER
IPC Information Systems, Inc. IPC is a leader in providing integrated
telecommunications equipment and services that facilitate the execution of
transactions by the financial trading community. Such transactions involve the
trading of equity and debt securities, commodities, currencies and other
financial instruments. The Company designs, manufactures, installs and services
trading room voice communication systems ("turret systems") and installs and
services the cabling infrastructure and networks ("Information Transport
Systems" or "I.T.S.") which provide financial traders with desktop access to
time-sensitive communications and data. The Company's primary customers include
securities and investment banking firms, merchant and commercial banks,
interdealer brokers, foreign exchange and commodity brokers and dealers,
securities and commodity exchanges, mutual and hedge fund companies, asset
managers and insurance companies. The Company uses an integrated approach to
marketing its products and services, leveraging its established customer base
throughout the financial trading community. In addition, through its
subsidiary, International Exchange Networks, Ltd. ("IXnet"), the Company
operates 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. See "AVAILABLE INFORMATION,"
"THE COMPANY," "THE MERGER--PARTIES TO THE MERGER," "SELECTED HISTORICAL AND
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA," AND "PRO FORMA
CONSOLIDATED FINANCIAL INFORMATION."
The Company's principal executive offices are located at Wall Street Plaza,
88 Pine Street, New York, New York 10005, and its telephone number is (212)
825-9060.
Arizona Acquisition Corp. AAC is a Delaware corporation which was
incorporated on November 13, 1997 and has not carried on any activities to date
other than those incident to its formation and the transactions contemplated by
the Merger Agreement. All of the outstanding capital stock of AAC is owned by
Cable Systems Holding, LLC ("CSH LLC") and its subsidiaries.
Cable Systems Holding, LLC. CSH LLC is a Delaware limited liability company
which engages in certain telecommunication businesses through its subsidiaries.
Members of CSH LLC owning units of CSH LLC attributable to CSH LLC's ownership
of IPC (the "IPC Units"), acting directly or through their designees, make all
of the investment decisions on behalf of CSH LLC. Immediately following the
Merger, David Kirby, a private investor and U.S. citizen, will control 25.5% of
the voting interests relating to the IPC Units, John O'Mara, a private investor
and U.S. citizen, will own 25.5% relating to the voting interests of the IPC
Units and CVC will own 49% of the voting interests relating to the IPC Units.
CSH LLC is headquartered at 505 N. 51st Avenue, Phoenix, Arizona 85043-2701.
CSH LLC has two other operating subsidiaries, Cable Systems International, Inc.
("CSI"), a closely-held manufacturer of telecommunications products for outside
plant, customer premises and broadband networks, and LoDan Electronics, Inc.
("LoDan"), a closely-held manufacturer of specialized cable assemblies and
contract assembly service provider. See "THE MERGER--Parties to the Merger."
3
<PAGE>
THE ANNUAL MEETING
General. The Annual Meeting is scheduled to be held at [ ] .m., on
[ ], 1998 at [ ], New York, New York. At the Annual Meeting IPC
stockholders will consider and vote upon (i) a proposal to approve the Merger
Agreement (including the Ballot Amendment), (ii) a proposal to approve the
Certificate Amendment, (iii) a proposal to approve and adopt the New Stock
Incentive Plan, (iv) the election of two directors to hold office until the
2001 annual meeting and until their respective successors have been duly
elected or appointed (as the case may be) and qualified; provided, that if the
Merger is approved by the stockholders of IPC, the current directors of IPC,
other than Richard P. Kleinknecht, will submit their resignations, and the
individuals set forth in the Merger Agreement will be appointed as directors of
the Surviving Corporation following the Effective Time, (v) the ratification of
the appointment by the IPC Board of Coopers & Lybrand as independent
accountants for IPC for the fiscal year ending September 30, 1998 and (vi) the
Additional Proposal.
Record Date; Voting of Proxies. Only holders of record of IPC Common Stock as
of the close of business on the Record Date will be entitled to vote at the
Annual Meeting, with each such holder entitled to one vote per share. All
shares of IPC Common Stock represented by properly executed proxies received at
or prior to the Annual Meeting and not subsequently revoked will be voted as
directed in such proxies. IF INSTRUCTIONS ARE NOT GIVEN, SHARES REPRESENTED BY
PROPERLY EXECUTED PROXIES WILL BE VOTED FOR APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT, FOR APPROVAL AND ADOPTION OF THE CERTIFICATE AMENDMENT, FOR THE NEW
STOCK INCENTIVE PLAN, FOR THE ELECTION OF TWO DIRECTORS, FOR RATIFICATION OF
THE APPOINTMENT OF COOPERS & LYBRAND AND FOR THE ADDITIONAL PROPOSAL. However,
no proxy which is voted against the proposal to approve the Merger Agreement
will be voted in favor of the Additional Proposal by the proxies pursuant to
such discretion. See "THE ANNUAL MEETING--Voting of Proxies."
Solicitation of Proxies. The cost of soliciting proxies from holders of IPC
Common Stock will be borne by the Company. Such solicitation will be made by
mail but may also be made by telephone, telegram or in person by directors,
officers and employees of IPC, who will receive no additional compensation for
doing so but may be reimbursed for reasonable out-of-pocket expenses in
connection therewith. IPC will make arrangements to furnish copies of proxy
materials to fiduciaries, custodians and brokerage houses for forwarding to
beneficial owners of IPC Common Stock. Such persons will be reimbursed for
reasonable out-of-pocket expenses in connection with their distribution of
proxy materials to beneficial owners of IPC Common Stock. See "THE ANNUAL
MEETING--Solicitation of Proxies."
IPC has retained ChaseMellon Shareholder Services, L.L.C. ("ChaseMellon"), a
proxy solicitation firm, to assist in such solicitation. The fee for such
solicitation to be paid to such firm is not expected to exceed $5,000, plus
reasonable out-of-pocket expenses. If you have any questions or require
additional material, please call ChaseMellon at (toll free) 1-800-953-2497.
HOLDERS OF IPC COMMON STOCK SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR
PROXY CARDS. THE FORM OF STOCK ELECTION SENT TO ALL IPC STOCKHOLDERS UNDER
SEPARATE COVER WILL SET FORTH INSTRUCTIONS FOR RETURNING STOCK CERTIFICATES FOR
STOCKHOLDERS WHO ELECT TO RETAIN SHARES OF SURVIVING CORPORATION COMMON STOCK.
AFTER THE EFFECTIVE TIME A LETTER OF TRANSMITTAL WILL BE SENT TO STOCKHOLDERS
WHO DO NOT ELECT TO RETAIN STOCK AND WHICH WILL SET FORTH INSTRUCTIONS FOR
RETURNING STOCK CERTIFICATES.
Revocability of Proxies. Any holder of IPC Common Stock who has executed and
delivered a proxy may revoke it at any time prior to its exercise (i) by
delivering a written notice of revocation to the Corporate Secretary of IPC,
(ii) by delivering a duly executed proxy relating to the matters to be
considered at the Annual Meeting bearing a date later than the proxy previously
executed, to the Corporate Secretary of IPC, or (iii) by
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attending the Annual Meeting, filing a written notice of revocation with the
secretary of the meeting and voting in person (although attendance at the
Annual Meeting will not in and of itself constitute revocation of a proxy). If
you are a stockholder whose shares are not registered in your own name, you
must send any revocation of proxy or any proxy bearing a later date to the
registered holders thereof, and you will need additional documentation from
your recordholder to attend and to vote personally at the Annual Meeting.
Examples of such documentation would include a broker's statement, letter or
other document that will confirm your ownership of IPC Common Stock. Unless
revoked in one of the manners set forth above, proxies in the form enclosed
will be voted at the Annual Meeting in accordance with instructions in such
proxies. A proxy will not be revoked by death or supervening incapacity of the
stockholder executing the proxy unless, before the vote, notice of such death
or incapacity is filed with the Corporate Secretary or other person responsible
for tabulating votes on behalf of IPC.
Vote Required. The affirmative vote of the holders of a majority of the
aggregate outstanding shares of IPC Common Stock on the Record Date is required
to approve and adopt the Merger Agreement and the affirmative vote of the
holders of at least 80% of the aggregate outstanding shares of IPC Common Stock
on the Record Date is required to approve the Certificate Amendment. A
plurality of the votes cast is sufficient to elect directors. In addition,
assuming the existence of a quorum, the affirmative vote of a majority of the
shares present in person or by proxy and entitled to vote at the Annual Meeting
is required to approve the New Stock Incentive Plan, ratify the appointment of
Coopers & Lybrand and approve the Additional Proposal. A failure to return a
properly executed proxy card or to vote in person or abstaining from voting
will have the same effect as a vote against the Merger Agreement and the
Certificate Amendment. Abstentions with respect to the New Stock Incentive
Plan, the ratification of Coopers & Lybrand and the Additional Proposal, will
have the effect of a vote against such proposals. Broker non-votes will not be
counted as having been voted in person or by proxy at the Annual Meeting and
will have the same effect as a vote against the Merger Agreement and the
Certificate Amendment. In contrast, shares underlying broker non-votes will
have no effect on the vote on the New Stock Incentive Plan, the ratification of
Coopers & Lybrand and the Additional Proposal. As of the Record Date, there
were [ ] shares of IPC Common Stock outstanding and entitled to be voted at
the Annual Meeting.
Security Ownership of Management. As of the Record Date, IPC's directors and
executive officers (and their affiliates) (20 persons), beneficially owned and
had the power to vote 6,993,883 shares of IPC Common Stock which represented
approximately 65% of the outstanding shares of IPC Common Stock that may be
voted at the Annual Meeting. Such persons have indicated their intention to
vote, or direct the voting of all such shares in favor of the Merger Agreement,
the New Stock Incentive Plan and the Certificate Amendment. The Kleinknecht
Stockholders have entered into the Stockholders Agreement, pursuant to which
they have agreed upon the terms set forth therein to vote all shares
beneficially owned by them, which shares represented, as of the Record Date,
approximately 64% of shares of IPC Common Stock eligible to be voted at the
Annual Meeting, in favor of approval and adoption of the Merger Agreement, the
New Stock Incentive Plan and the Certificate Amendment. See "SPECIAL FACTORS--
Interests of Certain Persons in the Merger" and "--Ancillary Agreements--
Stockholders Agreement." As of the Record Date, AAC and its directors and
executive officers, beneficially owned no shares of IPC Common Stock. See "THE
ANNUAL MEETING."
Dissenting Stockholders. See "--Dissenters' Rights."
SPECIAL FACTORS
Background of the Merger. For a description of the events leading to the
approval and adoption of the Merger and the Merger Agreement, see "SPECIAL
FACTORS--Background of the Merger."
Board Recommendation; Opinion of Financial Advisor to the IPC Board. The IPC
Board, acting on the unanimous recommendation of the Independent Directors, has
unanimously approved the Merger Agreement and has determined that the Merger is
fair and in the best interests of IPC and its stockholders. The IPC Board
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unanimously recommends that IPC's stockholders vote FOR approval of the Merger
Agreement, the Certificate Amendment, the New Stock Incentive Plan, as well as
the election of two directors, the ratification of the appointment of Coopers &
Lybrand and the Additional Proposal.
Deutsche Morgan Grenfell Inc. ("DMG") has served as financial advisor to IPC
in connection with the Merger and has rendered an opinion to the IPC Board
that, as of December 17, 1997, the consideration to be received by the holders
of shares of IPC Common Stock pursuant to the Merger Agreement was fair, from a
financial point of view, to IPC stockholders. DMG has rendered a subsequent
confirmation dated April 6, 1998 that, as of April 6, 1998, DMG remained of the
same opinion. For additional information, see "SPECIAL FACTORS--Opinion of
Financial Advisor." The opinion and subsequent confirmation of DMG are included
as Annexes E-1 and E-2, respectively, to this Proxy Statement/Prospectus.
Stockholders are urged to read such opinion, and the subsequent confirmation,
in its entirety for a description of the procedures followed, assumptions made,
matters considered and qualifications of the review undertaken by DMG in
connection therewith.
Advantages and Disadvantages of the Merger. The IPC Board believes that among
the principal advantages of the Merger to the stockholders is that they will
have the opportunity to receive an attractive value for their shares of IPC
Common Stock while also being offered the opportunity to elect to participate
in the potential growth of the Surviving Corporation through the retention of
shares of Surviving Corporation Common Stock (to the extent such retention is
not otherwise limited by proration). See "SPECIAL FACTORS--Recommendation of
the IPC Board; Reasons for the Merger" and "THE ANNUAL MEETING--Recommendation
of the IPC Board."
The IPC Board believes that the principal disadvantages of the Merger to the
stockholders are (i) the potential for proration of stockholders who choose to
retain shares in the Surviving Corporation, (ii) the dilution of the equity
ownership percentage of shares retained by stockholders, (iii) the increased
risk to such stockholders resulting from the increased indebtedness of the
Surviving Corporation and (iv) the potential delisting of, and ensuing loss of
liquidity of, Surviving Corporation Common Stock to be retained by
stockholders. See "RISK FACTORS" and "SPECIAL FACTORS--Recommendation of the
IPC Board; Reasons for the Merger."
Effects of the Merger; Effective Time. Pursuant to the Merger Agreement, at
the Effective Time, AAC will be merged with and into IPC with IPC being the
Surviving Corporation.
The Merger will become effective at the time (the "Effective Time") set forth
in the certificate of merger that will be filed with the Secretary of State of
the State of Delaware in accordance with applicable law. See "SPECIAL FACTORS--
Effective Time of the Merger."
Following the Merger, the total number of outstanding shares will decrease
from approximately 10.7 million shares of IPC Common Stock to approximately 3.8
million shares of Surviving Corporation Common Stock, of which the stockholders
of AAC will own between 2,057,143 and 3,428,572 shares of Surviving Corporation
Common Stock (representing between 50.25% and 86.25% (prior to giving effect to
the IXnet Exchange)), and the existing holders of IPC Common Stock will own
between 380,952 and 1,752,381 shares of Surviving Corporation Common Stock
(representing between 10% and 46%), depending upon the number of shares of
Surviving Corporation Common Stock to be retained by existing holders of IPC
Common Stock. The stockholders of the Surviving Corporation will be subject to
immediate dilution as a result of the exchange of shares of IXnet Common Stock
for shares of Surviving Corporation Common Stock and will be subject to
dilution upon the exercise of options granted under the New Stock Incentive
Plan. See "THE MERGER--Ancillary Agreements--Share Exchange and Termination
Agreement."
Certain Federal Income Tax Considerations. For a summary of the material U.S.
federal income tax consequences of the Merger, see "SPECIAL FACTORS--Federal
Income Tax Consequences."
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EACH IPC STOCKHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR
CONCERNING THE FEDERAL (AND ANY STATE, LOCAL AND FOREIGN) TAX CONSEQUENCES OF
THE MERGER.
Accounting Treatment. It is expected that the Merger will be accounted for as
a leveraged recapitalization. Accordingly, the historical basis of IPC's assets
and liabilities would not be affected by the Merger. See "SPECIAL FACTORS--
Accounting Treatment."
Interest of Certain Persons in the Merger. Certain members of IPC's
management and the IPC Board may be deemed to have interests in the Merger in
addition to their interests, if any, as holders of IPC Common Stock. The IPC
Board was aware of these factors and considered them, among other matters, in
approving the Merger Agreement and the transactions contemplated thereby. See
"THE MERGER--Ancillary Agreements."
Indemnification and Insurance. Pursuant to the Merger Agreement, the
Surviving Corporation has agreed to indemnify all present directors and
officers of the Company for six years after the Effective Time and, subject to
certain limitations, to maintain for six years a directors' and officers'
insurance and indemnification policy containing terms and conditions which are
not less advantageous to the directors and officers than any such policy which
may be in effect prior to the Effective Time.
Employment Agreements, Severance Arrangements and Bonuses. Certain officers
of the Company have severance agreements with the Company that could provide
them with incentive compensation if the Merger is consummated and with certain
termination benefits in the event their employment is terminated after
consummation of, or in connection with, the Merger. See "IPC ANNUAL MEETING--
Other Matters-- Employment Agreements." Certain officers of the Company and
IXnet have entered into amended and restated employment agreements with the
Surviving Corporation that will become effective as of the Effective Time. See
"THE MERGER--Ancillary Agreements--Employment Agreements."
At the Effective Time, all Options will be canceled and the holders thereof
will receive the Option Cash Proceeds (as defined in "The Merger--Merger
Consideration") in lieu of the Merger Consideration. As of the Record Date,
approximately Options were outstanding. The Company estimates that the
aggregate amount of the Option Cash Proceeds, assuming all Options are
canceled, will be approximately $ . Also, at the Effective Time, the
Surviving Corporation expects to establish the New Stock Incentive Plan under
which 554,112 shares of Surviving Corporation Common Stock will be reserved for
issuance upon exercise of options which may be granted to selected employees,
directors and consultants of the Surviving Corporation and its subsidiaries.
The Surviving Corporation has committed to grant options to purchase 207,792
shares at $21.00 per share pursuant to the New Stock Incentive Plan to three
senior employees of the Company or a subsidiary thereof. The Company does not
expect to recognize compensation expense with respect to any such grant. See
"PROPOSAL 3--NEW STOCK INCENTIVE PLAN"
Stock Ownership. As of the Record Date, directors and executive officers of
IPC and certain of their affiliates, other than the Kleinknecht Stockholders,
owned an aggregate of 87,329 shares of IPC Common Stock for which they will
receive the Merger Consideration.
Stockholders Agreement. As of the Record Date the Kleinknecht Stockholders
owned, beneficially and/or of record, an aggregate of 6,906,554 shares of IPC
Common Stock constituting approximately 64% of the outstanding shares of IPC
Common Stock entitled to vote at the Annual Meeting. Pursuant to the
Stockholders Agreement, the Kleinknecht Stockholders, in their capacity as
such, have agreed, among other things, to vote their shares in favor of the
Merger and the adoption of the Merger Agreement.
Management of the Surviving Corporation After the Merger. It is a condition
to the consummation of the Merger that all current directors of IPC, other than
Richard P. Kleinknecht, submit resignations prior to the
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Effective Time. Pursuant to the Merger Agreement, the following individuals
will be appointed to serve as directors after the Effective Time: Peter Woog,
Richard Cashin, Jr., David Y. Howe, Robert J. McInerney, Terry Clontz and David
A. Walsh. After the Merger, it is contemplated that Peter Woog, President of
CSI, will serve as Chairman and Richard P. Kleinknecht will serve as Vice
Chairman of the Board of Directors of the Surviving Corporation ("Surviving
Corporation Board"). Following the Merger, the Investors Agreement will govern
certain rights, duties and obligations of the parties thereto, as the principal
stockholders of the Surviving Corporation, including, without limitation, the
election of directors. See "MANAGEMENT FOLLOWING THE MERGER" and "THE MERGER--
Ancillary Agreements--Investors Agreement."
Certain Differences in Stockholder Rights. If the Certificate Amendment is
adopted at the Annual Meeting, at the Effective Time, the rights of
stockholders of the Surviving Corporation will be determined by the Certificate
Amendment, the Amended and Restated Bylaws of the Surviving Corporation (the
"Surviving Corporation Bylaws") and DGCL. If the Certificate Amendment is not
approved but the Merger Agreement is approved, then the Surviving Corporation
will be governed by IPC's Existing Certificate of Incorporation (including the
Ballot Amendment), the Surviving Corporation's Bylaws and DGCL. If the
Certificate Amendment is adopted, the rights of stockholders of the Surviving
Corporation will differ from the rights of stockholders of IPC with respect to
(a) classification of, and filling vacancies on, the board, and (b) super-
majority voting requirements for certain future amendments to the Certificate
of Incorporation. For a summary of these differences, see "COMPARISON OF
CERTAIN RIGHTS OF STOCKHOLDERS."
Risk Factors. Holders of IPC Common Stock, in connection with their
consideration of the Merger, should carefully consider the following factors
related to the retention of Surviving Corporation Common Stock, which are
described in more detail beginning on page 19. As a result of the Merger (i)
CSH LLC and its affiliates and associates will have control of the Surviving
Corporation, including the ability to elect a majority of its directors, (ii)
there will be a substantial decrease in the liquidity of Surviving Corporation
Common Stock and (iii) the terms of the Merger Financing are expected to
subject the Surviving Corporation to significant operating and financial
restrictions and to increase substantially the leverage of the Surviving
Corporation. Any future grant or sale by the Surviving Corporation of shares of
Surviving Corporation Common Stock or options to purchase Surviving Corporation
Common Stock to management will dilute the equity percentage ownership of
stockholders and may result in a decrease in Surviving Corporation Common Stock
book value per share. The risk of proration, as described in greater detail
herein, may subject holders of Surviving Corporation Common Stock to dividend
treatment for tax purposes with respect to cash received in the Merger. The
effects of proration may also result in stockholders receiving consideration
which is different from the consideration specified in their respective
elections. In addition, IPC's business entails certain risks relating to (i)
concentration of customers in the financial trading community, (ii) competitors
with greater resources, (iii) management of growth, (iv) risks associated with
international expansion, (v) market acceptance, (vi) dependence on key
personnel, (vii) dependence on suppliers, (viii) regulation and (ix) rapid
technological change. See "RISK FACTORS" for a more detailed discussion of the
above mentioned risk factors.
THE MERGER
Merger Consideration. At the Effective Time, subject to certain provisions as
described herein with respect to shares of IPC Common Stock held in treasury,
shares owned by AAC and shares as to which dissenters' rights have been
exercised ("Dissenting Shares") and the effects of proration described herein,
each share of IPC Common Stock (other than Stock Electing Shares (as defined
below)), will be converted into the right to receive in cash following the
Merger an amount equal to $21.00 (the "Cash Election Price"), and each share of
IPC Common Stock with respect to which an election to retain Surviving
Corporation Common Stock has been made and not revoked in accordance with the
Merger Agreement (a "Stock Electing Share") will be converted into the right to
retain one fully paid and nonassessable share of Surviving Corporation Common
Stock (the "Stock Election Price," and together with the Cash Election Price,
the "Merger Consideration").
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The Merger Agreement contemplates that stockholders of IPC must elect to
convert a minimum number of shares of IPC Common Stock into the right to retain
at least 380,952 shares of Surviving Corporation Common Stock (the "Minimum
Stock Election Number") and a maximum number of shares of IPC Common Stock into
the right to retain no more than 1,752,381 shares of Surviving Corporation
Common Stock (the "Maximum Stock Election Number"). Pursuant to the
Stockholders Agreement, Richard P. Kleinknecht has agreed to elect to retain an
aggregate of 380,952 shares of Surviving Corporation Common Stock, which is
equal to the Minimum Stock Election Number. As a result, IPC stockholders who
do not elect to receive Surviving Corporation Common Stock will receive the
full amount in cash at $21 per share and will not be required to retain any
shares of Surviving Corporation Common Stock. However, stockholders who elect
to retain shares of Surviving Corporation Common Stock, including Richard P.
Kleinknecht, may receive a lesser, prorated number of shares of Surviving
Corporation Common Stock than such stockholders elected to retain, plus cash in
lieu of shares of Surviving Corporation Common Stock, if the aggregate number
of shares of Surviving Corporation Common Stock elected to be retained exceeds
the Maximum Stock Election Number. Richard P. Kleinknecht has advised the
Company of his intent to elect to receive cash at $21 per share for his
remaining 3,072,744 shares of IPC Common Stock beneficially owned by him and
his immediate family. In addition, all other signatories to the Stockholders
Agreement, including family members of Richard P. Kleinknecht, Peter J.
Kleinknecht and his family members and Russell G. Kleinknecht have advised the
Company of their intent to elect to receive cash at $21 per share for their
aggregate of 6,525,602 shares of IPC Common Stock and therefore will receive
cash at $21 per share for such shares.
At the Effective Time, each option to purchase shares of IPC Common Stock
that is outstanding immediately prior to the Effective Time (whether vested or
exercisable) (the "Options") will be canceled and, in exchange therefor, the
holders of such Options will receive, with respect to each Option, a cash
payment which, prior to deduction for applicable withholding taxes, is in an
amount equal to the product of (i) the excess, if any, of $21.00 over the per
share exercise price of such Option and (ii) the number of shares of IPC Common
Stock subject to such Option (the "Option Cash Proceeds"). Payment of the
Option Cash Proceeds will be made by the Surviving Corporation on or after the
closing date of the Merger immediately upon receipt of a written agreement from
the Option holder to accept such payment in full settlement of such Option
holder's rights with respect to the Option. If the per share exercise price of
any Option equals or exceeds $21.00, such Option will be canceled without any
payment therefor.
If IPC effects a stock dividend, subdivision, reclassification,
recapitalization, split, combination or exchange of shares prior to the
Effective Time, an appropriate adjustment to the Merger Consideration and
Option Cash Proceeds will be made.
Upon consummation of the Merger, any shares of IPC Common Stock that are
owned by IPC or any subsidiary thereof as treasury stock or that are held
directly or indirectly by IPC (other than in a fiduciary capacity or in
satisfaction of a debt previously contracted) or that are owned by AAC will be
canceled and retired and cease to exist, and no payment will be made with
respect thereto. In addition, Dissenting Shares will not be converted into
Surviving Corporation Common Stock as provided in the Merger Agreement. See "--
Dissenters' Rights." For certain information concerning the historical market
prices of IPC Common Stock, see "STOCK PRICE AND DIVIDEND INFORMATION."
Fractional Shares. No certificates or scrip representing fractional shares
of Surviving Corporation Common Stock will be issued upon the surrender for
exchange of certificates representing shares of IPC Common Stock, and such
fractional share interests will not entitle the owner thereof to vote or to any
rights of a stockholder of the Surviving Corporation following the Merger. Each
holder of shares of IPC Common Stock exchanged pursuant to the Merger who would
otherwise have been entitled to receive a fraction of a share of Surviving
Corporation Common Stock (after taking into account all shares of IPC Common
Stock delivered by such holder) will receive, in lieu thereof, a cash payment
(without interest) representing (i) the applicable fraction of Surviving
Corporation Common Stock multiplied by (ii) $21.00, payable as soon as
practicable on or after the Effective Time. See "THE MERGER--Fractional
Shares."
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Stock Election. Record holders of shares of IPC Common Stock will be entitled
to make an unconditional
Stock Election on or prior to the business day next preceding the date of the
Annual Meeting (the "Election Date") to retain the Stock Election Price (the
"Stock Election") on a form of stock election (the "Form of Stock Election")
being sent to all IPC stockholders at the same time as this Proxy
Statement/Prospectus but under separate cover. If the number of Stock Electing
Shares exceeds the Maximum Stock Election Number, however, then (i) the number
of Stock Electing Shares covered by a holder's Stock Election to be converted
into the right to retain Surviving Corporation Common Stock will be determined
by multiplying the total number of shares of IPC Common Stock covered by such
Stock Election by a stock proration factor (the "Stock Proration Factor")
determined by dividing the Maximum Stock Election Number by the total number of
Stock Electing Shares, and (ii) such number of Stock Electing Shares will be so
converted. All Stock Electing Shares, other than those shares converted into
the right to retain Surviving Corporation Common Stock as described in the
immediately preceding sentence, will be converted into the right to receive the
Cash Election Price as if such shares were not Stock Electing Shares.
The Merger Agreement provides that, if the number of Stock Electing Shares is
less than the Minimum Stock Election Number, then (i) all Stock Electing Shares
will be converted into the right to retain Surviving Corporation Common Stock
in accordance therewith, (ii) additional shares of IPC Common Stock, other than
Stock Electing Shares and Dissenting Shares, will be converted into the right
to retain Surviving Corporation Common Stock, which number of additional shares
shall be determined by multiplying the total number of shares, other than Stock
Electing Shares and Dissenting Shares, by a proration factor (the "Cash
Proration Factor") determined by dividing (x) the difference between the
Minimum Stock Election Number and the number of Stock Electing Shares by (y)
the total number of shares of IPC Common Stock, other than Stock Electing
Shares and Dissenting Shares, and (iii) such additional shares of IPC Common
Stock will be converted into the right to retain Surviving Corporation Common
Stock in accordance with the Merger Agreement (on a consistent pro rata basis
among stockholders who held shares of IPC Common Stock as to which they did not
make a Stock Election). However, as described above, pursuant to the
Stockholders Agreement, Richard P. Kleinknecht has elected to retain 380,952
shares of Surviving Corporation Common Stock, which is equal to the Minimum
Stock Election Number. As a result, all IPC stockholders who do not elect to
retain Surviving Corporation Common Stock will receive the full amount in cash
and will not be required to retain any shares of Surviving Corporation Common
Stock.
Possible Effects of Proration. The following examples illustrate the
potential effects of proration. No fractional shares of Surviving Corporation
Common Stock will be issued; in lieu of fractional shares of Surviving
Corporation Common Stock, stockholders who elect Surviving Corporation Common
Stock will receive cash. See "--Fractional Shares."
A. HOLDER A OWNS 100 SHARES OF IPC COMMON STOCK AND DOES NOT ELECT TO RETAIN
ANY SHARES OF SURVIVING CORPORATION COMMON STOCK.
As described above, because Richard P. Kleinknecht has elected to retain
380,952 shares of Surviving Corporation Common Stock, which is equal to the
Minimum Stock Election Number, Holder A will receive $2,100 in cash (100 shares
at $21 per share).
B. HOLDER B OWNS 100 SHARES OF IPC COMMON STOCK AND ELECTS TO RETAIN ALL SUCH
SHARES OF SURVIVING CORPORATION COMMON STOCK.
1. If all the stockholders, including Holder B, elect to retain an aggregate
number of shares of Surviving Corporation Common Stock equal to or less than
the Maximum Stock Election Number, then Holder B will be able to retain 100
shares of Surviving Corporation Common Stock.
2. If all stockholders, including Holder B, elect to retain more shares of
Surviving Corporation Common Stock than the Maximum Stock Election Number in
the aggregate, then Holder B will not be able to retain all of
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his or her shares and will receive some cash. In the case of maximum proration
(i.e., the number of Stock Electing Shares equals 10,715,119, which is equal to
the number of outstanding shares of IPC Common Stock as of December 17, 1997),
Holder B would be able to retain only 16 shares and would receive $1,764 in
cash (84 shares at $21 per share including cash paid in lieu of fractional
shares).
The Kleinknecht Stockholders (as defined below) who, in the aggregate own
approximately 6.9 million of the outstanding shares of IPC Common Stock, have
informed management that they intend to convert all their shares of IPC Common
Stock into cash, other than Richard P. Kleinknecht who has agreed to elect to
retain 10% of the outstanding shares of Surviving Corporation Common Stock.
Assuming all the Kleinknecht Stockholders who have indicated their intent to
convert their shares of IPC Common Stock into cash so elect, and assuming all
other stockholders elect to retain shares of Surviving Corporation Common
Stock, such stock-electing stockholders will generally be able to retain
approximately 41% of their shares and will receive cash for approximately 59%
of their shares.
C. HOLDER C OWNS 100 SHARES OF IPC COMMON STOCK AND ELECTS TO RETAIN 50
SHARES OF SURVIVING CORPORATION COMMON STOCK AND CONVERT 50 SHARES OF IPC
COMMON STOCK TO CASH.
1. In the event that stockholders (including Holder C) elect to retain
1,752,381 or fewer shares of Surviving Corporation Common Stock in the
aggregate, then Holder C will be able to retain his or her 50 shares of
Surviving Corporation Common Stock and will receive $1,050 in cash (50 shares
at $21 per share).
2. If the stockholders (including Holder C) elect to retain more shares of
Surviving Corporation Common Stock than the Maximum Stock Election Number in
the aggregate, then Holder C will not be able to retain all of his or her 50
shares. For example, if the number of Stock Electing Shares is 10,000,000
shares in the aggregate, then each holder, including Holder C, would be able to
retain only 17.52% of shares of Surviving Corporation Common Stock in order to
reduce the number of retained shares to the Maximum Stock Election Number.
Therefore, Holder C would be able to retain only 8 shares of Surviving
Corporation Common Stock (or 16% of his or her 50 shares) and would receive
$1,932 in cash (92 shares at $21 per share including cash paid in lieu of
fractional shares). If the number of Stock Electing Shares is more than
10,000,000 shares of Surviving Corporation Common Stock in the aggregate,
Holder C would receive fewer shares of Surviving Corporation Common Stock than
in the example above, but would receive a commensurately greater amount of
cash.
3. Assuming all the Kleinknecht Stockholders who have indicated their intent
to convert their shares of IPC Common Stock into cash so elect, and all other
IPC stockholders elect to retain stock, Holder C would be able to retain only
20 shares of Surviving Corporation Common Stock (or approximately 41% of his or
her 50 shares) and would receive $1,680 in cash (80 shares at $21 per share
including cash paid in lieu of fractional shares).
If a stockholder elects to make a Stock Election and receives cash as a
result of the proration procedures described above, or if a stockholder makes a
split election of both retained stock and cash, such stockholder's cash
proceeds received thereby may be treated as a dividend, rather than as a
capital gain, for tax purposes. See "RISK FACTORS." See also "THE MERGER--
Conversion/Retention of Shares; Procedures for Exchange of Certificates" and
"SPECIAL FACTORS--Federal Income Tax Consequences-- Stockholders Receiving
Cash," and "--Stockholders Retaining a Portion of their Stock and Receiving
Cash."
With respect to certain risks related to retaining Surviving Corporation
Common Stock, see "RISK FACTORS." For information on how IPC stockholders will
be able to exchange certificates representing shares of IPC Common Stock for
new certificates representing the shares of Surviving Corporation Common Stock
to be issued to them, see "THE MERGER--Conversion/Retention of Shares;
Procedures for Exchange of Certificates."
AAC's Reasons for the Merger. CSH LLC and AAC believe that consummation of
the Merger and the transactions contemplated thereby are a good long-term
investment.
11
<PAGE>
Conduct of Business Pending the Merger. Pursuant to the Merger Agreement, the
Company has agreed to carry on its business and that of its subsidiaries in the
ordinary and usual course of business consistent with past practices. See "THE
MERGER--Conduct of Business Pending the Merger."
No Solicitation. The Merger Agreement generally provides that neither the
Company nor any of its subsidiaries or affiliates will either directly or
indirectly solicit the submission of inquiries, proposals or offers from any
third party relating to (i) the acquisition or purchase of assets of the
Company and its subsidiaries, (ii) certain tender offers, (iii) certain mergers
or consolidations involving the Company or its subsidiaries or (iv) any other
transaction which would impede, prevent or delay the Merger. See "THE MERGER--
No Solicitation."
Conditions. The obligations of the Company and AAC to consummate the Merger
are subject to various conditions, including receipt of the approval of IPC's
stockholders solicited hereby, the termination or expiration of the relevant
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended (the "HSR Act"), the absence of any injunction or other legal
restraint or prohibition preventing consummation of the Merger and satisfaction
of other customary closing conditions.
Regulatory Approvals. Under the HSR Act and the rules that have been
promulgated thereunder (the "HSR Rules") by the Federal Trade Commission (the
"FTC"), certain merger transactions may not be consummated unless certain
information has been furnished to the Antitrust Division of the Department of
Justice (the "Antitrust Division") and the FTC and certain applicable waiting
periods have expired. The Merger is subject to the requirements of the HSR Act
and the HSR Rules. Pursuant to the requirements of the HSR Act, AAC filed
Notification and Report Form with respect to the Merger with the Antitrust
Division and the FTC on February 12, 1998. IPC filed a Notification and Report
Form with respect to the Merger on February 12, 1998. The waiting period
applicable to the Merger terminated on March 19, 1998.
IXnet possesses certain licenses and/or authorities from the Federal
Communications Commission (the "FCC") and various state Public Utility
Commissions ("PUCs"). Certain of these licenses and authorities require pre-
approval of any transfer or change of control with respect thereto. IXnet has
filed for approval to transfer, merge or for change of control, as appropriate,
under the rules of the FCC, and the state PUCs and anticipates receiving
clearance in all cases prior to the Effective Date. In some state
jurisdictions, pre- or post-transfer notification is required and such filing
will be done on a timely basis. IXnet also has licenses issued by the
appropriate authorities in certain foreign jurisdictions including the United
Kingdom, Japan, Hong Kong, Singapore and Brazil. In these jurisdictions, no
pre-closing approvals are required. However, some of these jurisdictions do
require a pre-closing notification. The Company intends that notifications
required in these jurisdictions will be filed on a timely basis. See "RISK
FACTORS--Risks Associated with Operations--Regulation," and "THE COMPANY--
Regulatory Environment."
Termination. The Merger Agreement may be terminated and the Merger may be
abandoned at any time prior to the Effective Time (notwithstanding any approval
of the Merger Agreement by the stockholders of the Company): (a) by mutual
written consent of the Company and AAC; (b) by either the Company or AAC, if
the Merger has not been consummated by April 30, 1998 by reason of the failure
of any condition precedent, provided that the party seeking to exercise such
right is not then in breach in any material respect of any of its obligations
under the Merger Agreement; (c) by either the Company or AAC, if AAC (in the
case of termination by the Company), or the Company (in the case of termination
by AAC) shall have breached in any material respect any of its obligations or
representations and warranties under the Merger Agreement and the breach has
continued without cure for a period of 15 days after notice of the breach of
any such obligation, representation and warranty of AAC (in the case of
termination by the Company) or the Company (in the case of termination by AAC);
(d) by the Company, in the event that any person has made an acquisition
proposal (the "Acquisition Proposal") that the IPC Board determines in good
faith, after consultation with and advice from its financial advisors, is
reasonably likely to be subject to completion and would, if consummated, result
in a transaction more favorable, from a financial point of view, to the
stockholders of the Company than the Merger Agreement and
12
<PAGE>
the Merger (a "Superior Acquisition Proposal"); (e) by AAC if the IPC Board has
withdrawn or modified or amended, in a manner adverse to AAC, its approval or
recommendation of the Merger Agreement and the Merger or its recommendation
that stockholders of the Company adopt and approve the Merger Agreement and the
Merger, or approved, recommended or endorsed any proposal for a transaction
other than the Merger (including a tender or exchange offer for shares of IPC
Common Stock) or if the Company has failed to call a stockholder meeting to
vote on the Merger; (f) by the Company if prior to the Effective Time the IPC
Board has withdrawn or modified or amended, in a manner adverse to AAC, its
approval or recommendation of the Merger Agreement and the Merger or its
recommendation that stockholders of the Company adopt and approve the Merger
Agreement and the Merger or the IPC Board has approved or endorsed any proposal
recommended for a transaction other than the Merger, provided that the Company
is in compliance with its obligations described under "THE MERGER--No
Solicitation;" and (g) by either the Company or AAC if, at a duly held
stockholders meeting of the Company or any adjournment thereof at which the
Merger Agreement and the Merger is voted upon, the adoption and approval by a
majority vote of the Company's stockholders has not been obtained.
The party desiring to terminate the Merger Agreement will give written notice
of such termination to the other party in accordance with the terms thereof. If
the Merger Agreement is terminated, such Agreement will become void and of no
effect with no liability on the part of any party thereto, except as provided
therein.
Termination Fee. In recognition of the efforts and expenses of and other
opportunities foregone by AAC while structuring the Merger, the Merger
Agreement provides that IPC shall, in certain circumstances, pay to AAC a
termination fee of $3.37 million (the "Termination Fee"). The Termination Fee
is payable upon the occurrence of any one of the following: (i) the Merger
Agreement is terminated by the Company or AAC, as the case may be, pursuant to
(d) above under "THE MERGER--Termination" or the IPC Board has approved,
recommended, or endorsed a Superior Acquisition Proposal; or (ii) a Third Party
has made an Acquisition Proposal, the Merger Agreement is terminated because
the IPC Board has withdrawn, modified, or amended, in a manner adverse to AAC,
its approval and recommendation of the Merger Agreement and the Merger or its
recommendation that the stockholders of the Company adopt and approve the
Merger Agreement and the Merger or the Company has failed to call a meeting of
stockholders to vote on the Merger, and the Company consummates an Acquisition
Transaction within 12 months following termination of the Merger Agreement.
In addition, the Merger Agreement provides, subject to various exceptions and
limitations, for the reimbursement by IPC of certain expenses of AAC, not to
exceed $2.2 million in the aggregate, consisting of all reasonable out-of-
pocket costs, fees and expenses, including, without limitation, the reasonable
fees and disbursements of banks, investment banks, accountants or legal
counsel. These costs, fees and expenses are payable, upon termination of the
Merger Agreement as a result of one of the events described in the previous
paragraph, within 10 business days of receipt by the Company of reasonably
satisfactory documentation detailing such costs, fees and expenses. See "THE
MERGER--Termination" and "--Termination Fee."
Dissenters' Rights. Under Section 262 of DGCL, holders of IPC Common Stock
who: (i) hold shares of IPC Common Stock on the date of making a demand for
appraisal; (ii) continuously hold such shares through the Effective Time; (iii)
deliver a properly executed written demand for appraisal to IPC prior to the
Annual Meeting; (iv) do not vote in favor of the Merger or consent thereto in
writing; (v) file any necessary petition in the Delaware Court of Chancery (the
"Delaware Court") within 120 days after the Effective Time; and (vi) otherwise
satisfy all procedural requirements, are entitled, if the Merger is
consummated, to receive payment of the fair value of their shares of IPC Common
Stock as appraised by the Delaware Court; provided, however, that if any such
holder of Dissenting Shares shall have failed to establish an entitlement to
appraisal rights as provided in Section 262 of DGCL, if any such holder of
Dissenting Shares shall have effectively withdrawn a demand for appraisal of
such shares or lost the right to appraisal and payment for his shares under
Section 262 of the DGCL or if neither any holder of Dissenting Shares nor the
Surviving Corporation shall have filed a petition demanding a determination of
the value of all Dissenting Shares within the time provided in Section 262 of
DGCL, such
13
<PAGE>
holder will forfeit the right to appraisal of such shares and each such share
will be treated as if it had been a share with respect to which no election to
receive the Stock Election Stock Price has been made and had been converted, as
of the Effective Time, into a right to receive the Cash Election Price as the
Merger Consideration, without interest thereon, from the Surviving Corporation.
See "THE ANNUAL MEETING--Dissenters' Rights" and "THE MERGER--Dissenters'
Rights."
Nasdaq Listing. IPC Common Stock is currently included for quotation on
Nasdaq under the symbol "IPCI." However, see "RISK FACTORS--Risks Associated
with the Merger--Potential Delisting and Loss of Liquidity."
MERGER FINANCING
CSH LLC, directly or indirectly, expects to make an equity contribution of
between $43.2 and $72 million (the "Equity Investment") which amounts will be
used to fund partially the payment of the cash consideration and expenses
incurred in the Merger. The balance of funds required to consummate the
transactions contemplated by the Merger Agreement and fees and expenses
incurred in connection with this Merger will be provided through the issuance
of up to $180 million of the Company's unsecured senior discount notes assisted
by Morgan Stanley & Co. Incorporated ("MSCI") and Goldman, Sachs & Co.
("Goldman") ("Notes"). At the Effective Time, the Company expects to enter into
a $75 million senior secured five-year revolving credit facility (the
"Revolving Credit Facility") with a group of banks led by Morgan Stanley Senior
Funding, Inc. ("MSSF"). The Merger, the Notes, the Revolving Credit Facility,
the Equity Investment and the use of proceeds therefrom and the transactions
contemplated by the Ancillary Agreements are collectively referred to as the
"Merger Transactions." It is expected that the Notes will feature a three-year
deferred interest component which will enhance the cash flow from the Surviving
Corporation's operations during such three year period and which may be used to
satisfy the greater capital requirements of IXnet. On December 17, 1997, CVC,
which together with certain officers and employees thereof and others own a
majority of the membership interests in CSH LLC, and AAC received an executed
commitment from MSSF to provide up to $75 million under the Revolving Credit
Facility. On December 17, 1997, MSCI delivered to CVC and AAC a commitment
letter regarding $157 million of Notes, pursuant to which it agreed to use its
best efforts to complete a public offering or a private placement of the Notes,
or, in the event such public offering or private placement is not completed
within the offering period described therein, to purchase the Notes. The
commitments are subject to customary conditions, including the negotiation,
execution and delivery of definitive documentation with respect to the
commitments. Due to anticipated favorable market conditions, the Company is
expected to increase the offering of Notes to $180 million. On January 12,
1998, CVC and AAC received an amended and restated commitment letter, which
added Goldman as a co-manager from MSCI and Goldman and which superseded the
commitment letter from MSCI referred to in the second preceding sentence. See
"THE MERGER--Merger Financing."
ANCILLARY AGREEMENTS
In connection with the execution of the Merger Agreement, certain parties to
the Merger Agreement or related thereto have entered into certain agreements
with respect to the transactions contemplated by the Merger Agreement. These
agreements, other than the Stockholders Agreement, which was effective upon
execution, become effective only upon the consummation of the transactions
contemplated by the Merger Agreement and such agreements, including the
Stockholders Agreement, will automatically terminate and be of no further force
or effect upon termination of the Merger Agreement. For a further discussion,
see "THE MERGER--Ancillary Agreements."
Investors Agreement. The Investors Agreement, by and among IPC, CSH LLC,
Richard P. Kleinknecht, David A. Walsh ("Walsh"), Anthony Servidio ("Servidio")
(Richard P. Kleinknecht, Walsh and Servidio collectively, the "Management
Stockholders"), and certain other parties dated as of December 18, 1997, as
amended and restated (the "Investors Agreement"), is effective only upon the
consummation of the Merger
14
<PAGE>
Agreement. The Investors Agreement provides generally that each party thereto
will vote in favor of the nominees for director of each other party, subject to
such party's ownership percentage of Surviving Corporation Common Stock. The
Investors Agreement also provides for restrictions on, and rights in connection
with, sales and transfer of Surviving Corporation Common Stock by any CSH
stockholder or Management Stockholder and certain of their respective permitted
transferees.
Stockholders Agreement. Pursuant to the Stockholders Agreement, the
Kleinknecht Stockholders have agreed to vote their shares of IPC Common Stock
(i) in favor of the Merger Agreement and the Merger (ii) against any action or
agreement that would result in a breach of any covenant, representation or
warranty or any other obligation or agreement of IPC under the Merger Agreement
or the Kleinknecht Stockholders under the Stockholders Agreement, (iii) in
favor of the New Stock Incentive Plan and (iv) against a number of actions
which could impede, interfere with or delay the Merger or the transactions
contemplated by the Merger Agreement or the Stockholders Agreement. Each
Kleinknecht Stockholder has also agreed, except as otherwise permitted by
certain other ancillary agreements, for a period of 3 years after the Effective
Time not to directly or indirectly (i) engage in any activities competitive in
any material respect with the business of the Surviving Corporation and its
subsidiaries and affiliates or (ii) become a partner, stockholder or involved
in any capacity in an entity which engages in activities competitive with the
business of the Surviving Corporation and its subsidiaries.
In addition, pursuant to the Stockholders Agreement, Richard P. Kleinknecht
has agreed to elect to, subject to proration, retain an aggregate of 380,952
shares of Surviving Corporation Common Stock.
Share Exchange and Termination Agreement. Pursuant to the Share Exchange and
Termination Agreement, dated as of December 18, 1997 (the "Share Exchange and
Termination Agreement"), by and among IPC, IXnet, Walsh and Servidio, Walsh has
agreed to exchange 336 shares of IXnet Common Stock representing 12% of the
outstanding shares of IXnet Common Stock for 152,381 shares of Surviving
Corporation Common Stock and Servidio has agreed to exchange 224 shares of
IXnet Common Stock representing 8% of the outstanding shares of IXnet Common
Stock for 101,587 shares of Surviving Corporation Common Stock immediately
following the Effective Time. Ten percent of Walsh's and Servidio's Surviving
Corporation Common Stock will be issued only upon delivery, by June 18, 1998,
of certain releases of claims by three former IXnet stockholders. The shares of
Surviving Corporation Common Stock so received will be subject to usual and
customary restrictions on transfer.
Each of Walsh and Servidio has agreed that, except as permitted under the
Merger Agreement, for a period of two and one-half years after the Effective
Time, he will not, directly or indirectly, in any form or manner on a worldwide
basis (i) engage in any activities competitive in any material respect with the
business of the Surviving Corporation and its subsidiaries and affiliates or
(ii) become a partner, shareholder or involved in any other capacity in an
entity which engages in activities competitive with the business of the
Surviving Corporation and its subsidiaries; provided that each of Walsh and
Servidio may own, directly or indirectly, solely as a passive investment,
securities of an entity so long as he does not control the entity and does not,
directly or indirectly, own 5% or more of any voting class of securities of the
entity.
Other Agreements. In addition to the agreements referred to above, various
parties entered into (i) the Amended and Restated Corporate Opportunity
Agreement, (ii) the Amended and Restated Labor Pool Agreements, (iii) Amended
and Restated Employment Agreements between the Company and each of Richard P.
Kleinknecht and Peter J. Kleinknecht and between IXnet and each of Walsh and
Servidio, (iv) the Starr Termination Agreement and (v) the AAC Stockholders
Agreement. See "THE MERGER--Ancillary Agreements" for a description of the
relevant terms of such agreements.
CONVERSION OF AAC STOCK
As a result of the Merger, in connection with the Equity Investment, AAC's
stockholders will receive shares of Surviving Corporation Common Stock
representing not less than 50.25% nor more than 86.25% (prior to giving effect
to the IXnet Exchange) of the number of shares of Surviving Corporation Common
Stock to be outstanding upon the Merger.
15
<PAGE>
STOCK PRICE AND DIVIDEND INFORMATION
The shares of IPC Common Stock are included for quotation on Nasdaq (symbol:
"IPCI"). The following table sets forth the high and low sale prices of shares
of IPC Common Stock as reported on Nasdaq. IPC Common Stock began trading on
September 27, 1994.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------------
1998 1997 1996 1995
------------ ----------- ------------ -----------
HIGH LOW HIGH LOW HIGH LOW HIGH LOW
---- ---- ---- --- ---- ---- ---- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter........... $24 3/8 $15 5/8 $22 $14 $19 1/4 $13 1/2 $15 1/4 $11
Second Quarter.......... 20 7/8 19 3/4 16 3/4 8 7/8 26 1/4 16 1/2 14 11 1/4
Third Quarter........... NA NA 19 1/8 9 25 17 1/16 15 1/2 11 1/2
Fourth Quarter.......... NA NA 21 3/4 15 3/4 21 13 1/2 18 3/4 12
</TABLE>
As of the Record Date, there were (i) shares of IPC Common Stock
outstanding, (ii) no shares of preferred stock outstanding and (iii)
holders of record of IPC's Common Stock (although the Company estimates that
approximately 1,600 to 1,800 additional beneficial owners hold IPC Common
Stock in street name through various nominees). To date, the Company has not
paid any cash dividends to its stockholders. Any future payments of cash
dividends will depend upon the Company's earnings and financial condition,
capital requirements, and other relevant factors. The Company does not intend
to pay cash dividends in the foreseeable future but intends to retain its
earnings for use in its business.
On December 18, 1997, the last trading day before public announcement of the
execution of the Merger Agreement, the closing price of IPC Common Stock as
reported on Nasdaq was $18 3/8 per share.
On , 1998, the closing price of IPC Common Stock as reported on Nasdaq
was $ per share.
Stockholders should obtain current market price quotations for IPC Common
Stock in connection with voting their shares.
16
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER INFORMATION
The selected historical consolidated financial information set forth below
for the Company as of September 30, 1997 and 1996 and for each of the three
years in the period ended September 30, 1997 is derived from the audited
consolidated financial statements included elsewhere in this prospectus. The
selected historical consolidated financial information set forth below for the
Company as of September 30, 1995 is derived from the consolidated financial
statements not included elsewhere herein. The selected historical combined
financial information set forth below for the Company as of September 30, 1994
and 1993 and for each of the two years in the period ended September 30, 1994
is derived from the combined financial statements not included elsewhere
herein.
The unaudited consolidated pro forma financial information of the Company
set forth below is based on historical consolidated financial statements of
the Company as adjusted to give effect to the Merger Transactions. The pro
forma statements of operations for the three months ended December 31, 1997
and for the year ended September 30, 1997 give effect to the Merger
Transactions as if they had occurred as of October 1, 1996. The pro forma
balance sheets give effect to the Merger Transactions, as if they had occurred
at September 30, 1997 and December 31, 1997, respectively. This table should
be read in conjunction with, and is qualified in its entirety by, the
historical financial statements, including the notes thereto, of IPC included
elsewhere in this prospectus. The unaudited pro forma financial information is
not indicative of the results that actually would have occurred had the Merger
been consummated on the dates indicated, or which may be attained in the
future.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
------------------------------------------------------------- -------------------------
PRO PRO
ACTUAL FORMA ACTUAL FORMA
--------------------------------------------------- -------- ---------------- -------
1993 1994 1995 1996 1997 1997(1) 1996 1997 1997(1)
-------- -------- -------- -------- -------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................ $112,714 $163,671 $206,254 $249,508 $270,323 $270,323 $59,411 $67,052 $67,052
Gross profit............ 31,152 48,043 63,173 76,818 80,214 80,214 17,574 26,627 26,627
Selling, general and
administrative expense. 19,542 23,727 31,038 45,143 60,697 61,459 13,847 16,557 16,748
Research and development
expense................ 7,703 7,654 10,108 11,467 9,976 9,976 2,372 2,404 2,404
Income (loss) from
operations............. 3,907 16,662 22,027 20,208 9,541 8,779 1,355 7,666 7,475
Interest income
(expense), net......... (1,404) (1,568) 233 (678) (1,844) (23,234) (463) (440) (6,160)
Net income (loss)....... $ 1,753 $ 16,549 (2) $ 13,267 $ 12,129 $ 3,834 $ (8,883) $ 566 $ 3,594 $ 284
Basic earnings per
share.................. -- -- $ 1.26 $ 1.15 $ 0.36 $ (2.19) $ 0.05 $ 0.34 $ 0.07
Basic weighted average
shares outstanding..... -- -- 10,506 10,590 10,664 4,063 10,647 10,711 4,063
Diluted earnings per
share.................. $ -- $ -- $ 1.26 $ 1.14 $ 0.36 $ (2.19) $ 0.05 $ 0.33 $ 0.07
Diluted weighted average
shares outstanding..... -- -- 10,506 10,615 10,704 4,063 10,758 10,865 4,063
Pro forma earnings per
share.................. -- $ 1.11 (3) -- -- -- -- -- -- --
Pro forma weighted
average shares
outstanding............ -- 8,535 (3) -- -- -- -- -- -- --
Supplemental pro forma
earnings per share..... -- $ 0.88 (4) -- -- -- -- -- -- --
STATEMENT OF CASH FLOWS
DATA:
Net cash provided by
(used in) operating
activities............. $ (5,160) $ 7,253 $ 7,343 $(14,737) $ 24,146 $ 11,429 $ 8,359 $ 8,845 $ 6,333
Net cash (used in)
investing activities... (1,494) (1,173) (8,506) (12,737) (14,474) (14,474) (2,989) (2,587) (2,587)
Net cash provided by
(used in) financing
activity............... 7,328 (4,795) 14,337 13,785 (10,043) (5,425) (6,391) (3,771) 3,429
OTHER DATA:
Depreciation and
amortization........... $ 4,214 $ 4,288 $ 3,840 $ 6,388 $ 8,743 $ 9,505 $ 1,707 $ 2,787 $ 2,978
EBITDA(5)(6)............ 8,121 20,950 25,867 26,596 18,284 18,284 3,062 10,453 10,453
EBITDA to interest
expense................ 5.8x 13.1x 61.6x 24.4x 9.0x 0.8x(7) 6.1x 19.3x 1.6x
Ratio of earnings to
fixed charges (8)...... 2.7x 8.4x 23.9x 12.2x 3.9x 0.4x 2.3x 11.2x 1.2x
</TABLE>
(footnotes on following page)
17
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, 1997
----------------------------------------------------- ------------------
PRO FORMA PRO
1993 1994 1995 1996 1997 1997(9) ACTUAL FORMA (9)
------- -------- -------- -------- -------- --------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 1,574 $ 2,616 $ 15,786 $ 2,306 $ 1,465 $ 6,083 $ 3,655 $ 11,653
Working capital......... 16,696 27,661 46,851 50,807 46,933 58,500 49,811 60,760
Total assets............ 70,120 110,702 128,036 141,877 158,362 180,603 169,788 191,515
Long-term debt, net of
current portion........ 12,916 10,663 -- 3,429 12,469 192,469 13,209 193,209
Stockholders' equity
(deficit).............. 7,328 21,122 58,504 71,715 76,910 (71,900) 81,314 (68,489)
Book value per share.... 1.00 2,91 5.56 6.75 7.19 (17.70) 7.57 (16.86)
Shares issued and
outstanding............ 7,331 7,256 10,522 10,618 10,690 4,063 10,738 4,063
</TABLE>
- --------
(1) The pro forma statement of operations information reflects the Merger
Transactions as if the Merger Transactions occurred on October 1, 1996,
assuming an interest rate of 10% on the Notes. A change of 1/2% in the
interest rate would change interest expense by $0.95 million for the year
ended September 30, 1997 and $0.28 million for the three months ending
December 31, 1997. See the Company's unaudited pro forma financial
information included elsewhere in this Prospectus.
(2) Net income includes the cumulative effect of the Company's termination of
its S corporation status which resulted in a tax benefit of $3,295.
(3) Pro forma earnings per share was computed by dividing pro forma net income
(income before provision for income taxes less pro forma provision for
income taxes) by pro forma weighted average number of shares outstanding.
The pro forma provision for income taxes assumes that IPC was subject to
corporate federal income taxes for the year and excludes the tax benefit
associated with the termination of the Company's S corporation status (See
(1) above). Pro forma weighted average number of shares outstanding is the
historical weighted average number of shares outstanding during the past
year adjusted to give effect to the number of shares whose proceeds were
necessary to pay the remaining S corporation distribution to the
stockholders of IPC prior to IPC's initial public offering of stock.
(4) Effective October 1, 1994, and in connection with the Company's initial
public offering, IPC converted from an S corporation to a C corporation.
Supplemental pro forma earnings per share for 1994 has been calculated
using the Company's reported income before taxes and giving effect for
both the Company's fiscal 1995 effective tax rate and weighted average
shares outstanding.
(5) EBITDA consists of income from operations plus depreciation and
amortization. EBITDA is provided because it is a measure commonly used in
the telecommunications industry. It is presented to enhance an
understanding of the Company's operating results and is not intended to
represent cash flow or results of operations in accordance with generally
accepted accounting principles ("GAAP") for the periods indicated. EBITDA
is not calculated under US GAAP and is not necessarily comparable to
similarly titled measures of other companies. See the Company's
consolidated financial statements and notes thereto included elsewhere in
this Prospectus. For certain state income tax purposes (including New York
State, where a substantial portion of the Company's revenues and net
income have been generated) the Company is not allowed to deduct the
losses of IXnet which have been material to the income of its other
operations. As a result, the Company's EBITDA will not necessarily all be
available to pay its interest expense.
(6) The Company's EBITDA has been reduced by $0.6 million, $3.7 million and
$8.3 million during the three year periods ended September 30, 1997,
respectively, related to operation of IXnet, a subsidiary of the Company
which was founded in 1993 and commenced operations in fiscal 1995. Such
amounts for the three months ended December 31, 1996 and 1997 were $1.5
million and $2.5 million, respectively.
(7) On a pro forma basis, EBITDA for the year ended September 30, 1997 was
insufficient to cover interest expense. The difference between the EBITDA
and interest expense is $5.4 million. Pro forma interest expense for 1997
includes $21.4 million of interest expense on the Notes. Cash interest on
the Notes will not be payable until 2001.
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RISK FACTORS
In addition to the other information set forth herein, stockholders should
carefully consider the following information in evaluating the Company and its
business before voting on the Merger and making a Stock Election.
RISKS ASSOCIATED WITH OPERATIONS
Concentration of Customers in the Financial Trading Community. Almost all of
the Company's revenues historically have been derived from, and its success is
dependent upon, sales to customers in the financial services industry. If the
financial services industry suffers an economic downturn, it is likely that
the Surviving Corporation would experience a decline in revenues which could
have a material adverse effect on the Surviving Corporation's financial
condition and results of operations.
Competition. The markets in which the Company operates are comprised of a
substantial number of global and regional competitors, including national and
international carriers and global alliances. In addition, the continuing trend
toward business combinations and strategic alliances in the telecommunications
industry may create significant new competitors to the Surviving Corporation.
Many of the Company's current and potential competitors have greater
financial, engineering, manufacturing and other resources than the Company.
For example, the Company's principal competitor in the turret system business
is British Telecom ("B.T."). B.T. has resources that are significantly larger
than those available to the Company. If B.T. decided to devote substantial
focus to the turret system business, it would have a material adverse effect
on the Company. Competing with such companies will require continued
investment by the Surviving Corporation in engineering, research and
development, marketing and customer service and support. There can be no
assurance that the Surviving Corporation will have sufficient resources to
make such investments. In addition, in many non-U.S. markets, the Company
faces competition from dominant local providers that have long standing
relationships with the Company's target customers. For example, in Japan,
Hitachi Ltd. has the leading market share of installed turret systems. Due to
Hitachi's relationships with the Company's target customers, it may be
difficult for the Company to increase significantly its penetration of the
Japanese market. Similar situations exist in many other non-U.S. markets.
Further, a number of companies compete for parts of the Company's I.T.S.
business. See "THE COMPANY--Competition."
Management of Growth; International Growth. The Company has experienced a
period of rapid growth that has placed significant demands on the Company's
management, operational, financial and accounting resources. The Company
intends to expand the operations of IXnet and expects to dedicate a
substantial portion of its financial and management resources to support such
expansion. The Surviving Corporation's future success will depend in part on
whether it can improve its operational, financial and accounting systems and
expand, train and manage its employee base. Whether the Surviving Corporation
can increase revenues is in part dependent upon hiring and training a
sufficient number of suitably skilled employees. A failure by the Surviving
Corporation to manage growth effectively could have a material adverse effect
on the Surviving Corporation's financial condition and results of operations.
A key component of the Company's strategy is its planned expansion into
international markets. There are certain risks inherent to doing business on
an international level, such as unexpected changes in regulatory requirements,
tariffs, customs, duties and other trade barriers, difficulties in staffing
and managing foreign operations, nationalization, war, insurrection and other
political risks, import restrictions or prohibitions, delays from customs
brokers or government agencies and potentially adverse tax consequences, which
could adversely impact the success of the Surviving Corporation's
international operations. In many countries, the Surviving Corporation may
need to enter into a joint venture or other strategic relationship with one or
more third parties in order to conduct successfully its operations. There can
be no assurance that such factors will not have an adverse effect on the
Surviving Corporation's future international operations. In addition, the U.S.
dollar value of revenues derived from products and services sold outside the
United States varies with currency exchange rate fluctuations, and the
Surviving Corporation may be exposed to exchange losses based upon such
fluctuations,
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which losses could have a material adverse effect on the Surviving
Corporation's financial results. Moreover, there can be no assurance that laws
or administrative practices relating to taxation, foreign exchange or other
matters of countries within which the Company operates will not change. Any
such change could have a material adverse effect on the Surviving
Corporation's business, financial condition and results of operations.
Market Acceptance. Although IPC has strong relationships with its financial
institution customers from the turret business, there can be no assurance that
the new products and services being offered through IXnet will be accepted by
the financial trading community. IXnet had $17.9 million of revenues in the
fiscal year ending September 30, 1997 and $7.4 million of revenues in the
three months ended December 31, 1997. IXnet had 131 and 150 customers as of
September 30, 1997 and December 31, 1997, respectively. The individuals within
the financial institutions who would decide whether to purchase the products
and services of IXnet are not necessarily the same individuals who decide to
purchase the Company's turrets. In addition, many of the traditional providers
of telecommunications services to financial institutions have long standing
relationships with these customers' senior management. Accordingly, there may
be strong institutional reluctance for a financial institution to purchase the
products and services offered through IXnet.
Dependence on Key Personnel. The Company's success depends to a significant
degree upon the continued contributions of its senior management team and
technical, marketing and sales personnel. The Company's employees may
voluntarily terminate their employment with the Company at any time.
Competition for qualified employees and personnel is intense, and there is a
limited number of persons with relevant knowledge and experience. The loss of
the services of key personnel, or the inability to attract additional
qualified personnel, could have a material adverse effect on the Surviving
Corporation's results and operations, product development efforts and ability
to expand its businesses. There can be no assurance that the Surviving
Corporation will be successful in attracting and retaining such executives and
personnel. In addition, the labor market for Software engineers has been
extremely competitive recently and the Surviving Corporation may lose key
employees or be forced to increase their compensation as a result.
Dependence Upon Suppliers. The IXnet Network (as herein defined) is
dependent on third party suppliers for its leased lines connections, or
bandwidth. These network suppliers are or may become competitors of the
Company or the Surviving Corporation.
The Company currently relies on third party single source suppliers of
certain hardware and software components used by the Company in providing its
networking services, including switches. The Company has from time to time
experienced delays in the receipt of certain components. The Company's
remedies against suppliers who fail to deliver products on a timely basis are
limited by contractual liability limitations contained in supply agreements
and purchase orders and, more importantly, by practical considerations. A
failure by a supplier to deliver quality products on a timely basis, or the
inability to develop alternative sources if and as required, could result in
delays which could materially adversely affect the Surviving Corporation.
In addition, the Company purchases certain custom product components for its
manufacturing operation primarily from single source suppliers. The disruption
of current flow of supplies could impair the Surviving Corporation's ability
to manufacture products or cause the Surviving Corporation to incur costs,
including payment of non-recurring engineering expenses to prospective
vendors, associated with the development of alternative sources. Any such
disruption could result in delays in product shipments or cause the Company to
incur unanticipated expenses, which could have a material adverse effect on
the Surviving Corporation's financial condition and results of operations. See
"THE COMPANY--Manufacturing."
Rapid Technological Changes. The markets for turret systems, I.T.S. and
networking services, are characterized by rapid technological change. The
Company believes that its ability to compete successfully is also dependent
upon the continued compatibility and interoperability issues raised by
technological changes. While the Company believes that for the foreseeable
future these changes will neither materially affect the continued use of
telecommunications networks nor materially hinder the Surviving Corporation's
ability to acquire necessary technologies, the effect of technological changes
on the businesses of the Surviving
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Corporation cannot be predicted. Thus, there can be no assurance that
technological developments will not have a material adverse effect on the
Surviving Corporation.
Need to Develop New Products and Services; Capital Requirements. The
Surviving Corporation's success will depend in part upon its ability to
develop new products and provide new services that meet customers' changing
requirements. The markets served by the Company are characterized by changes
in customer needs and frequent new service and product introductions. In
addition, the Company's substantial domestic market share for turret systems
(its principal product) will require it to develop new products and services
in order to achieve significant growth or to identify additional (non-
financial) markets for such products. In order to develop and roll out new
products and services, the Surviving Corporation expects to make significant
expenditures for IXnet Network development, research and development for new
products and services and for selling, general and administrative expenses in
advance of anticipated related revenues. In addition, new products and
services will consume a substantial amount of senior management time. The
Surviving Corporation's future success will depend, in part, on its ability to
use effectively leading technologies, to continue to develop its technical
expertise, to enhance its current services, to develop new services that meet
changing customer needs, and to influence and respond to emerging industry
standards on a timely and cost effective basis. The failure to develop and
manufacture or deploy new or enhanced products and services that meet or
anticipate such changes on a timely and cost-competitive basis could have a
material adverse effect on the Surviving Corporation's financial condition and
results of operations.
Dependence on Patents and Licenses. The Company owns certain patents and has
applied for other patents relating to its technology and proposed turret
products. No assurance can be given, however, whether pending patent
applications will be granted or whether any patents granted will be
enforceable or will provide the Surviving Corporation with meaningful
protection from competitors. The Surviving Corporation also may desire or be
required to renew or to obtain licenses from others in order further to
develop, produce and market commercially viable products effectively. There
can be no assurance that such licenses will be renewable or obtainable on
commercially reasonable terms, if at all, that the patents underlying such
licenses will be valid and enforceable or that the proprietary nature of the
unpatented technology underlying such licenses will remain proprietary. See
"The Company--Intellectual Property."
Dependence on Billing, Customer Service and Information
Systems. Sophisticated information and processing systems are vital to the
Company's growth and its ability to monitor costs, provision customer orders,
bill customers and achieve operating efficiencies. As the Company commences
providing dial tone and switched local access services, the need for enhanced
billing and information systems will increase significantly. The Company
currently uses five different management information systems and is acquiring
a new system to replace its existing systems. The inability of the Surviving
Corporation to adequately identify all of its information and processing
needs, or to upgrade systems as necessary, could have a material adverse
effect on the ability of the Surviving Corporation to reach its objectives, on
its financial condition and results of operations.
The Company is in the process of completing conversion to an enterprise-wide
management information system that is Year 2000 compliant. However, if the
systems of the Company's suppliers or customers are not Year 2000 compliant,
it could have a material adverse effect on the Company. Certain of the
Company's older generation products are not and will not be Year 2000
compliant. The Company has established a compliance program to notify
customers of such products and to offer products which will be Year 2000
compliant. See "THE COMPANY--Year 2000 Compliance."
Reliance on Unpatented Proprietary Know-how and Trade Secrets. The Company
also relies on unpatented proprietary know-how and trade secrets, and employs
various methods, including confidentiality agreements with employees and
consultants, to protect its trade secrets and know-how. However, such methods
may not afford complete protection and there can be no assurance that others
will not independently develop such trade secrets and know-how or obtain
access thereto. Furthermore, no assurance can be given that claims or
litigation asserting infringement of intellectual property rights will not be
initiated in the future seeking damages or an injunction against the sale of
the Surviving Corporation's products or that the Surviving Corporation would
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prevail in any such litigation. Any such litigation could be protracted and,
regardless of its outcome, costly and could have a material adverse effect on
the Surviving Corporation's business and results of operations. See "The
Company--Intellectual Property."
Potential Fluctuations in Quarterly Results. The Company's revenues and
operating results from turret systems and I.T.S. could fluctuate significantly
from period to period. Given the relatively large sales price of the Company's
systems, a limited number of system installations may account for a
substantial portion of revenues in any particular period. Due to the
substantial sales price of the Company's large turret and I.T.S. installations
and the Company's recognition of revenue only upon completion of
installations, revenue and operating results could fluctuate significantly
from quarter to quarter. In addition, revenues and gross profit margins may
fluctuate due to the mix of products sold and the size of systems sold. The
Company generally realizes a higher gross margin on sales of turret systems
than on sales of I.T.S. services and equipment. Furthermore, the Company
expects revenue from I.T.S. for its current fiscal year to decrease from prior
year levels, but does not expect this decrease to have a material effect on
its operating income. As a result of these and other factors, the Surviving
Corporation could experience significant fluctuations in revenues and
operating results in future periods.
Catastrophic Loss of Manufacturing Facility. The Company's sole
manufacturing facility is in Westbrook, Connecticut. While the Company
maintains insurance covering such facility, including business interruption
insurance, a catastrophic loss of all or a portion of the facility could have
a material adverse effect on the Company.
Possible Volatility of Stock Price. The market price of Surviving
Corporation Common Stock could be subject to significant fluctuations in
response to variations in quarterly operating results, trading volume and
other factors, including announcements of technical innovations or new
products by the Surviving Corporation or its competitors, the timing and
success or lack thereof, of its anticipated product releases, changes in law
and regulations and general market and economic conditions. The market price
of the shares of Surviving Corporation Common Stock, like that of the common
stock of many other telecommunications and technology companies, is likely to
be highly volatile. See "--Risks Associated with the Merger--Potential
Delisting--Loss of Liquidity; Registration Under the Exchange Act."
Payment of Dividends Uncertain. The Surviving Corporation does not intend to
pay cash dividends in the foreseeable future but intends to retain its
earnings for use in its business. See "Stock Price and Dividend Information."
Regulation. Telecommunications services provided by IXnet are subject to
regulation by international entities as well as by United States federal,
state and local government agencies. The primary regulatory policy of the
United States is to promote effective competition in the United States
telecommunications service market, particularly the market for international
services. It is the view of the United States government that competitive
international markets will provide incentives for further market entry both in
the United States and foreign markets. Competitive markets will also stimulate
technological innovation by United States suppliers of information technology.
There can be no assurance that future, legislative, regulatory and judicial
changes in the United States will not have an adverse impact on IXnet's
business.
For domestic services in the United States, the FCC and PUCs have direct
jurisdiction, granted by statute, over all aspects of IXnet service. With
international traffic, however, the United States' regulatory structure is
limited to the origination or termination of service 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 of a domestic statute, such as the Telecommunications Act of 1996 (the
"Telecommunications Act") can have in developing a new structure for
international telecommunications.
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In the United States, the provision of IXnet's services is subject to the
provisions of the Communications Act of 1934, as amended by the
Telecommunications Reform Act of 1996 and the FCC regulations 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, provision of
services and the terms and conditions under which IXnet's services are
provided. The interpretation and enforcement of laws and regulations by these
regulatory authorities vary and could limit IXnet's ability to provide certain
telecommunications services. Thus, there can be no assurance that changes in
current or future laws or regulations or future judicial intervention in the
United States or in any individual state would not have a material adverse
effect on the Company or that FCC or other regulatory investigation or
intervention would not have a material adverse effect on IXnet.
In addition IXnet is required by federal and state law and regulations to
file tariffs listing the rates, terms and conditions of the services it
provides. Any failure to maintain proper federal and state tariffs or
certification or any finding by the federal or state agencies that IXnet is
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 IXnet.
The existing regulatory environment for international telecommunications
service outside the United States differs from country-to-country.
Internationally, the World Trade Organization ("WTO") Basic Telecommunication
Agreement ("WTO Agreement") may result in the introduction of competitive
services in a number of countries throughout the world. Nevertheless, national
and local laws and regulations continue to differ significantly among the
countries in which Ixnet currently operates and plans to operate. An IXnet
subsidiary, IXnet Ltd., currently holds a license to provide international
simple resale ("ISR") services to all international points from the United
Kingdom and has recently been awarded a license to provide international
facilities-based voice services. In other European Union ("EU") countries and
Switzerland, IXnet currently provides voice services pursuant to special
regulations established for provision of telecommunication services to closed
user groups ("CUGS"). In Asia, IXnet has been issued certain licenses to offer
limited types of services in Japan, Hong Kong and Singapore. The regulatory
structures pursuant to which IXnet operates in all of these countries were all
recently enacted. Consequently, there is very limited guidance on the scope of
the authority provided to IXnet pursuant to existing regulatory structures in
these countries. Thus, there can be no assurance that any examination of
IXnet's operations by a regulatory or governmental authority would conclude
that IXnet is operating in a manner consistent with existing law, regulation
or license issued to IXnet. If a regulatory authority concludes that IXnet is
not operating in a matter consistent with the law, regulation or a license
issued to IXnet, it could limit IXnet's ability to provide certain
telecommunications services and may have a material adverse impact on IXnet's
business in the country in question. There can be no assurance that future
changes in the law or regulation of any particular country or the WTO
Agreement will not have a material adverse effect on IXnet's business, results
of operations and financial condition.
RISKS ASSOCIATED WITH THE MERGER
Substantial Leverage And Debt Service. The Company will incur substantial
indebtedness in connection with the Merger and will have substantially more
indebtedness than it has historically. See "THE MERGER-- Merger Financing." As
of December 31, 1997, after giving pro forma effect to the Merger (after
giving effect to the Merger Transactions and issuance of $180,000,000 of the
Surviving Corporation's Notes), the Company would have had $196.6 million of
consolidated indebtedness and a stockholders' deficit of $68.5 million. The
Company will also have up to $75.0 million available (subject to borrowing
base and other limitations) under its Revolving Credit Facility. On a pro
forma basis, the Company's income from operations would have been insufficient
to cover its net interest expense for the fiscal year ended September 30, 1997
by $14.5 million which includes interest expense of $21.4 million related to
the Notes on which cash interest payments do not commence until 2001. Although
the Company may experience a similar deficiency between income from operations
and
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interest expense in the future, it does not anticipate that such deficiency
will have an adverse effect on the Company's liquidity as interest related to
the Notes does not commence until 2001. Pro forma net loss for the fiscal year
ended September 30, 1997 would have been $8.8 million, as compared to net
income of $3.8 million for the same period on an historical basis. Pro forma
interest expense for the fiscal year ended September 30, 1997 would have been
$23.0 million ($2.0 million of cash interest expense), as compared to $1.8
million ($1.0 million of cash interest expense) for the same period on an
historical basis. The Company and its subsidiaries may incur additional
indebtedness in the future, subject to certain limitations contained in the
instruments governing their indebtedness. Accordingly, the Company will have
significant debt service obligations.
The Company's debt service obligations could have important consequences to
stockholders, including the following: (i) during certain periods, a
substantial portion of the Company's cash flow available from operations will
be dedicated to the payment of principal and interest on its indebtedness,
thereby reducing the funds that would otherwise be available to the Company,
including for acquisitions and future business opportunities; (ii) the
Company's ability to obtain additional financing in the future may be limited;
(iii) certain of the Company's borrowings (including, but not limited to, the
amounts borrowed under the Revolving Credit Facility) will be at variable
rates of interest, which will cause the Company to be vulnerable to increases
in interest rates; (iv) the Company's flexibility in planning for, or reacting
to, changes in its business and the industry may be limited; (v) the Company's
higher degree of leverage will make it relatively more vulnerable to economic
downturns and competitive pressures and (vi) a substantial decrease in net
operating cash flows or an increase in expenses of the Company could make it
difficult for the Company to meet its debt service requirements or force it to
modify its operations.
The Company's ability to make scheduled payments of the principal of, or to
pay interest on, or to refinance its indebtedness and to make scheduled
payments under its other obligations depends on its future performance, which
is subject to economic, financial, competitive and other factors beyond its
control. Based upon the current level of operations and anticipated growth,
management believes that future cash flow from operations, together with
available borrowings under the Revolving Credit Facility, will be adequate to
meet the Company's anticipated requirements for capital expenditures, working
capital, interest payments and scheduled principal payments. There can be no
assurance, however, that the Company's business will continue to generate
sufficient cash flow from operations in the future to service its debt and
make necessary capital expenditures after satisfying certain liabilities
arising in the ordinary course of business. If unable to do so, the Company
may be required to refinance all or a portion of its existing debt, to sell
assets or to obtain additional financing. There can be no assurance that any
such refinancing would be possible or that any such sales of assets or
additional financing could be achieved.
Control by CSH LLC. Following the Merger, not less than 50.25% nor more than
86.25% of the outstanding shares of Surviving Corporation Common Stock (prior
to giving effect to the IXnet Exchange) will be held by the stockholders of
AAC. As of the date hereof, all of the outstanding capital stock of AAC is
owned, directly or indirectly, in the aggregate by CSH LLC. Immediately
following the Merger, David Kirby, a private investor and U.S. citizen, will
own 25.5% of the voting interests relating to the IPC Units, John O'Mara, a
private investor and U.S. citizen, will own 25.5% relating to the voting
interests of the IPC Units and CVC will own 49% of the voting interests
relating to the IPC Units.
IPC, CSH LLC, Richard P. Kleinknecht, Walsh, Servidio and certain other
parties entered into the Investors Agreement to be effective only upon the
consummation of the transactions contemplated by the Merger Agreement. The
Investors Agreement contains provisions that, among other things, require the
parties thereto to vote in favor of the persons to be nominated to serve on
the Surviving Corporation Board following the Merger and restrict the transfer
of shares of Surviving Corporation Common Stock by Messrs. Richard
Kleinknecht, Walsh, Servidio and certain other parties. As a result of their
stock ownership and the Investors Agreement, following the Effective Time, CSH
LLC, its subsidiaries, affiliates and associates (collectively, the "CSH
Entities") will control the Surviving Corporation and will have the power to
elect a majority of its directors and approve any action requiring the
approval of the holders of Surviving Corporation Common Stock, including
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adopting certain amendments to the Surviving Corporation's certificate of
incorporation and approving mergers or sales of all or substantially all of
the Surviving Corporation's assets. The directors elected by the CSH Entities
will have the authority to effect decisions affecting the capital structure of
the Surviving Corporation, including the issuance of additional capital stock,
the implementation of stock repurchase programs and the declaration of
dividends.
The existence of controlling stockholders of the Surviving Corporation is
likely to have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from seeking to acquire, a majority
of the outstanding shares of Surviving Corporation Common Stock. A third party
would be required to negotiate any such transaction with the CSH Entities, and
the interests of the CSH Entities may be different from the interests of other
stockholders of the Surviving Corporation.
Potential of a Second Stage Transaction. Because there are no contractual
restrictions or limitations on the stockholders of AAC from engaging in a
second stage transaction, the risk exists that the stockholders of AAC could
engage in such a transaction thereby eliminating the minority stockholders of
the Surviving Corporation at a price lower than $21 per share.
Potential Delisting; Loss of Liquidity; Registration Under the Exchange
Act. IPC Common Stock is listed on Nasdaq. In order to be eligible for
inclusion on Nasdaq an issuer must, among other things, (a) have at least
500,000 publicly held shares, and (b) be held by at least 300 shareholders. As
a result of the Merger, the Surviving Corporation Common Stock may no longer
meet such listing requirements and Nasdaq may unilaterally act to delist the
Surviving Corporation Common Stock. Under the terms of the Merger Agreement,
the Surviving Corporation is obligated to use commercially reasonable efforts,
for at least two years after the Merger, to cause the Surviving Corporation
Common Stock not to be delisted from Nasdaq. However, the Surviving
Corporation is under no obligation to prevent the delisting of the Surviving
Corporation Common Stock in the event that it no longer meets Nasdaq listing
requirements. Whether the Surviving Corporation Common Stock is delisted, the
volume of shares traded after the Merger is expected to decline substantially
because of the recapitalization.
Upon any delisting, it is possible that shares of the Surviving Corporation
Common Stock may trade in the over-the-counter market and that price
quotations in respect of trades might be published by the National Association
of Securities Dealers, Inc. periodically in the "pink sheets" or through other
sources. However, there can be no assurances that quotes for such shares would
be available, and the Surviving Corporation does not presently intend to
request or support such initiatives if delisting does occur. If such delisting
occurred, it could be expected that the shares would trade much less
frequently relative to the trading volume of IPC Common Stock prior to the
Merger, and stockholders may experience difficulty selling Surviving
Corporation Common Stock or obtaining prices that reflect the value thereof.
IPC Common Stock is currently registered under the Exchange Act.
Registration could be terminated upon application by the Surviving Corporation
to the Commission if the Surviving Corporation Common Stock is not listed on a
national securities exchange or registered national securities association and
there are fewer than 300 record holders. The termination of the registration
of the Surviving Corporation Common Stock under the Exchange Act would
substantially reduce the information required to be furnished by the Surviving
Corporation to holders of Surviving Corporation Common Stock and to the
Commission and would make certain provisions of the Exchange Act, such as the
short-swing profit recovery provisions of Section 16(b), the requirement of
furnishing a proxy statement in connection with stockholders' meetings, the
requirements of Rule 13e-3 under the Exchange Act with respect to "going
private" transactions, certain periodic reporting requirements and certain
beneficial ownership reporting requirements, no longer applicable to the
Surviving Corporation.
Notwithstanding the foregoing, the Surviving Corporation will, in connection
with the issuance of the Notes, agree to file with the Commission all reports
and other information required to be filed with the Commission by Sections
13(a) or 15(d) of the Exchange Act, if it is subject to such provisions. There
can be no assurance, however, that the Surviving Corporation will continue to
make such filings if the Notes are no longer outstanding.
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Taxation of Stockholders Receiving Cash--Possible Dividend Treatment. A
stockholder may make a Stock Election and thereby elect to retain shares of
Surviving Corporation Common Stock in the Merger. However, if the number of
Stock Electing Shares exceeds the Maximum Stock Election Number, each electing
stockholder will receive some cash for a portion of his or her IPC Common
Stock as a result of the proration procedures described herein under "The
Merger--Stock Election." In addition, a stockholder may receive dividend
treatment (rather than the generally more favorable capital gain treatment)
for any cash received in the Merger. See "SPECIAL FACTORS--Federal Income Tax
Consequences" for a more detailed discussion of the tax consequences of
receiving cash. No such dividend treatment should generally be applicable in
the case of a stockholder who exchanges all of his or her shares of IPC Common
Stock for cash in the Merger.
Certain Proration Risks. The election of record holders of IPC Common Stock
to retain the Stock Election Price or to receive the Cash Election Price
pursuant to the Merger is subject to the proration procedures of the Merger
Agreement. Accordingly, if the Merger is consummated, stockholders may not
necessarily receive the type of consideration specified in their respective
elections. However, because Richard P. Kleinknecht has agreed to retain
380,952 shares of Surviving Corporation Common Stock, which is equal to the
Minimum Stock Election Number, any other stockholder who elects to receive
cash will receive the full amount of the Merger Consideration in cash and will
not be required to retain any portion of his or her shares as Surviving
Corporation Common Stock.
Potential ERISA Implications. In the event that, following the Merger, the
stockholders of AAC own 80% or more of the outstanding shares of Surviving
Corporation Common Stock, IPC and IXnet may become members of a controlled
group of corporations that includes CVC and its affiliates. In such event, IPC
and IXnet may have joint and several liability with CVC and its affiliates for
certain benefit obligations incurred by CVC or its affiliates under ERISA.
Neither CVC nor any of its affiliates has made any representation to IPC
concerning the existence of any such obligations, and no assessment has been
made as to the potential effect of such joint and several liability on the
Surviving Corporation.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
The information herein contains forward-looking statements that involve a
number of risks and uncertainties. A number of factors could cause actual
results, performance, achievements of the Surviving Corporation and its
subsidiaries, or industry results to be materially different from any future
results, performance or achievements expressed or implied by such forward-
looking statements. These factors include, but are not limited to, the
competitive environment in the telecommunications industry in general and in
the Surviving Corporation's and its subsidiaries' specific market areas;
changes in prevailing interest rates and the availability of and terms of
financing to fund the anticipated growth of the Surviving Corporation's and
its subsidiaries' respective businesses; inflation; changes in costs of goods
and services; economic conditions in general and in the Surviving
Corporation's and its subsidiaries' specific market areas; demographic
changes; changes in or failure to comply with federal, state and/or local
government regulations; liability and other claims asserted against the
Surviving Corporation or its subsidiaries; changes in operating strategy or
development plans; the ability to attract and retain qualified personnel; the
significant indebtedness of the Surviving Corporation and its subsidiaries;
labor disturbances; changes in the Surviving Corporation's and its
subsidiaries' acquisition and capital expenditure plans; and other factors
referenced herein. In addition, such forward-looking statements are
necessarily dependent upon assumptions, estimates and dates that may be
incorrect or imprecise and involve known and unknown risks uncertainties and
other factors. Accordingly, any forward-looking statements included herein do
not purport to be predictions of future events or circumstances and may not be
realized. Forward-looking statements can be identified by, among other things,
the use of forward-looking terminology such as "believes," "expects," "may,"
"will," "should," "seeks," "pro forma," "anticipates," "intends" or the
negative of any thereof, or other variations thereon or comparable
terminology, or by discussions of strategy or intentions. Given these
uncertainties, prospective investors are cautioned not to place undue reliance
on such forward-looking statements. The Company and the Surviving Corporation
disclaim any obligations to update any such factors or to publicly announce
the results of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
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THE COMPANY
GENERAL
IPC Information Systems, Inc. IPC is a leader in providing integrated
telecommunications equipment and services that facilitate the execution of
transactions by the financial trading community. Such transactions involve the
trading of equity and debt securities, commodities, currencies and other
financial instruments. The Company designs, manufactures, installs and
services "turret systems" and installs and services the cabling infrastructure
and networks which provide financial traders with desktop access to time-
sensitive communications and data. The Company's primary customers include
securities and investment banking firms, merchant and commercial banks,
interdealer brokers, foreign exchange and commodity brokers and dealers,
securities and commodity exchanges, mutual and hedge fund companies, asset
managers and insurance companies. The Company uses an integrated approach to
marketing its products and services, leveraging its established customer base
throughout the financial trading community. In addition, through its
subsidiary, IXnet, the Company operates 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. The Company recently acquired MXNet Inc., ("MXNet") a provider of
market data distribution services for market data content providers such as
Reuters America Inc. and Bridge Information Systems America, Inc. MXNet
services are targeted toward members of the financial trading community with
small to medium size trading floors.
THE COMPANY'S THREE MAJOR OPERATING UNITS
Turret Systems. The Company's sophisticated turret systems, consisting of
turrets and associated backroom switching equipment, provide highly reliable,
"non-blocking" voice communications for trading operations. In addition, these
systems incorporate a proprietary design, including many features designed to
increase the trader's productivity, such as expanded access to telephone
lines, rapid call completion times, high voice quality, built-in redundancy,
trader mobility, personalized call button layouts and the ability to implement
system upgrades via software changes as opposed to hardware changes. The
Company 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. The Company
offers a full-line of digital turret systems, including systems for trading
floors with over 1,000 trading positions as well as systems for smaller
operations with as few as five trading positions. The Company also provides
its customers with post-installation maintenance and service, often pursuant
to long-term contracts.
Information Transport Systems. The Company's Information Transport Systems
("I.T.S.") division provides cabling infrastructure, design, installation and
maintenance services for high speed voice and data networks, including local
area networks ("LANs"), wide area networks ("WANs") and data connectivity
applications. The Company'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,
utilizing components from suppliers such as Cisco Systems, Inc. ("Cisco"),
3Com Corporation ("3Com"), Bay Networks, Inc. ("Bay Networks") and Xylan
Corporation ("Xylan"), 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. The Company stations
I.T.S. personnel on-site for many of its major investment banking customers.
IXnet. IXnet has deployed and continues to expand a network (the "IXnet
Network") specifically designed to address the needs of the global financial
community. The IXnet Network uses uniform equipment platforms and includes
network operation centers ("NOCs") and switches located in New York and
London, network access nodes (known as "Points of Presence," or "POPs") and
customer premise nodes (known as customer access nodes, or "CANs") in 15
financial centers including Frankfurt, Paris, Zurich, Tokyo and Hong Kong and
additional CANs in 29 other cities at December 31, 1997. The IXnet Network
employs leased dedicated long-haul circuits to connect IXnet Network cities
and leased dedicated local circuits to connect customers to the IXnet Network.
Because the IXnet Network is, for the most part, leased, the Company generally
can rapidly expand capacity in response to increased customer traffic while
reducing the level of capital expenditures required in advance of related
revenues. However, the Company may participate in the ownership
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of transmission facilities from time to time where it believes there will
eventually be sufficient traffic to improve gross margins. The IXnet Network
combines the benefits of high quality, security and end-to-end connectivity
from a single network provider, which have historically only been available
through private networks, with the significant advantages of lower cost,
outsourcing of network management, and the ability for network subscribers to
communicate over dedicated circuits not only with other offices of the same
firm, but also with other IXnet subscriber firms.
Through IXnet, the Company provides a variety of telecommunications
services, including dedicated private line, managed data and switched voice
communications among network subscribers. These services include specific
applications for the financial trading community such as turret-to-turret
communications, multi-location voice broadcast and on-and off-net long-
distance voice and data transport services. IXnet provides dedicated private
network connectivity to the financial trading community in the U.S., the
countries of the European Union, Japan, Hong Kong, Singapore and several other
countries. IXnet is authorized to provide interstate long distance voice
service throughout the U.S., to provide international resale of long-distance
services between the U.S. and the U.K., Canada, Sweden, New Zealand and
Australia, and to resell private line service to numerous international
points. See "--Regulatory Environment." The installation of a CAN in a
customer location often leads to subsequent sales of additional equipment. As
of December 31, 1997, the Company provided telecommunications services to 150
customers and had 229 CANs.
The Company was established in 1973 as Interconnect Planning Corporation to
provide telephone equipment specifically designed to perform in the demanding
environment of the financial trading community. In 1986, the Company, then
owned by Contel Corporation and known as Contel IPC, opened its current
manufacturing facility in the U.S. and commenced operations in the U.K. In
October 1991, the Company was acquired from Contel Corporation by Richard and
Peter Kleinknecht and certain others and renamed IPC Information Systems, Inc.
On October 3, 1994, the Company completed its initial public offering of
3,250,000 shares of common stock at $15.00 per share.
BUSINESS STRATEGY
The Company's strategy is to enhance its turret system leadership position
and leverage its established customer relationships to become the preferred
network provider to the financial trading community. The principal elements of
the Company's business strategy include the following:
Increase Market Share of Turret Systems on Large Trading Floors. The
Company estimates that its turrets represent a majority of the total
installed base of turrets in New York, and approximately 38% of the total
installed base of turrets in London and lower percentages in other
financial centers such as Hong Kong, Tokyo and Frankfurt. Between 1994 and
1997, the Company estimates that it increased its market share of the
installed base of turrets in London from 24% to 38%. The Company believes
that there is substantial opportunity to achieve substantial increases in
other financial centers, as well as further increasing its London market
share by dedicating additional sales and marketing resources and by
focusing on the large installation opportunities the Company expects will
continue to be created in the financial services industry expansion and
consolidation trend. The Company expects to further grow market share as
its customers expand to new locations and standardize their technology
platforms. The Company also believes it will generate substantial new sales
from existing customers who upgrade their older analog turret systems with
digital systems; currently, analog systems represent approximately half of
the Company's installed base of turrets.
Penetrate New Markets. The Company's turret systems have traditionally
been designed as "high-end" products offering optimal performance for large
trading organizations at premium prices. The Company has enjoyed strong
market share among large trading organizations such as global investment
banks and is now focusing on penetrating other markets. These markets
include smaller broker/dealers, hedge funds and asset management companies,
as well as commodity trading operations in non-financial firms (such as
energy-related companies) and regional trading organizations based in
emerging markets, which typically require either smaller installations or
less functional capability. The Company has recently
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completed development of two new products to meet the needs of these
customers: VS-MX(TM), a turret system designed to be cost effective for the
smallest trading organizations; and TraderConnect(TM), a Centrex-like
managed service. The VS-MX system, which the Company intends to begin
shipping in the spring of 1998, shares most of the features of the
Company's flagship Tradenet MX(R) product but provides comparable price
performance per trading position for locations with between five and 16
trading positions. The Company believes that this product will enable it to
penetrate new geographic markets in Latin America and Asia, as well as
smaller trading operations in established markets. TraderConnect is a
managed service in which the Company owns and operates a centrally located
and shared trading turret system and provides IXnet Network services to the
customer. TraderConnect meets the needs of trading organizations that
either cannot afford the upfront investment of a full turret system or
prefer to outsource. The Company offers TraderConnect in New York and
intends to begin providing this service in London during 1998 and in other
financial centers thereafter. The Company intends to use TraderConnect to
increase its penetration of smaller accounts in major financial centers.
Leverage Existing Customer Relationships to Provide Enhanced
Telecommunications Services. The Company believes it is in a strong
position to provide private network services via IXnet to the financial
trading community by virtue of IPC's large installed base of turrets
systems and established relationships with many of the largest firms
involved in global trading activity. The Company believes its reputation
for high quality service will enable it to capture much of the
telecommunications services revenue generated by these clients. A
substantial portion of the total telecommunications spending by financial
services firms is generated by trading operations using turret systems. In
addition, the Company believes that its ability to provide fully managed
turret-to-turret connectivity between users of IPC turret systems, with a
single point of contact for all customer service issues, will be a
competitive advantage.
Leverage I.T.S. Expertise. The Company intends to leverage I.T.S.'s
expertise in the design, integration and installation of internet-working
equipment (such as routers and hubs) to provide turnkey managed data
services and ongoing support of data networking equipment located at the
Company's client sites. In addition, the Company intends to narrow its
focus on the higher margin components of design, installation and support
of LANs, WANs and data connectivity and by reducing its involvement in the
more competitive and lower margin cabling infrastructure projects.
Broaden IXnet Customer Base to Include Buyside Participants. While many
of the largest investment banks and broker/dealer firms have either created
their own private networks or contracted for managed private network
services, most if not all of these firms still rely on public switched
networks for communications with trading counterparties and customers on
the "buyside" (mutual fund companies, asset managers and hedge funds). By
targeting buyside participants, the Company intends to increase the number
of subscribers to the IXnet Network. As the number of buyside participants
connected to the IXnet Network increases, the incentive for "sellside"
participants and market data and application providers to use the IXnet
Network to communicate with these buyside participants is expected to
increase.
Exploit First-Mover Advantage. The Company believes that it is one of
the first to offer an international, inter-firm private network (extranet)
service dedicated primarily to the financial trading community, and that
the high concentration of telecommunications traffic among financial
trading community participants will enable the Company to leverage its
first-mover advantage into a position as the preferred service provider to
the financial trading community. As the number of customer locations
connected to the IXnet Network grows, the appeal of the network to
prospective customers increases. The limited number of financial trading
community participants amplifies this effect and enables the Company to
achieve significant penetration of the target customer base. Commercially
launched in the spring of 1996, IXnet had 59 customers as of December 31,
1996 and 150 customers as of December 31, 1997.
Reduce Risk by Scaling IXnet Network Expansion to Customer
Additions. IXnet's business plan is based on a success-driven network
investment program, which generally calls for the addition of network
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equipment and transport capacity as required by the addition of new
customers to the network or the sale of additional services to existing
customers, as opposed to in advance of such events as is typical of other
telecommunication services firms. Given the availability of local fiber
facilities at competitive rates in many of the world's financial centers,
as well as the competitive market for transport capacity on major
international routes, the Company believes it will be able to rapidly
provision high-quality services without building its own fiber facilities,
although the Company will participate in ownership of transmission
facilities from time to time where it believes there will eventually be
sufficient traffic to improve gross margins. The capital investment
required to expand the IXnet Network is comprised largely of additional
CANs and incremental additions to the Company's existing London and New
York NOCs and various POPs.
Accelerate Growth of IXnet by Acquisitions. The Company's growth strategy
for IXnet includes the acquisition of similar or compatible
telecommunications services firms with strong financial trading community
focus. The Company intends to use such acquisitions to accelerate IXnet's
growth to "critical mass" by extending its geographic reach and also to
improve its margins by increasing utilization of the IXnet Network backbone
over a broader customer base.
INDUSTRY BACKGROUND
Turret Systems. The turret systems industry is characterized by a small
number of manufacturers of highly specialized telecommunications systems sold
primarily to companies in the financial trading community. A trader requires
highly reliable, non-blocking simultaneous access to multiple lines which
cannot be provided by traditional internal corporate telephone systems (also
known as "Private Branch Exchange" or "PBX"). In order to meet these specific
needs, a small number of manufacturers have developed a highly specialized
voice communications systems called turret systems. Turret systems must be
exceptionally reliable because of the time-sensitive nature of trading
activity and the high potential opportunity cost of a service outage. A single
trading floor may contain in excess of 1,000 turrets, with each turret
providing access to hundreds of telephone lines.
Telecommunications Services. The telecommunications marketplace has
experienced a transformation over the last decade. Improved technology and
increased competition, due in part to widespread regulatory reform, have
contributed to the rapid expansion of telecommunications traffic. The
financial trading community has grown significantly, while at the same time
individual firms have expanded operations to new international locations to
compete in the global marketplace. Many of these firms require extensive
communication network capabilities to remain competitive in this environment.
However, the Company believes that most readily available alternatives either
do not adequately address the specific needs for seamless, high performance
international communications between the various trading partners, or provide
the required services in a suboptimal manner which is neither ideal for the
client nor cost effective for the provider.
To date, financial trading firms have had two alternatives for addressing
their exacting telecommunications demands: (i) building a private network,
thereby incurring both substantial development and ongoing costs while
primarily providing connectivity among various locations of a single firm; or
(ii) utilizing the broad based common carriers' public networks, which 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 and the global telecommunications
alliances as "virtual private network" services, are typically conducted
through disparate public networks and service organizations that do not offer
the quality, services, reliability or timeliness of delivery that would be
available through a dedicated private network.
LAN/WAN Infrastructure, Design, Installation and Maintenance. Integrated
high speed internal data communications networks have become critical to
financial services companies. Companies are installing increasingly complex
computing environments centered around LANs and WANs that connect networked
desktop personal computers and workstations, printers, telecommunications
equipment, file servers and facsimile machines. As network requirements have
grown and network designs have become more complex, many companies have chosen
to outsource their LAN/WAN design, installation and maintenance needs to
independent specialists.
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PRODUCTS AND SERVICES
The Company is involved in (i) the design, manufacture, installation and
maintenance of voice telecommunications systems primarily for the financial
trading community (including turret systems and other associated products);
(ii) the design, installation and maintenance of data networks and associated
cabling infrastructures (I.T.S.); and (iii) the provision of voice and data
telecommunications services to the financial trading community (IXnet). For
the fiscal year ended September 30, 1997, these products and services
represented 65.7%, 27.7% and 6.6%, respectively, and 73.1%, 15.9% and 11.0%,
respectively, for the three months ended December 31, 1997, of the Company's
consolidated revenue.
Turret Systems
A turret system is a sophisticated telephone system consisting of desktop
consoles and backroom switching equipment, used by trading personnel requiring
rapid access to multiple telephone lines, near instantaneous connection to the
call recipient and a high degree of reliability. A turret system is installed
in addition to, and communicates with, a company's PBX, but has enhanced
features compared to a PBX.
Key features of the Company's turret systems include:
Reliability. On a trading floor, a lost connection could result in a lost
transaction, and the outage of the entire telecommunications system could
be extremely damaging to a trading firm. IPC's turret systems are designed
with a distributed architecture utilizing redundant equipment and circuitry
with parallel internal transmission paths. This architecture ensures that
no single component failure within the system can cause the failure of the
entire system.
Call Capacity. IPC's turret systems are "non-blocking," designed to allow
every user to be on one or more telephone lines at the same time without
call blocking or a degradation of call setup speed. The Company's flagship
Tradenet MX system is designed to support up to 23,000 telephone lines in
simultaneous use by up to 4,000 user positions. In sharp contrast, a
typical PBX configuration accommodates only approximately 20% of users
speaking at the same time.
User Programmability and Mobility; Speed. IPC's digital turret systems
allow each user trader to customize the system with his own speed-dial and
direct connections and associated displays, and to store his personal
settings in memory in the system's back room switching equipment. If for
any reason a trader is in a location other than his normal location, he can
easily access his customized settings from any other MX turret on the
system at the same location or at any remote network-linked location.
The Company has historically focused on large trading organizations. The
Tradenet MX is designed for trading floors from 40 to over 1,000 positions.
The MX Compact, introduced in 1994, is designed for trading floors of
between 16 and 40 positions. The VS-MX, which the Company expects to begin
shipping in the spring of 1998, is designed for between five and 16
positions. The entire MX product line utilizes similar hardware and
software, has common interfacing (all of which facilitates upgrading) and
can be interconnected and integrated in order to meet the requirements of
customers with multiple trading floors of various sizes.
The Company's key turret systems products and services include the
following:
Large Trading Systems. The Company's flagship turret product is the
Tradenet MX system. Tradenet MX is a fully digital proprietary system based
on a fault tolerant switch which is not vulnerable to isolated component
failure. Its distributed architecture design provides reliability by
harnessing the computing power of multiple Sun Microsystems SPARC
microprocessors throughout the system, and provides rapid and easily
programmable switching of voice calls. Tradenet MX is designed to allow
software upgradability of features and applications without major hardware
upgrades. Because they are mainly software-based, such upgrades can be made
quickly to enable the Company to respond rapidly to developments in the
market or to a customer's specific request. The customer can have maintain
a continually up-to-date system by gradual
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periodic upgrading of software. The Tradenet MX platform is designed with
the capability to switch data and video as well as voice. The current list
price range for the Tradenet MX is between $8,500 and $15,000 per user
position depending on the configuration and features required.
Medium-sized Trading Systems. The Company provides MX Compact, a less
costly version of Tradenet MX, for medium-sized locations. MX Compact is
designed for trading operations from between 16 and 40 trading positions at
a single site, such as branch offices or those located in smaller markets.
The MX Compact is packaged in a single cabinet and is competitively priced,
while retaining most of the same advanced features as the Tradenet MX.
Small Trading Systems. The Company has recently completed final testing
of the VS-MX, which provides high reliability and most of the same advanced
features of the Tradenet MX but at a substantially lower price per trading
position for locations of five to 16 positions. The Company intends to
begin shipping the VS-MX in the spring of 1998 and believes that this
product will provide it with a means to enhance its penetration with target
customers such as asset managers, hedge funds, smaller energy and commodity
trading floors, and financial trading firms typical of emerging markets
such as Latin America, Asia and the Middle East.
Turret Service. A significant portion of the Company's revenue from
turret systems is related to post-installation service and is generated (i)
under annual and long-term service contracts; and (ii) from incremental
sales of turrets and related equipment for "moves, adds and changes" to
existing IPC trading floor installations. For fiscal year 1997, turret
service revenue accounted for $55.1 million of the Company's $177.6 million
in consolidated revenue from turret systems. Turret service revenue has
historically been very stable and less subject than the Company's turret
systems sales to cyclical changes in the financial strength and growth of
the financial trading community. Following a standard one-year period after
installation of a turret system, a customer generally enters into an annual
or multi-year service contract with the Company. These contracts typically
cover full time on-site technical support by IPC technicians deployed to
client sites for large trading operations, and on-call technical support by
IPC personnel for smaller trading operations. As of September 30, 1997, the
Company had over 90 technicians servicing ongoing contracts, primarily in
New York and London. "Moves, adds and changes" revenue is generated
whenever a customer adds additional trading positions to an existing IPC
trading floor or makes changes to the turret system configuration and
produces a steady and relatively predictable revenue stream for the
Company.
Centralized Trading Systems. In June 1997, the Company introduced a
centralized trading system called TraderConnect, in which the Company
maintains equipment and operating responsibility for a centrally located
and shared Tradenet MX turret system and provides a turnkey solution to
customers by furnishing turrets at the customer premises in addition to
local and long distance communications. The service is akin to the Centrex
method of providing centralized PBX services, and is billed to clients on a
per position and communication usage basis. TraderConnect provides its
customers with many of the same features available to owners of other MX
products. While TraderConnect is capable of supporting larger trading
operations, the Company is initially targeting trading operations between
one and 30 trader positions for TraderConnect services.
TradePhone MX(TM). The Company also manufactures a multi-button telephone
called the TradePhone MX that is designed to operate with the Tradenet MX
family of turret systems. This product was introduced in May of 1997 and is
targeted at trading support, sales and research personnel that have a need
to communicate directly with the traders. It provides the connectivity to
the MX system and with the feature functionality of a trading turret in a
scaled-down unit that is suitable for use off of the trading floor.
The WorldTurret(TM). The WorldTurret is a JAVA(TM) software application
that provides remote access to a trader's existing MX system via the
Internet. This product provides a trader with a standard PC ease of access
to his trading system from a remote location. A WorldTurret user gains the
full feature functionality and real time performance of the trading system
via a standard voice and data connection.
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Exchangefone(R). Exchangefone is an extremely ruggedized telephone
specifically designed for use on exchange floors. Exchangefone uses
distributed microprocessor technology to provide ease of feature
customization and reduces the amount of cable required between the trading
floor and the backroom switching equipment.
Open Line Speaker Systems. The Company manufactures open-line, digital
speaker systems for the financial trading community. These speaker systems,
which are sold either as an integral part of a turret system or on a stand-
alone basis, provide full-duplex continuous communications that enable
enabling brokers to communicate rapidly on a "hands-free" basis without
having to dial a telephone. From a single microphone, brokers can broadcast
simultaneously to numerous trading counterparts. Additionally, these
speaker systems contain digital signal processor software which enables
them to function effectively in a noisy trading floor environment.
Other Products and Services. In order to offer a broader product line,
IPC remarkets various other products, including PBX systems, video
conferencing equipment and voice logging and recorder devices.
The installation of a turret system involves extensive planning to ensure
that all materials and labor are coordinated to achieve and be completed on-
time, and within-budget. Detailed analysis is performed, defining all required
features and lines. The cabling infrastructure is installed and tested prior
to delivery of backroom switching equipment, usually a month before the time
when the system use begins (referred to as "cutover"). About two weeks prior
to cutover, the desktop consoles are installed and the complete system is
rigorously tested. The largest trading floors currently in operation using IPC
equipment have in excess of 1,200 turret positions with access to 8,000-10,000
telephone lines and can take up to a year to install. IPC's turret systems
customers are natural candidates for the Company's I.T.S. services.
The IXnet Network
IXnet was founded by several telecommunications specialists with extensive
experience in purchasing and implementing telecommunications services for the
financial trading community and began commercial operations in the spring of
1996. IXnet capitalizes on several characteristics of the target customer
base: rapid changes in technology requiring constant reevaluation of previous
technology decisions and new investments to remain competitive; internal
telecommunications departments focused on intra-firm communications via
private networks rather than on communications with trading counterparts;
demand for high performance communications between firms; difficulties in
dealing with multiple vendors, particularly in international markets;
significant disparity between the pricing and underlying costs of
international communications traffic; and no uniform global technology
platform for international communications.
IXnet has implemented a network specifically designed to address the needs
of the financial trading community. The network consists of Company-owned
switches, network access nodes POPs, customer access nodes CANs and NOCs, and
uses primarily leased transport capacity. Significant features of the IXnet
Network include the following:
Uniform Equipment Platforms. The IXnet Network is based on a Newbridge
Network Corporation ("Newbridge") managed transport network overlaid with
Northern Telecom Ltd. ("Nortel") switches for enhanced voice services and
Cisco routers for enhanced data services. Newbridge network access nodes
and network management software are located at the Company's POPs, while
CANs are directly installed at the customers' premises. The Newbridge
platform provides high performance, advanced features and global network
management which allows for rapid provisioning, and end-to-end network
diagnostics from the Company's facilities to each customer's premises. The
Company owns a Nortel DMS-500 digital switch located in New York City and a
Nortel DMS-100E digital switch located in London. These switches are
equipped with the latest advanced intelligent networking ("AIN") and common
channel signaling system 7 ("SS7") capabilities, allowing for universal
availability of services, rapid provisioning of service, short call setup
times and a single network management and control system to enhance network
performance.
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Transport Facilities. IXnet utilizes multiple carriers to provide access
facilities from customer premises to IXnet POPs. Such carriers include
incumbent local exchange carriers ("ILECs"), competitive access providers
("CAPs") and competitive local exchange carriers ("CLECs"). Access from the
customer sites is typically via a digital facility, using one or more
dedicated T-1 or E-1 fiber optic links. In addition, the Company leases and
acquires bandwidth from regional and international common carriers to link
its network locations. In most of its market areas there are competitive
providers of fiber optic capacity.
Network Operation Centers. The Company currently has fully operational
NOCs in New York City and London, which house the specialized equipment
necessary for managing the network. The NOCs contain systems allowing for
the display of alarms for all equipment conditions, testing of adverse
conditions, re-routing of traffic to other equipment or networks,
management notification of critical conditions and provisioning of customer
bandwidth. While the New York City NOC acts as the overall operations
control center for the entire IXnet Network, either NOC can independently
support the IXnet Network. The New York NOC is fully manned, on a 7 day, 24
hour basis.
IXnet Services
IXnet services fall into three categories: dedicated private line services,
managed data services and switched voice services. Dedicated private line
services include the following:
IXLink(TM). IXLink is a managed dedicated private line service which
provides voice and/or data transmission on circuits ranging in capacity
from 8 Kbps to 2 Mbps. The service features include high quality digital
connectivity worldwide and end-to-end circuits which eliminate the need for
multiple vendors. These services are provided for both intra-firm and
inter-firm communications.
DigiHoot(TM). DigiHoot is a single sourced digital hoot & holler service
with network management and speaker equipment provided as part of an
integrated offering. Hoot & holler networks are specialized open line voice
conference systems that trading firms operate to allow continuous mission-
critical contact between various trading locations. This service combines
the IXnet high performance international network with IPC's MX turret
systems and IPC's speaker systems for a total desktop to desktop managed
solution. Digital connections and bridging provide clear communications and
IXnet backs up supports the service with 24-hour network management and
customer support. DigiHoot service can be rapidly provisioned and
reconfigured to meet customers' demand for a flexible trading environment.
MetroLink(TM). MetroLink is a private line service that connects IPC's MX
customers within the same metropolitan area. IXnet serves as a single
source provider of hardware and connectivity from turret to turret.
Compared to the analog connections typically provided by the ILEC,
MetroLink provides faster circuit provisioning, end-to-end managed digital
connectivity, and reduced installation cost and space requirements at a
competitive price. MetroLink is currently offered in New York City, and the
Company intends to offer this service in other cities as the regulatory
environment and customer demand warrants.
IXFrame(TM); Liquidity. IXFrame is a Managed data services provided by
IXnet using basic frame relay as its underlying technology, and
Liquidity(TM) is a managed inter-firm and intra-firm data network service
which is also frame relay based with frame relay as its underlying
technology. The service Liquidity provides secures delivery of time-
sensitive financial applications and information such as electronic
trading, market data, and FIX (Financial Information Exchange) messages.
Its standard features include: stand-alone encryption hardware, a Cisco
router supplied, owned and managed by IXnet, network performance guarantees
and real time network performance reporting.
MXNet. MXNet is a recently acquired subsidiary that owns and operates a
network facility in New Jersey, distributing Reuters and Bridge market data
and applications to smaller trading floors.
Switched voice services provided by IPC include the following:
IXGlobal(TM). IXGlobal is IXnet's on-net switched voice service. It
provides a seamless international virtual private voice network service to
the financial trading community over a uniform switching platform.
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Because IXnet provides end-to-end connectivity among all IXnet subscribers,
it is able to provide the same high performance characteristics presently
available only on dedicated private networks. Features of IXGlobal include:
preferential pricing for on-net calls to IXnet subscribers, fast call
completion and AIN features including caller ID, conference calling, call
forwarding, etc., customized billing formats for the financial trading
community and network control and account management.
All switched calls between IXGlobal subscribers are carried entirely on-
net (i.e., not terminated through LECs that impose access charges). As a
result, IXnet can provide customers with substantial discounts for IXGlobal
calls, while still enjoying favorable margins. Accordingly, as more members
of the financial trading community come onto the IXnet Network, the Company
expects the attractiveness of this service to improve.
IXPrime(TM). IXPrime is IXnet's off-network switched voice service.
Unlike IXGlobal, IXPrime calls terminate to off-net locations. Features of
IXPrime include switched or dedicated originating access and simplified
pricing for calls.
IXnet has a flexible and highly capable operational support system which
provides efficient management of "back office" functions such as order
entry, trouble ticket monitoring, provisioning and reporting. The system is
centered around an Oracle database for centralized customer and system
information. Billing is provided by a flexible system which allows the
customization of customer invoices. For all of its services, IXnet provides
flexible billing format and media, including clear and concise calendar
month invoicing which allows the user to see actual costs for each
different service. IXnet also offers optional local currency billing.
Information Transport Systems
The Company's I.T.S. division provides cabling infrastructure, design,
implementation and maintenance services for high speed data networks,
including LANs and WANs, with a primary focus on the financial trading
community. This business line includes four major product and service areas:
value-added services, networking products, cabling infrastructure and network
maintenance and support. Customers purchase these products and services, which
are cross-marketed with IPC's turret systems, on a stand-alone basis or in
bundled combinations. Over 89% of the Company's fiscal 1997 I.T.S. revenue was
from jobs performed in the New York City metropolitan area. In addition,
I.T.S. has a core group of highly skilled project managers and design
engineers who are dispatched to manage installation projects elsewhere.
Value-Added Services. The Company provides a wide range of value-added
services, including network and trading room design, consulting, engineering
implementation, project management, the staging and operational testing of
workstations and technology and operational outsourcing.
Networking Products. The Company markets and services a full line of third-
party manufactured networking products including LAN hubs, adapters, bridges,
routers, network management software and protocol converters. The company is a
certified reseller of third party networking products, including products from
Cisco, 3Com, Xylan and Bay Networks. The Company sells these products on a
stand-alone basis or fully installed, configured and integrated with customer
systems.
Cabling Infrastructure. Cabling infrastructure provides physical
connectivity among communications devices, including turrets, telephone
switching equipment (turret or PBX), facsimile machines, computer networks and
video conference facilities. Providing a customer with cabling infrastructure
includes several distinct phases: network design, documentation, installation,
certification and ongoing service and maintenance. The Company offers its
cabling infrastructure customers design input on various system elements,
including diversity of cable routing, uninterruptable power systems, security
safeguards and cable management systems. The Company intends to narrow its
focus on the higher margin components of design, installation and support of
LANs, WANs and data connectivity and by reducing its involvement in the more
competitive and lower margin cabling infrastructure projects. The Company
places special emphasis on the testing and certification phases of
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the project since today's high speed networks demand that products be
installed in accordance with strict manufacturer specifications.
Network Maintenance and Support. The Company offers a broad line of post-
installation maintenance and support services to customers for "moves,
additions and changes" or as part of a long-term technical services contract.
These contracts provide customers with access to a wide range of IPC technical
and operational resources, including network engineering analysis, on-site
technical support, help desk support, user training and network
reconfiguration. These services provide the Company with a recurring revenue
stream, which, in fiscal 1997, accounted for $17.3 million out of total I.T.S.
revenue of $74.8 million.
YEAR 2000 COMPLIANCE
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the Year
2000. The Year 2000 issue affects virtually all companies and organizations.
The Company began addressing Year 2000 compliance early in 1997, initially
with respect to its own and third-party products and services which it
supplies to customers, and subsequently with respect to third-party suppliers
which the Company utilizes. As the Company's customers are substantially drawn
from the financial services industry which has been at the forefront of
addressing Year 2000 compliance issues for its operations, the Company is
aware of the extent of the concern and the importance of this issue.
The Company has established a program to address and communicate to its
customers the status of Year 2000 compliance of its various products and
services. It is anticipated that for such current products and services which
are not presently Year 2000 compliant, upgrades and enhancements will be made
available during the current calendar year or early in calendar year 1999. The
Company anticipates that internal costs associated with such compliance
efforts will not be material.
The Company also continues to address Year 2000 compliance issues with
respect to its systems and those of suppliers of products and services that
are used for the operations of its business. The Company is in the process of
completing conversion to an enterprise-wide management information system that
is Year 2000 compliant. It has taken steps to obtain compliance status and/or
assurances from its suppliers of products and services, sufficiently in
advance of the century change, to allow for remediation or conversion to
alternate suppliers or systems. Any costs associated with such remediation
measures would likely be borne by the Company's suppliers and therefore would
not have a material impact on the Company's business, operations or financial
condition.
SALES AND MARKETING
IPC uses a team approach to sales and account management across its lines of
business. Customers are assigned a multi-disciplinary sales/service team
(except where turret systems are marketed through distributors) in order to
leverage IPC's existing extensive customer relationships, to present a unified
Company approach and to coordinate service offerings. IPC's sales efforts are
organized on an international basis in order to promote relationships with and
provide enhanced service to customers who have significant international
operations. This is a departure from the historical location-by-location and
project-by-project approach taken by turret vendors and service providers and
reflects the consolidation trend in the financial trading community and
customers' preference to utilize common technology and services throughout
their organizations. Account executives are compensated for identifying and
developing revenue opportunities outside their lines of business. The Company
presently markets its turret and I.T.S. products and services domestically and
in key international financial centers. This is accomplished through a
combination of distribution channels including both direct and distributor
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sales. The Company employed 68 direct sales representatives for its turret
systems and I.T.S. products and services as of December 31, 1997, in sales
offices and service locations in:
Atlanta Hong Kong Philadelphia
Baltimore Houston Pittsburgh
Boston London San Francisco
Chicago Los Angeles Stamford
Cincinnati New Jersey St. Louis
Dallas New York Toronto
The Company also has distributors for its turret systems in the following
countries:
Argentina Japan Philippines
Belgium Kuwait Russia
Brazil Luxembourg South Africa
Canada Malaysia Singapore
China Mexico Switzerland
Greece Netherlands Taiwan
Ireland New Zealand Thailand
Italy Peru Turkey
These distributors receive extensive training from the Company, and are
qualified in turret sales and maintenance, and LAN design and installation,
and provide qualified systems engineers to support customers.
IXnet services are marketed and sold by experienced network sales
professionals dedicated to the IXnet service offering. As of December, 1997,
IXnet had a total of 18 network sales professionals, including 12 in the
United States, and the remainder in the United Kingdom, Canada and France. The
Company intends to add sales professionals in these locations and in other key
locations as its expansion continues. The Company also sells IXnet services
through agents in selected international markets including Tokyo, Frankfurt
and Mexico City.
Non-U.S. markets are important to the Company. The following table shows the
approximate distribution of the Company's total consolidated revenue for the
fiscal years indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
SEPTEMBER 30
------------------
REGION 1995 1996 1997
------ ------ ------ ------
<S> <C> <C> <C>
New York............................................ 68% 54% 55%
Rest of United States............................... 17 20 18
United Kingdom...................................... 10 20 22
Rest of Europe...................................... -- 1 1
Far East............................................ 3 4 3
Latin America....................................... 2 1 1
------ ------ ------
Total............................................. 100% 100% 100%
====== ====== ======
</TABLE>
IPC maintains a high profile in the financial services market by publicizing
contracts won, utilizing placement of advertising in industry publications and
participating in relevant industry trade shows. The Company also actively
participates in industry seminars to communicate IPC's capabilities to
prospective customers and maintains a staff of experienced marketing
professionals who generate promotional brochures and training materials.
CUSTOMERS
The Company's customers are concentrated primarily in the financial trading
community which includes securities and investment banking firms, merchant and
commercial banks, inter-dealer brokers, and foreign exchange and commodity
brokers and dealers, securities and commodity exchanges, mutual and hedge fund
companies, asset managers and insurance companies. The Company also provides
equipment and services to
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commodity trading operations in non-financial firms (such as energy-related
companies). Historically, almost all of the Company's consolidated revenue has
been derived from sales to customers in the financial trading community. In
fiscal 1996, approximately 13% of consolidated revenues were from one
customer. In fiscal 1997, no single customer accounted for more than 10% of
the Company's consolidated revenues.
BACKLOG
As of December 31, 1997, the Company had a backlog of purchase contracts
representing approximately $57.0 million of future revenue, as compared with
approximately $53.4 million as of September 30, 1997. Due to the size and lead
time of orders, which can vary substantially, and because the Company
recognizes revenue upon the completion of an installation, the amount of
backlog at any date may not be indicative of actual sales for any subsequent
period. The Company's backlog includes only orders for new installations and
does not reflect annual or multi-year service contracts or orders for the
reconfiguration, alteration or expansion of existing systems, as such orders
are normally completed within one month.
RESEARCH AND DEVELOPMENT
IPC's Tradenet MX product family is recognized within the financial trading
community as providing a high standard of reliability, performance, and
functionality. IPC endeavors to work closely with its customers to understand
their future requirements and invests in research and development to ensure
its products address customer needs. For the fiscal years ended September 30,
1995, 1996 and 1997, the Company recorded expenses of $10.1, $11.5 and $10.0
million, respectively, on research and development. During 1997, IPC spent
3.7% of its total revenue on the continued development of the Tradenet MX
family as well as in developing its next generation of voice-based trading
system products. Additions to the Tradenet MX product line during fiscal 1997
included TraderConnect and the WorldTurret MX, and the Company expects to ship
its VS-MX system beginning in the spring of 1998. At December 31, 1997, the
Company employed 98 persons in the area of research, development and product
engineering.
In addition to developing new MX system features and functionality, IPC
intends to strongly emphasize product integration of the MX product line with
the IXnet Network telecommunications network. This integration is intended to
remove the traditional boundaries between internal turret systems and external
telecommunications networks.
Interoperability and integration of the traders' desktop systems will remain
a strategic focus. IPC intends to utilize its core competencies in call
processing, Computer Telephony Integration and fault tolerant switching to
provide solutions which meet the evolving needs of its customers.
MANUFACTURING
The Company manufactures its turret systems products at an 85,000-square
foot Company-owned building in Westbrook, Connecticut. The facility houses
production lines, a repair department, inventory, a training center and
various support functions, including production scheduling, purchasing and
quality assurance personnel. The Company's management believes that the
manufacturing facility and its resources are capable of handling expected
demand for the foreseeable future. The Company believes that there are
adequate supplies of labor in the immediate area of the Westbrook facility.
Although the Company carries insurance, including business interruption
insurance, on its manufacturing facility a calamity at the facility could have
a material adverse effect on the Company. See "RISK FACTORS--Risk Associated
with Operations--Catastrophic Loss of Manufacturing Facility.
Most turret components have a relatively short lead time of approximately 30
days. However, there are a few long lead time items, specifically displays and
buttons, that need up to 24 weeks order time. The Company purchases certain
key product components that are made to order from single source suppliers.
Materials are ordered in accordance with a production forecast that is derived
by constantly monitoring sales activity.
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Furthermore, IPC has developed a "point-of-use" program whereby certain
suppliers pre-position their inventory in IPC's warehouse and IPC does not
take ownership until the components are needed. The Company believes that its
relationships with its suppliers are good, and it has not experienced supply
difficulties.
COMPETITION
Turret Systems and LAN/WAN Infrastructure, Design, Installation and
Maintenance
The markets for turret systems and LAN/WAN infrastructure, design,
installation and maintenance are highly competitive. Although some of the
Company's competitors are substantially larger and have greater resources, the
Company believes that IPC's strong market position is the result of its
consistent ability to produce high quality products, its established
reputation for the high quality service, strong relationships with customers
and experienced management, sales and technical staffs.
In the worldwide market for trading turrets, IPC's main competitors are V
Band Corporation and BT. The Company also competes with Hitachi Ltd., Telaid
Industries Inc., Etrali S.A., Telenorma GmbH (a division of Robert Bosch
GmbH), LM Ericsson Ltd. and Siemens A.G., which have historically achieved
strong market shares in their respective domestic markets. The Company
believes it is able to compete effectively against these companies due to the
high quality of its products, its reputation for providing outstanding
customer service and its ability to provide a standardized technology platform
on a global scale.
Direct competitors to IPC in the I.T.S. business are numerous due to the
highly fragmented nature of the data networking market. Although a number of
companies compete for parts of what the Company includes in its customer
solutions (for example, cable installation), management believes that its
expertise and capability to support the full range of data network design and
installation requirements of large national and international customers enable
it to compete effectively in this market.
Telecommunications Services Competition
The nature of the telecommunications services market is changing
dramatically. These changes are creating opportunities for new market
entrants. Three major interrelated trends are apparent:
The first is a trend toward market liberalization and the introduction of
facilities-based competition for both domestic and international
telecommunications services. This trend is accelerating a shift from single
national carriers, whether government- or privately- owned, to multiple
carriers and more competitive markets.
The second is a trend toward the emergence of competition in many foreign
markets, allowing international carriers to transmit traffic without paying
artificially high prices to monopoly carriers. This competition has reduced
both the prices the Company can charge as well as its transmission costs for
international traffic. The Company believes its focus on the specific needs of
the financial trading community will help it mitigate the effect of declining
prices, while the increasing competition among international carriers will
continue to drive down the wholesale prices of long haul transport capacity.
The third trend is the increasing participation among major international
carriers in global alliances. The major telecommunications alliances are
Concert (BT & MCI Communications Corporation), Global One (France Telecom,
Deutsche Telekom AG and Sprint Corporation) and World Partners Association (a
confederation of carriers including AT&T Corp.). Such alliances, which may be
based on either equity or non-equity relations, are still new and not fully
developed, either in terms of corporate form or market strategy. To date,
revenues to the alliances from target markets, which include the global
provision of enhanced services to multinational corporations, are small
relative to traditional international voice traffic revenue. Nonetheless, such
alliances are of significance because they represent individual national
carriers' attempts to meet the perceived desire of multinational corporate
customers to obtain worldwide telecommunications services from a single
provider.
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In addition to competing with the alliances, the Company also competes with
many additional carriers which provide service in single or multiple markets,
including Cable & Wireless plc, Worldcom, Inc., Kokusai Denshin Denwa Co. Ltd.
(KDD), Swiss Telecom PTT and Hong Kong Telecom Ltd.
The Company believes that it has certain competitive advantages over
existing carriers and the developing alliances, including its network design
and its strategic focus on the financial trading community. The participants
in the alliances, as common carriers, have designed broad-based networks to
provide service to the public at large. These networks utilize a variety of
hardware and software, making it difficult to implement a uniform global
system platform that set of features and performance characteristics demanded
by the financial trading community. While the alliances are a response to
customer demand for a single point of contact, by their nature the alliances
have difficulty implementing projects and servicing customers across corporate
and national borders. The IXnet Network is designed to meet the specific
performance requirements of the financial trading community. This single
market focus and the Company's ability to integrate its products and services
allow the Company to provide comprehensive single source solutions for its
customers, which translates into a competitive advantage over global alliances
and large common carriers. See "RISK FACTORS--Risks Associated with
Operations--Competitors with Greater Resources."
REGULATORY ENVIRONMENT
Government Regulation
Telecommunications services provided by IXnet are subject to regulation by
international entities as well as by United States federal, state and local
government agencies. The primary regulatory policy of the United States is to
promote effective competition in the United States telecommunications service
market, particularly the market for international services. It is the view of
the United States government that competitive international markets will
provide incentives for further market entry both in the United States and
foreign markets. Competitive markets will also stimulate technological
innovation by United States suppliers of information technology. See "RISK
FACTORS--Regulation."
The existing regulatory environment for international telecommunications
service differs from country-to-country. For domestic services in the United
States, the FCC and PUCs have direct jurisdiction, granted by statute, over
all aspects of IXnet service. With international traffic, however, the United
States regulatory structure is limited to the origination or termination of
service 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, the provision of IXnet's services is subject to the
provisions of the Communications Act of 1934, as amended by the
Telecommunications Act and the FCC regulations 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, provision of services and the terms and
conditions under which IXnet's services are provided. In addition, IXnet is
required by federal and state law and regulations to file tariffs listing the
rates, terms and conditions of the services it provides. Any failure to
maintain proper federal and state tariffs or certification or any finding by
the federal or state agencies that IXnet is 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 IXnet.
IXnet currently holds several FCC authorizations for telecommunications
services. These authorizations permit IXnet to (i) acquire interests in
submarine cable and international satellite facilities previously authorized
by the FCC; (ii) resell private lines that are not interconnected to the
public switched telephone network for
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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
(iii) resell private lines interconnected to the public switched telephone
network for service between the United States and a small number of approved
countries. To date, the FCC has approved interconnected resale to the United
Kingdom, Canada, Sweden, New Zealand, Australia and the Netherlands. IXnet has
received a reciprocal authorization from the United Kingdom to resell private
lines interconnected to the public switched network between the United States
and the United Kingdom.
State regulatory commissions exercise jurisdiction over intrastate services.
Intrastate services are communications that originate and terminate in the
same state. IXnet holds a certificate of public convenience and necessity to
resell forms of telephone service within New York state and in nine other
states. IXnet is able to provide service in Michigan and Washington, D.C.
without authorization from those jurisdictions. IXnet has an application
pending in Georgia for authorization to provide service in that state and is
preparing to file for similar authorization in at least one other state. As
the regulatory regimes change in the United States and elsewhere, the
authorizations held by the Company also may need to be adjusted.
Regulatory requirements pertinent to IXnet's 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, and reduce international accounting rates toward cost. Among other
things, such changes may increase competition and alter the ability of IXnet
to compete with other service providers and continue to provide the same
services, or introduce new services. The impact on IXnet's operations of any
changes in applicable regulatory requirements cannot be predicted.
International Regulatory Considerations
Significant liberalization of telecommunications regulation in a number of
countries has provided IXnet with greater flexibility to obtain authorizations
to provide service. The specific licensing approach or regulation of IXnet
services has differed from country to country depending on the status of
deregulation and the development of competition in each country.
Canada. IXnet is registered as reseller and currently provides private line
service between Canada and the U.S. and Canada and the U.K. It is anticipated
that Canada will open its market to increased competition in international
telecommunication services in 1998. There can be no assurance that changes in
the Canadian regulatory structure will not adversely impact IXnet services in
Canada.
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. An IXnet subsidiary holds both an International Facilities Based
Telecommunications License ("IFBTL") and an ISR license in the United Kingdom.
The IFBTL entitles IXnet 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 BT and Mercury Communications, Ltd. The ISR license allows IXnet to
resell international private lines, as well as interconnect with, and obtain
capacity at wholesale rates from BT and Mercury Communications, Ltd.
Other European Union Countries. Prior to January 1, 1998, a majority of the
EU countries has maintained the position that all or most telecommunications
services are 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. The EU has required that
member states liberalize their telecommunications regulations, effective
January 1, 1998, to permit the introduction of competition in all sectors of
the telecommunications market. These regulatory reforms are in the early
stages of implementation. Nonetheless, IXnet has already initiated service
prior to these reforms. In some cases, IXnet was able to take advantage of a
special status granted to CUGs.
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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."
IXnet and its subsidiaries fit this definition of CUGs in several countries.
In addition, in several EU countries, IXnet structured its service offerings
to not require interconnection to the local public switched telephone network.
Based on CUG status and/or lack of interconnections to the public switched
network in these countries, IXnet subsidiaries are able to operate in France,
Germany, Ireland and The Netherlands without the need for licenses in these
countries. In these cases, the IXnet companies provide private line and
virtual private network voice services and a full range of data services.
IXnet has applications pending in Belgium and Italy to provide voice and data
service based on IXnet's status as a CUG.
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, IXnet, through its subsidiaries, has
been able to provide private line and virtual private network voice services
and a full range of data services in Switzerland due to its status as a CUG
and its lack of interconnection to the Swiss public switched telephone
network.
Japan. On January 27, 1997, the Japanese Ministry of Post & Telephone
granted IXnet's Japanese subsidiary a Special Type II telecommunications
carrier license. This license allows IXnet 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, an IXnet subsidiary received from the Hong Kong
Government Office of the Telecommunications Authority a Public Non-Exclusive
Telecommunications Service ("PNETS") license for the provision of virtual
private network services. This license allows IXnet to provide virtual private
network services 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 IXnet's Singapore subsidiary a license to operate a network
in Singapore for a closed user group of entities 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.
IXnet is preparing to seek authority to provide virtual private network voice
services in 1998.
Latin America. IXnet, through a subsidiary, has filed an application to
provide certain limited services in Brazil, including virtual private network
services. IXnet is preparing to seek authority in Mexico to provide similar
services.
IXnet intends to expand its operations into other jurisdictions as such
markets deregulate and IXnet is able to offer a full range of services to its
customers. In addition, 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 IXnet's entry into such additional markets. The ability of IXnet 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 IXnet is
able to gain entry to such a market, no assurances can be given that IXnet
will be able to provide a full range of services in such market, that it will
not have to significantly modify its 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 IXnet's business, results of operations or
financial condition.
In those countries where IXnet is strictly prohibited from offering service,
IXnet may enter into a relationship with the state-sanctioned
telecommunications monopoly so that its services can be offered in that
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jurisdiction. In these situations, the local telecommunications service
provider would provide the facilities and offer local services to IXnet
customers. It is likely that services would be of higher cost in these
situations. There are, however, certain countries which do not require
licensing for the provision of telecommunications network services.
INTELLECTUAL PROPERTY
The Company relies on a combination of patents, trade secrets, trademarks,
copyrights and other intellectual property law, nondisclosure agreements and
other protective measures to protect its proprietary rights. The Company
currently has 16 United States patents, including design patents, and 4 more
pending United States patent applications for its technologies. The Company
also relies on unpatented know-how and trade secrets and employs various
methods, including confidentiality agreements with employees and consultants,
to protect its trade secrets and know-how. The Company also may desire to
develop, produce and market commercially viable new products, such as personal
communications systems, that may require new or renewed licenses from others.
EMPLOYEES
As of December 31, 1997, the Company had 663 full-time, non-union employees
worldwide, including 519 in the United States, and 132 in the United Kingdom,
8 in Canada, 2 in France and 2 in Hong Kong. Of these, 91 were engaged in
marketing and sales, 98 in research, development and product engineering, 189
in branch operations, finance and corporate administration, 122 in
manufacturing and 163 in operations.
An additional 363 United States workers are represented by collective
bargaining units at December 31, 1997, including 297 within the New York
metropolitan area provided under labor pooling agreements between the Company
and two of its affiliates. See "IPC ANNUAL MEETING--OTHER MATTERS--Certain
Relationships and Related Transactions." Contracts with unions are negotiated
every three years. The Company has never experienced a work stoppage.
Management believes that current relations with labor are good and that
existing union contracts will be renewed.
ENVIRONMENTAL MATTERS
The Company is subject to various federal, state and local environmental
laws and regulations, including those governing the use, discharge and
disposal of hazardous substances in the ordinary course of its manufacturing
process. Although management believes that its current manufacturing
operations comply in all material respects with applicable environmental laws
and regulations, there is no assurance that environmental legislation may not
in the future be enacted or interpreted to create environmental liability with
respect to the Company's facilities or operations.
PROPERTIES
During 1997, the Company purchased its sole manufacturing facility in
Westbrook, Connecticut and related land for approximately $2.5 million.
Additionally, the Company leases its executive offices and network switching
facilities in New York City and London, its research and development facility
in Stamford, Connecticut and its branch offices and sales offices in the
United States, Canada, Hong Kong and the United Kingdom. The Company believes
that its current facilities are adequate for its near-term requirements and
does not anticipate the need for significant expansion in the foreseeable
future, although it is currently in the process of procuring replacement space
for its research and development facility as the lease on currently occupied
space in Stamford, Connecticut expires May 31, 1998.
LEGAL PROCEEDINGS
The Company is not a party to any pending legal proceedings except for
claims and lawsuits arising in the normal course of business. The Company does
not believe that these claims or lawsuits will have a material adverse effect
on the Company's financial condition or results of operations.
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THE ANNUAL MEETING
GENERAL
Each copy of this Proxy Statement/Prospectus mailed to holders of IPC Common
Stock is accompanied by a proxy card furnished in connection with the IPC
Board's solicitation of proxies for use at the Annual Meeting. A Form of Stock
Election sent under separate cover is to be completed only by those IPC
stockholders who elect to retain Surviving Corporation Common Stock. The
Annual Meeting is scheduled to be held on [ ], 1998 at [ ] .m. at
[ ]. At the Annual Meeting, IPC stockholders will consider and vote upon
(i) a proposal to approve the Merger Agreement (including the Ballot
Amendment), (ii) a proposal to approve the Certificate Amendment, (iii) a
proposal to approve and adopt the New Stock Incentive Plan, (iv) the election
of two directors to hold office until the 2001 annual meeting and until their
respective successors have been duly elected or appointed (as the case may be)
and qualified; provided, that if the Merger is approved by the stockholders of
IPC, the current directors of IPC, other than Richard P. Kleinknecht, will
submit their resignations, and, the individuals (including two existing
directors) set forth in the Merger Agreement will be appointed as directors of
the Surviving Corporation following the Effective Time, (v) the ratification
of the appointment of Coopers & Lybrand as independent accountants for IPC for
the fiscal year ending September 30, 1998 and (vi) the Additional Proposal.
See "PROPOSAL 2--CERTIFICATE AMENDMENT," "PROPOSAL 3--NEW STOCK INCENTIVE
PLAN," "PROPOSAL 6--ADDITIONAL PROPOSAL" and "MANAGEMENT FOLLOWING THE
MERGER."
HOLDERS OF IPC COMMON STOCK ARE REQUESTED TO PROMPTLY COMPLETE, SIGN AND
DATE THE ACCOMPANYING PROXY CARD AND RETURN IT TO CHASEMELLON SHAREHOLDER
SERVICES, L.L.C. ("CHASEMELLON") IN THE ENCLOSED POSTAGE-PAID, ADDRESSED
ENVELOPE.
RECOMMENDATION OF THE IPC BOARD
The IPC Board, acting on the unanimous recommendation of the Independent
Directors, has unanimously approved the Merger Agreement and has determined
that the Merger is fair and in the best interests of IPC and its stockholders.
The IPC Board unanimously recommends that IPC's stockholders vote FOR approval
of the Merger Agreement, the Certificate Amendment, the New Stock Incentive
Plan, the proposed election of two directors, the ratification of the
appointment of Coopers & Lybrand and the Additional Proposal. See "SPECIAL
FACTORS--Recommendation of the IPC Board; Reasons for the Merger."
RECORD DATE
The IPC Board has fixed the close of business on [ ], 1998 as the
Record Date for the determination of holders of IPC Common Stock entitled to
receive notice of, and to vote at, the Annual Meeting. Only holders of record
of IPC Common Stock at the close of business on the Record Date are entitled
to receive notice of, and to vote at, the Annual Meeting.
VOTING OF PROXIES
IPC stockholders will be entitled to one vote for each share of IPC Common
Stock held of record as of the close of business on the Record Date on each
matter to be voted upon at the Annual Meeting. The presence in person or by
proxy of the holders of at least a majority of the total number of outstanding
shares of IPC Common Stock on the Record Date is necessary to constitute a
quorum at the Annual Meeting.
All shares of IPC Common Stock represented by properly executed proxies
received at or prior to the Annual Meeting and not subsequently revoked prior
to the vote at the Annual Meeting will be voted as directed in such proxies.
IF INSTRUCTIONS ARE NOT GIVEN, SHARES REPRESENTED BY PROPERLY EXECUTED PROXIES
WILL BE VOTED FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT (INCLUDING THE
BALLOT AMENDMENT), FOR APPROVAL AND
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ADOPTION OF THE CERTIFICATE AMENDMENT, FOR THE NEW STOCK INCENTIVE PLAN, FOR
THE PROPOSED ELECTION OF TWO DIRECTORS, FOR RATIFICATION OF THE APPOINTMENT OF
COOPERS & LYBRAND AND FOR THE ADDITIONAL PROPOSAL. However, no proxy which is
voted against the proposal to approve the Merger Agreement (including the
Ballot Amendment) will be voted in favor of the Additional Proposal by the
proxies pursuant to such discretion.
SOLICITATION OF PROXIES
The cost of soliciting proxies from holders of IPC Common Stock will be
borne by IPC. Such solicitation will be made by mail but also may be made by
telephone or in person by the directors, officers and employees of IPC (who
will receive no additional compensation for doing so but may be reimbursed for
reasonable out of pocket expenses in connection therewith). In addition, IPC
will make arrangements to furnish copies of proxy materials to fiduciaries,
custodians and brokerage houses for forwarding to beneficial owners of IPC
Common Stock. Such persons will be reimbursed for reasonable out-of-pocket
expenses in connection with their distribution of proxy materials to
beneficial owners of IPC Common Stock.
IPC has retained ChaseMellon, a proxy solicitation firm, to assist in such
solicitation. The fee for proxy solicitation to be paid to such firm is not
expected to exceed $5,000, plus reasonable out-of-pocket costs and expenses
authorized by IPC.
REVOCABILITY OF PROXIES
Any holder of IPC Common Stock who has executed and delivered a proxy may
revoke it at any time prior to its exercise (i) by delivering a written notice
of revocation to the Corporate Secretary of IPC, (ii) by delivering a duly
executed proxy relating to the matters to be considered at the Annual Meeting
bearing a date later than the proxy previously executed, to the Corporate
Secretary of IPC, or (iii) by attending the Annual Meeting, filing a written
notice of revocation with the secretary of the meeting and voting in person
(although attendance at the Annual Meeting will not in and of itself
constitute revocation of a proxy). If you are a stockholder whose shares are
not registered in your own name, you must send any revocation of proxy or any
proxy bearing a later date to the registered holder thereof, and will need
additional documentation from your recordholder to attend and to vote
personally at the Annual Meeting. Examples of such documentation would include
a broker's statement, letter or other document that will confirm your
ownership of IPC Common Stock. Unless revoked in one of the manners set forth
above, proxies in the form enclosed will be voted at the Annual Meeting in
accordance with instructions in such proxies. A proxy will not be revoked by
death or supervening incapacity of the stockholder executing the proxy unless,
before the vote, notice of such death or incapacity is filed with the
Corporate Secretary or other person responsible for tabulating votes on behalf
of IPC.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the aggregate
outstanding shares of IPC Common Stock on the Record Date is required to
approve and adopt the Merger Agreement and the affirmative vote of the holders
of at least 80% of the aggregate outstanding shares of IPC Common Stock on the
Record Date is required to approve the Certificate Amendment. A plurality of
the votes cast is sufficient to elect directors. In addition, assuming the
existence of a quorum, the affirmative vote of a majority of the shares
present in person or by proxy and entitled to vote at the Annual Meeting is
required to approve the New Stock Incentive Plan, ratify the appointment of
Coopers & Lybrand and approve the Additional Proposal. A failure to return a
properly executed proxy card or to vote in person or abstaining from voting
will have the same effect as a vote against the Merger Agreement and the
Certificate Amendment. Abstentions with respect to the New Stock Incentive
Plan, the ratification of Coopers & Lybrand and the Additional Proposal, will
have the effect of a vote against such proposals. Broker non-votes will not be
counted as having been voted in person or by proxy at the Annual Meeting and
will have the same effect as a vote against the Merger Agreement and the
Certificate Amendment. In contrast, shares underlying broker non-votes will
have no effect on the vote on the New Stock Incentive Plan, the ratification
of Coopers & Lybrand and the Additional Proposal. As of the Record Date, there
were [ ] shares of IPC Common Stock outstanding and entitled to be voted
at the Annual Meeting.
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As of the Record Date, IPC's directors and executive officers (and their
affiliates) (20 persons), beneficially own and have the power to vote
6,993,883 shares of IPC Common Stock, which represent approximately 65% of the
outstanding shares of IPC Common Stock, that may be voted at the Annual
Meeting. Such persons have indicated their intention to vote, or direct the
voting, of all such shares in favor of the Merger Agreement (including the
Ballot Amendment), the New Stock Incentive Plan and the Certificate Amendment.
See "IPC ANNUAL MEETING--Other Matters--Security Ownership of Certain
Beneficial Owners and Management."
Pursuant to the Stockholders Agreement, the Kleinknecht Stockholders have
agreed to vote all of the shares of IPC Common Stock owned by them, or
approximately 64% of the outstanding shares of IPC Common Stock, to approve
and adopt the Merger Agreement (including the Ballot Amendment), the
Certificate Amendment, the New Stock Incentive Plan and any other transactions
or agreements related to the Merger and against any action which is intended,
or could reasonably be expected, to impede, interfere with, delay, postpone,
discourage or materially adversely affect the Merger or the transactions
contemplated by the Merger Agreement or the Stockholders Agreement, including,
among other things, any extraordinary corporate transactions, including,
without limitation, a merger, consolidation or other business combination
involving IPC or its subsidiaries. A copy of the Stockholders Agreement is
included as Annex D to this Proxy Statement/Prospectus. See "THE MERGER--
Ancillary Agreements--Stockholders Agreement."
DISSENTERS' RIGHTS
Each holder of IPC Common Stock has a right to dissent from the Merger, and,
if the Merger is consummated, to receive "fair value" for his or her shares in
cash by complying with the provisions of Delaware law, including Section 262
of DGCL. The dissenting stockholder must deliver to the Company, prior to the
vote being taken on the Merger Agreement at the Annual Meeting, written notice
of his or her intent to demand payment for his or her shares if the Merger is
effected and must not vote in favor of approval and adoption of the Merger
Agreement. The full text of Section 262 of DGCL is included as Annex F hereto.
See "THE MERGER--Dissenters' Rights" for a further discussion of such rights
and the legal consequences of voting shares of IPC Common Stock in favor of
the approval and adoption of the Merger Agreement.
SPECIAL FACTORS
BACKGROUND OF THE MERGER
In early 1997, the price of IPC Common Stock was trading below the initial
public offering price of $15.00, having hit an historic low of $8 7/8 on March
24 and March 25. There was a lack of equity analyst research coverage, and the
Company's management believed that the equity markets did not fully understand
the Company's mix of a mature equipment manufacturing business with a
developmental stage growth subsidiary (IXnet) and the synergies and growth
that the Company's management projected from this mix. In addition, IXnet's
development required significant amounts of capital, and IPC's financial
capacity to supply that capital was limited. Finally, one of the Company's
directors, senior executive officers and principal stockholders, Peter J.
Kleinknecht, asked that the IPC Board and management consider the possibility
of selling the Company rather than seeking alternatives for the Company to
further develop and integrate IXnet with the Company. As was the case with
many other strategic direction and management issues, Richard P. Kleinknecht,
a director, senior executive officer and the other principal stockholder,
disagreed with Peter J. Kleinknecht's suggestion.
At a special meeting of the IPC Board held on March 28 in response to the
foregoing factors and at the recommendation of IPC's management, the IPC Board
authorized the engagement of DMG to evaluate and advise the Company on
alternative strategies for enhancing shareholder value, including, without
limitation, alliances with strategic partners, joint ventures, business
combinations, the sale of all or part of the Company's equity or assets to one
or more acquirers and raising new capital through a private placement or
public offering of the Company's securities. On April 2, a Company press
release announced the Company's engagement of DMG.
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At a regularly scheduled meeting of the IPC Board held on May 8, the IPC
Board considered DMG's preliminary report, which included a preliminary
valuation of IPC and a preliminary evaluation of strategic alternatives
available to IPC. In discussing strategic alternatives, Richard P. Kleinknecht
and Peter J. Kleinknecht expressed markedly differing views concerning the
Company's prospects and direction. Peter J. Kleinknecht believed the capital
requirements and risk of successfully developing IXnet could have an adverse
impact on the Company as a whole. He again proposed that the Company be sold.
No action was taken on Peter J. Kleinknecht's proposal. Richard P. Kleinknecht
believed the Company's prospects as an independent entity were attractive,
although he was undecided about the level of continued investment for IXnet.
These substantial differences in risk tolerance, as well as in other areas,
between Richard P. Kleinknecht and Peter J. Kleinknecht had become generally
known to employees and some customers, and the other members of the IPC Board
expressed their strong belief that a solution needed to be found. Given the
potential conflicts that the three management directors (including Richard P.
Kleinknecht and Peter J. Kleinknecht) might have in arriving at a decision
regarding the appropriate strategic direction for the Company, the IPC Board
acknowledged that the independent directors, Theodore J. Johnson, Robert J.
McInerney and Peter M. Stein (the "Independent Directors"), should have an
active role in recommending action to the full IPC Board.
The IPC Board tabled further discussion of the differences discussed at the
meeting, pending management's preparation of a revised and updated business
plan and related financial forecasts and assumptions. In the interim, however,
it was agreed that IPC's management would work with DMG to develop a
preliminary list of possible third party strategic partners and others who
might have an interest in the Company.
At a special meeting of the IPC Board held on June 26, the IPC Board
reviewed a revised and updated five-year financial forecast with assumptions
that had been prepared by the Company's management. The IPC Board acknowledged
the attractiveness of the forecasts presented but noted that the forecasts
assumed access to adequate capital for investment in IXnet and the resolution
of the differing views of Richard P. Kleinknecht and Peter J. Kleinknecht
regarding the future of the Company. Following opinionated discussions on the
strategic alternatives available to the Company, the Independent Directors met
privately with representatives of DMG and the Company's legal counsel. The
Independent Directors reiterated that the continuing disagreements between
Richard P. Kleinknecht and Peter J. Kleinknecht over the management and
strategic direction of the Company needed resolution. A number of solutions
were considered, including a possible sale of the Company. The Independent
Directors considered the timing of such a sale in light of the Company's
prospects as reflected in the updated business plan and financial forecasts,
on the one hand, and the greater risk to realizing such prospects if the
disagreements between Richard P. Kleinknecht and Peter J. Kleinknecht
continued, on the other hand. The Independent Directors determined that it had
become necessary to consider consolidating control in a single entity through
the sale of the Company. After further consideration of the Company's
prospects, the Independent Directors also determined that another acceptable
alternative to be considered would be to sell only a controlling interest in
the Company to a new entity which would enhance the Company's access to
capital for investment in IXnet while allowing existing stockholders the
option to retain their investment in the Company and share in the value that
might be created through continued pursuit of the IXnet business expansion.
Accordingly, in accordance with the recommendation of the Independent
Directors, the IPC Board directed DMG to explore third party interest in (i)
the acquisition of the Company and (ii) the acquisition of control of the
Company, preferably by a party that could commit substantial resources (e.g.,
$50 million or more) to IXnet's continued development. The IPC Board
designated an ad-hoc committee of Terry Clontz, the Company's President and
Chief Executive Officer, Theodore J. Johnson, Richard P. Kleinknecht and Peter
J. Kleinknecht, with Theodore J. Johnson to serve as chairman (the
"Transaction Committee"), to coordinate DMG's efforts and to review responses
to those efforts.
Following the June 26 meeting, a senior executive of IXnet asked his
brother, a senior executive of CSH LLC, if CVC might be interested in
participating in the process of evaluating the Company as a possible
investment. Several meetings followed between representatives of CVC and David
Walsh, President of IXnet, and the other senior executive at IXnet to discuss
this possibility. Representatives of DMG contacted representatives of CVC as a
potential party who might have an interest in the Company.
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On July 7, IPC and DMG entered into an engagement letter (the "Engagement
Letter"), pursuant to which DMG was engaged to act as the Company's exclusive
financial advisor in connection with entering into a possible investment, sale
or merger involving a change of control of the Company's equity or assets. See
"SPECIAL FACTORS--Opinion of Financial Advisor."
On July 16, representatives of DMG made a presentation to the Company's
management, with Richard P. Kleinknecht and Peter J. Kleinknecht also present.
DMG presented its revised preliminary valuation ranges based on the revised
and updated business plan and the related financial forecasts and assumptions
prepared by management (as presented to the IPC Board on June 26) and which
reflected a material investment to develop IXnet during the five fiscal years
1998 through 2002. Discounted cash flow and leveraged buyout valuations
conducted by DMG both suggested a valuation range of $20-$22. Additional
valuation analysis, using other methodologies, was conducted by DMG which
broadly substantiated the results of the discounted cash flow and leveraged
buyout analysis but which in DMG's opinion was less meaningful due to the lack
of publicly traded companies or precedent transactions involving businesses
comparable to IPC. Representatives of DMG also discussed a list of potential
third party entities that it expected to target consistent with the IPC
Board's June 26 mandate. Terry Clontz subsequently communicated the details of
the DMG presentation to the members of the IPC Board not present at the
presentation.
In the weeks following the July 16 meeting, DMG initiated contact with a
number of third parties to determine possible interest in a transaction with
the Company.
On August 7, 1997, CVC executed a Confidentiality/Standstill Letter
Agreement with the Company and began to conduct due diligence on the Company.
After CVC had been contacted, numerous discussions continued (a) between the
IXnet senior executive and his brother at CSH LLC, regarding explanations of
business concepts, and (b) with Walsh, regarding the elimination of IXnet's
minority equity interest and his new employment agreement.
At a regularly scheduled meeting of the IPC Board held on August 12, the IPC
Board received a status report regarding DMG's efforts. The IPC Board learned
(i) that the procedures letter for submitting written definitive offers by
potentially interested third parties had been prepared, (ii) the identity of
the parties that had been contacted by DMG, as well as the degree of interest
expressed by those parties, (iii) the identity of those parties who had signed
confidentiality and standstill agreements and were scheduled to attend
management presentations and (iv) a list of third parties reserved for future
contact, as necessary, to ensure that a sufficient number of parties would be
contacted during the solicitation process.
During the period beginning in early June and continuing until late
November, several third parties indicated to representatives of IPC a possible
interest in a transaction. In each case, such third parties were referred to
DMG.
During the period from the end of July through the middle of September,
approximately forty companies (as identified through a collaborative effort
between DMG and IPC's management) were solicited, of which four parties
(including (i) CVC, (ii) another domestic financial investor, (iii) a foreign
diversified multinational company with substantial telecommunications
equipment manufacturing operations and (iv) a foreign telecommunications
company) conducted preliminary due diligence on the Company. Each of these
four parties met with management and was provided access to relevant company
information. Each of these parties was given a deadline of September 30 to
submit its written offer together with comments on the form of acquisition
agreement previously furnished it by the Company. Notwithstanding these four
contacts, DMG continued to solicit other potentially interested parties.
Throughout this period, the Transaction Committee met weekly, either by
telephone or in person, to review the results of the solicitation process and
to provide information to DMG to assist it in furthering the process.
In late August, 1997, representatives of CVC attended a management
presentation with representatives of DMG in attendance.
On October 2, the Company received a letter from CVC (the "October 2
Letter") setting forth the proposed terms of a possible transaction. This
followed several weeks of discussions between DMG and CVC regarding
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the structure that would best satisfy the IPC Board's June 26 mandate. The
October 2 Letter contemplated (i) a price per share of $20, (ii) a transaction
structured as a leveraged recapitalization, enabling IPC stockholders existing
at the time of transaction to retain up to 49% of the equity of the
recapitalized company, in the form of both preferred and common stock, and
(iii) a management stock option plan granted at closing equal to 10% of the
fully diluted common stock of the recapitalized company. The primary condition
precedent to the closing of the proposed transaction was the satisfactory
completion of the anticipated financing.
At a special meeting of the IPC Board held on October 3 to inform the IPC
Board of the results that had been achieved by the Company and DMG in
exploring a possible change of control transaction, the IPC Board was advised
of the October 2 Letter, as well as a letter from a foreign telecommunications
company that expressed interest only with respect to the Trading Systems
division. After the terms of the October 2 Letter were described to the IPC
Board, the IPC Board determined that the offer from CVC should be pursued
because the proposed structure met the stated objectives that the IPC Board
had outlined at its June 26 board meeting and because DMG informed the IPC
Board that DMG believed it could render an opinion that the value of CVC's
offer was fair to the Company's stockholders from a financial point of view.
Representatives of DMG suggested to the IPC Board that it should require a
firm financing commitment as part of any acceptable offer. The IPC Board
instructed DMG and IPC's management to respond to the CVC offer with several
conditions: (i) a price per share of not less than $21.00, (ii) a firm
commitment for full financing of the transaction and (iii) completion of due
diligence within two weeks.
On October 6, DMG sent a letter to CVC indicating that DMG had been
authorized to negotiate, on IPC's behalf, a transaction with CVC subject to
the conditions outlined above and the negotiation of a definitive agreement
satisfactory to IPC by Friday, October 17. Subject to agreement by CVC to such
amended terms, CVC was granted a period of exclusivity ending on October 17.
On October 8, CVC responded with a letter which provided for (i) a purchase
price of $21 per share, (ii) receipt of committed debt financing in writing
from the party providing the financing, prior to the announcement of a
transaction, (iii) all required due diligence to be completed as soon as
possible and in any event no later than October 24 and (iv) a definitive
agreement satisfactory to IPC to be negotiated and agreed to by October 24. An
IPC Board meeting to formally consider the new CVC offer was deferred pending
a better understanding by IPC of the details of the proposed structure, which
details were discussed with IPC management over the next two weeks.
During a telephone conference call with the IPC Board held on October 24,
IPC's management and representatives of DMG informed the IPC Board that (i)
CVC had raised its price from $20 per share to $21 per share, (ii) CVC
imminently would be receiving drafts of financing commitment letters from two
nationally recognized investment banking firms, each of whom had proposed a
different financing structure and (iii) CVC and IPC had been unable to
finalize documentation but efforts to do so were continuing.
From October 24 until December 5, the next regularly scheduled meeting of
the IPC Board, the IPC Board was kept apprised of developments and issues
through five telephone conference calls. Representatives of IPC's management
and of DMG and the Company's legal counsel participated in each conference
call.
A telephone conference call with the IPC Board was arranged on October 27 in
order for representatives of DMG to review the structure of the proposed
leveraged recapitalization with the IPC Board and to provide the directors the
opportunity to ask any questions they might have. In addition, representatives
of DMG described the proposed alternative financing structures to the IPC
Board.
During the conference call, the IPC Board discussed a potential conflict of
interest with respect to one of the Independent Directors, Theodore J.
Johnson, Managing Director--National Institutional Equity Research Sales and
Trading Manager of MSCI, because of the possibility that MSCI would serve as
lead underwriter for the debt financing. After a thorough discussion which
included a summary of discussions held between the
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Company's counsel and MSCI's counsel who was performing his own conflicts
review, the IPC Board determined that no conflict existed and that Mr. Johnson
could continue to serve as an independent director.
Representatives of DMG and IPC's management then informed the IPC Board of a
letter from a foreign diversified multinational company with substantial
telecommunications equipment manufacturing operations, which indicated its
interest in securing a minority interest in IPC but only if IXnet were sold.
Noting that the exclusive negotiation period offered to CVC had expired, the
IPC Board instructed DMG and IPC's management to further explore this
possibility.
During a telephone conference call with the IPC Board on October 31,
representatives of DMG and IPC's management informed the IPC Board of the
status of contacts with parties other than CVC and, together with
representatives of Company's legal counsel, discussed certain issues relating
to the proposed documentation with CVC, in particular, (i) the fact that CVC
had designated a newly-formed subsidiary with no significant assets to be its
only signatory to the Merger Agreement, thus providing IPC with limited or no
recourse in the event CVC, through such subsidiary, defaulted on the Merger
Agreement and (ii) the proposed termination fee and the circumstances under
which such a fee would be paid. With respect to the first issue,
representatives of DMG noted CVC's strong reputation in the financial
marketplace. With respect to the second issue, they also indicated that the
then proposed termination fee equal to 2-2 1/2% of the aggregate transaction
value, plus the reimbursement of reasonable fees and expenses, was not
atypical for this type of transaction. Members of the IPC Board continued to
discuss both the size of an acceptable termination fee and the type of
termination events that they believed should result in the payment of a
termination fee and the reimbursement of expenses.
During the ensuing weeks, negotiations leading toward definitive
documentation continued.
During a telephone conference call with the IPC Board held on November 26, a
number of issues were discussed. First, the IPC Board learned that discussions
with the foreign diversified multinational company discussed during the
October 27 telephone conference were not progressing and, that, while another
party was continuing to explore a direct interest in IXnet, the likelihood of
combining the separate interests of these two parties into a competitive offer
for the entire Company was remote in the immediate term. In addition, the IPC
Board was informed that a large domestic data-processing and servicing company
that had expressed an interest in the Company was no longer interested and
that a large multi-national computer manufacturing and services provider,
while potentially interested in the Company, would not be able to contemplate
a transaction until after January, 1998.
During this conference call, Richard P. Kleinknecht advised the IPC Board
that he did not intend to retain any shares of Surviving Corporation Common
Stock as part of the proposed transaction. As a result, the IPC Board directed
DMG to discuss with CVC the possibility of restructuring the transaction as a
tender offer instead of a recapitalization.
After discussion between Richard P. Kleinknecht and representatives of CVC
regarding the Company's long-term prospects, Richard P. Kleinknecht chose to
retain shares of Surviving Corporation Common Stock.
During a conference call with the IPC Board on December 3, Richard P.
Kleinknecht informed the IPC Board that Richard P. Kleinknecht had decided to
retain up to 10% of the outstanding shares of Surviving Corporation Common
Stock, which would most likely allow the transaction to be structured as a
recapitalization. It was noted that, since October 17, the expiration of the
exclusive negotiating period granted CVC, DMG had resumed solicitation of
other competitive offers. However, representatives of DMG advised the IPC
Board that no other third parties with whom discussions had been held had
indicated to DMG that they would be in a position to make a definitive offer
in the immediate future.
The IPC Board discussed a number of issues relating to the negotiations with
CVC, including (i) the necessity that IPC, and not the CVC-designated
purchaser, AAC, incur the debt required to consummate the transaction; (ii)
the acceptability of certain exceptions and conditions in the proposed
financing commitment
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letters; (iii) the proposed no solicitation provision; and (iv) the size and
the timing of the Company's payment of the proposed termination fee.
Because of questions related to the progress of the DMG engagement that had
arisen from investors and analysts during the two previous quarterly financial
conference calls held since announcing the DMG engagement on April 2, there
was also some discussion regarding IPC management's preference to announce a
definitive acquisition agreement with CVC simultaneously with IPC's fourth
quarter and fiscal year-end financial results announcement rather than shortly
thereafter.
The IPC Board directed IPC's management and IPC's legal counsel to attempt
to avoid terms in the Merger Agreement that would be likely to create any
material obstacles to an interested third party making a bid for the Company
after the Merger Agreement was signed.
On December 4, representatives of the Company, having initiated
communications with a new financial investor about a possible investment in
the Company, met with representatives of the new financial investor. Several
follow-up meetings were held.
During a regularly scheduled meeting of the IPC Board held on December 5,
representatives of DMG and legal counsel to the Company updated the IPC Board
on the remaining open issues with respect to the proposed transaction with
CVC, which included, among other things, the ongoing differences relating to
the extent, and effect on the Company, of stockholder lock-up agreements to
which Richard P. Kleinknecht, Peter J. Kleinknecht and others would be
parties, the scope of the no solicitation provision and the amount and timing
of payment of the termination fees and the types of fee-triggering termination
events.
It was also reported to the IPC Board that there were still numerous
unresolved issues relating to the Ancillary Agreements, most of which were
being negotiated between CVC and various employees, affiliates and
stockholders of IPC. The IPC Board heard descriptions of these negotiations
between CVC and (i) Richard P. Kleinknecht and Peter J. Kleinknecht, in
connection with proposed new employment agreements to replace their existing
employment agreements, (ii) David Walsh and Anthony Servidio, in connection
with the exchange of their minority equity interest in IXnet and other IXnet
related contractual rights for Surviving Corporation Common Stock and other
consideration, including new employment agreements and substantial grants of
stock options and (iii) KEC in connection with the Labor Pooling Agreements
and Corporate Opportunity Agreement. IPC's legal counsel noted that the delay
in finalizing the Merger Agreement was largely attributable to the foregoing
matters being resolved concurrently with the finalizing of the Merger
Agreement.
Finally, representatives of DMG notified the IPC Board of a letter received
from a financial investor requesting the opportunity to perform due diligence
on the Company so that it would be in a position potentially to make a timely
definitive offer for the Company which also provided for a leveraged
recapitalization and continued IPC shareholder minority investment. The
financial investor requested a ten-day period to perform its due diligence and
to meet with management and indicated its understanding of the requirement for
an accelerated time schedule.
The IPC Board authorized IPC's management to continue to explore a potential
transaction with this new party and also to continue efforts to resolve the
differences in the terms of the proposed Merger Agreement with CVC.
During a telephone conference call on December 11 with the IPC Board,
representatives of DMG updated the IPC Board on the status of negotiations
with the new financial investor and with CVC. With respect to the new
financial investor, it was noted that the new financial investor had met with
management and was taking the opportunity very seriously, although the new
financial investor had not proposed a price nor, to DMG's knowledge, did it
have committed financing.
Members of the IPC Board, believing that CVC was aware of the interest of a
competing financial investor, discussed possible reactions by CVC.
Representatives of DMG observed that there existed a risk of jeopardizing
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the only definitive offer received that met the criteria set by the IPC Board
at its June 26 meeting. With respect to CVC, representatives of IPC's legal
counsel discussed the remaining open issues with respect to the Merger
Agreement, including the amount and timing of the payment of a termination
fee, the termination events and the no solicitation provision. Representatives
of DMG advised the IPC Board that they did not believe that the 1 1/2%
termination fee (as then tentatively agreed to by CVC) together with the no
solicitation provision sought by CVC would materially impede another serious
possible suitor. In response to inquiries by the IPC Board concerning the fact
that only one definitive offer meeting the IPC Board's June 26 criteria had
been received, representatives of DMG reiterated that, although a public
auction had not been conducted, a press release relating to DMG's engagement
had been issued, equity research reports speculating on a sale of the Company
had been published by third parties, the Company had been extensively marketed
through contacts with approximately 40 parties and the industry was generally
aware of the solicitation efforts.
On December 12, based on CVC's belief of the existence of the other
financial investor, CVC communicated that, if an agreement was not signed with
CVC by Monday, December 15, its offer would be withdrawn. Following further
discussions between representatives of DMG and IPC's legal counsel and
representatives of CVC, CVC agreed to leave its offer open for a 48 hour
period beginning from the point all relevant documentation was finalized in
order to allow the IPC Board time to evaluate the final documentation.
On December 17, a special meeting of the IPC Board was called to provide the
IPC Board the opportunity to hear presentations from representatives of CVC
and from the new financial investor. A representative of DMG advised the IPC
Board of the deadline imposed by CVC and noted that, although the new
financial investor had attempted to complete its due diligence and review of
the Company in a short time frame, as far as DMG was aware, the new financial
investor did not yet have a firm financing commitment and had not yet proposed
a price or a preferred capital structure. A representative of the Company's
legal counsel described (i) the differences in the transaction structures
proposed by CVC and the new financial investor and (ii) the status of the
negotiations with each of CVC and the new financial investor, noting that
efforts to negotiate a satisfactory form of merger agreement with each party
were virtually complete.
A representative from DMG then discussed DMG's revised preliminary views as
to the possible ranges of values to a financial investor and to a strategic
investor.
Certain members of management discussed various aspects of a possible
transaction with the new financial investor and identified what they believed
to be certain advantages to such a transaction.
The IPC Board received an oral summary of the DMG Opinion (as herein
defined) which provided that, as of the date of the DMG Opinion and based upon
and subject to the various considerations set forth in the DMG Opinion, the
Merger Consideration offered by CVC pursuant to the terms of the Merger
Agreement was fair from a financial point of view to the holders of IPC Common
Stock.
As scheduled, representatives of IPC's legal counsel met separately with the
Independent Directors. They were given the opportunity to ask questions and to
consult with Delaware counsel who had agreed to be available by telephone for
this purpose.
Following this session, representatives of CVC made a detailed presentation
of CVC's offer, noting the complexity of the transaction, noting the numerous
parties whose interests had been addressed during the negotiations of the
Ancillary Agreements and how the structure of the transaction attempted to
accommodate those stockholders seeking liquidity, as well as those who wanted
to participate in IPC's future growth. They also informed the IPC Board that
CVC was aware that another financial investor was scheduled to make a
presentation following CVC's and that if the IPC Board heard this presentation
or communicated with the other financial investor, CVC would withdraw its
offer. The representatives of CVC then left the meeting to await, in a nearby
conference room, the IPC Board's decision.
The IPC Board then considered at length the merits of the CVC proposal and
the possible consequences of rejecting the CVC demand in order to enable the
IPC Board to consider what might be a superior offer from the
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new financial investor. Representatives of the Company's management again
expressed their belief regarding certain advantages to a transaction with the
new financial investor. The IPC Board acknowledged that, if the Company agreed
to sign a Merger Agreement with CVC's designee, AAC, the Company would be
bound by the terms of the Merger Agreement and would thereby be prohibited,
pursuant to the no solicitation provision, from soliciting or negotiating with
the other financial investor or any other third party. However, if IPC
subsequently received a Superior Acquisition Proposal from the other financial
investor, or any other third party, the Merger Agreement could be terminated
by the Company and that, under certain circumstances, such termination could
result in a termination fee of $3.37 million and the reimbursement of CVC's
fees and expenses up to $2.2 million, an approximate cost of approximately
$.52 per share.
Representatives of DMG reminded the IPC Board of the uncertainties regarding
a possible offer from the new financial investor: no price had previously been
communicated and any offer might be subject to further due diligence and could
be conditioned on financing. Furthermore, if CVC's proposal were withdrawn,
there would be little reason for the new financial investor to offer a higher
price.
After discussion and deliberation, the IPC Board, acting on the unanimous
recommendation of the Independent Directors, voted unanimously to approve the
Merger Agreement with CVC as fair and in the best interests of IPC and its
stockholders and to recommend, subject to the terms of the Merger Agreement,
the approval of the Merger Agreement by the Company's stockholders.
RECOMMENDATION OF THE IPC BOARD; REASONS FOR THE MERGER
At its meeting on December 17, 1997, the IPC Board, acting on the unanimous
recommendation of the Independent Directors, voted unanimously to approve the
Merger Agreement as fair and in the best interests of IPC and its stockholders
and to recommend, subject to the terms of the Merger Agreement, the approval
of the Merger Agreement to the holders of IPC Common Stock. The IPC Board
received an oral summary of the DMG Opinion, which provided that, as of the
date of the DMG Opinion and based upon and subject to the various
considerations set forth in the DMG Opinion, the Merger Consideration to be
received by the holders of IPC Common Stock pursuant to the terms of the
Merger Agreement was fair from a financial point of view to such holders.
The recommendation by the IPC Board that the IPC stockholders approve and
adopt the Merger Agreement is not, and should not be considered to be, a
recommendation by the IPC Board that the stockholders elect to retain or,
alternatively, that the stockholders sell shares, of IPC Common Stock held by
them in connection with the Merger.
In its deliberations, the IPC Board considered a number of factors
including, without limitation, the following:
1.The IPC Board's knowledge of the Company's business, operations,
properties, financial condition, operating results and prospects,
including, without limitation, the forecasted growth of the Company and
expected industry growth. From March 28, 1997 through the IPC Board meeting
on December 17, 1997, the IPC Board heard a number of presentations from
management and DMG, met or received telephone conference updates on
numerous occasions and otherwise participated in the process of evaluating
alternative strategies for enhancing shareholder value and, thereafter, of
exploring third party interest and, finally, negotiating the Merger
Agreement. The several bases for the optimistic expectations to be
expressed in the Company's September 30, 1997 Annual Report on Form 10-K
were reflected in DMG's analyses and presentations to the IPC Board. The
Company's traditional core business is mostly product oriented and as such
depends on period sales to support the revenue forecast. While management
does expect to continue its success in increasing market share for its
turret related products, the IPC Board was aware that the market is finite
and subject to cyclical market swings in the financial industry. This
market risk is well documented in analysts' reports, and the possibility of
such a general market downturn had been discussed by the IPC Board from
time to time. In fact, it is possible for the Company to achieve
incremental
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market share gains while showing a decrease in overall revenue, profits,
and cash flow as a result of a general market downturn. Nevertheless, the
financial forecasts and assumptions, on which DMG's fairness determination
was based, assumes year on year revenue growth. While management believes
it has taken certain actions and can take additional actions to mitigate
the impact of a possible soft market for its core product, the IPC Board
considered the Company's vulnerability to market cycles in the financial
industry as one of the factors in determining the fairness of the price and
terms offered by CVC. The IPC Board also took notice of certain actions
that had been taken by management such as the development of two new turret
products for the small systems market, broadening of the Company's product
portfolio to increase its sales opportunities in new market segments, and
the continuing acceleration of investments in IXnet to expand its
addressable market and increase the Company's mix of recurring revenue.
2.The IPC Board's belief that (a) the Merger Consideration was within the
possible ranges of values discussed by DMG and (b) the Merger Consideration
permitted IPC stockholders to recognize with certainty $21 per share in
cash for all their shares, whereas, without the Merger, the ability of IPC
stockholders to realize the Merger Consideration or any price within the
possible ranges of values discussed by DMG would be subject to significant
economic and competitive uncertainties and contingencies beyond IPC's
control.
3.The determination by the IPC Board that it would be desirable to
consolidate control in a single entity, through the sale of all or a
controlling interest in the Company, because of the differing views of
Richard P. Kleinknecht and Peter J. Kleinknecht, the two principal
stockholders of the Company, concerning the Company's prospects and
direction, as well as their substantial differences in risk tolerance with
respect to the level of continued investment in IXnet and the fact that
these differences had become generally known to employees and some
customers. The determination to consolidate control was believed necessary
to improve the Company's performance through a unified strategic direction.
4.The determination by the IPC Board that the single entity to whom
control of the Company would be sold would be able to provide, not only
direction, but also financial capacity to the Surviving Corporation to
promote IXnet's development. CVC's equity capital infusion of between $43.2
million and $72 million (depending on the number of Stock Electing Shares)
will enable the Company to access more funds from the debt capital markets,
thereby providing an additional source of capital for IXnet's development.
5.The IPC Board's belief, that, although only one definitive offer
meeting the IPC Board's June 26 criteria had been received, the Company had
been extensively marketed through contacts with approximately 40 parties
from the period beginning July 7, 1997 through December 17, 1997. The IPC
Board took into account that, although a public auction had not been
conducted, a press release relating to DMG's engagement had been issued,
equity research reports speculating on a sale of the Company had been
published by third parties, and the industry was generally aware of the
solicitation efforts.
6.The oral and written presentations of DMG, including the DMG Opinion.
The IPC Board did not materially rely on the May 8, 1997 and July 16, 1997
reports prepared by DMG in arriving at its fairness determination. The IPC
Board did not materially rely on the May 8, 1997 preliminary report by DMG
in arriving at its fairness determination because the information contained
in the report was based on (a) materially incomplete due diligence by DMG,
(b) forecasts prepared by DMG based on assumptions made by DMG, not the
Company and (c) an outdated business plan and outdated forecasts prepared
by the Company. At the May 8, 1997 special meeting of the IPC Board, the
IPC Board, noting these material deficiencies, did not consider DMG's
preliminary report useful and instructed management to prepare an updated
business plan and financial forecasts with assumptions upon which DMG could
determine more accurate preliminary financial valuation ranges. This effort
was completed in June, and at the June 26, 1997 special meeting of the IPC
Board the IPC Board received revised management-prepared financial
forecasts and assumptions. At the July 16, 1997 management meeting with
DMG, IPC management received DMG's revised preliminary valuation ranges
which, applying a discounted cash flow analysis and a leveraged buy-out
analysis, were both $20-$22 based on the revised and updated business plan
and the related management-prepared financial forecasts and assumptions.
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Management and the IPC Board found the July 16, 1997 report useful at the
time because it confirmed that the Company was most likely worth more than
was reflected by the trading price of the IPC Common
Stock and because the report provided a basis for a reasonable expectation
of what the process of soliciting indications of interest from third
parties should bring. Ultimately, however, the IPC Board relied heavily on
the fact that, after an extensive marketing effort by DMG, CVC's offer was
the only firm offer received and that it was within the final valuation
ranges presented orally to the IPC Board at its December 17, 1997 special
meeting. Thus, the July 16, 1997 DMG presentation was not given any
material consideration because it had been superseded by DMG's final
presentation.
7.The terms and conditions of the Merger Agreement including in
particular the "no solicitation" provision, the termination fee and expense
reimbursement provision and the termination events provision. Although
termination of the Agreement would be subject to an obligation, under
certain circumstances, to pay a termination fee and reimburse expenses, the
IPC Board determined that these provisions, (a) would not materially impede
another serious possible suitor and would allow the IPC Board to fulfill
its fiduciary obligations to consider such a Superior Acquisition Proposal
in the event one were to be received and (b) would allow the IPC Board to
terminate the Merger Agreement if the IPC Board's approval or
recommendation of the Merger Agreement and the Merger were withdrawn,
modified or amended in a manner adverse to AAC.
8.The terms and conditions of the Stockholders Agreement (which among
other things obligates the Kleinknecht Stockholders to vote in favor of the
Merger Agreement), including in particular the fact that it would terminate
if the IPC Board determined to terminate the Merger Agreement (subject to
an obligation, under certain circumstances, to pay a termination fee and
reimburse expenses), thereby enabling the Company to engage in another
transaction involving the sale of all or a controlling interest in the
Company.
9.The inability of the Company to recapitalize on its own at a price
equal to or better than $21 per share without a third party equity sponsor.
Although it might have been possible for the Company to have raised a
similar level of debt on its own, without a third party equity sponsor, the
Company would have been only able to offer either (i) $21 per share to a
limited number of IPC stockholders or (ii) significantly less than $21 per
share for all IPC stockholders, who would then all be required to retain
some stock as a result of proration.
10.The endorsement by Richard P. Kleinknecht (who has expressed his
intent to convert all, except for 380,952, of his beneficially owned IPC
Common Stock into cash) and Peter J. Kleinknecht (who has expressed his
intent to sell all of his beneficially owned IPC Common Stock) of the CVC
offer and the consideration to be received thereunder as fair and in the
best interests of the Company and its stockholders. The IPC Board took into
account Richard P. Kleinknecht's intention to retain up to 380,952 shares
of Surviving Corporation Common Stock in determining that the transaction
would most likely be afforded recapitalization treatment. Because Richard
P. Kleinknecht, like the other IPC stockholders, will be subject to
proration in the event IPC stockholders elect to retain shares of Surviving
Corporation Common Stock in excess of the Maximum Stock Election Number,
and therefore all IPC stockholders will be treated alike, the IPC Board did
not take Richard P. Kleinknecht's retention of stock into account in its
fairness determination.
11.The IPC Board's consideration of the conditions to closing included in
the Merger Agreement and the fact that the financing commitment letters
furnished by MSSF, MSCI and CVC rendered the financing condition likely to
be satisfied, and the IPC Board's belief that CVC was a recognized
participant in the financial marketplace with a longstanding history of
completing transactions.
12.The fact that, as a result of Richard P. Kleinknecht's agreement under
the Stockholders Agreement to retain up to 380,952 shares of Surviving
Corporation Common Stock, which is equal to the Minimum Stock Election
Number, all IPC stockholders who elect to convert their stock into cash
will receive the full amount in cash and will not be required to retain a
portion of their shares of Surviving Corporation Common Stock.
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13.The IPC Board's belief that, as a result of the consummation of the
transactions contemplated by the Merger Agreement, the Surviving
Corporation (on a consolidated basis) (a) will not be left with
unreasonably small capital, (b) will not have incurred debts beyond its
ability to pay such debts as they mature, and (c) will have a fair value
and present fair salable value of its assets in excess of its stated
liabilities and identified contingent liabilities. A condition to closing
provides that the IPC Board will receive an opinion to the foregoing effect
from an independent valuation firm.
14.The possible adverse effect on a potential transaction if the trading
price of the IPC Common Stock were to materially decline as a result of not
announcing a transaction at the time of the year-end earnings announcement,
more than eight months after announcing the Company's initial engagement of
DMG.
15.The IPC Board's belief that the price of IPC's Common Stock did not
reflect the Company's true value as evidenced by the fact that in early
1997 the price of IPC Common Stock was trading below the initial public
offering price of $15.00, having hit an historic low of $8 7/8 on March 24
and March 25. There was a lack of equity analyst research coverage, and the
Company's management believed that the equity markets did not fully
understand the Company's mix of a mature equipment manufacturing business
with a developmental stage growth subsidiary (IXnet) and the synergies and
growth that the Company's management projected from this mix.
In addition to the foregoing factors, the IPC Board considered the
following:
1.The effect of the transaction on management. Because certain members of
management had made known what they believed to be certain advantages to a
transaction with another possible financial investor, the IPC Board
considered the effect on management of consummating the proposed
transaction with CVC. However, the IPC Board concluded that it was more
important that its determination be made on the basis of what was in the
best interest of the holders of IPC Common Stock.
2.The high level of debt to be incurred by the Surviving Corporation as a
result of the financing required to consummate the transactions
contemplated by the Merger Agreement and to develop IXnet. The IPC Board
took into account the increased risks associated with the substantial
indebtedness to be incurred by the Surviving Corporation (to IPC and to the
IPC stockholders who elect to retain Surviving Corporation Common Stock),
but also recognized that in order for the Merger to be consummated and in
order to ensure that all the IPC stockholders choosing to convert their IPC
Common Stock into cash could receive $21 per share in cash without being
subject to proration, such a level of debt had to be incurred. CVC proposed
the leveraged recapitalization structure as CVC was only interested in a
transaction which would be accounted for as a leveraged recapitalization.
The transaction was therefore structured in such a way as to qualify for
recapitalization treatment under generally accepted accounting principles.
One of the requirements for a merger to qualify for recapitalization
treatment is that a certain portion of the outstanding equity securities of
the recapitalized company remain outstanding. See "Special Factors--Effects
of the Merger; Effective Time of the Merger," "--Federal Income Tax
Consequences; "--Accounting Treatment," "--Interests of Certain Persons in
the Merger," "--Effect on IPC Employee Benefit Plans".
3.The expected decline in the number of stockholders, the number of
shares outstanding and the volume of shares of IPC Common Stock following
the Merger and the potential delisting of such shares as a result thereof,
all of which will be likely to make an investment in the Surviving
Corporation less liquid.
4.The fact that (a) the IPC stockholders who choose to convert their
shares of IPC Common Stock into cash would not have an opportunity to
participate in any future growth of the Company and (b) the IPC
stockholders who choose to retain their shares of the Surviving Corporation
Common Stock will be unable to participate fully in any such future growth
due to the potential dilution following the Merger of the equity percentage
and book value of the shares of the Surviving Corporation Common Stock to
be retained by such stockholders.
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5.Because the approval of the Merger Agreement requires a vote of the
majority of the outstanding shares of IPC Common Stock and because the
Kleinknecht Stockholders have agreed to vote all their beneficially owned
shares (equal to approximately 64% of the outstanding shares of IPC Common
Stock), the vote of the unaffiliated stockholders of IPC will not be
determinative of the outcome of the vote to approve the Merger Agreement.
(However, in order for the Certificate Amendment to be adopted and
approved, an additional approximately 16% of the shares of IPC Common Stock
must vote in favor of the proposal.) CVC was only willing to enter into the
Merger Agreement if it was assured, through the Stockholders Agreement with
the Kleinknecht Stockholders, that the requisite stockholder vote to
approve the Merger Agreement would be obtained and that the Merger
Agreement would not permit the Company to condition approval of the Merger
Agreement on the vote of the unaffiliated stockholders. Therefore, the IPC
Board did not take the lack of an unaffiliated stockholder vote into
account in determining whether the Merger Agreement was fair and in the
best interest of the IPC stockholders.
6.The lack of contractual restrictions or limitations on CVC's engaging
in a second stage transaction which could eliminate the minority
stockholders of the Surviving Corporation at a price lower than $21 per
share. Although the IPC Board was concerned about the effects that a second
stage transaction might have on those IPC stockholders electing to retain
Surviving Corporation Common Stock, the IPC Board relied on CVC's
statements to the effect that it had no plan or proposal for the Surviving
Corporation to engage in such a transaction.
In arriving at its fairness determination, the IPC Board considered the
discounted cash flow and leveraged buyout analysis presented by DMG, and the
current and historical market prices of IPC Common Stock. Although the IPC
Board did not consider the liquidation value or the book value of IPC, it was
the IPC Board's view that such values would be significantly below the other
possible ranges of values discussed by DMG using other valuation
methodologies. The discussion of the information and factors considered and
given weight by the IPC Board in this section, "Recommendation of the IPC
Board; Reasons for the Merger," is not intended to be exhaustive. In view of
the variety of factors considered in connection with its evaluation of the
Merger, the IPC Board did not find it practicable to, and did not, quantify or
otherwise assign relative weights to the specific factors considered in
reaching its determination. In addition, individual members of the IPC Board
may have given different weights to different factors.
Richard P. Kleinknecht also concluded that the Merger Agreement was fair and
in the best interests of IPC and its stockholders. In reaching this
conclusion, Richard P. Kleinknecht considered all of the factors listed above
that were considered by the IPC Board. Richard P. Kleinknecht did not consider
any other material factors and did not assign a particular weight to any one
factor. Richard P. Kleinknecht based his decision to retain up to 380,952
shares of Surviving Corporation Common Stock on his belief that it will be an
attractive investment opportunity, although it will involve substantial risk.
By agreeing to retain up to 380,952 shares of Surviving Corporation Common
Stock, Richard P. Kleinknecht will be able to divest a substantial portion of
his investment in IPC and at the same time make it possible for all those IPC
stockholders choosing to convert their IPC Common Stock into cash to receive
$21 per share in cash without being subject to proration. Another consequence
of Richard P. Kleinknecht's agreement to retain up to 380,952 shares was that
the transaction would likely be structured as a recapitalization.
Because of the role of the Independent Directors and the engagement of DMG
and the Company's outside legal counsel, the IPC Board did not appoint an
unaffiliated representative to act solely on behalf of the unaffiliated
holders of IPC Common Stock.
OPINION OF FINANCIAL ADVISOR
Pursuant to the Engagement Letter, DMG provided a financial fairness opinion
to IPC in connection with the Merger Agreement. At the meeting of the IPC
Board on December 17, 1997, DMG rendered its oral opinion, which was
subsequently confirmed in writing as of December 17, 1997 (the "DMG Opinion"),
that, as of such date, based upon and subject to the various considerations
set forth in the DMG Opinion, the Merger Consideration to be received by the
holders of IPC Common Stock pursuant to the terms of the Merger Agreement was
fair from a financial point of view to such holders. DMG has rendered a
subsequent confirmation dated April 6, 1998 that, as of April 6, 1998, DMG
remained of the same opinion.
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THE FULL TEXT OF THE DMG OPINION, WHICH SETS FORTH, AMONG OTHER THINGS,
ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS ON
THE SCOPE OF THE REVIEW UNDERTAKEN BY DMG IN RENDERING THE DMG OPINION, IS
INCLUDED AS ANNEX E-1 TO THIS PROXY STATEMENT/PROSPECTUS. IPC STOCKHOLDERS ARE
URGED TO READ THE DMG OPINION CAREFULLY AND IN ITS ENTIRETY. THE DMG OPINION
ADDRESSES ONLY THE FAIRNESS OF THE MERGER CONSIDERATION FROM A FINANCIAL POINT
OF VIEW TO THE IPC STOCKHOLDERS AS OF THE DATE OF THE DMG OPINION, AND DOES
NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW SUCH STOCKHOLDER
SHOULD VOTE AT THE ANNUAL MEETING. THE SUMMARY OF THE DMG OPINION SET FORTH IN
THIS PROXY STATEMENT/PROSPECTUS IS QUALIFIED BY REFERENCE TO THE FULL TEXT OF
THE DMG OPINION.
In rendering the DMG Opinion, DMG, among other things: (i) analyzed certain
publicly available financial statements and other information of IPC; (ii)
reviewed and analyzed certain financial projections of IPC for the period
1998-2002 prepared by the Company (the "Projections"); (iii) discussed with
senior management of IPC the current operations, financial condition and the
prospects of the Company; (iv) reviewed the reported stock prices and trading
activity for IPC Common Stock; (v) compared the historical financial
performance and market trading values of IPC with that of certain other
generally comparable publicly-traded companies and their securities; (vi)
reviewed the financial terms, to the extent publicly available, of certain
comparable acquisition transactions; (vii) based on the Projections, performed
a discounted cash flow analysis and leveraged buy-out analysis of IPC; (viii)
discussed with senior management of IPC other acquisition proposals and
related discussions the Company held with other parties; (ix) reviewed the
financial terms of the Merger Agreement; and (x) performed such other
financial analysis and examinations and considered such other factors as DMG
deemed appropriate.
In rendering the DMG Opinion, DMG assumed and relied upon, without
independent verification, the accuracy and completeness of the information
reviewed by DMG for the purposes of the DMG Opinion. With respect to the
Projections supplied by or confirmed by IPC, DMG further assumed that such
Projections represented the best currently available estimates and judgment of
the management of IPC as to the expected future financial performance of the
Company. DMG did not make any independent verification of information supplied
by or confirmed by IPC and did not undertake any independent valuation or
appraisal of the assets or liabilities of IPC, nor was DMG furnished with such
appraisals. The DMG Opinion does not imply any conclusion as to the likely
trading range for the Surviving Corporation Common Stock following the Merger,
which may vary depending upon, among other factors, changes in interest rates,
market conditions, general economic conditions and other factors that
generally influence the price of securities. The DMG Opinion does not address
IPC's underlying business decision to effect the Merger. DMG assumed that the
Merger would be consummated in accordance with the terms set forth in the
Merger Agreement. The DMG Opinion is necessarily based on economic, market,
financial and other conditions as in effect on, and the information made
available to DMG as of, the date thereof.
The following is a summary of the analysis performed by DMG in preparation
of the DMG Opinion, and reviewed with the IPC Board at its meeting held on
December 17, 1997. This analysis was provided to the IPC Board for background
information only and was one of the many factors considered by DMG in
rendering the DMG Opinion. No conclusions can be independently drawn from any
independent analysis. The methodologies described below are commonly used in
preparing financial fairness opinions. After applying these methodologies to
the Company, it was determined that the lack of identical companies and
transactions with which to compare to the Company and the Merger rendered
methodologies based on this data not meaningful in DMG's determination that
the Merger Consideration was fair to the IPC stockholders from a financial
point of view.
(i)Historical Trading Analysis: DMG reviewed the history of trading
prices and volumes for shares of IPC Common Stock over the period from
September 27, 1994 to December 16, 1997. DMG observed that the $21 offer
price represented a premium of 18%, 17% and 123% over the December 16, 1997
closing
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price, the 10-day moving average IPC share price ending December 16, 1997
and the April 1, 1997 closing price, respectively. DMG observed that on
April 2, 1997, IPC's announcement that it had retained DMG to advise and
assist IPC in achieving enhanced shareholder value, had a perceived
positive impact on the IPC stock price.
(ii)Peer Group Comparison: DMG performed a peer group comparison analysis
for IPC. DMG examined certain publicly available financial and market
information of four selected publicly-traded companies in the
telecommunications equipment sector: Cidco Inc., Plantronics Inc., Inter-
tel Inc., and Communications Systems, Inc. (the "Selected
Telecommunications Equipment Companies") and compared the financial
performance of IPC's turret systems and I.T.S. divisions with this group of
companies. DMG also selected five publicly-traded companies in the
international long distance re-seller sector: IDT Corp., Primus
Telecommunications, Trescom International Inc., Viatel Inc. and ACC Corp.
(the "Selected International Long Distance Re-seller Companies") which were
compared with the financial performance of the IXnet division. The peer
group comparison showed median ratios for the Selected Telecommunications
Equipment Companies of market capitalization plus total debt and preferred
stock less cash ("Aggregate Value") to revenue, earnings before interest,
taxes, depreciation and amortization ("EBITDA"), and earnings before
interest and taxes ("EBIT") for 1997 of 1.85x, 10.9x, and 12.0x,
respectively, and a median equity value to net income for 1997 of 19.5x. A
similar analysis for 1998 ratios for the Selected Telecommunications
Equipment Companies of Aggregate Value to revenue, EBITDA and EBIT showed
median multiples of 1.62x, 11.2x, and 11.6x, respectively, and a median
equity value to net income for 1998 of 15.2x. The analysis for the Selected
International Long Distance Re-seller Companies showed median ratios of
Aggregate Value to revenue for 1997, 1998, 1999 and 2000 of 2.07x, 1.40x,
0.95x and 0.83x, respectively, and Aggregate Value to EBITDA for the same
years of 10.5x, 11.9x, 5.8x and 4.7x, respectively. Median multiples of
equity value to net income for 1998, 1999 and 2000 were 36.0x, 25.7x and
18.4x, respectively.
This analysis did not affect DMG's fairness determination because no
company used in the peer group comparison was identical to IPC's turret
systems and I.T.S. divisions or IXnet. DMG did not find it meaningful to
infer a range for each of the valuation measures for the peer group
members. In addition, because DMG concluded there were no companies that
were identical to the Company, a comparison between the Company and the
amounts of the ranges for the peer group would have been impracticable.
Accordingly, an analysis of the results of the foregoing necessarily
involves complex considerations and judgments concerning differences in
financial and operating characteristics of the companies and other factors
that could affect the public trading value of the companies to which they
are being compared. Mathematical analysis is not, in itself, a meaningful
method of ensuring comparable company data.
(iii) Discounted Cash Flow Analysis: DMG performed an analysis of the
present value per share of IPC Common Stock based on free cash flows
determined using the assumptions and Projections for IPC which were
discussed, reviewed and confirmed by management for calendar years 1998 to
2002 (the "IPC Best Case"). The Projections included certain corporate
overhead and research and development savings to be implemented as a result
of and following financial due diligence by CVC and the lead debt
underwriters. DMG also performed a sensitivity to the IPC Best Case which
reflected more conservative growth and profitability assumptions (the "IPC
Flat Case"). DMG performed separate valuations for (a) the turret systems
and I.T.S. divisions and (b) IXnet reflecting the different risk and growth
profiles of the businesses. DMG applied a range of discount rates of
between 14% to 15% for the projected cash flows of the turret systems and
I.T.S. divisions. This discount range was selected on the basis of a
weighted average cost of capital analysis for the Company. The exit
terminal value in 2002 was calculated based on a perpetual growth rate of
2.5% to 3.0%, which seemed consistent with the future growth profile of the
turret systems and I.T.S. divisions. DMG treated IXnet as a new venture
equity investment and assumed a cost of equity range of 35% to 40% which
was regarded as reasonable given its early developmental stage and current
business projections. An EBITDA exit multiple of 5.5x to 6.5x was applied
in 2002 to calculate the terminal value of IXnet which implied an exit
revenue multiple of 1.30x to 1.50x. This multiple range was found to be
generally consistent with the range of exit multiples used by equity
research analysts for more mature
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comparable companies. Based on a summation of the valuations for (a) the
turret systems and I.T.S. divisions and (b) 80% of IXnet (as of the date of
the DMG Opinion, IPC owned 80% of IXnet), DMG computed a range of estimated
values per share of IPC Common Stock for the IPC Flat Case and the IPC Best
Case of $17 to $24.
(iv) Selected Precedent Transactions: DMG reviewed eight transactions
since 1994 involving companies in the telecommunications equipment sector:
(i) Octel Communications Corp./Lucent Technologies Inc. (July 1997); (ii)
ITC Media Conferencing/Williams Cos. Inc. (September 1996); (iii)
Electronic Systems division (SAFCO Corp.)/Gilbert Assoc., Inc. (August
1996); (iv) Colonial Data Technologies/US Order Inc. (August 1996); (v)
Reliance Comm/Tec (Rockwell International Corp.)/Kohlberg Kravis Roberts &
Co. (June 1996); (vi) ConferTech International Inc./ALC Communications
Corp. (January 1995); (vii) Realcom Office Communications/MFS
Communications Inc. (May 1994); and (viii) VMX/Octel Communications
(January 1994). DMG computed various multiples which resulted in median
multiples of Aggregate Value paid for the target company as a ratio of its
last twelve months' ("LTM") revenues, EBITDA and EBIT of 1.44x, 9.7x and
18.7x, respectively. Median multiples of equity value paid for the target
company compared to LTM earnings and book value were 25.9x and 3.34x,
respectively. DMG also reviewed eight transactions since 1994 in the second
tier inter-exchange carrier industry: (i) ACC Corp./Teleport Communications
Group (November 1997); (ii) USLD Communications Corp./LCI International,
Inc. (September 1997); (iii) Consolidated Communications Inc./McLeodUSA
Inc. (June 1996); (iv) Telco Communications Group, Inc./EXCEL
Communications, Inc. (June 1997); (v) Corporate Telemanagement Group/LCI
International Inc. (May 1995); (vi) ALC Communications/Frontier Corp.
(April 1995); (vii) IDB Communications Inc./LDDS Communications (August
1994); and (viii) WilTel Network Services (The Williams Cos. Inc.)/LDDS
Communications (August 1994). DMG computed various multiples which resulted
in median multiples of Aggregate Value paid for the target company compared
to LTM revenues, EBITDA and EBIT of 2.60x, 13.7x and 26.6x, respectively.
Median multiples of equity value paid for the target company compared to
LTM earnings and book value were 24.8x and 9.7x, respectively.
This analysis did not affect DMG's fairness determination because no
transaction used in the precedent transactions analysis summarized above
was identical to the Merger. DMG did not find it meaningful to infer a
range for each of the valuation measures for the precedent transaction
analysis. In addition, because DMG concluded there were no transactions
identical to the Merger, a comparison between the proposed transaction and
the amounts of the ranges would have been impracticable. Accordingly, an
analysis of the value of the Merger involves complex considerations and
judgments concerning differences in the potential financial and operating
characteristics of the comparable companies and other factors in relation
to the trading and acquisition values of the comparable companies and
publicly announced transactions. Mathematical analysis is not, in itself, a
meaningful method of ensuring comparable transaction data.
(v) Leveraged Buy-Out Analysis: DMG performed a leveraged buy-out ("LBO")
analysis of the turret systems and I.T.S. divisions of IPC assuming a
recapitalization of the company. DMG used the IPC Best Case and IPC Flat
Case projections for the turret systems and I.T.S. divisions. Given the
projected negative cash flow characteristics of IXnet, DMG valued this
division separately and on the basis of the discounted cash flow analysis
as outlined above. The LBO analysis assumed the following: transaction
capitalization: 26% equity (reflecting $80 million equity capitalization at
$21 per share); $157 million of subordinated debt at 11% interest cost,
receivable financing credit line of up to $75 million at 7% interest cost
and $50 million as pre-funding for IXnet working capital. DMG also analyzed
an alternative funding structure assuming no interest paid for 3 years on
the $157 million subordinated debt, with such interest accruing to the
principal, with IXnet funded from the cash flow generated by the turret
systems and I.T.S. divisions (such funding capped at $50 million). The LBO
valuation analysis for the IPC Best Case and the IPC Flat Case was computed
on achieving a set of constraints which included: a required rate of return
for the equity investors of 25% to 30%; a maximum total debt ratio to
EBITDA of 5.0x; the subordinated debt being re-paid within seven years; and
EBITDA to interest coverage ratio of being greater than 1.35x. Based on
this analysis and a summation of the valuations for (a) the LBO analysis of
the turret systems and I.T.S.
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divisions and (b) the discounted cash flow analysis valuation for 80% of
IXnet, DMG computed a range of estimated values per share of IPC Common
Stock for the IPC Flat Case and the IPC Best Case of $13 to $22.
(vi) Premiums Paid Analysis: DMG analyzed premiums paid in a number of
selected public telecommunications transactions since 1988. Such analysis
showed median offer premiums of approximately 23%, 29% and 36% over the
average closing stock price of the target company over 1 day, 10 day and 30
day periods ending the day preceding the public announcement of these
transactions, respectively. DMG also reviewed selected recent leveraged
recapitalization transactions: (i) Zilog, Inc./Texas Pacific Group, Inc.
(July 1997); (ii) Alliance Imaging, Inc./Newport Investment LLC (July
1997); (iii) Fisher Scientific International, Inc./Investor Group (DLJ
Merchant Banking, Chase Capital Partners, Thomas Lee & Co.) (August 1997);
and (iv) Amscan Holdings, Inc./GS Capital Partners II (August 1997). Such
analysis showed median offer premiums of approximately 10%, 10% and 16%
over the average closing stock price of the target companies over a 1 day,
10 day and 30 day period ending the day preceding the public announcement
of the transactions, respectively. DMG observed that the $21 offer price
for IPC Common Stock represented average premiums of approximately 18%,
17%, 16% and 123% over the December 16, 1997 closing stock price, the 10-
day average closing price prior to the announcement of the transaction, the
30-day average closing price prior to the announcement and April 1, 1997
(the day prior to the IPC announcement that DMG had been retained to advise
and assist IPC in achieving enhanced shareholder value), respectively.
(vii) Other Considerations: DMG also gave consideration to the results of
its efforts to solicit indications of interest for all or a controlling
interest in IPC. The retention of DMG by IPC to advise and assist IPC in
achieving enhanced shareholder value was publicly announced on April 2,
1997 and certain market analysts commented that the retention of DMG
signaled an intention of the IPC Board to sell the Company. During the
process, DMG contacted approximately 40 parties in total. In considering
the fairness of the transaction, DMG observed that, despite an extensive
marketing process, only one party made a definitive offer for IPC as a
whole.
The financial forecasts and assumptions prepared by IPC's management in
June 1997 (upon which DMG's July 16, 1997 financial valuation ranges were
based) took into account the market power derived from the Company's
significant market penetration for its turret systems business. However,
because DMG concluded that no company used in the peer group comparison was
identical to IPC's turret systems and I.T.S. divisions or IXnet and that no
transaction used in the precedent transactions analysis was identical to
the Merger, DMG gave little consideration in its peer group comparison and
precedent transaction analysis to the Company's market power derived from
the Company's significant market penetration for its turret systems.
In connection with the review of the Merger by the IPC Board, DMG performed
a variety of financial and comparative analyses for the purpose of rendering
the DMG Opinion. While the foregoing summary describes all material analyses
and factors reviewed by DMG with the IPC Board, it does not purport to be a
complete description of the presentation by DMG to the IPC Board or the
analyses performed by DMG in arriving at the DMG Opinion. The preparation of a
fairness opinion is a complex process and is not necessarily susceptible to
partial analysis or summary description. DMG believes that its analyses must
be considered as a whole and that selecting portions of its analyses and of
the factors considered by it, without considering all analyses and factors,
could create a misleading view of the processes underlying the DMG Opinion. In
addition, DMG may have given various analyses more or less weight than other
analyses, and may have deemed various assumptions more or less probable than
other assumptions, so that the range of valuation resulting from any
particular analysis described above should not be taken to be DMG's view of
the actual value of IPC. In performing its analyses, DMG made numerous
assumptions with respect to industry performance, general business and
economic conditions and other matters, many of which are beyond the control of
IPC. The analyses performed by DMG are not necessarily indicative of actual
values or actual future results, which may be significantly more or less
favorable than suggested by such analyses. In addition, analyses relating to
the value of businesses or assets do
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not purport to be appraisals or necessarily to reflect the prices at which
businesses or assets may actually be sold. The analyses performed were
prepared solely as part of DMG's analysis of the fairness of the Merger
Consideration, from a financial point of view, to the holders of IPC Common
Stock and were provided to the Board of IPC Directors in connection with the
delivery of the DMG Opinion.
DMG is an internationally recognized investment banking and advisory firm.
DMG, as part of its investment banking business, is continuously engaged in
the valuation of businesses and securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. In the ordinary course of its
business, DMG and its affiliates may actively trade the securities and loans
of IPC for their own accounts and for the accounts of their customers and,
accordingly, may at any time hold a long or short position in such securities
and loans.
DMG has from time to time provided investment banking and financial advisory
services to IPC and has received fees for rendering such services. In
addition, both Deutsche Bank AG and DMG are substantial customers of IPC,
purchasing turrets, I.T.S. and IXnet services on an ongoing basis.
Although several nationally recognized investment banks, including DMG, were
familiar with the Company and the industries within which the Company
competed, the Company retained DMG in part because of its belief that the
substantial relationship with DMG (and, because of that relationship, its
significant relationship with senior executives of DMG's parent, Deutsche Bank
AG) was such that the Company would receive greater attention from more senior
people than it would from other investment banks.
IPC and DMG entered into a letter agreement dated March 27, 1997 (the
"Letter Agreement"), pursuant to which DMG was engaged to evaluate and advise
IPC on alternative strategies for enhancing shareholder value. The advisory
fee under such agreement was equal to $250,000, $125,000 of which was paid
upon execution of such agreement and the balance was to be paid on the date 12
months after the date of such agreement, provided, however, that if IPC
retained DMG to provide services in connection with a transaction described
therein, the balance of the advisory fee would be waived.
Pursuant to the Engagement Letter, IPC has agreed to pay DMG a retainer in
the amount of $500,000, payable in two installments and a success fee on
closing of a transaction equivalent to 1.25% of the aggregate value of the
transaction, subject to a minimum of $1.0 million, against which such retainer
fee will be credited. The second $125,000 installment of the advisory fee
described in the preceding paragraph was waived pursuant to the terms of the
Letter Agreement. In addition, IPC has agreed to reimburse DMG for its
reasonable out-of-pocket expenses incurred in connection with its engagement,
and to indemnify DMG and certain related persons against certain liabilities
and expenses arising out of or in conjunction with its rendering of services
under its engagement, including certain liabilities under the federal
securities laws.
EFFECTS OF THE MERGER; EFFECTIVE TIME OF THE MERGER
The Merger will become effective upon the filing of the Certificate of
Merger with the Secretary of State of the State of Delaware or at such later
time as is specified in the Certificate of Merger. The filing of the
Certificate of Merger will occur as soon as practicable on or after the
closing of the Merger unless another date is agreed to in writing by the
Company and AAC. Subject to certain limitations, the Merger Agreement may be
terminated by either party if, among other reasons, the Merger has not been
consummated by April 30, 1998. See "--Conditions to the Consummation of the
Merger" and "--Termination."
The Merger Agreement provides that the Certificate of Incorporation of the
Surviving Corporation, as amended by the Ballot Amendment, will be the IPC
Certificate of Incorporation. The IPC Certificate of Incorporation is proposed
to be amended in the Merger by adding a provision stating that votes taken in
the election of directors need not be, unless required by law or the By-laws,
by written ballot. Such amendment is intended to provide the Company and its
stockholders with flexibility in electing directors in the event there is a
small number of stockholders following the Merger. For a discussion of certain
other proposed amendments contained in the Certificate Amendment see "Proposal
2--Certificate Amendment."
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Following the Merger, the total number of outstanding shares of IPC Common
Stock will decrease from approximately 10.7 million shares to approximately
3.8 million shares of Surviving Corporation Common Stock, of which the
stockholders of AAC will own between 2,057,143 and 3,428,572 shares of
Surviving Corporation Common Stock (representing between 50.25% and 86.25%
(prior to giving effect to the IXnet Exchange)), and the existing holders of
IPC Common Stock will own between 380,952 and 1,752,381 shares of Surviving
Corporation Common Stock (representing between 10% and 46%), depending upon
the number of shares of Surviving Corporation Common Stock to be retained by
existing holders of IPC Common Stock and cash to be received in lieu of
fractional shares of Surviving Corporation Common Stock. The stockholders of
the Surviving Corporation will immediately be subject to dilution as a result
of the exchange of shares of IXnet Common Stock for shares of Surviving
Corporation Common Stock and will be subject to dilution upon the exercise of
options granted under the New Stock Incentive Plan. See "THE MERGER--Ancillary
Agreements--Share Exchange and Termination Agreement" and "Proposal 3--New
Stock Incentive Plan."
FEDERAL INCOME TAX CONSEQUENCES
This discussion is a general summary of the material United States federal
income tax consequences of the Merger to stockholders of the Company and does
not purport to be a complete analysis or discussion of all potential tax
considerations or consequences relevant to a decision whether to vote for the
approval of the Merger, or whether to make an election to retain shares of
Surviving Corporation Common Stock or to receive cash with respect to a
stockholder's shares of IPC Common Stock or to make a split election. The tax
treatment described herein may vary depending upon each stockholder's
particular circumstances and tax position. Certain stockholders (including
insurance companies, tax-exempt organizations, retirement plans, financial
institutions or broker-dealers, foreign corporations, persons who are not
citizens or residents of the U.S., stockholders who do not hold their shares
as capital assets, stockholders who have acquired their existing stock upon
the exercise of options or otherwise as compensation and stockholders who hold
their stock as part of a "straddle," "hedge" or "conversion transaction") may
be subject to special rules not discussed below. No ruling from the Internal
Revenue Service ("IRS") will be applied for with respect to the federal income
tax consequences discussed herein and, accordingly, there can be no assurance
that the IRS will agree with the conclusions stated herein. The discussion
below is based upon the provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), and regulations, rulings and judicial decisions
thereunder as of the date hereof, and such authorities may be repealed,
revoked or modified, possibly on a retroactive basis, so as to result in U.S.
federal income tax consequences different from those discussed below. In
addition, this discussion does not consider the effect of any applicable
foreign, state, local or other tax laws. EACH STOCKHOLDER SHOULD CONSULT HIS
OR HER OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO HIM OR HER OF
THE MERGER, INCLUDING THE APPLICABILITY AND EFFECT OF ANY FOREIGN, STATE,
LOCAL OR OTHER TAX LAWS, ANY RECENT CHANGES IN APPLICABLE TAX LAWS AND ANY
PROPOSED LEGISLATION.
Tax Opinion
Thacher Proffitt & Wood has rendered an opinion (the "Tax Opinion") that the
following discussion addresses the material United States federal income
matters and consequences generally applicable to the Merger under currently
applicable law. The Tax Opinion is not binding on the IRS, and there can be no
assurance that the IRS will not contest the conclusion stated herein.
Characterization of the Merger for U.S. Federal Income Tax Purposes
For U.S. federal income tax purposes, AAC will be disregarded as a
transitory entity, and a shareholder who chooses to receive cash in the Merger
with respect to such stockholder's shares of IPC Common Stock (the "Cash
Electing Shares") will be treated as if there were a sale of a portion of such
shares to CSH LLC and a purchase of a portion of such shares by the Company.
Because there is a lack of judicial or administrative precedent as to the
method of determining the extent to which the cash paid for Cash Electing
Shares should be
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treated as having been paid by CSH LLC or by the Company, it is unclear how
the allocation of proceeds between the two should be determined. The Company
intends to take the position that the percentage of a stockholder's Cash
Electing Shares that will be treated as if sold to CSH LLC will be a
percentage of such shares equal to (i) the amount contributed to AAC by CSH
LLC in exchange for shares of AAC common stock or as a capital contribution
divided by (ii) the aggregate amount of cash paid to stockholders pursuant to
the Merger. The remainder of the stockholder's Cash Electing Shares will be
treated as purchased by the Company. The IRS, however, could, however, adopt a
different approach in determining the portion, if any, of a stockholder's Cash
Electing Shares that is treated as purchased by the Company. If the IRS should
successfully maintain that a greater percentage of a stockholder's Cash
Electing Shares should be treated as purchased by the Company, the transfer of
such greater percentage, in addition to the transfer of the percentage so
treated by the Company, would not be eligible for capital gain treatment
unless it qualifies as a sale or exchange under Section 302 of the Code. See
"--Stockholders Receiving Cash" below for a discussion of the consequences of
cash being deemed paid for the purchase of Cash Electing Shares by the
Company. Stockholders should note that, because the number of shares of
Surviving Corporation Common Stock retained may not exceed the Maximum Stock
Election Number, they will be subject to a pro rata reduction in the number of
shares of Surviving Corporation Common Stock they elect to retain in the event
that the Maximum Stock Election Number is exceeded. See "--Stockholders
Receiving Cash," below for a discussion of the consequences of receiving cash
in the Merger.
Stockholders Receiving Cash
As described more fully below, for U.S. federal income tax purposes, a
stockholder who receives cash pursuant to the Merger (including cash paid to
dissenting stockholders and cash paid in lieu of fractional shares) will
recognize gain or loss (which may be capital gain or loss), unless the receipt
of such cash has the effect of a distribution of a dividend, in which case
such cash will be treated as a dividend to the extent of undistributed
earnings and profits of the Corporation.
The U.S. federal income tax consequences of the Merger with respect to a
particular stockholder who receives cash pursuant to the Merger will depend
upon, among other things, the extent to which a stockholder is deemed to have
sold shares of IPC Common Stock to CSH LLC or is deemed to have had such
shares purchased by the Company and whether the deemed purchase of a
stockholder's shares by the Company qualifies as a sale or exchange under
Section 302 of the Code. First, to the extent that a stockholder is considered
to have sold shares to CSH LLC, such stockholder will recognize either capital
gain or loss (assuming the shares are held by such stockholder as a capital
asset) equal to the difference between the amount realized on the deemed sale
of shares to CSH LLC (i.e., the cash proceeds properly allocated to such
deemed sale) and the stockholder's adjusted tax basis in such shares. Second,
a stockholder also will recognize either capital gain or loss equal to the
difference between the cash proceeds allocable to the deemed purchase of such
shares by the Company and the stockholder's adjusted tax basis in such shares,
to the extent such deemed purchase by the Company is treated as a sale or
exchange under Section 302 of the Code with respect to such stockholder. In
either case, any such capital gain will qualify for the 20% maximum tax (10%
in the case of individual stockholders in the 15% ordinary income tax bracket)
on net capital gains if the shares were held for at least 18 months, and for
the 28% maximum tax on net capital gains if the shares were held for more than
one year and less than 18 months. Under Section 302 of the Code, a deemed
purchase by the Company of shares pursuant to the Merger will, as a general
rule, be treated as a sale or exchange if such deemed purchase (a) is
"substantially disproportionate" with respect to the stockholder as defined in
Section 302(b)(2) of the Code, (b) results in a complete termination of the
stockholder's interest in the Company as described in Section 302(b)(3) of the
Code or (c) is "not essentially equivalent to a dividend" with respect to the
stockholder within the meaning of Section 302(b)(1) of the Code.
In determining whether any of these Code Section 302 tests is satisfied,
stockholders must take into account not only the shares that they actually
own, but also any shares they are deemed to own under the constructive
ownership rules set forth in Section 318 of the Code. (Stockholders cannot
elect to receive either cash or stock with respect to such deemed-owned
shares.) Pursuant to these constructive ownership rules, a stockholder is
deemed to constructively own any shares that are owned by certain related
individuals (including a spouse,
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children, grandchildren and parents) or entities (including certain
partnerships, estates, trusts and corporations) and any shares that the
stockholder (or a related person) has the right to acquire by exercise of an
option or by conversion or exchange of a security. In addition, if a
stockholder lives in a community property state, the community property laws
of that state may have an effect on the constructive ownership rules.
Stockholders who live in a community property state should consult their own
advisors with respect to the impact of community property laws on the
constructive ownership rules.
The deemed purchase by the Company of a stockholder's shares will be
"substantially disproportionate" with respect to such stockholder if (i) the
percentage of shares actually or constructively owned by such stockholder
immediately following the Merger is less than 80% of the percentage of shares
actually or constructively owned by such stockholder immediately prior to the
Merger and (ii) the same stockholder, immediately after the Merger, actually
or constructively owns less than 50% of the total combined voting power of the
Company. Stockholders should consult their own tax advisors with respect to
the application of the "substantially disproportionate" test to their
particular facts and circumstances.
The deemed purchase by the Company of a stockholder's shares will result in
a complete termination of a stockholder's interest in the Company described in
Section 302(b)(3) of the Code if either (a) all the shares actually or
constructively owned by the stockholder are sold in the Merger or (b) all the
shares actually owned by the stockholder are sold in the Merger and the
stockholder is eligible to waive, and does effectively waive in accordance
with Section 302(c) of the Code, attribution of all shares which otherwise
would be considered to be constructively owned by such stockholder. Such
waiver of attribution applies only to shares that would be attributed to a
stockholder from members of such stockholder's family. Stockholders should
consult their own tax advisors with respect to the application of the
"complete termination" test to their particular facts and circumstances.
Even if, because of the constructive ownership rules, the deemed purchase by
the Company of a stockholder's shares fails to satisfy the "substantially
disproportionate" test and the complete termination test described above, the
deemed purchase by the Company of a stockholder's shares may nevertheless
satisfy the "not essentially equivalent to a dividend" test if the
stockholder's sale of shares in the Merger results in a "meaningful reduction"
in such stockholder's proportionate interest in the IPC Common Stock. Whether
the receipt of cash by a stockholder will be considered "not essentially
equivalent to a dividend" will depend upon such stockholder's facts and
circumstances. In certain circumstances, even a small reduction in a
stockholder's proportionate equity interest may satisfy this test. For
example, the IRS has indicated in a published ruling that a relatively small
reduction in the proportionate equity interest of a small (substantially less
than 1%) stockholder in a publicly held corporation who exercises no control
over corporate affairs constitutes such a "meaningful reduction." Stockholders
should consult their own tax advisors as to the application of this test in
their particular situation.
A tendering stockholder may not be able to satisfy one of the above three
tests because of a contemporaneous election to retain some shares of Surviving
Corporation Common Stock owned by a related party whose shares would be
attributed to such stockholder under Section 318 of the Code, or because of
another acquisition of such shares by such stockholder or such a related
party. Stockholders should consult their own tax advisors regarding the tax
consequences of such acquisitions in their particular circumstances. Also, in
assessing whether a purchase by the Company of a stockholder's IPC Common
Stock satisfies the "substantially disproportionate" test or the "not
essentially equivalent to a dividend" test described above, stockholders
should consider the fact that the Merger will substantially reduce the number
of outstanding shares of Surviving Corporation Common Stock. As a result, if a
related party whose shares would be attributed to such stockholder under
Section 318 of the Code elects to retain a portion of his or her Surviving
Corporation Common Stock, the stockholder's percentage interest in the
Surviving Corporation Common Stock may not be sufficiently reduced.
If a stockholder cannot satisfy any of the three tests described above and
to the extent the Company has sufficient current and/or accumulated earnings
and profits, such stockholder will be treated as having received a dividend
which will be includable in gross income (and treated as ordinary income) in
an amount equal to the
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cash received in respect of the purchase by the Company of such stockholder's
shares, and the stockholder's basis in the shares of IPC Common Stock
purchased by the Company will not offset the amount of cash received, but
instead, will be reallocated to shares of Surviving Corporation Common Stock
retained by such stockholder or, although the matter is not free from doubt,
if no shares are actually owned, reallocated to those shares constructively
owned, under certain circumstances.
In the case of a corporate stockholder, if the cash paid is treated as a
dividend, such dividend income may be eligible for the dividends-received
deduction. The dividends-received deduction is subject to certain limitations,
and may not be available if the corporate stockholder does not satisfy certain
holding period requirements with respect to the shares or if the shares are
treated as "debt financed portfolio stock" within the meaning of Section
246A(c) of the Code. Additionally, if a dividends-received deduction is
available, the dividend may be treated as an "extraordinary dividend" under
Section 1059(a) of the Code, in which case a corporate stockholder's adjusted
tax basis in the shares retained by such stockholder would be reduced, but not
below zero, by the amount of the nontaxed portion of such dividend and, if the
nontaxed portion of the dividend exceeds such basis, such excess will be
treated as gain from the sale or exchange of such shares. In addition, under
the adjusted current earnings rules of the alternative minimum tax provisions
of the Code, and depending upon a corporate holder's particular tax situation,
up to 75% of any dividends received deduction may be added back in the
computation of alternative minimum taxable income.
Stockholders Retaining Stock and Receiving No Cash
The Merger will have no U.S. federal income tax consequences for
stockholders who retain shares of Surviving Corporation Common Stock and
receive no cash. Accordingly, a stockholder will not recognize any gain or
loss on any shares retained by such stockholder.
Stockholders Retaining a Portion of Their Stock and Receiving Cash
To the extent that a stockholder elects to both retain a portion of his or
her shares and exchange a portion of his or her shares for cash or to the
extent a stockholder is prorated into receiving cash in exchange for some
portion of his or her shares, the tax treatment of the stockholder's receipt
of such cash will be the same as set forth above under "--Stockholders
Receiving Cash." In general, such a stockholder will not recognize any gain or
loss as a result of the Merger to the extent the stockholder retains shares of
Surviving Corporation Common Stock. However, as described more fully above
under "--Stockholders Receiving Cash," a stockholder's retention of shares
may, under certain circumstances, cause the cash received by such stockholder
pursuant to the Merger to be treated as a dividend for U.S. federal income tax
purposes.
Foreign Stockholders--Withholding
The following is a general discussion of certain U.S. federal income tax
consequences of the Merger to foreign stockholders. For this purpose, a
foreign stockholder is any person who is, for U.S. federal income tax
purposes, a foreign corporation, a non-resident alien individual, a foreign
partnership or a foreign estate or trust.
In the case of any foreign stockholder, the Exchange Agent will withhold 30%
of the amount treated as paid by the Company to purchase the shares of such
stockholder in order to satisfy certain U.S. withholding requirements, unless
such foreign stockholder proves in a manner satisfactory to the Company and
the Exchange Agent that either (i) the deemed purchase by the Company of his
or her shares pursuant to the Merger will qualify as a sale or exchange under
Section 302 of the Code, rather than as a dividend for U.S. federal income tax
purposes, in which case no withholding will be required, (ii) the foreign
stockholder is eligible for a reduced tax treaty rate with respect to dividend
income, in which case the Exchange Agent will withhold at the reduced treaty
rate or (iii) no U.S. withholding is otherwise required. Foreign stockholders
should consult their own tax advisors regarding the application of these
withholding rules.
Information Reporting and Backup Withholding
The Company must report annually to the IRS and to each stockholder the
amount of dividends paid to such stockholder and the backup withholding tax,
if any, withheld with respect to such dividends. Copies of these information
returns also may be made available to the tax authorities in the country in
which a foreign stockholder resides under the provisions of an applicable
income tax treaty.
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Backup withholding (which generally is a withholding tax imposed at the rate
of 31% on certain payments to persons that fail to furnish certain information
under the United States information reporting requirements) generally will not
apply to dividends paid to a foreign stockholder at an address outside the
United States (unless the payer has knowledge that the payee is a U.S.
person).
Payment of the proceeds of a sale of shares by or through a U.S. office of a
broker is subject to both backup withholding and information reporting unless
the beneficial owner certifies under penalties of perjury that it is a foreign
stockholder, and the payer does not have actual knowledge that such owner is a
U.S. person, or otherwise establishes an exemption. In general, backup
withholding and information reporting will not apply to a payment of the
proceeds of a sale of shares by or through a foreign office of a broker. If,
however, such broker is, for United States federal income tax purposes, a U.S.
person, a controlled foreign corporation, or a foreign person that derives 50%
or more of his or her gross income for certain periods from the conduct of a
trade or business in the U.S., such payments will be subject to information
reporting, but not backup withholding, unless (1) such broker has documentary
evidence in its records that the beneficial owner is a foreign holder and
certain other conditions are met, or (2) the beneficial owner otherwise
establishes an exemption.
Any amounts withheld under the backup withholding rules may be allowed as a
refund or a credit against the holder's U.S. federal income tax liability
provided the required information is furnished to the IRS.
United States Treasury Regulations, issued on October 6, 1997 (the
"Regulations") and generally effective with respect to dividends paid after
December 31, 1998, alter the foregoing rules in certain respects. Among other
things, the Regulations provide certain presumptions under which a foreign
stockholder could be subject to backup withholding and information reporting
unless the holder properly documents its foreign status to the Company through
a completed Form W-8.
THOUGH THE FOREGOING ARE THE MATERIAL U.S. FEDERAL INCOME TAX CONSIDERATIONS
GENERALLY APPLICABLE TO THE MERGER, THE DISCUSSION DOES NOT ADDRESS EVERY
FEDERAL INCOME TAX CONCERN WHICH MAY BE APPLICABLE TO A PARTICULAR
STOCKHOLDER. EACH STOCKHOLDER IS URGED TO CONSULT SUCH STOCKHOLDER'S OWN TAX
ADVISOR TO DETERMINE THE TAX CONSEQUENCES TO SUCH STOCKHOLDER, IN THE LIGHT OF
HIS OR HER PARTICULAR CIRCUMSTANCES, OF THE DISPOSITION OF SHARES PURSUANT TO
THE MERGER.
ACCOUNTING TREATMENT
It is expected that the Merger will be accounted for as a leveraged
recapitalization. Accordingly, the historical basis of the Company's assets
and liabilities should not be affected by the Merger.
RESALE OF SURVIVING CORPORATION COMMON STOCK FOLLOWING THE MERGER
Surviving Corporation Common Stock to be retained in connection with the
Merger will be freely transferable, except that shares of Surviving
Corporation Common Stock retained by any stockholder who may be deemed to be
an "affiliate" (as defined under the Securities Act and generally including,
without limitation, directors, certain executive officers and beneficial
owners of 10% or more of a class of capital stock) of the Company for purposes
of Rule 145 under the Securities Act will not be transferable except in
compliance with the Securities Act. This Proxy Statement/Prospectus does not
cover sales of Surviving Corporation Common Stock retained by any person who
may be deemed to be an affiliate of the Company.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of IPC's management and the IPC Board may be deemed to have
interests in the Merger in addition to their interests, if any, as holders of
IPC Common Stock. The IPC Board was aware of these factors and considered
them, among other matters, in approving the Merger Agreement and the
transactions contemplated thereby. See "--Ancillary Agreements."
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Indemnification and Insurance. Pursuant to the Merger Agreement, the Company
has agreed to indemnify all present directors and officers of the Company for
six years after the Effective Time and, subject to certain limitations, to
maintain for six years a directors' and officers' insurance and
indemnification policy containing terms and conditions which are not less
advantageous to the directors and officers than any such policy which may be
in effect prior to the Effective Time.
Employment Agreements, Severance Arrangements and Bonuses. Certain officers
of the Company have severance agreements with the Company that could provide
them with incentive compensation if the Merger is consummated and with certain
termination benefits in the event their employment is terminated after
consummation of, or in connection with, the Merger. See "IPC ANNUAL MEETING--
OTHER MATTERS--Employment Agreements." Certain officers of the Company and
IXnet have entered into amended and restated employment agreements with the
Surviving Corporation that will become effective as of the Effective Time. See
"--Ancillary Agreements--Employment Agreements."
At the Effective Time, all Options will be canceled and the holders thereof
will receive the Option Cash Proceeds in lieu of the Merger Consideration. As
of the Record Date, approximately Options were outstanding. The Company
estimates that the aggregate amount of the Option Cash Proceeds, assuming all
Options are canceled, will be approximately $ . Also, at the Effective
Time, the Surviving Corporation expects to establish the New Stock Incentive
Plan under which 554,112 shares of Surviving Corporation Common Stock will be
reserved for issuance upon exercise of options which may be granted to
selected employees, directors and consultants of the Surviving Corporation and
its subsidiaries. The Surviving Corporation has committed to grant Options to
purchase 207,792 shares at $21.00 per share pursuant to the New Stock
Incentive Plan to three senior employees of the Company or a subsidiary
thereof. The Company does not expect to recognize compensation expense with
respect to any such grant. See "PROPOSAL 3--NEW STOCK INCENTIVE PLAN."
Stock Ownership. As of the Record Date, directors and executive officers of
IPC and certain of their affiliates, other than the Kleinknecht Stockholders
(see below), owned an aggregate of 87,329 shares of IPC Common Stock for which
they will receive the Merger Consideration.
Stockholders Agreement. As of the Record Date, the Kleinknecht Stockholders
owned, beneficially and/or of record, an aggregate of 6,906,554 shares of IPC
Common Stock constituting approximately 64% of the outstanding shares of IPC
Common Stock entitled to vote at the Annual Meeting. Pursuant to the
Stockholders Agreement, the Kleinknecht Stockholders, in their capacity as
such, have agreed, among other things, to vote their shares in favor of the
Merger and the adoption of the Merger Agreement. See "--Ancillary Agreements--
Stockholders Agreement."
EFFECT ON IPC EMPLOYEE BENEFIT PLANS
1994 Stock Option and Incentive Plan. Pursuant to the Merger Agreement, IPC
has agreed that it will not grant any additional options or rights or benefits
under the IPC Information Systems, Inc. 1994 Stock Option and Incentive Plan
(the "Option Plan"). In addition, at the Effective Time all outstanding
options will be canceled and exchanged for the Option Cash Proceeds. See "--
Interests of Certain Persons in the Merger--Employment Agreements, Severance
Arrangements and Bonuses."
1994 Employee Stock Purchase Plan. Pursuant to the Merger Agreement, IPC has
agreed that it will not grant any stock purchase rights under the IPC
Information Systems, Inc. Employee Stock Purchase Plan (the "Stock Purchase
Plan") following the conclusion of the calendar year 1997 offering period.
Advance Notice of Benefit Plan Changes. Pursuant to the Merger Agreement, it
has been agreed that, for a period of one year after the Effective Time, none
of IPC's employee pension or welfare benefit plans will be changed in any way
that would terminate or substantially reduce any benefits provided thereunder,
or materially increase the cost of participation by any employee, without at
least sixty days advance notice to the affected employees.
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THE MERGER
The following information, insofar as it relates to matters contained in the
Merger Agreement, is qualified by reference to the Merger Agreement, which is
included herewith as Annex A, and is incorporated herein by reference. IPC
stockholders are urged to read the Merger Agreement in its entirety.
PARTIES TO THE MERGER
IPC. IPC is a leader in providing integrated telecommunications equipment
and services that facilitate the execution of transactions by the financial
trading community. Such transactions involve the trading of equity and debt
securities, commodities, currencies and other financial instruments. The
Company designs, manufactures, installs and services turret systems and
installs and services the cabling infrastructure and networks which provide
financial traders with desktop access to time-sensitive communications and
data. The Company's primary customers include securities and investment
banking firms, merchant and commercial banks, interdealer brokers, foreign
exchange and commodity brokers and dealers, securities and commodity
exchanges, mutual and hedge fund companies, asset managers and insurance
companies. The Company uses an integrated approach to marketing its products
and services, leveraging its established customer base throughout the
financial trading community. In addition, through its subsidiary, IXnet, the
Company operates 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. See "AVAILABLE INFORMATION"
and "THE COMPANY."
AAC. AAC is a Delaware corporation which was incorporated on November 13,
1997 and has not carried on any activities to date other than those incident
to its formation and the transactions contemplated by the Merger Agreement.
All of the outstanding capital stock of AAC is owned, directly or indirectly,
by CSH LLC and its subsidiaries.
CSH LLC. CSH LLC is a Delaware limited liability company which engages in
certain telecommunication businesses through its subsidiaries. Members of CSH
LLC owning units of CSH LLC attributable to CSH LLC's ownership of AAC, acting
directly or through their designees, make all of the investment decisions on
behalf of CSH LLC. Immediately following the Merger, David Kirby, a private
investor and U.S. citizen, will own 25.5% of the voting interests relating to
the IPC Units, John O'Mara, a private investor and U.S. citizen, will own
25.5% relating to the voting interests of the IPC Units and CVC will own 49%
of the voting interests relating to the IPC Units. CSH LLC is headquartered at
505 N. 51st Avenue, Phoenix, Arizona 85043-2701. CSH LLC has two other
operating subsidiaries, CSI, a closely-held manufacturer of telecommunications
products for outside plant, customer premises and broadband networks, and
LoDan, a closely-held manufacturer of specialized cable assembly and contract
assembly service provider.
MERGER CONSIDERATION
At the Effective Time, subject to certain provisions as described herein
with respect to shares of IPC Common Stock held in treasury, shares owned by
AAC, fractional shares and Dissenting Shares and the effects of proration
described herein, each share of IPC Common Stock (other than Stock Electing
Shares), will be converted into the right to receive in cash following the
Merger an amount equal to $21.00, and each Stock Electing Share will be
converted into the right to retain one fully paid and nonassessable share of
Surviving Corporation Common Stock.
The Merger Agreement contemplates that stockholders of IPC must elect to
convert a minimum number of shares of IPC Common Stock into the right to
retain at least 380,952 shares of Surviving Corporation Common Stock and a
maximum number of shares of IPC Common Stock into the right to retain no more
than 1,752,381 shares of Surviving Corporation Common Stock. Pursuant to the
Stockholders Agreement, Richard P. Kleinknecht has agreed to elect to retain
an aggregate of 380,952 shares of Surviving Corporation Common Stock, which is
equal to the Minimum Stock Election Number. As a result, IPC stockholders who
choose to convert their shares into cash will receive the full amount in cash
and will not be required to retain any shares of Surviving Corporation Common
Stock. However, stockholders who elect to retain shares of Surviving
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Corporation Common Stock may receive a lesser, prorated number of shares of
Surviving Corporation Common Stock than such stockholders elected to retain,
plus cash, if the aggregate number of shares of Surviving Corporation Common
Stock elected to be retained exceeds the Maximum Stock Election Number.
At the Effective Time, each Option will be canceled and, in exchange
therefor, the holders of such Options will receive, with respect to each
Option, a cash payment which, prior to deduction for applicable withholding
taxes, is in an amount equal to the Option Cash Proceeds. Payment of the
Option Cash Proceeds will be made by the Surviving Corporation on or after the
closing date of the Merger immediately upon receipt of a written agreement
from the Option holder to accept such payment in full settlement of such
Option holder's rights with respect to the Option. If the per share exercise
price of any Option equals or exceeds $21.00, such Option will be canceled
without any payment therefor.
No certificates or scrip representing fractional shares of Surviving
Corporation Common Stock will be issued upon the surrender for exchange of
certificates representing shares of IPC Common Stock. See "-- Fractional
Shares."
Dissenting Stockholders. See "--Dissenters' Rights."
STOCK ELECTION
Record holders of shares of IPC Common Stock will be entitled to make an
unconditional Stock Election to retain shares of Surviving Corporation Common
Stock on or prior to the Election Date on the Form of Stock Election being
sent to all record holders of IPC Common Stock at the same time as this Proxy
Statement/Prospectus but under separate cover. If the number of Stock Electing
Shares exceeds the Maximum Stock Election Number, however, then (i) the number
of Stock Electing Shares covered by a holder's Stock Election to be converted
into the right to retain Surviving Corporation Common Stock will be determined
by multiplying the total number of Stock Electing Shares covered by such Stock
Election by the Stock Proration Factor. All Stock Electing Shares, other than
those shares converted into the right to retain Stock Electing Shares as
described in the immediately preceding sentence, will be converted into the
right to receive the Cash Election Price as if such shares were not Stock
Electing Shares.
The Merger Agreement provides that, if the number of Stock Electing Shares
is less than the Minimum Stock Election Number, then (i) all Stock Electing
Shares will be converted into the right to retain Surviving Corporation Common
Stock in accordance therewith, (ii) additional shares of IPC Common Stock,
other than Stock Electing Shares and Dissenting Shares, will be converted into
the right to retain Surviving Corporation Common Stock, which number of
additional shares shall be determined by multiplying the total number of
shares, other than Stock Electing Shares and Dissenting Shares, by the Cash
Proration Factor and (iii) such additional shares of IPC Common Stock will be
converted into the right to retain Surviving Corporation Common Stock in
accordance with the Merger Agreement (on a consistent pro rata basis among
stockholders who held shares of IPC Common Stock as to which they did not make
a Stock Election.) However, as described above, pursuant to the Stockholders
Agreement, Richard P. Kleinknecht has elected to retain 380,952 shares of
Surviving Corporation Common Stock, which is equal to the Minimum Stock
Election Number. As a result, all IPC stockholders who choose to convert their
shares of IPC Common Stock into cash will receive the full amount in cash and
will not be required to retain any shares as Surviving Corporation Common
Stock. Examples of the effects of the result of a Stock Election are set forth
below.
If (i) a stockholder elects to make a Stock Election or makes a split
election and or (ii) receives cash as a result of the proration procedures
described above or a split election, such stockholder may receive dividend
treatment (rather than capital gain treatment) for any cash received in the
Merger as a result of such proration procedures or split election. See "RISK
FACTORS--Risks Associated with the Merger--Taxation of Stockholders Receiving
Cash--Possible Dividend Treatment." See also "SPECIAL FACTORS--Federal Income
Tax Consequences--Stockholders Receiving Cash" and "--Stockholders Retaining a
Portion of their Stock and Receiving Cash."
With respect to certain risks related to continuing to hold Surviving
Corporation Common Stock, see "RISK FACTORS."
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POSSIBLE EFFECTS OF PRORATION
The following examples illustrate the potential effects of proration. No
fractional shares of Surviving Corporation Common Stock will be issued; in
lieu of fractional shares of Surviving Corporation Common Stock, stockholders
who elect Surviving Corporation Common Stock will receive cash. See "--
Fractional Shares."
A. HOLDER A OWNS 100 SHARES OF IPC COMMON STOCK AND DOES NOT ELECT TO RETAIN
ANY SHARES OF SURVIVING CORPORATION COMMON STOCK.
As described above, because Richard P. Kleinknecht has elected to retain
380,952 shares of Surviving Corporation Common Stock, which is equal to the
Minimum Stock Election Number, Holder A will receive $2,100 in cash (100
shares at $21 per share).
B. HOLDER B OWNS 100 SHARES OF IPC COMMON STOCK AND ELECTS TO RETAIN ALL
SUCH SHARES OF SURVIVING CORPORATION COMMON STOCK.
1. If all the stockholders, including Holder B, elect to retain an aggregate
number of shares of Surviving Corporation Common Stock equal to or less than
the Maximum Stock Election Number, then Holder B will be able to retain 100
shares of Surviving Corporation Common Stock.
2. If all stockholders, including Holder B, elect to retain more shares of
Surviving Corporation Common Stock than the Maximum Stock Election Number in
the aggregate, then Holder B will not be able to retain all of his or her
shares and will receive some cash. In the case of maximum proration (i.e., the
number of Stock Electing Shares equals 10,715,119, which is equal to the
number of outstanding shares of IPC Common Stock as of December 17, 1997),
Holder B would be able to retain only 16 shares and would receive $1764 in
cash (84 shares at $21 per share including cash paid in lieu of fractional
shares).
The Kleinknecht Stockholders who, in the aggregate own approximately 6.9
million of the outstanding shares of IPC Common Stock, have informed
management that they intend to convert all their shares of IPC Common Stock
into cash, other than Richard P. Kleinknecht who has agreed to elect to retain
10% of the outstanding shares of Surviving Corporation Common Stock. Assuming
all the Kleinknecht Stockholders who have indicated their intent to convert
their shares of IPC Common Stock into cash so elect and assuming all other
stockholders elect to retain shares of Surviving Corporation's Common Stock,
such stock electing stockholders will generally be able to retain
approximately 41% of their shares and will receive cash for approximately 59%
of their shares.
C. HOLDER C OWNS 100 SHARES OF IPC COMMON STOCK AND ELECTS TO RETAIN 50
SHARES OF SURVIVING CORPORATION COMMON STOCK AND CONVERT 50 SHARES OF IPC
COMMON STOCK TO CASH.
1. In the event that stockholders (including Holder C) elect to retain
1,752,381 or fewer shares of Surviving Corporation Common Stock in the
aggregate, then Holder C will be able to retain his or her 50 shares of
Surviving Corporation Common Stock and will receive $1,050 in cash (50 shares
at $21 per share).
2. If the stockholders (including Holder C) elect to retain more shares of
Surviving Corporation Common Stock than the Maximum Stock Election Number in
the aggregate, then Holder C will not be able to retain all of his or her 50
shares. For example, if the number of Stock Electing Shares is 10,000,000
shares in the aggregate, then each holder, including Holder C, would be able
to retain only 17.52% of shares of Surviving Corporation Common Stock in order
to reduce the number of retained shares to the Maximum Stock Election Number.
Therefore, Holder C would be able to retain only 8 shares of Surviving
Corporation Common Stock (or 16% of his or her 50 shares) and would receive
$1,932 in cash (92 shares at $21 per share including cash paid in lieu of
fractional shares). If the number of Stock Electing Shares is more than
10,000,000 shares of Surviving Corporation Common Stock in the aggregate,
Holder C would receive fewer shares of Surviving Corporation Common Stock than
in the example above, but would receive a commensurately greater amount of
cash.
3. Assuming all the Kleinknecht Stockholders who have indicated their intent
to convert their shares of IPC Common Stock into cash so elect, and all other
IPC stockholders elect to retain stock, Holder C would be able to retain only
20 shares of Surviving Corporation Common Stock (or approximately 42% of his
or her 50
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shares) and would receive $1,680 in cash (80 shares at $21 per share including
cash paid in lieu of fractional shares).
STOCK ELECTION PROCEDURE
The Form of Stock Election is being mailed to all holders of record of IPC
Common Stock as of the last business day preceding such mailing at the same
time as this Proxy Statement/Prospectus but under separate cover.
FOR A STOCK ELECTION TO BE EFFECTIVE, HOLDERS OF IPC COMMON STOCK MUST
PROPERLY COMPLETE SUCH FORM OF STOCK ELECTION, AND SUCH FORM OF STOCK
ELECTION, TOGETHER WITH ALL CERTIFICATES FOR SHARES OF IPC COMMON STOCK HELD
BY SUCH HOLDER, DULY ENDORSED IN BLANK OR OTHERWISE IN FORM ACCEPTABLE FOR
TRANSFER ON THE BOOKS OF THE COMPANY (OR BY APPROPRIATE GUARANTEE OF DELIVERY
AS SET FORTH IN SUCH FORM OF STOCK ELECTION), MUST BE RECEIVED BY CHASEMELLON
SHAREHOLDER SERVICES, L.L.C., AS EXCHANGE AGENT (THE "EXCHANGE AGENT") AT ONE
OF THE ADDRESSES LISTED ON THE FORM OF STOCK ELECTION AND NOT WITHDRAWN, BY
5:00 P.M., ON THE ELECTION DATE.
ONLY HOLDERS OF IPC COMMON STOCK WHO WISH TO MAKE A STOCK ELECTION ARE
REQUIRED TO SEND STOCK CERTIFICATES WITH THEIR FORM OF STOCK ELECTION. HOLDERS
OF IPC COMMON STOCK WHO DO NOT MAKE A STOCK ELECTION WITH RESPECT TO ALL OF
SUCH HOLDER'S SHARES OF IPC COMMON STOCK WILL RECEIVE, BY MAIL, LETTERS OF
TRANSMITTAL WITH WHICH SUCH STOCK CERTIFICATES SHOULD BE RETURNED AFTER THE
EFFECTIVE TIME. IN NO EVENT SHOULD STOCKHOLDERS SEND STOCK CERTIFICATES WITH
THEIR PROXY CARDS.
The good faith determinations of the Exchange Agent as to whether or not
Stock Elections have been properly made or revoked, and when such elections or
revocations were received, will be binding.
CONVERSION/RETENTION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES
The conversion of shares of IPC Common Stock (other than Dissenting Shares)
into the right to receive cash or the right to retain shares of Surviving
Corporation Common Stock following the Merger will occur at the Effective
Time.
As soon as practicable as of or after the Effective Time, the Exchange Agent
will send a letter of transmittal to each holder of IPC Common Stock (other
than holders of IPC Common Stock who made a timely and valid Stock Election
with respect to all of such holder's shares). The letter of transmittal will
contain instructions with respect to the surrender of certificates
representing shares of IPC Common Stock in exchange for the cash portion of
the Merger Consideration.
EXCEPT FOR IPC COMMON STOCK CERTIFICATES SURRENDERED WITH A FORM OF STOCK
ELECTION AS DESCRIBED ABOVE UNDER "--STOCK ELECTION PROCEDURE," STOCKHOLDERS
OF THE COMPANY SHOULD NOT FORWARD STOCK CERTIFICATES TO THE EXCHANGE AGENT
UNTIL THEY HAVE RECEIVED THE LETTER OF TRANSMITTAL.
As soon as practicable after the Effective Time, each holder of an
outstanding certificate or certificates at such time which prior thereto
represented shares of IPC Common Stock shall, upon surrender to the Exchange
Agent, of such certificate or certificates and acceptance thereof by the
Exchange Agent, be entitled to the amount of cash, into which the number of
shares of IPC Common Stock previously represented by such certificate or
certificates surrendered shall have been converted pursuant to the Merger
Agreement. The Exchange Agent will accept such certificates upon compliance
with such reasonable terms and conditions as the Exchange Agent may
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impose to effect an orderly exchange thereof in accordance with normal
exchange practices. After the Effective Time, there will be no further
transfer on the records of the Company or its transfer agent of certificates
representing shares of IPC Common Stock which have been converted, in whole or
in part, pursuant to the Merger Agreement into the right to receive cash, and
if such certificates are presented to the Company for transfer, they will be
canceled against delivery of cash. Until surrendered as contemplated by the
Merger Agreement, each certificate for shares of IPC Common Stock will be
deemed at any time after the Effective Time to represent only the right to
receive upon such surrender the Merger Consideration. No interest will be paid
or will accrue on any cash payable as consideration in the Merger or in lieu
of any fractional shares of Surviving Corporation Common Stock.
No dividends or other distributions with respect to Surviving Corporation
Common Stock with a record date after the Effective Time will be paid to the
holder of any unsurrendered certificate for shares of IPC Common Stock with
respect to the shares of Surviving Corporation Common Stock represented
thereby and no cash payment in lieu of fractional shares will be paid to any
such holder pursuant to the Merger Agreement until the surrender of such
certificate in accordance with the Merger Agreement. Subject to the effect of
applicable laws, following surrender of any such certificate, there shall be
paid to the holder of the certificate representing whole shares of Surviving
Corporation Common Stock issued in connection therewith, without interest, (i)
the amount of dividends and other distributions with a record date after the
Effective Time theretofore paid with respect to such whole shares of Surviving
Corporation Common Stock, and (ii) at the appropriate payment date, the amount
of dividends or other distributions with a record date after the Effective
Time but prior to such surrender and a payment date subsequent to such
surrender payable with respect to such whole shares of Surviving Corporation
Common Stock.
FRACTIONAL SHARES
No certificates or scrip representing fractional shares of Surviving
Corporation Common Stock will be issued upon the surrender or exchange of
certificates representing shares of IPC Common Stock in connection with the
Merger, and such fractional share interests will not entitle the owner thereof
to vote or to any rights of a stockholder of the Surviving Corporation
following the Merger. Each holder of shares of IPC Common Stock exchanged
pursuant to the Merger who would otherwise have been entitled to receive a
fraction of a share of Surviving Corporation Common Stock (after taking into
account all shares of IPC Common Stock delivered by such holder) will receive,
in lieu thereof, a cash payment (without interest) representing the product of
(i) the applicable fraction of Surviving Corporation Common Stock and (ii)
$21.00, payable as soon as practicable on or after the Effective Time.
CONDUCT OF BUSINESS PENDING THE MERGER
Pursuant to the Merger Agreement, the Company has agreed that without the
written consent of AAC, the Company will not (and will not cause or permit any
of its subsidiaries to) engage in any practice, take any action or enter into
any transaction other than in the ordinary and usual course of business and
consistent with prior practice, including, without limitation, the following:
(i) authorizing or effecting any change in its certification of incorporation
or bylaws other than as contemplated by the Merger Agreement; (ii) granting
any options, warrants, or other rights to purchase or obtain any of its
capital stock or issuing, selling, or otherwise disposing of any of its
capital stock (except upon the conversion or exercise of options and other
rights and obligations outstanding as of the date of the Merger Agreement);
(iii) declaring, setting aside, or paying any dividend or distribution with
respect to its capital stock, or redeeming, repurchasing, or otherwise
acquiring any of its capital stock, in either case, outside the ordinary
course of business; (iv) issuing any note, bond, or other debt security or
creating, incurring, assuming, or guaranteeing any indebtedness for borrowed
money or capitalized lease obligation (except for inter-company loans or
advances from the Company to, or guarantees on behalf of, any one or more of
its subsidiaries), outside the ordinary course of business; (v) imposing any
lien upon any of its assets outside the ordinary course of business; (vi)
making any material change in employment terms for any of its directors,
officers and employees outside the ordinary course of business (other than
pursuant to the
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transactions contemplated by the Merger Agreement); (vii) making any capital
investment in, making any loan to, or acquiring the securities or assets of
any other person outside the ordinary course of business (except pursuant to
agreements existing as of the date of the Merger Agreement); (viii) adopting
or amending any bonus, profit sharing, compensation, severance, termination,
stock option, pension, retirement, deferred compensation, employment or
employee benefit plan, agreement, trust, plan, fund or other arrangement for
the benefit and welfare of any director, officer or employee, except for
normal increases in the ordinary course of business and that, in the
aggregate, do not result in a material increase in benefits or compensation
expense to the Company or any subsidiary; (ix) revaluing in any material
respect any significant portion of its assets, including, without limitation,
writing down the value of inventory in any material amount or write-off of
notes or accounts receivable in any material amount; (x) paying, discharging
or satisfying any material liabilities other than the payment, discharge or
satisfaction in the ordinary course of business of liabilities reflected or
reserved against in the consolidated financial statements of the Company and
set forth in the Company's filings with the Commission or incurred in the
ordinary course of business; (xi) making any tax election with respect to or
settling or compromising any material income tax liability; (xii) taking any
action other than in the ordinary course of business with respect to
accounting policies or procedures; and (xiii) committing to any of the
foregoing.
NO SOLICITATION
The Merger Agreement provides that neither the Company nor any of its
subsidiaries will (whether directly or indirectly through advisors, agents or
other intermediaries), nor will the Company or any of its subsidiaries
authorize or permit any of its or their officers, directors, agents,
representatives, advisors or subsidiaries to, (a) solicit, initiate or take
any action knowingly to facilitate the submission of inquiries, proposals or
offers from any Third Party relating to (i) any acquisition or purchase of 10%
or more of the consolidated assets of the Company and its subsidiaries or of
over 10% of any class of equity securities of the Company or any of its
subsidiaries, (ii) any tender offer (including a self tender offer) or
exchange offer that if consummated would result in any Third Party
beneficially owning 10% or more of any class of equity securities of the
Company or any of its subsidiaries, (iii) any merger, consolidation, business
combination, recapitalization, liquidation, dissolution or similar transaction
involving the Company, or any of its subsidiaries whose assets, individually
or in the aggregate, constitute more than 10% of the consolidated assets of
the Company, other than the transactions contemplated by the Merger Agreement,
or (iv) any other transaction the consummation of which would, or could
reasonably be expected to impede, interfere with, prevent or materially delay
the Merger or which would, or could reasonably be expected to, materially
dilute the benefits to AAC of the transactions contemplated thereby, or (b)
enter into or participate in any discussions or negotiations regarding any of
the foregoing, or furnish to any Third Party any information with respect to
its business, properties or assets in connection with the foregoing, or
otherwise cooperate in any way with, or knowingly assist or participate in,
facilitate or encourage, any effort or attempt by any Third Party to do or
seek any of the foregoing; provided, however, that the foregoing will not
prohibit the Company or the IPC Board (either directly or indirectly through
advisors, agents or other intermediaries) from (i) furnishing information
pursuant to an appropriate confidentiality letter concerning the Company and
its businesses, properties or assets to a Third Party who has made a Superior
Acquisition Proposal as to which a prior determination of the IPC Board as
contemplated under clause (i) above has been made and (ii) engaging in
discussions or negotiations with such a Third Party who has made a Superior
Acquisition Proposal but only if the IPC Board, after consultation with and
advice from outside counsel, determines in good faith that, in the exercise of
its fiduciary responsibilities, such discussions or negotiations should be
commenced or such information should be furnished or such facilitation
undertaken; provided, further, that (A) the IPC Board will not, and will not
authorize any officers or representatives to, take any of the foregoing
actions until notice to AAC of the Company's intent to take such action will
have been given; and (B) if the IPC Board receives a Superior Acquisition
Proposal, to the extent it may do so without breaching its fiduciary duties as
determined in good faith after consultation with its outside counsel, and
without violating any of the conditions of such Acquisition Proposal, then the
Company will promptly inform AAC of the material terms and conditions of such
proposal and the identity of the person making it; and (iii) taking a position
on a tender offer by a Third Party, as required under Rule 14e-2 under the
Exchange Act (provided no such position shall constitute a recommendation of
such transaction if it does not constitute a Superior Acquisition Proposal) or
complying with
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its duties of disclosure under applicable state law subject to the provisions
set forth above. As of December 18, 1997, the Company was obligated to
immediately cease and cause its subsidiaries and its and their advisors,
agents and other intermediaries to cease, any and all existing activity,
discussions or negotiations with any Third Party conducted prior to the date
on which the Merger Agreement was entered into.
CONDITIONS TO THE CONSUMMATION OF THE MERGER
The respective obligations of the Company and AAC to consummate the Merger
are subject to the satisfaction of the following conditions: (a) the
representations and warranties of the Company or AAC, as the case may be,
contained in the Merger Agreement and in any certificate or other writing
delivered by the Company or AAC, as the case may be, pursuant thereto shall be
true and correct in all respects at and as of the Effective Time (provided
that representations made as of a specific date will be required to be true as
of such date only) as if made at and as of such time; (b) each party shall
have performed and complied with all of its covenants under the Merger
Agreement in all material respects; (c) no judgment, order, decree or
injunction shall prohibit or restrain the consummation of the Merger;
provided, however, that the Company and AAC will each use its reasonable best
efforts to have any such judgment, order, decree or injunction vacated or
reversed; (d) each party shall have received a certificate signed by an
officer of the other party with respect to clauses (a), (b) and (c) above; (e)
the Merger Agreement shall have been adopted by the stockholders of the
Company in accordance with DGCL; (f) any applicable waiting period under the
HSR Act relating to the Merger shall have expired or been terminated and the
parties shall have received all other authorizations, consents and approvals
of government bodies, and (g) each of the Company and AAC shall be reasonably
satisfied that the Merger will be recorded as a recapitalization for financial
reporting purposes.
In addition, the obligations of AAC to consummate the Merger are further
subject to the satisfaction of the following conditions: (a) the holders of
not more than 3% of the outstanding shares of IPC Common Stock shall have
demanded appraisal rights in accordance with DGCL; (b) the Company shall have
delivered to AAC written consents to the transactions contemplated by the
Merger Agreement from third parties who are parties to certain contracts of
the Company; (c) the total debt of the Company and its subsidiaries on a
consolidated basis in accordance with United States generally accepted
accounting principles, consistently applied, as of the Effective Time shall
not exceed $38 million; (d) the Company shall have received the proceeds of
the financing on terms and conditions set forth in the Notes or upon the terms
and conditions which are substantially equivalent thereto; (e) the Company
shall have received and accepted the resignations of all directors of the
Company other than Richard P. Kleinknecht; (f) the Stockholders Agreement
shall be in full force and effect and the parties thereto shall have taken the
actions required to be taken pursuant to Section 5 thereof; and (g) each of
the Investors Agreement, the Share Exchange and Termination Agreement, the
Starr Termination Agreement, the Walsh Employment Agreement, the Corporate
Opportunity Agreement and the Labor Pool Agreements shall be in full force and
effect. See "--Ancillary Agreements" for a description of such agreements.
In addition, the obligations of the Company to consummate the Merger are
further subject to the following conditions: (a) the AAC Stockholders
Agreement shall be in full force and effect; and (b) the IPC Board shall have
received an opinion from an independent advisor confirming that, upon the
consummation of the transactions contemplated by the Merger Agreement, the
Surviving Corporation (on a consolidated basis) (i) will not be left with
unreasonably small capital to conduct its business, (ii) will not have
incurred debts beyond its ability to pay such debts as they mature, and (iii)
will have a fair value and present salable value of its assets in excess of
its stated liabilities and probable contingent liabilities. To the extent
permitted by applicable law, either party may waive any condition specified in
the Merger Agreement, if it executes and delivers to the other party a written
notice so stating at or prior to the closing.
The aforesaid opinion concerning the lack of insolvency as a result of the
Merger was sought by the Company as a closing condition for several reasons.
The payment of the cash portion of the Merger Consideration to the IPC
stockholders pursuant to the Merger may be subject to review under federal or
state fraudulent transfer laws. Under such laws, if a court in a lawsuit by a
creditor or a representative of creditors of the Company or the Surviving
Corporation, such as a trustee in bankruptcy or one of such entities as
debtor-in-
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possession, were to find that, at the time of, or after and giving effect to,
the Merger Transactions, the Company or the Surviving Corporation (i) was
insolvent or rendered insolvent thereby, (ii) was engaged in a business or
transaction for which its remaining assets constituted unreasonably small
capital, (iii) intended to incur, or believed that it would incur, debts
beyond its ability to pay as they matured, or (iv) intended to hinder, dely or
defraud creditors and, in the case of clauses (i), (ii) and (iii), that the
Company or the Surviving Corporation did not receive reasonably equivalent
value or fair consideration in the Merger, such court could avoid all or a
part of the payment of the Merger Consideration and require that the
stockholders, including stockholders exercising appraisal rights, return such
consideration to the Company or the Surviving Corporation or to a fund for the
benefit of their respective creditors. In addition, if a court were to find
that the Company or the Surviving Corporation came within any of clauses (i)
through (iv) above, the Company or the Surviving Corporation, or their
respective creditors or trustees in bankruptcy, could seek to avoid the grant
of security interests or incurrence of obligations, to the lenders under the
Revolving Credit Facility. This would result in an event of default with
respect to such indebtedness which, under the terms of such indebtedness
(subject to applicable law), would allow the lenders to terminate their
obligations thereunder and to accelerate payment of such indebtedness. In
addition, Section 174 of DGCL provides that a director who willfully or
negligently authorizes a corporation to unlawfully purchase its own shares of
capital stock when the capital of the corporation is or is thereby rendered
impaired shall be liable to the corporation and its creditors. Section 172 of
DGCL permits a director to rely in good faith upon certain information,
opinions and reports in determining whether a corporation's stock may properly
be purchased by the corporation.
The measure of insolvency for purposes of the foregoing will vary depending
upon the law of the jurisdiction which is being applied. There can be no
certainty as to what law a court would apply pursuant to applicable choice of
law provisions. Generally, however, a company would be considered insolvent
for purposes of the foregoing if the Company (i) will be left with
unreasonably small capital to conduct its business, (ii) has incurred debts
beyond its ability to pay such debts as they mature, or (iii) will not have a
fair value and present fair saleable value in excess of its stated liabilities
and identified contingent liabilities. There can be no assurance as to what
standards a court would use to determine whether the Company or the Surviving
Corporation was solvent at the relevant time. It is a condition to
consummation of the Merger that the Company receive a solvency opinion, which
is expected to be delivered by Houlihan, Lokey, Howard & Zukin, Inc. There
can, however, be no assurance that a court would not determine that the
Company or the Surviving Corporation, as the case may be, was insolvent at the
time of, or after giving effect to, the Merger Transactions.
The Company believes that, after incurring the indebtedness at the Effective
Time, the Company (i) will be (a) neither insolvent nor rendered insolvent
thereby, (b) in possession of sufficient capital to run its business
effectively and (c) incurring debts within its ability to pay as the same
mature or become due and (ii) will have sufficient assets to satisfy any
probable money judgment against it in any pending action. There can be no
assurance, however, that a court passing on such questions would reach the
same conclusions.
ANCILLARY AGREEMENTS
In connection with the execution of the Merger Agreement, the following
agreements were entered into, each of which will become effective only upon
the consummation of the transactions contemplated by the Merger Agreement.
Investors Agreement. IPC, CSH LLC, Richard P. Kleinknecht, Walsh, Servidio
and certain other parties have entered into the Investors Agreement to be
effective only upon the consummation of the transactions contemplated by the
Merger Agreement. Pursuant to the Investors Agreement, the Surviving
Corporation Board will consist of nine members, (i) three of whom shall be
nominated by CSH LLC and its Permitted Transferees (as defined in the
Investors Agreement) ("CSH Stockholders"); (ii) two of whom shall be nominated
by the CSH Stockholders and shall be individuals who are not "Affiliates" or
"Associates" (as those terms are used within the meaning of Rule 12b-2 of the
General Rules and Regulations under the Exchange Act) of any party to the
Investors Agreement or any Affiliate thereof; (iii) two of whom shall be
nominated by the CSH Stockholders
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and shall be individuals who are executive officers of IPC or its
subsidiaries; and (iv) two of whom shall be nominated by Richard P.
Kleinknecht and his Permitted Transferees. Each of the parties to the
Investors Agreement and its Permitted Transferees has agreed to vote its
shares of IPC Common Stock in favor of the persons so nominated, provided that
none of the parties will be required to vote for another party's nominees if
the number of shares of Surviving Corporation Common Stock held by the person
or group making the nomination is (A) in the case of the CSH Stockholders,
less than 5% of the then outstanding number of shares of Surviving Corporation
Common Stock or (B) in the case of Richard P. Kleinknecht and his Permitted
Transferees, less than 50% of such person's or group's Initial Ownership
(defined as the number of shares of Surviving Corporation Common Stock held by
such person or group as of the Effective Time) ("Initial Ownership").
Pursuant to the Investors Agreement, the CSH Stockholders and the Management
Stockholders have agreed that they will not, directly or indirectly, sell,
assign, transfer, grant a participation in, pledge or otherwise dispose of any
Surviving Corporation Common Stock (or solicit any offers to buy or otherwise
acquire, or take a pledge of any Surviving Corporation Common Stock) except in
compliance with the Securities Act of 1933, as amended, and the terms and
conditions of the Investors Agreement.
Any CSH Stockholder or Management Stockholder may at any time transfer any
or all of its Surviving Corporation Common Stock to one or more of its
Permitted Transferees without the consent of the Surviving Corporation or any
CSH Stockholder or Management Stockholder, as the case may be, so long as (i)
such Permitted Transferee shall have executed a Joinder Agreement
substantially in the form of Exhibit A to the Investors Agreement and thereby
agreed to be bound by the terms of the Investors Agreement and (ii) the
transfer to such Permitted Transferee is not in violation of applicable
federal or state securities laws.
Aside from a transfer to a Permitted Transferee as discussed above, Richard
P. Kleinknecht and his Permitted Transferees may transfer their Surviving
Corporation Common Stock only as follows: (i) pursuant to the Tag-Along Rights
described below; (ii) pursuant to the Drag-Along Rights described below; (iii)
in a public offering in connection with the exercise of their registration
rights under Article 5 of the Investors Agreement; or (iv) following the
earlier to occur of (A) the date on which the number of shares of Surviving
Corporation Common Stock held by Richard P. Kleinknecht and his Permitted
Transferees is less than 5% of the outstanding number of shares of Surviving
Corporation Common Stock and (B) the fifth anniversary of the Effective Time,
to any person other than any Adverse Person (as defined in the Investors
Agreement). The above-described restrictions on Richard P. Kleinknecht and his
Permitted Transferees shall terminate at such time as the aggregate number of
shares of Surviving Corporation Common Stock held by the CSH Stockholders is
less than 50% of the CSH Stockholders' aggregate Initial Ownership of
Surviving Corporation Common Stock.
Aside from a transfer to a Permitted Transferee as discussed above, Walsh
and his Permitted Transferees and Servidio and his Permitted Transferees may
transfer their Surviving Corporation Common Stock only as follows: (i)
pursuant to the Tag-Along Rights described below; (ii) pursuant to the Drag-
Along Rights described below; (iii) in any public offering; (iv) following the
30th month anniversary of the Effective Time, to any person other than any
Adverse Person (as defined in the Investors Agreement); or (v) to any person,
in a transfer through a broker or dealer in compliance with Rule 144 (or any
successor rule).
The Investors Agreement also provides that if the CSH Stockholders propose
to sell Surviving Corporation Common Stock, the Management Stockholders will
have the right to participate in the sale ("Tag-Along Rights"), provided that
no such rights shall apply (i) to sales of up to 3% in the aggregate of the
outstanding Surviving Corporation Common Stock; (ii) to sales to Permitted
Transferees of CSH Stockholders; or (iii) in public offerings. If Tag-Along
Rights apply, the CSH Stockholders will inform the Management Stockholders
(collectively, the "Tag Stockholders") of the terms and conditions of the
proposed sale and offer each Tag Stockholder the opportunity to participate.
If the number of shares of Surviving Corporation Common Stock that CSH
Stockholders and the Tag Stockholders propose to sell exceeds the number that
can be sold on the terms and conditions proposed by the buyer, the CSH
Stockholders and each Tag Stockholder who has exercised Tag-Along Rights will
be entitled to sell up to his or her Tag Along Portion. "Tag Along Portion"
shall mean the
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number of shares of Surviving Corporation Common Stock owned by such Tag
Stockholder (on a fully diluted basis) (and in the case of the CSH
Stockholders, owned by CSH Stockholders on a fully diluted basis) multiplied
by a fraction, the numerator of which shall be the number of shares of
Surviving Corporation Common Stock proposed to be sold by CSH Stockholders and
the denominator of which shall be the total number of shares of Surviving
Corporation Common Stock (on a fully diluted basis) held by parties to the
Investors Agreement. The CSH Stockholders and the Tag Stockholders who have
exercised Tag-Along Rights may sell their Surviving Corporation Common Stock
on substantially the same terms and conditions set forth in the notice
(subject to an increase in the amount of consideration of up to 5%) within 120
days of the date all Tag-Along Rights are waived, exercised or expire.
The Investors Agreement contemplates that if the CSH Shareholders (i)
propose to sell shares of Surviving Corporation Common Stock constituting not
less than 50% of their Initial Ownership in a bona fide third party sale, and
(ii) propose a sale in which the Surviving Corporation Common Stock to be sold
by CSH Stockholders and the Management Stockholders constitute 50% or more of
the outstanding Surviving Corporation Common Stock held by all such
Stockholders, the CSH Stockholders will be entitled to compel the Management
Stockholders to participate in the sale ("Drag-Along Rights") with respect to
the Surviving Corporation Common Stock owned by each Management Shareholder
which constitute the "Drag-Along Portion" of the number of shares of Surviving
Corporation Common Stock that such person owns. "Drag-Along Portion" shall
mean as to any Management Shareholder, the number of shares of Surviving
Corporation Common Stock such person owns (on a fully diluted basis)
multiplied by a fraction, the numerator of which is the number of shares of
Surviving Corporation Common Stock to be sold by the seller and proposed
sellers and the denominator of which is the total number of shares of
Surviving Corporation Common Stock owned by the seller and proposed sellers.
Pursuant to the Investors Agreement, CSH LLC also has the right to request
the Surviving Corporation to register for sale its Surviving Corporation
Common Stock on five occasions if the aggregate proceeds expected to be
received from any such sale exceeds $7,500,000. Once the Surviving Corporation
has effected one such registration for the CSH Stockholders, Richard P.
Kleinknecht and his Permitted Transferees may request two registrations of
their Surviving Corporation Common Stock. Each party to the Investors
Agreement has the right, subject to certain limitations, to request the
Surviving Corporation to include its Surviving Corporation Common Stock in any
registration undertaken by the Surviving Corporation. All requests for
registration are subject to certain other customary terms and conditions.
The Investors Agreement also provides that until the earlier to occur of (i)
the fifth anniversary of the Effective Time or (ii) the occurrence of a
"change in control" (defined as the date on which the CSH Stockholders own
less than 20% of the outstanding shares of Surviving Corporation Common Stock
or the transfer of all or substantially all of the assets of the Surviving
Corporation or a liquidation of the Surviving Corporation), neither Richard P.
Kleinknecht nor the Permitted Transferees shall acquire any Surviving
Corporation Common Stock or securities convertible into or exercisable or
exchangeable for Surviving Corporation Common Stock, with certain exceptions.
Amended and Restated Corporate Opportunity Agreement. Under the Amended and
Restated Corporate Opportunity Agreement, dated as of December 18, 1997,
Kleinknecht Electric Company, a New York corporation ("KEC-NY"), and
Kleinknecht Electric Company, a New Jersey corporation ("KEC-NJ" and together
with KEC-NY, "KEC" each of which are electrical companies controlled by
Richard P. Kleinknecht, Peter J. Kleinknecht and certain members of their
families), agree for three years from December 18, 1997 not to bid for or
accept any job requiring KEC to install low voltage wire, cable and related
devices intended to serve as local or wide area network for voice, data and/or
video communication, which installation does not require such work to be
performed by a licensed electrician but specifically excludes installations
intended to transmit signaling in connection with mechanical controls, fire
safety and security systems ("Cabling Work"). KEC may not bid for Cabling Work
without IPC's written consent if IPC has notified KEC of its intent to bid for
such job. This restriction on KEC does not apply if (a) IPC does not so notify
KEC and (b) KEC notifies IPC
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of its intention to bid for the job and does not receive notification from IPC
within 5 days that IPC wishes to place its own bid for the job.
The Corporate Opportunity Agreement may be terminated (a) by IPC with or
without cause upon 90 days written notice; (b) by either party upon 5 days
written notice if (i) there is a material default or (ii) a party files for
insolvency relief; or (c) will automatically terminate if (i) the Labor Pool
Agreements are terminated and (ii) IPC does not elect to pay KEC an aggregate
of $500,000 per year.
Amended and Restated Labor Pool Agreements. As of December 18, 1997, but
effective only upon consummation of the Merger, KEC-NY and KEC-NJ each entered
into Amended and Restated Labor Pool Agreements with IPC. Under such
individual but virtually identical labor sharing agreements, KEC continues to
act as payroll agents for IPC's Pooled Employees and serves as the signatory
to collective bargaining agreements with the Union Locals that represent these
employees (IBEW Locals 3 and 164T in New York and New Jersey, respectively)
(the "Amended Labor Pool Agreements"). Each of the Amended Labor Pool
Agreements is for a term of 20 years. IPC agrees to pay $45,000 to KEC-NY and
$5,000 to KEC-NJ in monthly fees under the respective Agreements, confirming a
modification to the pre-existing labor pool agreements, entered into as of
October 1, 1993, which had provided for an administrative fee equal to 2 1/2%
of the total compensation and benefit cost disbursed by KEC with respect to
such employees.
Under the Amended Labor Pool Agreements, IPC will obtain a standby letter of
credit in the amount of $1.5 million with respect to KEC's payments for labor
compensation and benefits related to Pooled Employees.
Under the Amended Labor Pool Agreements, IPC will additionally indemnify
KEC-NJ and KEC-NY from "Losses" that arise from a final determination that
either KEC entity is subject to withdrawal liability under Title IV of ERISA.
There is a $5 million cap on the indemnity. Under the Amended Labor Pool
Agreements, "Loss" expressly does not include any fines or penalties incurred
due to KEC's failure to comply with ERISA or to cooperate with the Surviving
Corporation in defending the Loss in a timely and reasonable manner (unless
such fines are due to the Surviving Corporation's failure to make payments
under its indemnity obligation in a timely manner). Fees and expenses incurred
in defending against the Loss, to the extent that they relate to Losses under
the cap, shall be borne by IPC. The obligation to indemnify terminates when
the applicable statute of limitations with respect to a claim for a Loss
expires.
Each of the Amended Labor Pool Agreements may be terminated by the Surviving
Corporation with or without cause upon 90 days written notice; or by either
party (a) upon 30 days prior notice if (i) the Surviving Corporation fails to
reimburse KEC for payroll and such failure continues for three business days
after receipt of notice from KEC; (ii) there is a material default; (iii) a
party files for insolvency relief; or (iv) the union withdraws its consent to
or objects to continuation of the pooling arrangement or (b) upon 90 days
prior notice in the event KEC shall cease operations which require it to
maintain a collective bargaining agreement.
Stockholders Agreement. Pursuant to the Stockholders Agreement, Richard P.
Kleinknecht and Peter J. Kleinknecht and certain family members and trusts
associated with Richard P. Kleinknecht and Peter J. Kleinknecht and Russell G.
Kleinknecht have agreed that, until the first to occur of (a) the Effective
Time and (b) the date the Merger Agreement is terminated in accordance with
its terms (the "Termination Date"), such Kleinknecht Stockholder shall vote
(or cause to be voted) the shares of IPC Common Stock held of record or
beneficially by such Stockholder (i) in favor of the Merger, the execution and
delivery by IPC of the Merger Agreement and the approval of the terms thereof
and each of the other actions contemplated by the Merger Agreement and the
Stockholders Agreement and any actions required in furtherance thereof; (ii)
against any action or agreement that would result in a breach of any covenant,
representation or warranty or any other obligation or agreement of IPC under
the Merger Agreement or the Kleinknecht Stockholders under the Stockholders
Agreement; (iii) in favor of the New Stock Incentive Plan and (iv) against the
following actions (other than the Merger and the transactions contemplated by
the Merger Agreement or any such actions identified in writing to AAC in
advance): (A) any extraordinary corporate transaction, including, without
limitation, a merger, consolidation or other business combination involving
IPC or its subsidiaries; (B) a sale, lease or transfer
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of a material amount of assets of IPC or its subsidiaries or a reorganization,
recapitalization, dissolution or liquidation of IPC or its subsidiaries; (C)
any change in the majority of the IPC Board; (D) any material change in the
present capitalization of IPC or any amendment of IPC's Certificate of
Incorporation or By-Laws; (E) any other material change in IPC's corporate
structure or business; or (F) any other action which is intended, or could
reasonably be expected, to impede, interfere with, delay, postpone, discourage
or materially adversely affect the Merger or the transactions contemplated by
the Merger Agreement or the Stockholders Agreement.
Pursuant to the Stockholders Agreement, Richard P. Kleinknecht has agreed to
elect, subject to proration, to retain an aggregate of 380,952 shares of
Surviving Corporation Common Stock. In addition, all other signatories to the
Stockholders Agreement, including family members of Richard P. Kleinknecht,
Peter J. Kleinknecht and his family members and Russell G. Kleinknecht have
advised the Company of their intent to elect to receive cash for their
aggregate of 6,525,602 shares of IPC Common Stock.
Each Kleinknecht Stockholder has agreed that, except as permitted under the
Merger Agreement, the Corporate Opportunity Agreement or the Labor Pool
Agreements, for a period of three years after the Effective Time, he will not,
directly or indirectly, in any form or manner on a worldwide basis: (i) engage
in any activities competitive in any material respect with the business of the
Surviving Corporation and its subsidiaries and affiliates or (ii) become a
partner, shareholder or involved in any other capacity in an entity which
engages in activities competitive with the business of the Surviving
Corporation and its subsidiaries; provided that each of Walsh and Servidio may
own, directly or indirectly, solely as a passive investment, securities of an
entity so long as he does not control the entity and does not, directly or
indirectly, own 5% or more of any voting class of securities of the entity.
In addition, under the Stockholders Agreement, each of Richard P.
Kleinknecht and Peter J. Kleinknecht has agreed that, for a period ending on
the later of three years following the Effective Time or the termination of
the Labor Pool Agreements, he will not employ or attempt to employ an employee
of the Surviving Corporation or any of its subsidiaries or joint ventures
(other than, with respect to Richard P. Kleinknecht, his executive assistant).
AAC Stockholders Agreement. Pursuant to the terms of the AAC Stockholders
Agreement, dated as of December 18, 1997, between IPC and CSH LLC, CSH LLC, as
sole stockholder of AAC ("AAC Stockholders Agreement"), has agreed, among
other things, to vote its shares of AAC in favor of the Merger and against any
action or agreement that would result in a breach of any covenant,
representation or warranty or any other obligation or agreement of AAC under
the Merger Agreement or the AAC Stockholders Agreement.
Share Exchange and Termination Agreement. Pursuant to the Share Exchange and
Termination Agreement, by and among IPC, IXnet, Walsh and Servidio, Walsh has
agreed to exchange 336 shares of IXnet Common Stock for 152,381 shares of
Surviving Corporation Common Stock and Servidio has agreed to exchange 224
shares of IXnet Common Stock for 101,587 shares of Surviving Corporation
Common Stock immediately following the Effective Time. Ten percent of Walsh's
and Servidio's shares of Surviving Corporation Common Stock will be retained
and issued only upon delivery, by June 18, 1998, of releases by three former
IXnet Common Stock shareholders with respect to certain installment purchase
agreements. The shares of Surviving Corporation Common Stock so received will
be subject to usual and customary restrictions on transfer.
Each of Walsh and Servidio has agreed that, except as permitted under the
Merger Agreement, for a period of two and one-half years after the Effective
Time, he will not, directly or indirectly, in any form or manner on a
worldwide basis: (i) engage in any activities competitive in any material
respect with the business of the Surviving Corporation and its subsidiaries
and affiliates or (ii) become a partner, shareholder or involved in any other
capacity in an entity which engages in activities competitive with the
business of the Surviving Corporation and its subsidiaries; provided that each
of Walsh and Servidio may own, directly or indirectly, solely as a passive
investment, securities of an entity so long as he does not control the entity
and does not, directly or indirectly, own 5% or more of any voting class of
securities of the entity.
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Starr Termination Agreement. Pursuant to a Termination Agreement, dated as
of December 18, 1997 (the "Starr Termination Agreement"), among IPC and the
Starrs, the Starrs have agreed to terminate their registration rights with
respect to IPC Common Stock.
Employment Agreements. Under an Amended and Restated Employment Agreement,
dated as of December 18, 1997, by and between Richard P. Kleinknecht and IPC,
Richard P. Kleinknecht is to be employed for a two-year term, commencing on
the closing date of the transactions contemplated by the Merger Agreement (the
"Closing Date"), as Vice-Chairman, reporting to the Surviving Corporation
Board and Chairman of the Surviving Corporation. Richard P. Kleinknecht shall
receive $420,000 in annual base salary, plus a possible discretionary bonus as
well as options to purchase 1.25% of the fully diluted shares of the Surviving
Corporation pursuant to the New Stock Incentive Plan. The Surviving
Corporation has a right to terminate the employment agreement with or without
cause. If Richard P. Kleinknecht's employment is terminated without cause, the
Surviving Corporation must pay Richard P. Kleinknecht's base salary for the
remainder of his term, at normal payroll intervals. During the term of his
employment and for one year thereafter, Richard P. Kleinknecht will be subject
to restrictions on (i) competition and (ii) the solicitation of customers and
employees, and for all periods during and after the term, he will be subject
to nondisclosure and confidentiality restrictions relating to the confidential
information and trade secrets of the Surviving Corporation and its affiliates.
Richard P. Kleinknecht is to be employed on a full-time basis subject to his
continued work for KEC-NJ, KEC-NY and Knight Maintenance Corporation. The
Amended and Restated Employment Agreement will supersede an existing
employment agreement between Richard P. Kleinknecht and the Company. See "THE
ANNUAL MEETING--OTHER MATTERS--Employment Agreements."
Peter J. Kleinknecht has entered into an Amended and Restated Employment
Agreement with IPC, dated as of December 18, 1997, whereby he will be engaged
as an IPC employee reporting only to the full Surviving Corporation Board
under which agreement he shall perform such duties as may be from time to time
assigned, not inconsistent with the duties performed in the six months prior
to the Closing Date, although he shall not be required to perform such duties
at the offices of the Surviving Corporation. The terms and conditions are
substantially the same as Richard P. Kleinknecht's employment agreement except
for the following: (i) Peter J. Kleinknecht shall devote time to the Surviving
Corporation on an "as needed basis" and shall continue in his capacity as an
officer of both KEC-NY and KEC-NJ; (ii) if Peter J. Kleinknecht's employment
is terminated by the Surviving Corporation due to death, disability or without
cause, the Surviving Corporation must pay him or his estate, as the case may
be, a lump sum equal to his base salary for the remainder of his term,
discounted for present value; and (iii) Peter J. Kleinknecht's employment
agreement specifically provides for a car, life insurance and social club
membership, consistent with past practice. The Amended and Restated Employment
Agreement will supersede an existing employment agreement between Peter J.
Kleinknecht and the Company. See "THE ANNUAL MEETING--OTHER METTERS--
Employment Agreements."
Walsh has entered into an Amended and Restated Employment Agreement with
IXnet, dated as of December 18, 1997 (the "Walsh Employment Agreement"), under
which he is to be employed on a full time basis for a five-year term as Chief
Executive Officer of IXnet and Chairman of the IXnet Board of Directors
("IXnet Board") reporting only to the full IXnet Board or Surviving
Corporation Board. Under the employment agreement, Walsh will receive $225,000
in base salary plus a discretionary bonus targeted at a minimum of $175,000
and benefits consistent with past practice. He will also receive options to
purchase 2% of the fully diluted shares of the Surviving Corporation and a
"springing" option grant equal to 3% of the shares of IXnet (with an
additional 2% reserved for grants to other employees) in the event of a public
offering or spin-off of IXnet stock within 2 years. He is entitled to lump sum
severance payments payable if he is terminated "without cause" or if he
resigns for "good reason," equal to his base salary, plus his average bonus,
for a period equal to the greater of three (3) years or the number of years in
his then-remaining term of employment. Walsh's benefits under his employment
agreement will continue during such severance period. During the term and for
2.5 years thereafter, Walsh is subject to restrictions on (i) competition and
(ii) the solicitation of customers and employees, and for all periods during
and after the term, he is subject to nondisclosure and confidentiality
restrictions relating to the confidential information and trade secrets of the
Surviving Corporation and its affiliates.
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Servidio has entered into an Amended and Restated Employment Agreement with
IXnet, dated as of December 18, 1997, as Vice President--Sales of IXnet,
reporting to the full IXnet Board or the Chief Executive Officer of IXnet. The
terms and conditions of Servidio's employment agreement are substantially the
same as Walsh's employment agreement except that Servidio will receive
$190,000 in base salary, plus a commission-based bonus with a minimum draw of
$110,000 and benefits consistent with past practice.
REGULATORY CONSIDERATIONS/APPROVALS
Under the HSR Act and the HSR Rules by the FTC, certain merger transactions
may not be consummated unless certain information has been furnished to the
Antitrust Division and the FTC and certain applicable waiting periods have
expired. The Merger is subject to the requirements of the HSR Act and the HSR
Rules. Pursuant to the requirements of the HSR Act, AAC filed a Notification
and Report Form with respect to the Merger with the Antitrust Division and the
FTC on February 12, 1998. The Company filed a Notification and Report Form
with respect to the Merger on February 12, 1998. The waiting period applicable
to the Merger terminated on March 19, 1998.
At any time before or after the consummation of the Merger, the Antitrust
Division or the FTC could take such action under the antitrust laws as either
deems necessary or desirable in the public interest, including seeking to
enjoin the Merger or seeking divestiture of the Company by AAC following
consummation of the Merger. Private parties (including individual states) may
also bring legal actions under the antitrust laws. Neither AAC nor the Company
believes that the consummation of the Merger will result in a violation of any
applicable antitrust laws. However, there can be no assurance that a challenge
to the Merger on antitrust grounds will not be made, or if such a challenge is
made, what the result will be.
IXnet possesses certain licenses and/or authorities from the FCC and various
state PUCs. Certain of these licenses and authorities require pre-approval of
any transfer or change of control with respect thereto. IXnet has filed for
approval to transfer, merge or for change of control, as appropriate, under
the rules of the FCC, and the state PUCs and anticipates receiving clearance
in all cases prior to the Effective Date. In some state jurisdictions, pre- or
post-transfer notification is required and such filing will be done on a
timely basis. IXnet also has licenses issued by the appropriate authorities in
certain foreign jurisdictions including the United Kingdom, Japan, Hong Kong,
Singapore and Brazil. In these jurisdictions, no pre-closing approvals are
required. However, some of these jurisdictions do require a pre-closing
notification. Any such notifications in these jurisdictions will be done on a
timely basis. See "RISK FACTORS--Risks Associated with Operations--
Regulation," and "THE COMPANY--Regulatory Environment."
REPRESENTATIONS AND WARRANTIES
Each of IPC and AAC has made certain representations and warranties to each
other in the Merger Agreement as to, among other things, the authorization,
validity, binding effect and enforceability of the Merger Agreement, various
corporate matters, capital structure, compliance with laws, absence of
material adverse changes, financial statements, labor matters, employee
benefit plans, environmental matters, asset quality, loan portfolio and
allowances for possible loan losses, investment securities and borrowings,
books and records, absence of certain legal proceedings and regulatory actions
and certain fees payable in connection with the proposed transactions.
Virtually all of the representations and warranties of the parties, the
accuracy of which is a condition to the closing of the transactions
contemplated by the Merger Agreement, contain exceptions for any condition,
event, change or occurrence that would not have a material adverse effect on
the financial condition or operations, business, assets or results of
operations of the party making such representation or warranty, and its
subsidiaries taken as a whole. The representations and warranties of the
parties do not survive beyond the Effective Time if the Merger is consummated,
and, if the Merger Agreement is terminated without consummation of the Merger,
there will be no liability on the part of any party for a misrepresentation
except that no party will be relieved from any liability arising out of the
willful breach by any other party of any covenant or willful misrepresentation
contained in the Merger Agreement.
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AMENDMENT AND WAIVER
Subject to applicable law, the Merger Agreement may be amended by IPC and
AAC at any time before or after approval by the stockholders of IPC of the
matters presented herein in connection with the Merger, except that, after any
such approval, no amendment may be made which contravenes the DGCL. Subject to
applicable law, the parties may extend the time for performance of the
obligations or other acts of the other party to the Merger Agreement, may
waive any inaccuracies in the representations and warranties contained in the
Merger Agreement or in any document delivered pursuant thereto and may waive
compliance with any agreements or conditions for their respective benefit
contained in the Merger Agreement.
TERMINATION
The Merger Agreement may be terminated and the Merger may be abandoned at
any time prior to the Effective Time (notwithstanding any approval of the
Merger Agreement by the stockholders of the Company): (a) by mutual written
consent of the Company and AAC; (b) by either the Company or AAC, if the
Merger has not been consummated by April 30, 1998 by reason of the failure of
any condition precedent, provided that the party seeking to exercise such
right is not then in breach in any material respect of any of its obligations
under the Merger Agreement; (c) by either the Company or AAC, if AAC (in the
case of termination by the Company), or the Company (in the case of
termination by AAC) shall have breached in any material respect any of its
obligations or representations and warranties under the Merger Agreement and
the breach has continued without cure for a period of 15 days after notice of
the breach of any such obligation, representation and warranty of AAC (in the
case of termination by the Company) or the Company (in the case of termination
by AAC); (d) by the Company, in the event that any person has made a Superior
Acquisition Proposal; (e) by AAC if the IPC Board has withdrawn or modified or
amended, in a manner adverse to AAC, its approval or recommendation of the
Merger Agreement and the Merger or its recommendation that stockholders of the
Company adopt and approve the Merger Agreement and the Merger, or approved,
recommended or endorsed any proposal for a transaction other than the Merger
(including a tender or exchange offer for shares of IPC Common Stock) or if
the Company has failed to call stockholder meeting to vote on the Merger; (f)
by the Company, if prior to the Effective Time, the IPC Board has withdrawn or
modified or amended, in a manner adverse to AAC, its approval or
recommendation of the Merger Agreement and the Merger or its recommendation
that stockholders of the Company adopt and approve the Merger Agreement and
the Merger or the IPC Board has approved or endorsed any proposal recommended
for a transaction other than the Merger provided that the Company is in
compliance with its obligations described under "--No Solicitation;" and (g)
by either the Company or AAC if, at a duly held stockholders meeting of the
Company or any adjournment thereof at which the Merger Agreement and the
Merger is voted upon, the adoption and approval by a majority vote of the
Company's stockholders has not been obtained.
The party desiring to terminate the Merger Agreement must give written
notice of such termination to the other party in accordance with the terms
thereof. If the Merger Agreement is terminated, such Agreement will become
void and of no effect with no liability on the part of any party thereto,
except as provided therein.
TERMINATION FEE
In recognition of the efforts and expenses of and other opportunities
foregone by AAC while structuring the Merger, the Merger Agreement provides
that IPC shall, in certain circumstances, pay to AAC a termination fee of
$3.37 million. The Termination Fee is payable upon the occurrence of any one
of the following: (i) the Merger Agreement is terminated by the Company or
AAC, as the case may be, pursuant to (d) above under "THE MERGER--Termination"
or the IPC Board has approved, recommended, or endorsed a Superior Acquisition
Proposal; or (ii) a Third Party has made an Acquisition Proposal, the Merger
Agreement is terminated because the IPC Board has withdrawn, modified, amended
in a manner adverse to AAC, its approval and recommendation of the Merger
Agreement and the Merger or its recommendation that the stockholders of the
Company adopt and approve the Merger Agreement and the Merger or the Company
has failed to call a meeting of stockholders
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to vote on the Merger, and the Company consummates an Acquisition Transaction
within 12 months following termination of the Merger Agreement.
In addition, the Merger Agreement provides, subject to various exceptions
and limitations, for reimbursement of certain expenses of AAC, not to exceed
$2.2 million in the aggregate, consisting of all reasonable out-of-pocket
costs, fees and expenses, including without limitation, the reasonable fees
and disbursements of banks, investment banks, accountants or legal counsel.
These costs, fees and expenses are payable, upon termination of the Merger
Agreement as a result of one of the events described in the previous
paragraph, within 10 business days of receipt by the Company of reasonably
satisfactory documentation detailing such costs, fees and expenses.
CERTAIN FEES AND EXPENSES
All costs and expenses incurred in connection with the Merger Agreement and
the transactions contemplated thereby shall be paid by the party incurring
such expense.
As a result of the proposed Merger, the Company will incur various costs
currently estimated at $14.0 million (pre-tax) in connection with consummating
the transaction. These costs consist primarily of professional fees,
registration costs, printing costs and other expenses. While the exact timing,
nature and amount of these costs are subject to change the Company will also
incur a one-time charge of approximately $8.3 million ($4.7 million after tax)
in the quarter in which the Merger is consummated. This one time charge
consists of certain "change in control" bonuses and severance payments
aggregating $2.5 million (pre-tax) and the payment, upon cancellation, of
stock options aggregating $5.8 million on a pre-tax basis. As a result of the
foregoing, the Company expects to record a significant net loss in the quarter
in which the Merger is recorded. Because this loss will result directly from
the one-time charge incurred in connection with the Merger, and this charge
will be funded entirely through the proceeds of the Merger Financing, the
Company does not expect this loss to materially impact its liquidity, ongoing
operations or market position.
MERGER FINANCING
The Company is expected to enter into debt financing arrangements
aggregating approximately $255 million, which will consist of both the Notes
and the Revolving Credit Facility. It is anticipated that substantially all
the proceeds of the Notes, together with the Equity Investment, will be used
to finance the cash portion of the Merger Consideration and to pay related
costs, fees and expenses incurred in connection with the Merger. Any remaining
proceeds will be used for working capital and other purposes. It is also
anticipated that the Revolving Credit Facility may be used to meet the
Company's working capital requirements after the Merger. It is expected that
the Notes will feature a three-year deferred interest component which will
enhance the cash flow from the Surviving Corporation's operations during such
three-year period and which may be used to satisfy the greater capital
requirements of IXnet. On December 17, 1997, CVC and AAC received commitment
letters to provide financing in the amount of $232 million consisting of $157
million in Notes and a Revolving Credit Facility for $75 million. Due to
anticipated favorable market conditions, the Company expects to increase the
amount of the Notes to $180 million. With respect to $157 million of the
Notes, MSCI committed to use its best efforts to complete a public offering or
a private placement of the Notes, or, in the event such public offering or
private placement is not completed within the offering period described
therein, to purchase the Notes. On January 12, 1998, CVC and AAC received an
amended and restated commitment letter from MSCI and Goldman, which superseded
the commitment letter referred to in the second preceding sentence and which
added Goldman as a co-manager. The commitments are subject to customary
conditions, including the negotiation, execution and delivery of definitive
documentation with respect to the financings contemplated by the commitments.
Under the Revolving Credit Facility, a banking syndicate led by MSSF will
provide the Surviving Corporation with $75 million of revolving credit
borrowings. The Revolving Credit Facility will include a sublimit for the
issuance of letters of credit. Borrowings made under the Revolving Credit
Facility will bear interest at a rate equal to, at the Surviving Corporation's
option, the administrative agent's Base Rate plus 150
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basis points or the LIBOR Rate plus 250 basis points. The "Base Rate" is a
fluctuating interest rate equal to the higher of (i) the rate of interest
announced publicly by the administrative agent as its prime rate and (ii) a
rate equal to 1/2 of 1% per annum above the weighted average of the rates on
overnight Federal funds transactions with members of the Federal Reserve
System arranged by Federal funds brokers, as determined for any day by the
administrative agent. The Base Rate and LIBOR Rate will be subject to step-
downs based on the leverage ratio of the Surviving Corporation and its
subsidiaries on a consolidated basis.
The Revolving Credit Facility expires five years from the Effective Time.
The obligations of the Surviving Corporation under the Revolving Credit
Facility are secured by substantially all of the real and personal property of
the Surviving Corporation and its subsidiaries including its inventory,
accounts receivable and the proceeds of the foregoing.
The Revolving Credit Facility contains customary covenants of the Surviving
Corporation and its subsidiaries, including, without limitation, restrictions
on (i) asset dispositions, (ii) mergers or acquisitions, (iii) capital
expenditures, (iv) restricted payments, including prohibitions on the payment
of dividends to, or the repurchase or redemption of stock from, stockholders,
(v) the incurrence of indebtedness, (vi) loans and investments, (vii) liens,
(viii) transactions with affiliates (as defined in the Revolving Credit
Facility) and (ix) various other covenants. Pursuant to the terms of the
Revolving Credit Facility, the Surviving Corporation would be in default under
the Revolving Credit Facility upon the non-payment of principal or interest
when due under the notes issued in connection with the Revolving Credit
Facility or, subject to applicable grace periods in certain circumstances,
upon the non-fulfillment of the covenants described above, certain changes in
control of the ownership of the Surviving Corporation or various other
defaults described in the Revolving Credit Facility. If such a default occurs,
the banks will be entitled to take all actions permitted to be taken by a
secured creditor under the Uniform Commercial Code and to accelerate the
amounts due under the Revolving Credit Facility and may require all such
amounts to be immediately paid in full.
The Company plans to issue $157 million original principal amount of Notes
which, due to anticipated favorable market conditions, is expected to increase
to $180 million. The Notes will have a maturity of ten years from the date of
issue. Interest shall be payable semi-annually except that interest shall be
payable in additional Notes, rather than cash, for three years after their
issuance. The Notes will be senior unsecured indebtedness of the Surviving
Corporation, ranking senior to all existing and future subordinated
indebtedness of the Surviving Corporation and pari passu in right of payment
with all other existing and future senior unsecured indebtedness of the
Surviving Corporation. The payment of principal, premium, if any, and interest
on the Notes will be unconditionally guaranteed on a joint and several basis
by each of the Surviving Corporation's domestic subsidiaries.
On or after five years from the date of issue, the Surviving Corporation may
redeem the Notes in whole or in part pursuant to the terms thereof.
Notwithstanding the foregoing, at any time on or before three years from the
date of issue, the Surviving Corporation may redeem up to 35% of the original
aggregate principal amount of Notes at a premium, provided that at least 65%
of the original principal amount of Notes remain outstanding immediately after
the occurrence of such redemption. Upon a Change of Control (as defined in the
Indenture pursuant to which the Notes will be issued (the "Indenture")), the
Surviving Corporation will be required to make an offer to purchase all
outstanding Notes at 101% of the accrued value thereof. In addition, a Change
of Control would also require the Surviving Corporation to repay outstanding
indebtedness under the Revolving Credit Facility. There can be no assurance
that in the event of a Change of Control the Company will have, or will have
access to, sufficient funds to repurchase the Notes and to repay indebtedness
under the Revolving Credit Facility.
In addition, the Indenture will restrict, among other things, the ability of
the Company and its subsidiaries to incur additional indebtedness, pay
dividends or make certain other restricted payments, incur liens, engage in
any sale and leaseback transactions, sell stock of subsidiaries, apply net
proceeds from certain assets sales, merge or consolidate with any other
person, sell, assign, transfer, lease, convey or otherwise dispose of
substantially all
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of the assets of the Company, enter into certain transactions with affiliates,
or incur indebtedness that is subordinate in right of payment to any
indebtedness and senior in right of payment to the Notes.
CSH LLC, directly or indirectly, expects to make the Equity Investment,
depending on the number of shares of Surviving Corporation Common Stock that
existing stockholders of the Company elect to retain in the Merger.
CONVERSION OF AAC STOCK
As a result of the Merger, in connection with the Equity Investment, AAC's
stockholders will receive not less than 50.25% nor more than 86.25% (prior to
giving effect to the IXnet Exchange) of the number of shares of Surviving
Corporation Common Stock expected to be outstanding upon the Merger.
DISSENTERS' RIGHTS
Holders of shares of IPC Common Stock are entitled to appraisal rights under
Section 262 ("Section 262") of DGCL, provided that they comply with the
conditions established by Section 262. Section 262 is included in its entirety
as Annex F to this Proxy Statement/Prospectus. The following discussion does
not purport to be a complete statement of the law relating to appraisal rights
and is qualified by reference to Annex F. This discussion and Annex F should
be reviewed carefully by any holder who wishes to exercise statutory appraisal
rights or who wishes to preserve the right to do so, as failure to comply with
the procedures set forth herein or therein may result in the loss of appraisal
rights. Stockholders of record who desire to exercise their appraisal rights
must: (i) hold shares of IPC Common Stock on the date of making a demand for
appraisal; (ii) continuously hold such shares through the Effective Time;
(iii) deliver a properly executed written demand for appraisal to the Company
prior to the vote by the stockholders of the Company on the Merger; (iv) not
vote in favor of the Merger or consent thereto in writing; (v) file any
necessary petition in the Delaware Court, as more fully described below,
within 120 days after the Effective Time; and (vi) otherwise satisfy all of
the conditions described more fully below and in Annex F.
A record holder of shares of IPC Common Stock who makes the demand described
below with respect to such shares, who continuously is the record holder of
such shares through the Effective Time, who otherwise complies with the
statutory requirements of Section 262 and who neither votes in favor of the
Merger nor consents thereto in writing will be entitled, if the Merger is
consummated, to receive payment of the fair value of his shares of IPC Common
Stock as appraised by the Delaware Court. All references in Section 262 and in
this summary of appraisal rights to a "stockholder" or "holders of shares of
common stock" are to the record holder or holders of shares of IPC Common
Stock.
Under Section 262, not less than 20 days prior to the Annual Meeting, the
Company is required to notify each stockholder eligible for appraisal rights
of the availability of such appraisal rights. This Proxy Statement/Prospectus
constitutes notice to holders of IPC Common Stock that appraisal rights are
available to them. Stockholders of record who desire to exercise their
appraisal rights must satisfy all of the conditions set forth herein. A
written demand for appraisal of any shares of IPC Common Stock must be filed
with the Company before the taking of the vote on the Merger. Such written
demand must reasonably inform the Company of the identity of the stockholder
of record and of such stockholder's intention to demand appraisal of the IPC
Common Stock held by such stockholder. This written demand for appraisal of
shares must be in addition to and separate from any proxy or vote abstaining
from or voting against the Merger. Voting against, abstaining from voting on,
failing to return a proxy with respect to, or failing to vote on the Merger
will not, in and of itself, constitute a demand for appraisal within Section
262.
Stockholders who desire to exercise appraisal rights must not vote in favor
of the Merger or consent thereto in writing. Voting in favor of the Merger or
delivering a proxy in connection with the Annual Meeting (unless the proxy
votes against, or expressly abstains from the vote on, the approval of the
Merger), will constitute a waiver of the stockholder's right of appraisal and
will nullify any written demand for appraisal submitted by the stockholder.
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A demand for appraisal must be executed by or on behalf of the stockholder
of record, fully and correctly, as such stockholder's name appears on the
certificate or certificates representing the shares of IPC Common Stock. A
person having a beneficial interest in shares of IPC Common Stock that are
held of record in the name of another person, such as a broker, fiduciary or
other nominee, must act promptly to cause the record holder to follow the
steps summarized herein properly and in a timely manner to perfect any
appraisal rights. If the shares of IPC Common Stock are owned of record by a
person other than the beneficial owner, including a broker, fiduciary (such as
a trustee, guardian or custodian) or other nominee, such demand must be
executed by or for the record owner. If the shares of IPC Common Stock are
owned of record by more than one person, as in a joint tenancy or tenancy in
common, such demand must be executed by or for all such joint owners. An
authorized agent, including an agent for two or more joint owners, may execute
the demand for appraisal for a stockholder of record; however, the agent must
identify the record owner and expressly disclose the fact that, in exercising
the demand, such person is acting as agent for the record owner. A record
owner, such as a broker, fiduciary or other nominee, who holds shares of IPC
Common Stock as a nominee for others, may exercise appraisal rights with
respect to the shares held for all or less than all beneficial owners of
shares as to which such person is the record owner. In such case, the written
demand must set forth the number of shares covered by such demand. Where the
number of shares is not expressly stated, the demand will be presumed to cover
all shares of IPC Common Stock outstanding in the name of such record owner. A
stockholder who elects to exercise appraisal rights should mail or deliver his
or her written demand to: IPC Information Systems, Inc., Wall Street Plaza, 88
Pine Street, New York, New York 10005; Attention: Corporate Secretary. The
written demand for appraisal should specify the stockholder's name and mailing
address, the number of shares of IPC Common Stock owned, and that the
stockholder is thereby demanding appraisal of his or her shares. A proxy or
vote against the Merger will not constitute such a demand.
Within ten days after the Effective Time, the Surviving Corporation must
provide notice of the Effective Time to all stockholders who have complied
with Section 262. Within 120 days after the Effective Time, either the
Surviving Corporation or any stockholder who has complied with the required
conditions of Section 262 may file a petition in the Delaware Court, with a
copy served on the Surviving Corporation in the case of a petition filed by a
stockholder, demanding a determination of the fair value of the shares of all
dissenting stockholders. The Surviving Corporation does not currently intend
to file an appraisal petition. Stockholders seeking to exercise appraisal
rights should not assume that the Surviving Corporation will file such a
petition or that the Surviving Corporation will initiate any negotiations with
respect to the fair value of such shares. Accordingly, stockholders who desire
to have their shares appraised should initiate any petitions necessary for the
perfection of their appraisal rights within the time periods and in the manner
prescribed in Section 262. Within 120 days after the Effective Time, any
stockholder who has theretofore complied with the applicable provisions of
Section 262 will be entitled, upon written request, to receive from the
Surviving Corporation a statement setting forth the aggregate number of shares
of IPC Common Stock not voted in favor of the Merger and with respect to which
demands for appraisal were received by the Company and the number of holders
of such shares. Such statement must be mailed within 10 days after the written
request therefor has been received by the Surviving Corporation (addressed as
specified for written demands in the preceding paragraph) or within 10 days
after expiration of the time for delivery of demands for appraisal under
Section 262, whichever is later.
If a petition for an appraisal is timely filed, at the hearing on such
petition, the Delaware Court will determine which stockholders are entitled to
appraisal rights and will appraise the shares of IPC Common Stock owned by
such stockholders, determining the fair value of such shares exclusive of any
element of value arising from the accomplishment or expectation of the Merger,
together with a fair rate of interest, if any, to be paid upon the amount
determined to be the fair value. In determining fair value, the Delaware Court
will take into account all relevant factors. In Weinberger v. UOP, Inc., the
Delaware Supreme Court discussed the factors that could be considered in
determining fair value in an appraisal proceeding, stating that "proof of
value by any techniques or methods which are generally considered acceptable
in the financial community and otherwise admissible in court" should be
considered, and that, "fair price obviously requires consideration of all
relevant factors involving the value of a company." The Delaware Supreme Court
stated that in making this determination of fair value the court must consider
market value, asset value, dividends, earnings prospects, the
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nature of the enterprise and any other facts which are known or which can be
ascertained as of the date of the merger and which throw any light on future
prospects of the merged corporation. In Weinberger, the Delaware Supreme Court
stated that "elements of future value, including the nature of the enterprise,
which are known or susceptible of proof as of the date of the merger and not
the product of speculation, may be considered." Section 262, however, provides
that fair value is to be "exclusive of any element of value arising from the
accomplishment or expectation of the merger."
Stockholders considering seeking appraisal should recognize that the fair
value of their shares as determined under Section 262 could be more than, the
same as or less than the Merger Consideration to be received if they do not
seek appraisal of their shares. The cost of the appraisal proceeding may be
determined by the Delaware Court and taxed against the parties as the Delaware
Court deems equitable in the circumstances. Upon application of a dissenting
stockholder of the Company, the Delaware Court may order that all or a portion
of the expenses incurred by any dissenting stockholder in connection with the
appraisal proceeding, including without limitation, reasonable attorneys' fees
and the fees and expenses of experts, be charged pro rata against the value of
all shares of stock entitled to appraisal.
Any holder of shares of IPC Common Stock who has duly demanded appraisal in
compliance with Section 262 will not, after the Effective Time, be entitled to
vote for any purpose any shares subject to such demand or to receive payment
of dividends or other distributions on such shares, except for dividends or
distributions payable to stockholders of record at a date prior to the
Effective Time.
PROPOSAL 2--CERTIFICATE AMENDMENT
In connection with the Merger, the IPC Board has approved and adopted,
subject to stockholder approval, the Certificate Amendment which is included
in this Proxy Statement/Prospectus as Annex B. Because the approval of the
Certificate Amendment is contingent upon the approval of the Merger, the
proposed Amended and Restated Certificate of Incorporation attached as Annex B
includes the provisions of the Ballot Amendment. In the event that the Merger
Agreement is approved, the Ballot Amendment will be deemed approved, whether
or not the Certificate Amendment is approved. Adoption of the Certificate
Amendment requires an affirmative vote of the holders of at least 80% of the
aggregate outstanding shares of IPC Common Stock on the Record Date. A failure
to return a properly executed proxy card or to vote in person or abstaining
from voting will have the same effect as a vote against the Certificate
Amendment. Broker non-votes will not be counted as having been voted in person
or by proxy at the Annual Meeting and will have the same effect as a vote
against the Certificate Amendment. Consummation of the Merger is not
contingent on adoption of the Certificate Amendment; however, approval of the
Certificate Amendment is contingent upon approval of the Merger Agreement.
The following is a summary of the material differences between the Restated
Certificate of Incorporation of IPC (the "Existing Certificate of
Incorporation") and the Certificate Amendment. The following discussion does
not purport to be a complete discussion of, and is qualified by reference to
DGCL, the Existing Certificate of Incorporation and the Certificate Amendment.
CLASSIFICATION OF THE BOARD
The Existing Certificate of Incorporation provides for a classified Board of
Directors, with the entire Board of Directors being divided into three classes
with each director being elected to serve for a term ending on the date of the
third annual meeting following the annual meeting at which such director was
elected. Any amendment to this provision requires an affirmative vote of the
stockholders of not less than eighty (80%) percent of the total number of
votes eligible to be cast by the holders of all outstanding shares of capital
stock.
Under the Certificate Amendment, the classified Board of Directors is
eliminated and the entire Board of Directors will stand for election at any
given annual meeting of stockholders. Furthermore, subsequent changes with
respect to classification of the Surviving Corporation Board could be made by
an affirmative vote of greater than fifty (50%) percent of the total number of
votes then eligible to be cast by the holders of all outstanding shares of
Surviving Corporation Common Stock.
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VACANCIES
The Existing Certificate of Incorporation provides that, subject to the
limitations prescribed by law, all vacancies in the office of director,
including vacancies created by newly created directorships resulting from an
increase in the authorized number of directors, may be filled only by a vote
of the directors then holding office, even if less than a quorum, or a sole
remaining director. The Existing Certificate of Incorporation further provides
that any director so elected shall serve the remainder of the full term of the
class of directors in which the new directorship was created or the vacancy
occurred and until such director's successor is duly elected and qualified or
until such director's resignation or removal. Any amendment to this provision
requires an affirmative vote of the stockholders of not less than eighty (80%)
percent of the total number of votes eligible to be cast by the holders of all
outstanding shares of capital stock.
There is no analogous provision regarding vacancies in the office of
director in the Certificate Amendment, therefore, all vacancies in the office
of director shall be filled pursuant to the governing provisions of the
bylaws. The provision in the Amended and Restated Bylaws of the Surviving
Corporation with respect to directors is substantially similar to the
provision in the Existing Certificate of Incorporation, and, for this reason,
the Certificate Amendment proposes the elimination of this provision in the
Existing Certificate of Incorporation.
SUPERMAJORITY VOTING
Section 5.4 of the Existing Certificate of Incorporation provides that any
amendments to paragraph 5 (concerning the composition of the Board of
Directors) of the Existing Certificate of Incorporation may only be approved
by a vote of the stockholders of not less than 80% of the total number of
votes eligible to be cast by the holders of all outstanding shares of IPC
Common Stock.
The Certificate Amendment proposes the elimination of the supermajority
voting requirement with respect to paragraph 5, and therefore the provisions
relating to such matters under DGCL will govern. Under the current DGCL all
such matters contained in paragraph 5 would require the affirmative vote of
not less than a majority of the outstanding shares of IPC Common Stock
entitled to vote thereon.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE "FOR"
APPROVAL OF THE CERTIFICATE AMENDMENT.
PROPOSAL 3--NEW STOCK INCENTIVE PLAN
GENERAL PLAN INFORMATION
The Company has adopted, subject to approval by shareholders of the Company,
a New Stock Incentive Plan. The New Stock Incentive Plan provides for the
grant of options to purchase Surviving Corporation Common Stock ("Surviving
Corporation Options") to selected officers, employees, consultants and
directors of the Surviving Corporation and its subsidiaries. The New Stock
Incentive Plan is not subject to ERISA and is not a tax qualified plan under
the Code. The principal provisions of the New Stock Incentive Plan are
summarized below. The full text of the New Stock Incentive Plan is included as
Annex C to this Proxy Statement/Prospectus, to which reference is made, and
the summary provided below is qualified by such reference.
VOTE REQUIRED
The New Stock Incentive Plan shall be effective immediately after the
closing of the transactions contemplated by the Merger Agreement, subject to
approval by the Company's stockholders before, or the Surviving Corporation's
stockholders after, such effective date. Approval of the New Stock Incentive
Plan requires the affirmative vote of a majority of shares present in person
or by proxy and entitled to vote at the meeting when the vote is taken.
Abstentions will be counted as present and entitled to vote and will have the
effect of a vote against the New Stock Incentive Plan. In contrast, shares
underlying broker non-votes will not be counted as present and entitled to
vote and will have no effect on the vote on the New Stock Incentive Plan. In
the event that the Merger is approved but stockholder approval is not obtained
at the Annual Meeting for the New Stock Incentive Plan, the New Stock
Incentive Plan will be resubmitted at a later date when CSH LLC will control a
sufficient number of votes to assure approval. If the Merger is not approved
by the stockholders, the New Stock Incentive Plan shall not become effective.
The effective date of the New Stock Incentive Plan shall be referred to as the
"New Stock Incentive Plan Effective Date."
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PURPOSE OF THE NEW STOCK INCENTIVE PLAN
The purpose of the New Stock Incentive Plan is to cause persons who are in a
position to contribute to the long-term success of the Surviving Corporation
and its subsidiaries to increase their interest in the welfare of the
Surviving Corporation and its subsidiaries and to aid in attracting and
retaining employees and consultants of outstanding ability.
DESCRIPTION OF THE NEW STOCK INCENTIVE PLAN
Administration. The members of the Compensation Committee of the Surviving
Corporation Board ("Surviving Corporation Compensation Committee") will
administer the New Stock Incentive Plan and determine, within the limitations
of the New Stock Incentive Plan, (i) the officers, consultants, employees and
directors to whom Surviving Corporation Options will be granted ("Grantees"),
(ii) the number of shares subject to each Surviving Corporation Option
(subject to the limitation that during any calendar year, no individual may be
granted Options with respect to more than 250,000 shares of Surviving
Corporation Common Stock), (iii) whether Surviving Corporation Options shall
be incentive stock options or non-qualified stock options, (iv) the extent any
non-qualified Surviving Corporation Options may be sold, transferred,
assigned, pledged or otherwise encumbered, (v) the terms of such Surviving
Corporation Options (including provisions regarding exercisability and
acceleration of exercisability) and the procedures by which the Surviving
Corporation Options may be exercised, (vi) the restrictions or conditions
related to the delivery, holding and disposition of shares of Surviving
Corporation Common Stock received upon the exercise of a Surviving Corporation
Option, (vii) whether, to what extent and under what circumstances the
exercise price of a Surviving Corporation Option may be paid in cash,
Surviving Corporation Common Stock or other property, or a Surviving
Corporation Option may expire or be canceled, forfeited, or surrendered and
(viii) the form of each agreement granting the Surviving Corporation Options
(which need not be identical for each Grantee). The New Stock Incentive Plan
also provides for the grant of Surviving Corporation Options to directors. In
general, the Surviving Corporation Compensation Committee will have the same
discretionary authority with respect to the determination of the terms and
provisions of the Options granted to directors, subject to the following
restrictions: (i) the determination of the term of the Options granted to
members of the Compensation Committee will be made by the Surviving
Corporation Board acting through a majority of its members who are not members
of the Compensation Committee and (ii) all Options granted to outside
directors shall be non-qualified stock options.
Subject to certain specific limitations and restrictions set forth in the
New Stock Incentive Plan, the Surviving Corporation Compensation Committee has
full and final authority to interpret the New Stock Incentive Plan, to
prescribe, amend and rescind rules and regulations, if any, relating to the
New Stock Incentive Plan and to make all determinations necessary or advisable
for the administration of the New Stock Incentive Plan. The costs and expenses
of administering the New Stock Incentive Plan will be borne by the Surviving
Corporation.
Stock Subject to the New Stock Incentive Plan. Subject to adjustment upon
changes in capitalization, the Surviving Corporation Common Stock which may be
issued pursuant to Surviving Corporation Options granted under the New Stock
Incentive Plan shall not exceed 554,112 shares in the aggregate ("Option
Shares"). Such Option Shares may be authorized and unissued shares or shares
previously issued and reacquired by the Surviving Corporation. Any Option
Shares subject to grants under the New Stock Incentive Plan which expire or
are terminated, forfeited or canceled without having been exercised or vested
in full, shall again be available for purposes of the New Stock Incentive
Plan. The aggregate fair market value of the Option Shares reserved for
issuance was based on the closing sales price per share of IPC Common
Stock of on the Record Date.
Eligibility. Any employee, director or consultant of the Surviving
Corporation or its subsidiaries who is selected by the Surviving Corporation
Compensation Committee is eligible to participate in the New Stock Incentive
Plan.
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Terms and Conditions of Options Granted. It is contemplated that the
agreements memorializing grants under the New Stock Incentive Plan will
provide for the Options granted to officers and employees to be incentive
stock options to the maximum extent permitted by Section 422(d) of the Code,
and any excess over such maximum shall be non-qualified stock options. Unless
otherwise designated by the Surviving Corporation Compensation Committee,
Surviving Corporation Options will be exercisable at a price per share equal
to the fair market value of a share of Surviving Corporation Common Stock on
the date of the Option grant. Unless otherwise designated by the Surviving
Corporation Compensation Committee, Surviving Corporation Options will be
exercisable for a period of ten (10) years after the date of grant or for a
shorter period ending (i) the later of (a) 180 days after the Grantee's
termination of employment for reasons other than death or disability or
discharge for cause or (b) 180 days following the end of any "blackout period"
imposed by the Surviving Corporation's general counsel that is in effect on
the date of termination, (ii) one year after termination of employment due to
death or disability, with the Surviving Corporation Options to be exercisable
to the extent they would have been vested and exercisable as of the
anniversary of the date of grant next following such termination, assuming
such termination had not occurred, (iii) immediately upon termination for
cause, or (iv) upon the consummation of any transaction whereby the Surviving
Corporation (or any successor to the Surviving Corporation or substantially
all of its business) becomes a wholly owned subsidiary of any other
corporation (other than a corporation which is an affiliate of the Surviving
Corporation) unless such other corporation shall continue or assume the New
Stock Incentive Plan as it relates to Surviving Corporation Options then
outstanding.
Unless otherwise designated by the Surviving Corporation Compensation
Committee, each Surviving Corporation Option shall vest and become exercisable
in five (5) equal installments on each of the first five (5) anniversaries of
the date the Surviving Corporation Option is granted; provided, however, the
Surviving Corporation Option shall be vested and exercisable as to no less
than seventy-five (75%) percent of the shares of Surviving Corporation Common
Stock subject thereto as of the end of any period of thirty consecutive
trading days during which the fair market value thereof averages at least 300%
of the fair market value on the date the Surviving Corporation Option is
granted, and shall be vested and exercisable as to 100% of the shares of
Surviving Corporation Common Stock subject thereto as of the end of any period
of thirty consecutive trading days during which the fair market value thereof
averages at least 450% of the fair market value on the date the Surviving
Corporation Option is granted; and provided further that each Surviving
Corporation Option shall become vested and exercisable in full immediately
prior to a "change in control" as described in the New Stock Incentive Plan.
A holder of a Surviving Corporation Option shall exercise a Surviving
Corporation Option by delivery of written notice to the Surviving Corporation
setting forth the number of shares with respect to which the Surviving
Corporation Option is to be exercised, together with cash or a certified
check, bank draft, wire transfer, or postal or express money order payable to
the order of the Surviving Corporation for an amount equal to the exercise
price of such Surviving Corporation Option and any income tax required to be
withheld. The Surviving Corporation Compensation Committee, in its sole
discretion, may permit the holder of a Surviving Corporation Option to pay all
or a portion of the exercise price or tax withholding obligation by delivery
of Surviving Corporation Common Stock or other property (including notes or
other contractual obligations of the grantee to make payment on a deferred
basis, such as through "cashless exercise" arrangements, to the extent
permitted by applicable law), and the methods by which Surviving Corporation
Common Stock will be delivered or deemed to be delivered by the Grantee.
Adjustment Upon Changes in Capitalization. In the event any
recapitalization, reorganization, merger, Surviving Corporation Common Stock
dividend or other special and nonrecurring dividend or distribution or other
similar corporate transaction or event, affects the Surviving Corporation
Common Stock such that an adjustment is appropriate in order to prevent
dilution or enlargement of the rights of Grantees under the New Stock
Incentive Plan, the Surviving Corporation Compensation Committee shall, in
such manner as it may deem
equitable, adjust any or all of (i) the number and kind of shares of Surviving
Corporation Common Stock to be deemed available thereafter for grants of
Surviving Corporation Options, (ii) the number and kind of shares of Surviving
Corporation Common Stock that may be delivered or deliverable in respect of
outstanding Surviving
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Corporation Options, (iii) the number of shares with respect to which
Surviving Corporation Options may be granted to a given Grantee in the
specified period, and (iv) the exercise price. In addition, the Surviving
Corporation Compensation Committee is authorized to make adjustments in the
terms and conditions of, and the criteria included in, Surviving Corporation
Options in recognition of unusual or nonrecurring events (including, without
limitation, events described in the preceding sentence) affecting the
Surviving Corporation or any subsidiary or the financial statements of the
Surviving Corporation or any subsidiary, or in response to changes in
applicable laws, regulations, or accounting principals.
TERMINATION OR AMENDMENT OF THE NEW STOCK INCENTIVE PLAN
The Surviving Corporation Board may alter, amend, suspend, discontinue or
terminate the New Stock Incentive Plan at any time; provided, however, that no
such action shall adversely affect the rights of Grantees of Surviving
Corporation Options previously granted hereunder and, provided further,
however, that any stockholder approval necessary or desirable in order to
comply with applicable law, regulation or listing requirement shall be
obtained in the manner required therein.
FEDERAL INCOME TAX CONSEQUENCES
There are no federal income tax consequences for the Surviving Corporation
or the Grantee at the date of the grant of any Surviving Corporation Option.
Upon the exercise of a Surviving Corporation Option, an amount equal to the
difference between the fair market value of the shares to be purchased on the
date of exercise and the aggregate purchase price of such shares is generally
includible in the ordinary income of the person exercising such Surviving
Corporation Option, although such inclusion may be at a later date in the case
of a Grantee whose disposition of shares could result in liability under
Section 16(b) of the Exchange Act. The Surviving Corporation will ordinarily
be entitled to a deduction for federal income tax purposes at the time the
Grantee is taxed on the exercise of the Surviving Corporation Option equal to
the amount which the Grantee is required to include as ordinary income.
Section 162(m) of the Code limits the Surviving Corporation's deductions of
compensation in excess of $1,000,000.00 per year for the Chief Executive
Officer and the four (4) other most highly paid executives required to be
named in its Proxy Statement Compensation Table, but provides for certain
exceptions for performance-based compensation. In general, the Surviving
Corporation intends the New Stock Incentive Plan to comply with the
requirements for an exception to Section 162(m) applicable to stock option
plans so that the Surviving Corporation's deduction for compensation related
to the exercise of Surviving Corporation Options would not be subject to the
$1,000,000.00 limitation. However, this exception would not be available with
respect to any Surviving Corporation Option which has an exercise price that
is less than the fair market value of Surviving Corporation Common Stock on
the date of grant.
The foregoing statements are intended to summarize the general principles of
current federal income tax law applicable to Surviving Corporation Options
that may be granted under the New Stock Incentive Plan. State and local tax
consequences may also be significant.
THE IPC BOARD UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" APPROVAL
OF THE NEW STOCK INCENTIVE PLAN.
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NEW PLAN BENEFITS
IPC INFORMATION SYSTEMS, INC.
NEW STOCK INCENTIVE PLAN (1)(2)
<TABLE>
<CAPTION>
DOLLAR NUMBER OF
NAME/PRINCIPAL POSITION VALUE (3) UNITS
- ----------------------- --------- ---------
<S> <C> <C>
Richard P. Kleinknecht, Chairman............................ -- 57,720
Peter J. Kleinknecht, Vice Chairman......................... -- 57,720
Terry Clontz, President and Chief Executive Officer......... -- --
Russell G. Kleinknecht, Executive Vice President, I.T.S..... -- --
Gerald E. Starr, Executive Vice President, Turret Systems... -- --
David A. Walsh, President, IXnet............................ -- 92,352
Executive Group............................................. -- 57,720
All Non-Executive Director Group............................ -- --
All Nominees for Election as Directors...................... -- 57,720
5% Grantees................................................. -- --
Non-Executive Officer Employees Group....................... -- 150,072
</TABLE>
- --------
(1) The numbers in the table reflect the grants to be made under the New Stock
Incentive Plan Effective Date. On each anniversary of this date, 20% of
the shares subject to each Surviving Corporation Option (50% in the case
of Peter J. Kleinknecht) will become exercisable; provided, however, the
Surviving Corporation Options shall be vested and exercisable as to no
less than seventy-five (75%) percent of the shares of Surviving
Corporation Common Stock subject thereto as of the end of any period of
thirty consecutive trading days during which the fair market value
averages at least 300% of the fair market value on the date the Surviving
Corporation Option is granted, and shall be vested and exercisable as to
100% of the shares of Surviving Corporation Common Stock subject thereto
as of the end of any period of thirty consecutive trading days during
which the fair market value averages at least 450% of the fair market
value on the date the Surviving Corporation Option is granted; and
provided further that each Surviving Corporation Option shall become
vested and exercisable in full immediately prior to a "change in control"
as described in the New Stock Incentive Plan.
(2) As of the date of this Proxy Statement/Prospectus, no determination has
been made as to whether employees, directors or consultants, other than
Richard P. Kleinknecht, Peter J. Kleinknecht and David A. Walsh, will
receive grants or the amounts of such grants, if awarded.
(3) The value of the Surviving Corporation Options will depend upon changes in
value of Surviving Corporation Common Stock after the date of grant.
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IPC ANNUAL MEETING--OTHER MATTERS
GENERAL
In addition to voting on the approval and adoption of the Merger Agreement
and the transactions contemplated thereby, the shareholders of IPC will also
be asked to consider and vote upon the following matters: (i) the election of
two directors; and (ii) the ratification of the appointment of Coopers &
Lybrand L.L.P. as IPC's independent accountants for the fiscal year ending
September 30, 1998.
By Management. The following table sets forth certain information, as of
January 26, 1998 and pro forma, upon consummation of the Merger Transactions,
with respect to the beneficial ownership of IPC Common Stock and Surviving
Corporation Common Stock, respectively, by: (i) each person who, to the
knowledge of the Company, beneficially owns more than five percent; (ii) each
director and nominee; (iii) each of the named executive officers; and (iv) all
executive officers and directors as a group. Unless indicated otherwise, each
person listed has sole voting and investment power over the shares
beneficially owned.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
AMOUNT & NATURE APPROXIMATE AMOUNT OF APPROXIMATE
OF BENEFICIAL PERCENT OF BENEFICIAL PERCENT OF
NAME OF BENEFICIAL OWNER OWNERSHIP (1) CLASS (2) OWNERSHIP CLASS (14)
- ------------------------ --------------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Richard P. Kleinknecht.. 3,453,398(3)(9) 32.16% 380,952(15) 9.4%
Peter J. Kleinknecht.... 2,852,348(4)(9) 26.56% N/A(10)
Terry Clontz............ 68,333(5) * -- --
Theodore J. Johnson..... 5,000 * N/A(10)
Robert J. McInerney..... 4,000 * -- --
Peter M. Stein.......... 1,000 * N/A(10)
Gerald E. Starr......... 77,617(6) * -- --
Russell G. Kleinknecht.. 116,907(7)(9) * -- --
Richard Cashin(11)...... N/A -- -- --
David Howe(11).......... N/A -- -- --
David A. Walsh(11)...... N/A -- -- --
Peter Woog(11).......... N/A -- -- --
Cable Systems Holding,
LLC(12)................ N/A 1,156,191(15) 28.4%
Cable Systems Holding,
LLC(13)................ N/A 2,527,620(15) 62.2%
Cable Systems Interna-
tional, Inc............ N/A 758,095(15) 18.7%
All executive officers
and directors as a
group (10 persons)..... 6,592,480(8) 60.52%
All executive officers
and directors as a
group (11 persons)..... N/A 533,333 13.1%
</TABLE>
- --------
* Less than 1%
(1) Based upon information supplied by officers and directors, and filings
under Sections 13 and 16 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act").
(2) Percentage of ownership is based on 10,739,446 shares of IPC Common Stock
outstanding on January 26, 1998, except that the percentage ownership of
the group is based on 10,892,277 shares, including as outstanding all
shares issuable upon exercise of stock options which may be exercised
within 60 days of January 26, 1998.
(3) Includes 1,552,273 shares directly owned by Richard P. Kleinknecht and
1,901,125 shares beneficially owned as follows: (a) 1,000,000 shares held
in a trust pursuant to a trust agreement dated February 12, 1997, for
which Richard Kleinknecht and his wife are the trustees and (b) 901,125
shares held in three trusts for Richard P. Kleinknecht's children.
(4) Includes 2,240,999 shares directly owned by Peter J. Kleinknecht and
611,349 shares beneficially owned as follows: (i) 155,637 shares in his
Grantor Retained Annuity Trust; (ii) 155,637 shares in his wife's Grantor
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Retained Annuity Trust; and (iii) 300,075 as custodian for his minor child.
Excludes 600,150 shares owned by Peter J. Kleinknecht's major children for
which he disclaims beneficial ownership.
(5) Includes options to purchase 58,333 shares exercisable within 60 days of
January 26, 1998.
(6) Includes options to purchase 13,333 shares exercisable within 60 days of
January 26, 1998.
(7) Includes options to purchase 70,333 shares exercisable within 60 days of
January 26, 1998.
(8) Includes options to purchase 152,831 shares exercisable within 60 days of
January 26, 1998.
(9) In accordance with the Stockholders Agreement, Richard P. Kleinknecht,
and certain family members and trusts, Peter J. Kleinknecht and certain
family members and trusts and Russell G. Kleinknecht have agreed, among
other things, to vote their shares of IPC Common Stock in favor of the
Merger and the Merger Agreement. See "THE MERGER--Ancillary Agreements--
Stockholders Agreement."
(10) Will be neither a director nor an executive officer after the Merger.
(11) Is neither a director nor an executive officer prior to the Merger.
(12) Assumes stockholders elect to retain the Maximum Stock Election Number.
(13) Assumes stockholders elect to retain the Minimum Stock Election Number.
(14) Percentage of ownership is based on 4,063,492 shares of Surviving
Corporation Common Stock outstanding upon consummation of the Merger
Transactions.
(15) In accordance with the Investors Agreement, dated as of [December 18,
1997] and effective upon the Merger, Messrs. Richard P. Kleinknecht and
David Walsh, CSH LLC, CSI and certain other parties have agreed to
certain transfer restrictions and voting agreements with respect to all
of their shares of Surviving Corporation Common Stock owned by each of
them. See "THE MERGER--Ancillary Agreement--Investor Agreement."
By Others. Except as set forth above, the Company is not aware of any
beneficial owner of more than 5% of IPC Common Stock as of January 26, 1998,
or pro forma, upon consummation of the Merger.
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PROPOSAL 4--ELECTION OF DIRECTORS
The Existing Certificate of Incorporation provides that the IPC Board shall
be divided into three classes, each class consisting, as near as may be
possible, of one-third of the total number of directors. The term of directors
serving in Class I (Richard P. Kleinknecht and Peter J. Kleinknecht) expires
in 1998; in Class II (Theodore J. Johnson and Terry Clontz), the term expires
in 1999; and in Class III (Robert J. McInerney and Peter M. Stein), the term
expires in 2000. Each director serves for an initial term ending on the date
of the annual meeting of stockholders occurring in the aforementioned years,
or his earlier death, resignation or removal. Directors elected at the annual
meetings of stockholders in 1998, 1999 and 2000 thereafter, shall serve for a
term ending on the date of the third annual meeting following the annual
meeting at which the director is elected, or his earlier death, resignation or
removal.
In the event of a vacancy on the IPC Board, the Existing Certificate of
Incorporation permits the remaining members of the IPC Board to fill such
vacancy, and the director selected shall hold office for the remainder of the
full term of the class of directors in which the vacancy occurred and until
such director's successor is elected and qualified, or until his earlier
death, resignation or removal.
The nominees for election include the members of Class I who, if elected at
the Annual Meeting, would each serve until the annual meeting to be held in
2001 and until their successors are elected or appointed (as the case may be)
and qualified, or until their earlier death, resignation or removal. It is the
intention of the persons named in the enclosed proxy, unless authorization to
do so is withheld, to vote the proxies received by them for the election of
the nominees named below. If prior to the Annual Meeting either of the
nominees should become unavailable for election, an event which is not now
anticipated by the IPC Board, the proxies will be voted for the election of
such substitute nominee as the IPC Board may propose. Each person nominated
for election has agreed to serve if elected and management has no reason to
believe that any nominee will be unable to serve. However, if the Merger is
approved, all current directors of IPC, other than Richard P. Kleinknecht,
will submit their resignations prior to the Effective Time. See "THE MERGER--
Conditions to Consummation of the Merger" and "MANAGEMENT FOLLOWING THE
MERGER."
Directors are elected by a plurality of the votes present in person or
represented by proxy and entitled to vote at the Annual Meeting. Stockholders
may not vote their shares cumulatively in the election of directors. Set forth
below is biographical information for the persons nominated and each person
whose term of office as a director will continue after the Annual Meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF THE NAMED NOMINEES.
INFORMATION WITH RESPECT TO NOMINEES AND CONTINUING DIRECTORS
The following table sets forth certain information with respect to each
nominee for election as a director and each continuing director whose term
does not expire at the IPC annual meeting. No person being nominated as a
director is being nominated for election pursuant to any agreement or
understanding between any such person and IPC.
<TABLE>
<CAPTION>
NAME AGE (1) POSITION SINCE CLASS
---- ------- -------- ----- -----
<S> <C> <C> <C> <C>
NOMINEES FOR A THREE-YEAR TERM
EXPIRING IN 2001
Richard P. Kleinknecht......... 59 Chairman and Director 1991 I
Peter J. Kleinknecht........... 52 Vice Chairman and Director 1991 I
CONTINUING DIRECTORS
Terry Clontz................... 47 CEO President and Director 1995 II
Theodore J. Johnson (2) (3).... 56 Director 1994 II
Robert J. McInerney (2) (3).... 52 Director 1994 III
Peter M. Stein (2) (3)......... 47 Director 1994 III
</TABLE>
(Footnotes on following page)
96
<PAGE>
- --------
(1) As of January 26, 1998.
(2)Member of the Audit Committee
(3) Member of the Compensation Committee
NOMINEES FOR ELECTION AS DIRECTORS
RICHARD P. KLEINKNECHT has served as Chairman and a Director of the Company
since its acquisition from Contel Corporation in October 1991 (the
"Acquisition"). Prior to the appointment of Mr. Clontz on December 3, 1995,
Mr. Kleinknecht also served as Chief Executive Officer of the Company. His
current responsibilities include presiding at meetings of the IPC Board and
stockholders and the planning for the Company's long-term needs and objectives
and strategic business development. Mr. Kleinknecht has also served as
Chairman of various companies which he and his brother, Peter, have jointly
owned or controlled (collectively, the "Kleinknecht Organization") since 1968
and has worked for the Kleinknecht Organization since 1960.
PETER J. KLEINKNECHT has served as Vice Chairman of the Company since May
1994 and a Director of the Company since the Acquisition. Prior to the
appointment of Mr. Clontz on December 3, 1995, Mr. Kleinknecht also served as
President of the Company. His current responsibilities include presiding at
meetings of the IPC Board and stockholders (in the absence of the Chairman)
and the planning for the Company's long-term needs and objectives and
strategic business development. Mr. Kleinknecht has also served as President
of various companies within the Kleinknecht Organization since 1972 and has
been employed by the Kleinknecht Organization since 1969.
Richard P. Kleinknecht and Peter J. Kleinknecht are brothers.
CONTINUING DIRECTORS
TERRY CLONTZ joined the Company in December, 1995 as President and Chief
Executive Officer and Director. From 1992 through December, 1995, Mr. Clontz
served as President of BellSouth International's Asia/Pacific Region and a
director of BellSouth's ventures in Australia, Singapore, India, New Zealand
and the People's Republic of China. Mr. Clontz was employed by BellSouth
Corporation and its affiliates for a total of 23 years, including 1987 to 1990
as Vice President of International Business Development and 1990 to 1992 as
Vice President--Business Development and Operations for BellSouth's
investments in Europe.
THEODORE J. JOHNSON has been employed by Morgan Stanley & Co., Incorporated
since March 1995, as Managing Director, National Institutional Equity Research
Sales and Trading Manager. Prior to this date, Mr. Johnson was employed by
Kidder, Peabody & Co. Incorporated and served as its Director of Equity
Research from 1991 to 1995. Mr. Johnson also served as Kidder, Peabody's
National Institutional Equity Sales Manager and a branch manager of
Institutional Equity Sales.
PETER M. STEIN has been a partner with the law firm of Epstein Becker &
Green since July 1986, having joined the firm in January 1984. Mr. Stein is
presently the Managing Partner of the firm's Stamford, Connecticut office.
Prior to joining Epstein Becker & Green, Mr. Stein was employed as Manager of
Labor Relations for U.S. Industries, Inc. from 1981 to 1984 and Associate
General Counsel for Health Industries, Inc. from 1975 to 1981.
ROBERT J. MCINERNEY serves as a consultant to Merisel, Inc. where he was,
from February 1997 until March 1998, employed as President and Chief Operating
Office, responsible for U.S. and Canadian operations. He was previously
employed as Executive Vice President of United Capital Corporation, a multi-
national holding corporation and parent to Dorne & Margolin, Ancom
Corporation, Metex Corporation and AFP Corporation from 1995. Prior to joining
United Capital Corporation, from 1981 Mr. McInerney was employed by Arrow
Electronics, Inc., the largest electronic component distributor in the world,
and served as President of Arrow's Commercial Systems Group from 1987 to 1994.
97
<PAGE>
BOARD MEETINGS AND COMMITTEES
In fiscal 1997, the IPC's Board met in person on seven occasions, the Audit
Committee met twice and the Compensation Committee of the IPC Board
("Compensation Committee") met twice. Each director attended, in person or by
telephone, all of the meetings of the IPC Board and the committees of which he
was a member.
The Audit Committee reviews with the Company's management and independent
accountants the financial statements and internal financial reporting system
and controls of the Company, reports to the IPC Board on the results of its
examination and makes recommendations to the IPC Board regarding the
employment of accountants and independent auditors.
The Compensation Committee oversees the development, implementation and
conduct of the Company's employment and personnel practices, including the
administration of the Company's compensation and benefit programs. The
Compensation Committee also makes recommendations to the IPC Board concerning
executive officers' compensation and the granting of stock options.
DIRECTORS' COMPENSATION
Each member of the IPC Board who is not an employee of the Company receives
an annual retainer of $5,000 contingent upon attending at least 75% of the
aggregate total number of meetings of the IPC Board and of each committee of
which such director is a member. Additionally, each non-employee director will
receive a fee of $2,500 for each IPC Board meeting or committee meeting
attended. However, if such director attends more than one meeting in a single
day, he will receive a fee of $2,500 for the first meeting attended and a fee
of $1,250 for each additional meeting. There are no provisions in the Existing
Certificate of Incorporation or Bylaws that have the effect of, nor has the
IPC Board adopted any policy that has the effect of, imposing a maximum
limitation on the total compensation payable in any year to any director.
COMPENSATION COMMITTEE INTERLOCK AND INSIDER PARTICIPATION
The Compensation Committee of the IPC Board consists of Messrs. Johnson,
McInerney and Stein. There is no insider participation on the Compensation
Committee.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The following shall not be deemed to be "soliciting material" or to be
"filed" with the Commission nor shall such information be incorporated by
reference into any future filing of the Company under the Securities Act, or
the Exchange Act.
The duties of the Compensation Committee (the "Committee") include approval
of salary and other compensation arrangements for the Company's executive
officers.
The Company has established a compensation philosophy around the principle
of having compensation reflect and reinforce the Company's strategic and
operational goals and enhance long-term stockholder value. The Company's
philosophy is to:
Set compensation levels to attract, retain, reward and motivate executive
officers and employees;
Align compensation with business objectives and performance;
Position compensation to reflect the individual's performance as well as
the level of responsibility, skill and strategic value of the employee; and
Recognize the evolving organizational structure of the Company and
directly motivate executives to accomplish results within their spheres of
influence as well as foster a Company-wide team spirit.
98
<PAGE>
The Company attempts to target its compensation programs to provide
compensation opportunities that are perceived by its executive officers to be
generally comparable to those provided by companies in the industry considered
comparable by such officers.
During the fiscal year ended September 30, 1996, the Company adopted a
formal Management Compensation Plan (the "Plan") and management compensation
continues to be recast in accordance therewith. This Plan addresses three
major elements: salary, bonus and long-term incentives. Each of these elements
of compensation serves a unique role in meeting the Company's compensation
objectives:
Salary forms the basic building block of the executive compensation
program. It is the assured element of compensation that permits income
predictability. In general, it is intended that salary levels be set at the
competitive norm but that individual salaries may vary from that norm to
reflect each executive's strategic value, experience, proficiency and
performance.
The annual bonus plan is designed to play a number of roles in
implementing the Company's compensation philosophy. Annual bonuses provide
a direct pay-for-performance vehicle. The bonus plan also serves to focus
executives on those activities that most directly affect shareholder value
which are within their control and for which they should be held
accountable. Therefore, it is intended that an annual bonus reflect
performance of the respective operating unit, as well as the entire
Company.
The long-term incentive program is also intended to play important roles
in implementing the Company's compensation philosophy. It directly links
executives' financial interests to the interests of the stockholder by
tying a portion of their overall compensation to share price appreciation.
It also acts as a motivation and reward system and as a device to attract
and retain superior management talent.
The Company has not established a specific peer group to use as a benchmark
in setting compensation levels. Instead, it relies on recommendations of an
independent compensation expert, which is charged with determining
comparability.
EXECUTIVE OFFICER COMPENSATION
In the fiscal year ended September 30, 1997, the Company continued to
address an enterprise-wide restructuring involving the redirection and
expansion of its market and its product orientation from a limited product and
service provider to a broad-based global technology integrator meeting the
needs of the global financial community. In addition, during the second half
of the fiscal year, the Company's senior management spent considerable time
and effort addressing an IPC Board-directed effort to update the Company's
five-year business plan and to work with DMG to solicit interest of third
parties in a potential acquisition or change of control of the Company. In
preparation for this eventuality, the Committee also worked with Company
management to put in place appropriate retention and incentive agreements so
that management could perform their regular duties and contribute fully to
this extraordinary effort with reasonable stability assured to key management,
while also being assured of appropriate compensation for their extra efforts.
See "--Employee Retention and Incentive Arrangements--Change Of Control,"
below.
Compensation decisions for the fiscal year ended September 30, 1997 were
based on the following considerations:
Existing contractual compensation commitments with four top executive
officers;
General industry compensation practices and levels where appropriate;
The criticality of the executives to the Company's current and future
success;
The significance of the executive's compensation cost relative to its
impact on the Company's financial success over the next few critical years;
and
The maintenance, where practical, of internal compensation relationships
that provide rationale and flexibility in organizational staffing.
99
<PAGE>
CHAIRMAN AND VICE CHAIRMAN COMPENSATION
Pre-existing employment contracts for Richard P. Kleinknecht and Peter J.
Kleinknecht stipulate that they receive equal amounts of salary and other
compensation as Chairman and Vice Chairman. For the fiscal year ended
September 30, 1997, no increase in the annual salary ($420,000) for each
individual was approved. Neither bonus payments nor grants of long-term
incentive compensation, in the form of option grants or otherwise, were made
with respect to said fiscal year.
PRESIDENT AND CHIEF EXECUTIVE OFFICER COMPENSATION
The employment agreement for Terry Clontz, the President and Chief Executive
Officer, became effective December 3, 1995. It provided for a minimum annual
salary of $300,000 (increased by the IPC Board to $330,000, as of December 3,
1996), an annual performance bonus to be determined by the Committee, a hiring
(sign-on) bonus of $100,000 and a grant of stock options totaling 200,000
shares of which 50,000 shares were contingent upon the attainment of specified
share prices of the Company's stock. Additionally, effective October 31, 1996,
the Committee awarded Mr. Clontz an additional grant of 25,000 stock options.
After evaluating the achievements of the Company during the fiscal year ended
September 30, 1997, including the aforementioned enterprise-wide restructuring
and the Company's efforts with respect to the change of control, the Committee
awarded Mr. Clontz a performance bonus of $60,000 for that year.
OTHER EXECUTIVE OFFICERS' COMPENSATION
Gerald E. Starr, the Executive Vice President, Turret Systems, receives
compensation in accordance with an employment agreement entered into with the
Company's subsidiary, IPC Bridge, Inc., upon the acquisition of the assets of
Bridge Electronics, Inc. Effective January 13, 1997, in connection with an
expansion of his duties and responsibilities, Mr. Starr's base salary was
increased by the Committee to $225,000. The Committee awarded Mr. Starr a
grant of 20,000 stock options, as of October 31, 1996, and an additional
20,000 stock options as of February 14, 1997 in consideration of his enhanced
duties and responsibilities.
Russell G. Kleinknecht, the Executive Vice President, I.T.S., received
compensation during the fiscal year ended September 30, 1997 as specified by
the Committee. For such period, the Committee approved an increase in his
annual salary to $250,000 and awarded a bonus of $31,250. Effective October 1,
1997, Mr. Kleinknecht entered into an employment agreement with the Company
providing for a base salary of $250,000, a signing bonus of $250,000, certain
grants of performance-based stock options and other matters. See "IPC ANNUAL
MEETING--OTHER MATTERS--Employment Agreements"
With respect to all Executive Officers and other Company management, no new
compensation plans were adopted nor were any such plans discontinued during
the fiscal year ended September 30, 1997. The compensation actions for
executive officers and other executives during the fiscal year ended September
30, 1997 were based on the considerations listed earlier in this report.
EMPLOYEE RETENTION AND INCENTIVE ARRANGEMENTS--CHANGE OF CONTROL
In anticipation of a potential change of control transaction, which the
Company began exploring during the second fiscal quarter of the fiscal year
ended September 30, 1997, the Company's management, at the direction of the
Committee, established certain categories of regional, divisional and senior
corporate management personnel for whom special consideration was necessary.
The Company's management developed, and the Committee and the IPC Board
approved, (i) a special transaction-related incentive bonus which, depending
upon an employee's involvement in and contribution to the potential
transaction process, was designed both to compensate such employees for
extraordinary efforts and to provide incentives for senior management to work
towards the highest attainable return to stockholders should such a
transaction occur and (ii) varying levels of severance assurance agreements to
provide such employees with reasonable security (or assured severance in the
event of employment termination related to such change of control) in order to
maintain stability in key positions.
100
<PAGE>
FEDERAL TAX CONSIDERATIONS UNDER SECTION 162(M)
Section 162(m) of the Internal Revenue Code of 1986 (the "Code") disallows
tax deductions for certain compensation paid by a public company to any
executive officer named in its proxy statement compensation table to the
extent such compensation exceeds $1 million in any calendar year. None of the
Company officers received taxable compensation from the Company in excess of
$1 million in 1997. If the Surviving Corporation Common Stock remains
registered under the Exchange Act following the Merger, considerations such as
the timing of the closing of the Merger, changes in the identities of the
Named Executive Officers for 1998, contractual obligations triggered by acts
or omissions of IPC or the Surviving Corporation in connection with the Merger
and changes in compensation philosophy of the Surviving Corporation
Compensation Committee following the resignation of the undersigned may affect
the applicability of Section 162(m) of the Code.
No member of the Compensation Committee is a current or former officer or
employee of the Company.
The duties of the Compensation Committee include approval of salary and
other compensation arrangements for the Company's executive officers.
Compensation Committee
Peter M. Stein, Chairman
Robert J. McInerney
Theodore J. Johnson
101
<PAGE>
PERFORMANCE GRAPH
IPC's Common Stock began trading on the Nasdaq effective with the start of
business on September 27, 1994. The following graph provides a comparison of
36-Month Cumulative Total Return among IPC Information Systems, Inc., the
Nasdaq Stock Market--US Index and the Nasdaq Telecommunications Index,
assuming $100 invested on September 26, 1994 in IPC Common Stock or the
respective indices (including reinvestment of dividends). These indices are
provided for comparative purposes only and do not necessarily reflect
management's opinion that such indices are an appropriate measure of the
relative performance of the stock involved and are not intended to forecast or
be indicative of possible future performance of Surviving Corporation Common
Stock.
COMPARISON OF 36 MONTH CUMULATIVE TOTAL RETURN*
AMONG IPC INFORMATION SYSTEMS, INC.,
THE NASDAQ STOCK MARKET (U.S.) INDEX AND
THE NASDAQ TELECOMMUNICATIONS INDEX
SEPTEMBER 26, 1994--SEPTEMBER 1997
[Line Graph]
- --------
* $100 Invested on 9/26/94 in stock or index--including reinvestment of
dividends. Fiscal year ending September 30.
<TABLE>
<CAPTION>
9/26/94 9/94 3/95 9/95 3/96 9/96 3/97 9/97
------- ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
IPC Information Systems,
Inc.................... 100.00 100.42 90.00 113.30 156.67 138.33 64.17 136.67
Nasdaq Stock Market
(U.S.)................. 100.00 101.11 108.97 139.66 147.96 165.73 164.45 227.51
Nasdaq
Telecommunications..... 100.00 101.71 98.26 121.37 129.64 125.85 117.12 170.67
</TABLE>
NOTES:
A. THE LINES REPRESENT INDEX LEVELS DERIVED FROM COMPOUNDED DAILY RETURNS THAT
INCLUDE ALL DIVIDENDS.
B. THE INDICES ARE REWEIGHTED DAILY, USING THE MARKET CAPITALIZATION ON THE
PREVIOUS TRADING DAY.
C. IF THE INTERVAL, BASED ON THE FISCAL YEAR-END, IS NOT A TRADING DAY, THE
PRECEDING TRADING DAY IS USED.
D. THE INDEX LEVEL FOR ALL SERIES WAS SET TO $100.00 ON 09/26/94.
102
<PAGE>
MANAGEMENT
The Company's executive officers who are not also directors and their ages
and positions, as of January 26, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Russell G. Kleinknecht.. 44 Executive Vice President, Information Transport Systems
Gerald E. Starr......... 44 Executive Vice President, Turret Systems
Brian L. Reach.......... 42 Vice President, Chief Financial Officer
Daniel Utevsky.......... 47 Vice President, General Counsel and Corporate Secretary
</TABLE>
RUSSELL G. KLEINKNECHT has served as Executive Vice President, I.T.S. since
October 1997 and previously had been Executive Vice President, Global Sales
since August 1996 when the Company was restructured along functional lines.
From December 1995 he served as Executive Vice President of Global Business
Development. From April 1994, he served as Vice President responsible for
major account development. Prior to joining the Company, Mr. Kleinknecht was
Executive Vice President of KEC, an affiliated company. Mr. Kleinknecht is the
cousin of Richard P. Kleinknecht and Peter J. Kleinknecht.
GERALD E. STARR has served as Executive Vice President, Turret Systems since
January 1997 and previously had been Vice President of Manufacturing and
Engineering since February of 1996. Since April 1995, he has also served as
President of IPC Bridge, Inc., a wholly owned subsidiary which acquired the
assets of Bridge Electronics, Inc. Mr. Starr founded Bridge Electronics, Inc.
in 1987. Previously, Mr. Starr founded Turret Equipment Corporation ("TEC") in
1980 and sold TEC to Tie Communications in 1984, where he remained until 1990.
BRIAN L. REACH joined the Company in May 1997 as Chief Financial Officer and
in November 1997 was named a Vice President. Prior to joining IPC, from 1993
through April 1997, Mr. Reach was employed by the Celadon Group Inc., an
international transportation company, as its Chief Financial Officer through
April 1996 and Vice President--Special Projects through April 1997. From 1990
through 1993, he was employed by Cantel Industries, Inc., an international
distributor of medical and scientific products and ergonomic seating, as the
Chief Financial Officer. Mr. Reach is a Certified Public Accountant.
DANIEL UTEVSKY has been employed by the Company since July 1993, has served
as General Counsel and Corporate Secretary since May 1994 and was named a Vice
President in October 1996. Mr. Utevsky has 20 years experience in the
telecommunications industry, including 14 years as an attorney. He was
previously employed for five years by Northern Telecom Inc. and for six years
by The City of New York, Office of Telecommunications Control.
EXECUTIVE COMPENSATION
The following table provides certain summary information concerning all
compensation earned by the Company's Chief Executive Officer, each of the
other four most highly compensated executive officers of the Company
(collectively, the "Named Executive Officers") whose annual salary and bonus
for the fiscal year ended September 30, 1997 exceeded $100,000 in the
aggregate and a former executive officer who, except for his termination of
employment, would have been among the other four most highly compensated
executive officers of the Company.
103
<PAGE>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
SECURITIES
UNDERLYING
NAME AND PRINCIPAL FISCAL SALARY OTHER ANNUAL OPTIONS/SARS ALL OTHER
POSITION YEAR (1) BONUS COMPENSATION (2) GRANTED COMPENSATION (3)
------------------ ------ -------- ------- ---------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Richard P. Kleinknecht. 1997 $420,000 $ -- $ -- -- $10,730
Chairman (4) 1996 420,000 -- -- -- 26,540
1995 380,000 380,000 -- -- 33,254
Peter J. Kleinknecht... 1997 420,000 -- -- -- 13,400
Vice Chairman (5) 1996 420,000 -- -- -- 13,200
1995 380,000 380,000 -- -- 17,800
Terry Clontz (6)....... 1997 324,692 60,000 82,829(7) 25,000 15,756
President and Chief 1996 255,006 250,000 33,300(7) 200,000 12,871
Executive Officer 1995 -- -- -- -- --
Gerald E. Starr (8).... 1997 217,789 28,325 -- 40,000 3,200
Executive Vice Presi-
dent 1996 183,077 25,000 -- -- --
Turret Systems 1995 66,346 -- -- -- --
Russell G. Kleinknecht. 1997 250,000 31,250 -- 40,000 7,670
Executive Vice Presi-
dent 1996 220,000 160,000 -- 100,000 10,773
I.T.S. 1995 133,461 200,000 -- 7,000 4,004
Jeffrey M. Gill (9).... 1997 250,000 477,536(10) -- -- --
Former Executive 1996 250,000 577,536(10) -- -- 45,198
Vice President 1995 200,000 580,000(10) -- -- 45,844
</TABLE>
- --------
(1) Includes amounts, if any, deferred by the named individual for the period
in question pursuant to Section 401(k) of the Code under the IPC
Information Systems, Inc. Retirement Savings Plan and Trust (the "401(k)
Plan").
(2) Does not include certain perquisites and other personal benefits,
securities or property received by the Named Executive Officers when 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.
(3) For 1997, consists of (i) premiums paid by the Company for term or other
life insurance coverage under contracts affording the named individual
dispositive control over the death benefit proceeds and (ii) in the case
of all named individuals except Mr. Gill, $3,200 each paid by the Company
as matching and/or profit sharing contributions to the 401(k) Plan.
(4) Effective December 3, 1995, Richard P. Kleinknecht resigned as Chief
Executive Officer.
(5) Effective December 3, 1995, Peter J. Kleinknecht resigned as President.
(6) Terry Clontz was employed by the Company as President and Chief Executive
Officer as of December 3, 1995.
(7) For fiscal year 1997, consists of $71,429 ($40,000 for moving expenses
and $31,429 tax gross-up on said payment) and $11,400 related to housing
costs. For fiscal year 1996, consists of $33,300 related to housing
costs.
(8) Gerald E. Starr was originally employed by a subsidiary of the Company,
IPC Bridge, Inc., as President, effective upon the acquisition of the
assets of Bridge Electronics, Inc. in April, 1995. Mr. Starr became an
Executive Officer of the Company effective October 23, 1996.
(9) Jeffrey M. Gill's employment with the Company terminated as of January
22, 1997. In accordance with provisions of an employment agreement
entered into with the Company, Mr. Gill continued to receive base salary
for one year thereafter and was entitled to receive 31,857 shares of IPC
Common Stock on September 30, 1997. Issuance of said stock has been
deferred, by mutual agreement, until Mr. Gill makes payment to the
Company for certain loans and employee advances made to him during the
course of his employ.
(footnotes continued on following page)
104
<PAGE>
(10) Represents the value of 31,857 shares of IPC Common Stock earned in each
such fiscal year, in accordance with Mr. Gill's employment agreement,
plus cash bonuses of $200,000 and $100,000, respectively in 1995 and
1996.
EMPLOYMENT AGREEMENTS
The Company has entered into separate employment agreements with each of
Richard P. Kleinknecht and Peter J. Kleinknecht setting forth the terms and
conditions of their service to the Company as its Chairman and Chief Executive
Officer, and Vice Chairman and President, respectively. (The employment
agreements were amended, as of October 17, 1995 and effective December 3,
1995, whereby Richard P. Kleinknecht resigned as Chief Executive Officer and
Peter J. Kleinknecht resigned as President and each consented to the
appointment of Terry Clontz to the formerly held positions.) Each employment
agreement is for an initial term of five years commencing on October 3, 1994
and converted to a rolling two-year term after the first three years. Pursuant
to his employment agreement, each executive initially received a base salary
at the minimum annual rate of $380,000 and is eligible for an annual
performance bonus in an amount determined by the Compensation Committee, in
its discretion. As of October 1, 1995, the Compensation Committee approved an
increase in the salary of each executive to $420,000 which, under the terms of
the employment agreements, becomes the minimum annual base salary for the
remainder of the term. In addition to standard benefits under the terms of the
Company's generally applicable benefit plans, each executive's employment
agreement provides for other fringe benefits including vacation, vehicle and
life insurance.
Each executive's employment agreement provides that he may be discharged for
cause, as defined, without liability to the Company other than for accrued and
unpaid compensation and benefits. If, however, the executive is discharged
under other circumstances or resigns following certain acts or failures to act
by the Company, the Company is liable for additional payments, as contract
damages, as follows: a lump sum payment equal to the present value of base
salary and bonus payments that would have been made if his employment had
continued for the remaining contract term; continued health, disability and
life insurance coverage (or the monetary equivalent) for the remaining
contract term; a lump sum payment equal to the value of additional benefits
that would have accrued under the Company's qualified and non-qualified
retirement plans if his employment had continued for the remaining contract
term; and, at the executive's election upon surrender of all options,
appreciation rights and restricted stock issued and outstanding to him, a cash
payment in lieu thereof. If the aggregate amount of payments contingent on a
"change in control" equals or exceeds three times the average compensation for
the prior five years (the "Base Amount"), so called "golden parachute" taxes
under Section 4999 of the Code (a nondeductible excise tax at the rate of 20%
of the amount by which payments contingent on a "change in control" exceed the
Base Amount) may be assessed. If termination occurs following a "change in
control" of the Company under circumstances giving rise to a liability for so-
called "golden parachute" taxes, each executive would be entitled to an
additional cash payment to indemnify him against the expense of such taxes.
As of December 18, 1997, Richard P. Kleinknecht and Peter J. Kleinknecht
each entered into an Amended and Restated Employment Agreement, effective and
contingent upon the closing of the Merger contemplated by the Merger
Agreement. Upon the occurrence of such contingency, the pre-existing
employment agreement shall terminate. For a description of each such Amended
and Restated Employment Agreement see "THE MERGER-- Ancillary Agreements--
Employment Agreements."
The Company entered into an employment agreement with Jeffrey M. Gill, with
a term commencing October 3, 1994, continuing until September 30, 1997 and
containing certain extension provisions, under which Mr. Gill was employed as
Chief Operating Officer. Effective January 22, 1997, as a result of certain
changes made by the Company to Mr. Gill's title and duties, Mr. Gill submitted
his resignation. The Company has paid Mr. Gill his base salary for the one
year period beginning upon his resignation, in accordance with the terms of
the agreement.
105
<PAGE>
The Company entered into an employment agreement with Terry Clontz, as of
October 17, 1995, setting forth the terms and conditions of his service to the
Company as its Chief Executive Officer and President. Mr. Clontz's employment
agreement was for an initial term commencing December 3, 1995 and ending
December 2, 1997 and which automatically renewed for subsequent one-year terms
unless notice of non-renewal was given by either party. Pursuant to a
resolution of the IPC Board (Mr. Clontz abstaining both from discussion and
voting thereupon) at a regular meeting held August 8, 1996, the Company
extended the term of Mr. Clontz's employment agreement to December 2, 1998.
Pursuant to his employment agreement, Mr. Clontz receives a base salary at the
minimum annual rate of $300,000 and is eligible for an annual performance
bonus in an amount determined by the Compensation Committee. Mr. Clontz
received a hiring bonus of $100,000 and is eligible for a residential loan in
the amount of $150,000 upon contracting for the purchase of a primary
residence in the New York area. Also pursuant to this agreement, the Company
issued to Mr. Clontz 150,000 Options to purchase shares of the IPC Common
Stock, exercisable at $14.125 and vesting in the following installments:
<TABLE>
<CAPTION>
NUMBER OF OPTIONS DATE OF VESTING
----------------- ----------------
<S> <C>
16,667................................................... December 2, 1996
33,333................................................... December 2, 1997
50,000................................................... December 2, 1998
33,334................................................... December 2, 1999
16,666................................................... December 2, 2000
</TABLE>
provided Mr. Clontz is then in the Company's employ. Mr. Clontz has also
received additional Options to purchase shares of IPC Common Stock which,
contingent upon continued employment of Mr. Clontz by the Company, may be
exercised as follows: (i) 25,000 shares at a share price of $25.00 upon the
occurrence of ninety consecutive trading days during which the closing price
averages at least $40.00; and (ii) 25,000 shares at a share price of $40.00
upon the occurrence of ninety consecutive trading days during which the
closing price averages at least $60.00. Mr. Clontz's employment agreement
provides that he may be discharged for cause, as defined, without liability to
the Company other than for accrued and unpaid compensation and benefits. If,
however, Mr. Clontz is discharged under other circumstances, the Company is
liable for payment of base salary through the end of the then-current term of
employment, but not less than twelve months of base salary.
Effective as of August 1, 1997, the Company and Mr. Clontz entered into the
first amendment to Mr. Clontz's employment agreement, providing (i)
documentation of the extension of the term of the agreement to December 2,
1998, by resolution of the IPC Board made on August 8, 1996, (ii)
documentation of the modification of the base salary to $330,000, by
resolution of the Compensation Committee of the IPC Board, made on November
26, 1996, (iii) addition of an additional paragraph to the "termination at
will" section, providing that in the event of his termination without cause at
or following a "change of control" (as defined therein) of the Company prior
to July 31, 1998, the Company would make severance payments to Mr. Clontz in
an amount equal to 240% of his then current base salary, (iv) an additional
provision providing, upon the occurrence prior to July 31, 1998 of a change of
control transaction involving the Company, payment to Mr. Clontz of incentive
payments (ranging from $200,900 to $717,500, depending upon the price realized
by the Company and/or its stockholders in said transaction); and (v) a
provision regarding the payment to certain specified charities of any amounts
constituting excess parachute payments due to Mr. Clontz under his employment
or the employment agreement.
The Company entered into an employment agreement with Russell G.
Kleinknecht, effective as of October 1, 1997. The agreement provides for an
employment term commencing October 1, 1997 and terminating September 30, 1999
(the "Initial Term"), unless extended. In accordance with the agreement, Mr.
Kleinknecht shall serve as an executive officer of the Company, devoting his
full time and attention thereto. The agreement provides for a minimum annual
base salary of $250,000 and participation by Mr. Kleinknecht in the Company's
Management Incentive Bonus Plan with a minimum target bonus equal to 50% of
his then current base salary. It also provides for the Company to obtain, at
its expense, whole life insurance (under a split-dollar arrangement) in the
amount of $1,000,000 and to pay up to $7,000 per year for term insurance for
Mr. Kleinknecht. Under the agreement, the Company paid to Mr. Kleinknecht a
signing bonus in the amount of $250,000 and granted to him
106
<PAGE>
100,000 stock options, as follows: (i) 50,000 options, exercisable at $25.00
per option and vesting, contingent upon continued employment upon the date on
which there shall have occurred for ninety consecutive trading days, a last
reported sale price for IPC Common Stock equal to or exceeding $25.00 and (ii)
50,000 options, exercisable at $25.00 per option and vesting, contingent upon
continued employment on September 30, 2001 and there having occurred prior to
such date a ninety consecutive trading day period during which the last
reported sale price for IPC Common Stock had equaled or exceeded $25.00.
The agreement with Mr. Kleinknecht also provides, in the event of a "change
of control" (as defined therein) of the Company, the Company shall pay to Mr.
Kleinknecht an incentive payment (ranging from $152,600 to $426,000, depending
upon the price realized by the Company and/or its stockholders in said
transaction) and in the event of his termination from employment without cause
at or following a change of control, the Company will make severance payments
to him in an amount equal to 225% of his then current base salary. Concurrent
with the execution of the employment agreement, Mr. Kleinknecht signed a
letter agreement relating to certain loans and employee advances, in the
amount of $276,739, as of September 30, 1997 and inclusive of accrued
interest, that had been previously made to him by the Company. As of December
31, 1997, the total amount outstanding was $280,890. This letter agreement
specifies the repayments to be made by Mr. Kleinknecht from bonuses payable to
him under the employment agreement and from change of control incentive
payments which may become due, but in any case not later than the expiration
of the Initial Term of the employment agreement.
As of April 20, 1995 and coincident with the acquisition of assets of Bridge
Electronics, Inc., IPC Bridge, Inc., a wholly-owned subsidiary of the Company,
entered into an employment agreement with Gerald E. Starr, providing an
employment term of five years, a minimum base salary of $150,000 and other
benefits. The agreement provided for its termination, with no further
liability to the Company in the event of Mr. Starr's death, disability or his
termination for Cause (as defined therein). The agreement also contains
provisions regarding the Company's ownership of inventions which he may make
during its term, and certain confidentiality and non-competition provisions.
Effective as of May 21, 1996, the parties entered into a first amendment to
the employment agreement, providing an increase in the base salary to
$200,000. As of August 1, 1997, the parties entered into a second amendment to
the employment agreement, providing: (i) documentation of an increase in Mr.
Starr's base salary to $225,000 (effective as of January 13, 1997); (ii) an
additional provision providing, upon the occurrence prior to July 31, 1998 of
a change of control transaction involving the Company, payment to Mr. Starr of
incentive payments (ranging from $137,200 to $392,000, depending upon the
price realized by the Company and/or its stockholders in said transaction);
and (iii) a termination at will clause which provides that in the event of his
termination without cause, at or following a change of control (as defined
therein) of the Company prior to July 31, 1998, the Company would make
severance payments to Mr. Starr in an amount equal to 225% of his then current
base salary.
As of August 1, 1997, the Company entered into Employee Retention and
Incentive Agreements with eight senior officers, including two Executive
Officers, Brian Reach and Daniel Utevsky, who are not Named Executive
Officers. In the event of a change of control, as defined therein, of the
Company prior to July 31, 1998, these Agreements provide for the payment to
said officers of (i) incentive bonus payments ranging from $54,000 to $90,000
and $57,000 to $95,000, respectively and (ii) additional payments equal to the
product of the difference between the per share price realized in the change
of control and $13 multiplied times 25,500 and 5,000, respectively,
representing authorized but ungranted stock options. Additionally, in the
event that these individuals' employment with the Company is terminated
without cause at or following a change of control of the Company prior to July
31, 1998, the Company would make severance payments equal to such employee's
base salary plus target bonus for a period not to exceed one year but not less
than six months plus one week for each year of service.
In connection with the Merger, certain officers of IPC and its subsidiaries
have entered into employment agreements to be effective upon consummation of
the Merger. See "The Merger--Ancillary Agreements-- Employment Agreements."
107
<PAGE>
STOCK OPTION PLAN
General Plan Information. The Option Plan provides for the grant to certain
officers and employees of options, stock appreciation rights ("SARs") and
restricted stock. The Option Plan was approved by holders of a majority of the
shares of IPC Common Stock present and entitled to vote at a stockholders'
meeting held on May 9, 1994. An amendment to the Option Plan, providing for an
increase in the number of shares reserved for issuance, was approved by a vote
of stockholders at the Annual Meeting of Stockholders held on February 14,
1996.
The Compensation Committee administers the Option Plan. Subject to certain
specific limitations and restrictions set forth in the Option Plan, the
Compensation Committee has full and final authority to interpret the Option
Plan, to prescribe, amend and rescind rules and regulations, if any, relating
to the Option Plan and to make all determinations necessary or advisable for
the administration of the Option Plan.
As of September 30, 1997, the Company has reserved 526,813 shares of IPC
Common Stock for future issuance of stock options. Such IPC Common Stock may
be authorized and unissued shares, treasury shares, or shares previously
issued and reacquired by the Company. Any shares of IPC Common Stock subject
to awards under the Option Plan which are terminated, expire, forfeited or are
canceled (for any reason other than the surrender of any such award upon
exercise of a related SAR) without having been exercised in full, shall again
be available for purposes of the Option Plan.
The following table sets forth certain information with respect to options
granted under the Option Plan during the fiscal year ended September 30, 1997
to the Named Executive Officers:
OPTION/SAR GRANTS IN FISCAL YEAR ENDED SEPTEMBER 30, 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
A B C D E F G
- ----------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF SHARE
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
----------------------------------------------------- ---------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO
OPTIONS/SARS EMPLOYEES IN EXERCISE OR BASE EXPIRATION
NAME GRANTED FISCAL YEAR PRICE ($/SHARE) DATE 5% 10%
- ----- ------------ ------------ ---------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Terry Clontz............ 25,000 6% $14.50 10/31/06 227,974 577,732
Richard P. Kleinknecht.. 0 -- -- -- -- --
Peter J. Kleinknecht.... 0 -- -- -- -- --
Gerald E. Starr......... 20,000 5% 14.50 10/31/06 182,379 462,185
20,000 5% 13.31 02/14/07 167,412 424,254
Russell G. Kleinknecht.. 40,000 10% 14.50 10/31/06 364,759 924,371
</TABLE>
All Options granted during the fiscal year ended September 30, 1997 provided
a ten-year term, vest in equal amounts on the first three anniversaries of
their grant date and are exercisable at the fair market value of IPC Common
Stock on the date of grant.
108
<PAGE>
The following table sets forth certain information with respect to options
exercised under the Option Plan during the fiscal year ended September 30,
1997 by the Named Executive Officers of the Company who are named in the
Summary Compensation Table:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISABLE
SHARES VALUE OPTIONS/SARS AT FISCAL IN-THE-MONEY OPTIONS/SARS
ACQUIRED REALIZED YEAR-END AT FISCAL YEAR-END
ON EXERCISE ON EXERCISE (#) ($)
NAME (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Terry Clontz............ 0 -- 16,667/208,333 $105,252/$990,498
Richard P. Kleinknecht.. 0 -- -- --
Peter J. Kleinknecht.... 0 -- -- --
Gerald E. Starr......... 0 -- 0/40,000 $ 0/261,350
Russell G. Kleinknecht.. 0 -- 21,332/125,668 $130,629/$776,551
</TABLE>
STOCK PURCHASE PLAN
General Plan Information. The Company adopted the Stock Purchase Plan
effective October 3, 1994. The Stock Purchase Plan is intended to enable
eligible employees of the Company and its participating subsidiaries to
purchase shares of IPC Common Stock and is intended to qualify as an "employee
stock purchase plan" under Section 423 of the Code. The Stock Purchase Plan is
administered by the Compensation Committee which has full power to interpret
the terms and adopt, amend and repeal the rules for implementing and
administering the Stock Purchase Plan. The Company has reserved 526,813 shares
for issuance under the Stock Purchase Plan. At January 1, 1998, 477,393 shares
are reserved for future issuance after subtraction of 10,373 shares, 20,953
shares and 18,094 issued in respect of the 1995, 1996 and 1997 offering
periods, respectively.
IPC Common Stock will be offered for sale pursuant to the Stock Purchase
Plan during offering periods established by the Compensation Committee. The
purchase price will be the lesser of 90% of the Fair Market Value on the last
business day or 100% of the Fair Market Value on the first business day of the
offering period, but not less than 85% of the lesser of the Fair Market Value
on the date of grant or exercise of the purchase right. Employees participate
in the Stock Purchase Plan through payroll deductions in an amount ranging
from 1% to 10% of base pay. Otherwise eligible employees will not be granted a
purchase right under the Stock Purchase Plan if, after grant of such purchase
right, the employee would own shares, options or other rights to purchase 5%
or more of the stock of the Company, or if the employee's rights to purchase
under this and any other employee stock purchase plan would exceed $25,000 of
stock in any calendar year. Unless a participant elects to withdraw from the
Stock Purchase Plan, the participant will be deemed to have automatically
exercised a purchase right on the last day of the offering period.
Certificates issued under the Stock Purchase Plan may be subject to such
transfer or other restrictions as the Compensation Committee may designate.
Additionally, "affiliates" of the Company may be subject to restrictions on
resale and executive officers, directors and 10% shareholders are subject to
certain reporting requirements under Section 16 of the Exchange Act.
Fifty-one employees participated in payroll deductions through the end of
the 1995 fiscal year which resulted in the issuance of 10,373 shares of IPC
Common Stock after the conclusion of the offering period on December 29, 1995.
Ninety-three employees participated in payroll deductions through the end of
the 1996 fiscal year which resulted in the issuance of 20,953 shares of IPC
Common Stock after the conclusion of the offering period on December 31, 1996.
Sixty-eight employees participated in payroll deductions through the end of
the 1997 fiscal year which resulted in the issuance of 18,904 shares of IPC
Common Stock after the conclusion of the offering period on December 31, 1997.
109
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Richard P. Kleinknecht, the Company's Chairman, and Peter J. Kleinknecht,
the Company's Vice Chairman, are controlling stockholders and executive
officers of several other entities that do business from time to time with the
Company and certain of its customers. These entities include KEC-NY, KEC-NJ,
both electrical services companies, and Humaco Leasing & Holding Corporation
("Humaco"), a tool and vehicle leasing company.
As of October 1, 1993, the Company and KEC-NY entered into a 20-year
contract with respect to a pool of field technicians and administrative
employees, who are members of the International Brotherhood of Electrical
Workers ("IBEW"), Local 3 and are utilized by either the Company or KEC-NY on
an ongoing or per project basis. The Company and KEC-NJ also entered into a
comparable 20-year agreement with respect to a similar pool of employees who
are members of IBEW, Local 164T. See "THE MERGER--Ancillary Agreements--
Amended and Restated Labor Pool Agreements." The Company, KEC-NY and KEC-NJ
have benefitted from these arrangements by allowing each company to draw from
a larger pool of field technicians and retaining the more highly trained and
skilled technicians for a broader range of projects. KEC-NY and KEC-NJ are
responsible for administering the payroll and related services for Company
employees in these pools. The Company pays all such compensation and benefits
by reimbursement to KEC-NY or KEC-NJ, as appropriate, plus an administration
fee equal to 2.5% of such costs. Effective October 3, 1996, the parties agreed
to amend this agreement to provide for a flat administrative fee of $50,000
per month (to be apportioned between KEC-NY and KEC-NJ for the period from
October 1, 1996 through October 1, 1997). The total amounts paid by the
Company for compensation and benefits under these arrangements in the fiscal
years ended September 30, 1997, 1996 and 1995 were $54.9, $54.9 and $40.7
million, respectively. In addition, the Company paid $0.6, $1.4 and $1.0
million in the fiscal years ended September 30, 1997, 1996 and 1995,
respectively, in related administrative fees.
In connection with and contingent upon consummation of the transactions
contemplated by the Merger Agreement, the Labor Pool Agreements have been
amended and restated. See "THE MERGER--Ancillary Agreements--Amended and
Restated Labor Pool Agreements."
The Company periodically subcontracts certain work to KEC-NY or KEC-NJ.
Amounts charged to these companies under subcontracts with the Company for the
years ended September 30, 1997, 1996 and 1995 were approximately $0.1, $1.0
and $2.2 million, respectively, while amounts charged to the Company under
subcontracts with these companies were approximately $0.3, $0.7 and $0.6
million, respectively.
The Company, KEC-NY and KEC-NJ entered into a 20-year agreement dated as of
May 9, 1994 with respect to corporate opportunities regarding electrical and
communications cable infrastructures (the "Corporate Opportunity Agreement").
KEC-NY and KEC-NJ have agreed not to bid for or accept any communications
cabling jobs in competition with the Company, if the Company intends to bid or
accept such work. The Company, which is not a licensed electrical contractor,
has agreed to refrain from bidding for or accepting, without the consent of
KEC-NY or KEC-NJ, opportunities that combine both electrical and
communications cabling work. IPC has also agreed to continue to refer to KEC-
NY and KEC-NJ certain electrical contracting bid opportunities which may
arise.
In connection with and contingent upon consummation of the transactions
contemplated by the Merger Agreement, the Corporate Opportunity Agreement has
been amended and restated. See "THE MERGER-- Ancillary Agreements--Amended and
Restated Corporate Opportunity Agreement."
The Company has from time to time rented certain equipment from Humaco.
There were no equipment rentals from affiliated companies during fiscal 1997.
During the years ended September 30, 1996 and 1995, approximately $0.9 and
$1.0 million, respectively, of equipment rentals were utilized. The Company,
under month to month arrangements, has rented three facilities from entities
controlled by Richard P. Kleinknecht and Peter J. Kleinknecht. For the years
ended September 30, 1997, 1996 and 1995, approximately $0.2, $0.5 and $0.5
million, respectively, of such lease expense was incurred.
110
<PAGE>
The Company loaned to Russell G. Kleinknecht $98,371, with interest accruing
at 6% per annum. As of December 31, 1997, the total amount outstanding under
this loan, and under employee advances in the principal amount of $140,000,
was $280,890, inclusive of accrued interest.
Contel Litigation. During the fiscal year ended September 30, 1996, Knight
Ventures, Inc. ("KVI"), a company principally owned by Richard P. Kleinknecht
and Peter J. Kleinknecht (the "Principal Stockholders"), and the former parent
of the Company, agreed to settle its litigation with Contel Corporation
("Contel") over, among other claims, responsibility for taxes, tax liens, tax
assessments and tax warrants with respect to Contel IPC, for periods prior to
the acquisition of the Company from Contel.
As of May 9, 1994, the Company, KVI and the Principal Stockholders entered
into a Tax Allocation and Indemnification Agreement (the "Tax Agreement")
relating to their respective income tax liabilities and certain related
matters as a consequence of the Company's termination of its S Corporation
status and its initial public offering. In addition, the Company, KVI and the
Principal Stockholders agreed, to the extent that either KVI or the Principal
Stockholders receives any cash proceeds or other benefit in the form of a
reduction in amounts payable to Contel, as a consequence of the litigation,
they will pay to the Company the lesser of (i) such benefit or (ii) the amount
paid by the Company for taxes and related charges subject to the dispute, plus
the amount of any expenses of such litigation incurred by the Company
following the consummation of the Company's initial public offering.
As of May 15, 1996, Contel, KVI, the Principal Stockholders and the Company,
although not a party to the litigation, entered into a settlement agreement
and mutual releases. In connection with this settlement agreement, KVI has
executed, and the Principal Stockholders have guaranteed, a note payable to
the Company, in the amount of $1.3 million, to fulfill obligations under the
Tax Agreement. As of December 31, 1997, this note, together with accrued
interest, was paid in full by KVI.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Under the securities laws of the United States, the Company's directors,
executive officers and any person holding more than ten percent of IPC's
Common Stock are required to file initial reports of ownership of IPC's Common
Stock and reports of changes in that ownership at the Commission and the
National Association of Securities Dealers, Inc. Specific due dates for these
reports have been established, and the Company is required to disclose in this
Proxy Statement/Prospectus any failure to file by these dates.
Form 3s are required to be filed within ten days after the event by which an
individual becomes a reporting person. Form 4s are required to be filed within
ten days after the end of the reporting month. Form 5s are required to be
filed on or before the forty-fifth day after the end of the issuer's fiscal
year. Based upon information available to it, the Company's management
believes that all Form 3s, Form 4s, and Form 5s required to be filed during
the fiscal year ended September 30, 1997 were filed on a timely basis.
111
<PAGE>
PROPOSAL 5--RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The IPC Board has appointed Coopers & Lybrand as the Company's independent
accountants for the year ending September 30, 1998, and has further directed
that management submit the appointment of independent accountants for
ratification by the stockholders at the Annual Meeting. Coopers & Lybrand has
audited the Company's financial statements since 1991. Representatives of
Coopers & Lybrand are expected to be present at the Annual Meeting, will have
an opportunity to make a statement if they so desire and will be available to
respond to appropriate questions. In the event the stockholders fail to ratify
the appointment, the IPC Board or the Surviving Corporation Board, as
appropriate, will reconsider whether or not to retain that firm.
The affirmative vote of the holders of a majority of the shares present in
person or represented by proxy and entitled to vote at the Annual Meeting will
be required to ratify the appointment of Coopers & Lybrand.
THE IPC BOARD RECOMMENDS A VOTE IN FAVOR OF THE RATIFICATION OF THE
APPOINTMENT OF COOPERS & LYBRAND.
PROPOSAL 6--ADDITIONAL PROPOSAL
The IPC Board is not aware of any other business that may properly come
before the Annual Meeting. The IPC Board seeks the authorization of the IPC
stockholders, in the event matters incident to the conduct of the Annual
Meeting properly come before such meeting, including, without limitation, a
motion to adjourn the Annual Meeting to another time or place for the purpose
of soliciting additional proxies in order to approve and adopt the
transactions contemplated by the Merger Agreement, or otherwise. As to all
such matters, the IPC Board intends to direct the voting of such shares in the
manner determined by the IPC Board in its discretion, and in the exercise of
its duties and responsibilities, to be in the best interests of IPC, and its
stockholders, taken as a whole. Only proxies marked "FOR" this proposal will
be voted for adjournment, in the event such vote is necessary.
THE IPC BOARD UNANIMOUSLY RECOMMENDS THAT ITS STOCKHOLDERS VOTE "FOR"
AUTHORIZATION OF THE IPC BOARD, TO DIRECT THE VOTE OF THE PROXIES UPON SUCH
OTHER MATTERS INCIDENT TO THE CONDUCT OF THE ANNUAL MEETING, AS MAY PROPERLY
COME BEFORE SUCH MEETING, INCLUDING, WITHOUT LIMITATION, A MOTION TO ADJOURN
SUCH MEETING.
112
<PAGE>
MANAGEMENT FOLLOWING THE MERGER
BOARD OF DIRECTORS
In the event the Merger is approved by IPC stockholders, all current
directors of IPC, other than Richard P. Kleinknecht, will submit their
resignations prior to the Effective Time. The individuals listed below are
expected to serve as directors of the Surviving Corporation Board following
the Effective Time. The following table sets forth the name, age and position
with the Surviving Corporation of each such person. Following the Merger, the
Investors Agreement will govern certain rights, duties and obligations of the
parties thereto, as the principal stockholders of the Surviving Corporation,
including, without limitation, the election of directors. Following the
Effective Time, directors of the Surviving Corporation are expected to be
compensated in accordance with the current policies of the Company. See "IPC
ANNUAL MEETING--Other Matters--Directors' Compensation."
<TABLE>
<CAPTION>
NAME(1) AGE (2) POSITION
- ------- ------- --------
<S> <C> <C>
Peter Woog.............. 55 Chairman of the Board and Director
Richard P. Kleinknecht.. 59 Vice Chairman and Director
Richard Cashin, Jr...... Director
David Y. Howe........... 33 Director
Robert J. McInerney..... 52 Director
Terry Clontz............ 47 CEO and President and Director
Russell G. Kleinknecht.. 44 Executive Vice President, Information Transport Systems
Gerald E. Starr......... 44 Executive Vice President, Trading Systems
David A. Walsh.......... 36 Executive Vice President, IXnet and Director
Brian C. Reach.......... 43 Vice President, Chief Financial Officer
Daniel Utevsky.......... 47 Vice President, General Counsel and Corporate Secretary
</TABLE>
- --------
(1) Pursuant to the Merger Agreement, CVC has the right to nominate two
additional directors who shall be independent directors, and each of the IPC
stockholders that are signatories to the Investors Agreement have agreed to
vote in favor of such nominees as well as the nominees listed above.
(2) As of December 31, 1997.
PETER WOOG, DIRECTOR AND CHAIRMAN OF THE BOARD. Mr. Woog is President and
Chief Executive Officer of CSI where he has been employed since 1995. He also
serves on the Board of Directors for Cable Systems Holding Company, CSI, LoDan
Electronics, Inc., the Arizona Association of Industries, the Samaritan Health
System, and AAC. Mr. Woog is also a trustee and chairman for the Arizona
Science Center.
RICHARD M. CASHIN, JR., DIRECTOR. Mr. Cashin has been employed by CVC since
1980, and has been President since 1994. Mr. Cashin is a director of Levitz
Furniture Incorporated, Furnishings International Inc., Euromax and Titan
Wheel International.
DAVID Y. HOWE, DIRECTOR. Mr. Howe is a Vice President of CVC where he has
been employed since 1993. He is also a director of American-Italian Pasta
Company, Aetna Industries, Inc., Bob's Stores, Inc., Brake-Pro, Inc., CSI,
Cable Systems Holding Company, LoDan Electronics, Inc., Copes-Vulcan, Inc.,
Pen-Tab Industries, Inc., Milk Specialties Company and Furnishings
International, Inc.
DAVID A. WALSH, DIRECTOR. Mr. Walsh founded IXnet in 1993 and has served as
President since then. Mr. Walsh also started Voyager Networks, a provider of
internet services, in 1992. At Voyager, he served as its CEO and President
until leaving to manage IXnet on a full-time basis in 1995. Mr. Walsh also
held various technology positions at several financial institutions, including
several commodities exchanges in New York (NYCE, NYMEX, CSCE and COMEX),
Garban, Garvin Guybutler, and Drexel Burnham Lambert Trading Corporation.
113
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a leader in providing integrated telecommunications equipment
and services that facilitate the execution of transactions by the financial
trading community. Such transactions involve the trading of equity and notes,
commodities, currencies and other financial instruments. The Company designs,
manufactures, installs and services turret systems and installs and services
the cabling infrastructure and networks which provide financial traders with
desktop access to time-sensitive communications and data. The Company's
primary customers include securities and investment banking firms, merchant
and commercial banks, interdealer brokers, foreign exchange and commodity
brokers and dealers, securities and commodity exchanges, mutual and hedge fund
companies, asset managers and insurance companies. The Company uses an
integrated approach to marketing its products and services, leveraging its
established customer base throughout the financial trading community. In
addition, through its subsidiary, IXnet, the Company operates an international
voice and data network, providing a variety of dedicated private line, managed
data and switched services, which has been specifically designed to meet the
specialized telecommunications requirements of the financial trading
community.
The Company's operations include turret systems, I.T.S. and network services
(IXnet). The Company accounts for sales of turret systems to distributors and
direct sales and installations of turret systems as "turret sales and
installation." The Company accounts for revenue from turret system
maintenance, including annual and multi-year service contracts, and from
moves, additions and changes to existing turret system installations as
"turret service." The Company accounts for revenue from I.T.S. design,
integration and implementation projects, from sales of intelligent network
products, such as hubs, bridges and routers, from on-site maintenance of
customer I.T.S., including annual and multi-year contracts, and from the
provision of outsourcing services for the support, expansion and upgrading of
existing customer networks as "I.T.S. sales, installation and service."
Additionally, the Company accounts for revenue derived from the IXnet Network
as "network services."
Revenue from turret and I.T.S. sales and installation is recognized upon
completion of the installation, except for revenue from sales of turret
systems to distributors, which is recognized upon shipment of turret products
by IPC. Invoices representing progress payments are submitted during various
stages of the installation. The revenue attributable to such advance payments
is deferred until system installation is completed. In addition, contracts for
annual recurring turret and I.T.S. services are generally billed in advance,
and are recorded as revenue ratably (on a monthly basis) over the contractual
periods. Revenue from moves, additions and changes to turret systems is
recognized upon completion, which usually occurs in the same month or the
month following the order for services. Revenue from network services are
recognized in the month the service is provided.
Cost or revenue for turret systems and I.T.S. includes material and labor
associated with the installation of a project or service. Cost of revenue for
network services includes charges from carriers for bandwidth associated with
network services revenue.
Due to the substantial sales price of the Company's large turret and I.T.S.
installations and the Company's recognition of revenue only upon completion of
installations, revenue and operating results could fluctuate significantly
from quarter to quarter. However, the Company's service business generates a
more consistent revenue stream than sales and installation and, consequently,
these fluctuations could be somewhat diminished in the future as the Company's
service business expands.
In connection with the proposed Merger Transactions, the Company will incur
various one-time costs currently estimated at $25.6 million. These costs
consist primarily of professional fees, printing costs, change of control
costs and other expenses. While the exact timing, nature and amount of these
costs are subject to change the Company will incur a one-time charge of
approximately $8.3 million in the quarter in which the Merger is consummated.
This one-time charge is included in the $25.6 million referred to above and
consists of certain change in control bonuses and severance payments
aggregating $2.5 million and payment to option holders, upon
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<PAGE>
cancellation of their stock options, aggregating $5.8 million. As a result of
the foregoing, the Company expects to incur a net loss in the quarter in which
the Merger is recorded. Because this loss would result directly from the one-
time charge incurred in connection with the Merger Transactions, the Company
does not expect this loss to materially impact its liquidity or ongoing
operations.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 1997 TO THE THREE MONTHS
ENDED DECEMBER 31, 1996
Revenue. Total revenue increased by $7.7 million, or 12.9%, to $67.1 million
for the three months ended December 31, 1997 (the "1997 period") from $59.4
million for the three months ended December 31, 1996 (the "1996 period").
Turret sales and installation and service revenue increased by $11.0
million, or 28.8%, to $49.0 million in the 1997 period from $38.0 million in
the 1996 period. The revenue increase related to new installations was $9.5
million, primarily from sales of the Company's Tradenet MX product. The
increase in service revenue in the 1997 period as compared to the 1996 period
was $1.5 million, principally due to the Company's increasing customer base.
Revenue from I.T.S. sales, installation and service decreased by $7.6
million, or 41.7%, to $10.7 million in the 1997 period from $18.3 million in
the 1996 period. I.T.S. revenue from new installations decreased $10.8 million
in the 1997 period as compared with the 1996 period. For its full fiscal year,
the Company expects revenue from I.T.S. to decrease from fiscal 1997 levels,
but does not expect this decrease to have a material effect on its operating
income. Partially offsetting the decrease in I.T.S. installation revenue was
an increase in service related revenue of $3.2 million in the 1997 period as
compared to the 1996 period. The increase in service revenue is partially
related to moves, adds and changes from several large new installation
projects which were recognized as revenue in prior quarters.
Revenue from network services, classified as service revenue, increased by
$4.3 million, or 140.7%, to $7.4 million in the 1997 period from $3.1 million
in the 1996 period. The increase is related to the increased customer base and
increased customer utilization of IXnet's international telecommunication
network during the 1997 period.
Cost of Revenue. Cost of revenue (as a percentage of revenue) of 60.3% for
the 1997 period decreased as compared to 70.4% in the 1996 period. The
decrease is principally attributable to turret sales and installation and
service revenue which was partially offset by an increase in cost related to
network services revenue. The lower costs of turret revenue resulted from a
higher percentage of revenue from products manufactured by the Company
(Tradenet MX) during the 1997 period as compared to the turret revenue mix
during the 1996 period. Turret sales and installation from manufactured
products contain a lower cost of revenue as compared to third party products,
I.T.S. sales, installation and service and network services.
Research and Development. Research and development expenses remained
consistent at $2.4 million for both the 1997 period and 1996 period. Research
and development expenses remained consistent due to initiatives taken by the
Company in fiscal 1997 so that research and development spending is focused on
the continued integration of the Tradenet MX family with the IXnet Network as
well as the enhancement of existing features of the Tradenet MX family to
sustain the Company's leadership position in voice-based products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("S,G&A") increased by $2.7 million, or 19.6% to $16.6
million in the 1997 period from $13.9 in the 1996 period. Approximately, $2.1
million of the increase (of which $0.6 million is depreciation) is due to
infrastructure costs associated with the expansion of the IXnet Network,
people resources and other expenses required to build, manage and grow this
business. The Company intends to continue to invest in the IXnet Network. As
the Company deploys this network, management anticipates that S,G&A will
increase. These expenses will be incurred prior to the realization of
anticipated related revenue.
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<PAGE>
Interest Income/(Expense). Interest expense, net for the 1997 period
decreased slightly to $0.4 million from $0.5 million in the 1996 period. The
decrease resulted from lower utilization of the Company's revolving credit
facilities during the current period, partially offset by interest expense
associated with an increase in the Company's capital lease obligations.
Interest expense will increase substantially as a result of the Offering.
Provision for Income Taxes. The Company's effective tax rate was 50.0% for
the 1997 period compared to 50.9% for the 1996 period.
COMPARISON OF THE YEAR ENDED SEPTEMBER 30, 1997 TO THE YEAR ENDED SEPTEMBER
30, 1996
Revenue. Total revenue increased by $20.8 million or 8.3% to $270.3 million
in the year ended September 30, 1997 from $249.5 million in the year ended
September 30, 1996.
Turret installation and related service revenue increased by $10.7 million,
or 6.4%, to $177.6 million in the year ended September 30, 1997 from $167.0
million in the year ended September 30, 1996. Turret revenue growth for the
year ended September 30, 1997 is from higher third party products sold in
conjunction with the Tradenet MX product.
Revenue from I.T.S. sales and related service decreased by $4.1 million, or
5.2% to $74.8 million in the year ended September 30, 1997 from $78.8 in the
year ended September 30, 1996. Although the number of new installations in
1997 were comparable to 1996, the decrease in revenue from new installations
related to lower revenue from the two largest installations during 1997 as
compared with 1996. This decrease was partially offset by higher service
related revenue in 1997 as compared to 1996.
Revenue from network services increased by $14.2 million, or 383.4% to $17.9
million in the year ended September 30, 1997 from $3.7 million in the year
ended September 30, 1996. The increase is from the continued buildup of
IXnet's international telecommunication network during 1997. Annualized
revenue for the month of September 1997 was $24.8 million, an increase in
excess of 148% as compared with September 1996.
Cost of Revenue. Cost of revenue (as a percentage of revenue) of 70.3% in
the year ended September 30, 1997 increased slightly as compared to 69.2% in
the year ended September 30, 1996. The increase is attributable to higher
third party product revenue associated with turret installations in 1997,
which typically has a higher cost of revenue than the Company's manufactured
products and higher project costs for I.T.S. revenue. Network service cost (as
a percentage of revenue) decreased in fiscal 1997 as compared with fiscal 1996
due to higher utilization of the IXnet Network in fiscal 1997.
Research and Development Expenses. Research and development expenses
decreased by $1.5 million, or 13.0%, to $10.0 million in the year ended
September 30, 1997 from $11.5 million in the year ended September 30, 1996.
The decrease is from the consolidation of research and development
organizations and the termination of development work on an Asynchronous
Transfer Mode ("ATM") project. Also, spending during the year ended September
30, 1997 had a higher mix of software development as opposed to hardware
applications. The Company intends to focus on the integration of the Tradenet
MX turret with IXnet's network capabilities as well as the enhancement of
existing features of the Tradenet MX family to sustain the Company's
leadership position in voice-based products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $15.6 million, or 34.5%, to $60.7 million
in the year ended September 30, 1997 from $45.1 million in the year ended
September 30, 1996. Approximately, $11.3 million of the increase (of which
$2.2 million is depreciation) is due to infrastructure costs associated with
the expansion of IXnet's international telecommunications network, people
resources and other expenses required to build, manage and grow this global
business. The Company intends to continue to fund the buildup of IXnet's
network. As the Company deploys its network, management anticipates that
selling, general and administrative expenses will increase. These expenses may
be incurred prior to the realization of anticipated related revenue.
Additionally, included in selling, general and administrative expenses for the
year ended September 30, 1997 is $0.65 million or $0.04 per share representing
the settlement of a employment agreement with the former Chief Operating
Officer.
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<PAGE>
Interest Income/(Expense). Interest (expense), net increased by $1.2 million
to $1.9 million for the year ended September 30, 1997 from $0.7 million for
the year ended September 30, 1996. The increase is due to higher utilization
of the Company's Revolving Credit Facility and capital lease obligations used
primarily to finance capital expenditures for IXnet during 1997.
Provision for Income Taxes. The Company's effective tax rate was 52.8% for
the year ended September 30, 1997 compared to 39.7% for the year ended
September 30, 1996. The increase is primarily due to IXnet's losses during
1997 for which the Company is not able to receive certain state statutory tax
benefits.
COMPARISON OF THE YEAR ENDED SEPTEMBER 30, 1996 TO THE YEAR ENDED SEPTEMBER
30, 1995
Revenue. Total revenue increased by $43.3 million or 21.0%, to $249.5
million in the year ended September 30, 1996 from $206.2 million in the year
ended September 30, 1995.
Turret installation and related service revenue increased by $16.1 million,
or 10.6%, to $167.0 million in the year ended September 30, 1996 from $150.9
million in the year ended September 30, 1995. This increase is primarily
attributable to the increased acceptance of Tradenet MX. Management expects
that sales of Tradenet MX will continue to generate the majority of turret
sales and installation revenue for the foreseeable future.
Revenue from I.T.S. sales and related service increased by $23.5 million, or
42.5% to $78.8 million in the year ended September 30, 1996 from $55.3 million
in the year ended September 30, 1995. These increases were attributable to the
continuing development and expansion of the I.T.S. business.
Revenue from network services of $3.7 million for the year ended September
30, 1996 resulted from IXnet's implementation of its international
telecommunication network during 1996, achieving recurring monthly revenue at
an annualized rate exceeding $10 million at fiscal year end.
Cost of Revenue. Cost of revenue (as a percentage of revenue) decreased to
69.2% for the year ended September 30, 1996 from 69.4% for the year ended
September 30, 1995. This decrease is due to continued installation
efficiencies and manufacturing cost reductions.
Research and Development Expenses. Research and development expenses
increased by $1.4 million, or 13.4%, to $11.5 million in the year ended
September 30, 1996 from $10.1 million in the year ended September 30, 1995.
The increase was due to the development of new products and enhancements to
existing products. Also, research and development expenses for the year ended
September 30, 1996 include expenses by IPC Bridge. Bridge Electronics, Inc.,
now known as IPC Bridge, was acquired by the Company in April 1995. The
Company believes that development of new products and enhancements to existing
products are essential to its continuing success, and management intends to
continue to devote substantial resources to research and product development
in the future.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $14.1 million, or 45.4%, to $45.1 million
in the year ended September 30, 1996 from $31.0 million in the year ended
September 30, 1995. These increases are attributable to an increase in
headcount and other expenses to support higher business levels, start up costs
associated with IXnet and the continued development and geographic expansion
of the Company's I.T.S. business.
Interest Income/(Expense). Interest income/(expense) decreased to $0.7
million in expense for the year ended September 30, 1996 from $0.2 million in
income for the year ended September 30, 1995. This decrease was primarily due
to the Company's utilization of its line of credit during fiscal 1996. Total
interest expense for the fiscal year ended 1996 was $1.1 million compared to
$0.4 million in the fiscal year ended 1995.
Provision for Income Taxes. The Company's effective tax rate for the years
ended September 30, 1996 and 1995 was 39.7% and 41.0%, respectively.
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<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since the Company's initial public offering in fiscal 1995, the Company has
satisfied its cash requirements through capital lease financing and bank lines
of credit. The Company's principal uses of cash are to fund working capital
requirements, losses of its IXnet subsidiary and capital expenditures
principally related to the expansion of IXnet's international
telecommunications network.
Net cash provided by operating activities was $8.8 million in the three
month period ending December 31, 1997 (the "1997 Period") as compared to net
cash provided by operating activities of $8.4 million for the three months
ended September 30, 1996 (the "1996 Period"). Net cash provided by operating
activities for the 1997 Period reflects a significant improvement in income
from operations and higher depreciation expense as compared with the 1996
Period, which was principally related to working capital improvements. The
increase in depreciation and amortization expense is largely the result of
increased capital expenditures, of which $2.1 million was financed with
capital lease obligations principally for IXnet during the 1997 Period as
compared with $3.7 million in the similar period of the prior year.
Cash used in investing activities was $2.6 million in the 1997 Period as
compared with $3.0 million in the 1996 Period. Net cash used in investing
activities include expenditures related to the acquisition of IPC Bridge and
for property, plant and equipment, principally for the IXnet Network.
The Company maintains short-term credit facilities with various banks up to
$35.0 million of which none was outstanding at December 31, 1997. The weighted
average interest rate was 6.63% during the 1997 period as compared to 6.43% in
the comparable prior year period.
In April 1997, the Company purchased its sole manufacturing facility and
related land in Westbrook, Connecticut for $2.5 million using the Company's
short-term credit facility. In July 1997, this purchase was refinanced through
a mortgage agreement with a bank for $2.2 million. The term of the mortgage is
for eight years with a twenty year payout bearing interest at Libor plus 125
basis points. The Company entered into an interest rate swap agreement with
its bank in order to fix the interest rate over the eight year term at an
effective interest rate of 7.85%.
In connection with the implementation of the IXnet Network, IXnet has
entered into capital lease agreements for certain network switching equipment,
aggregating approximately $2.1 million for the 1997 Period as compared with
$3.7 million in the 1996 Period.
On December 18, 1997, IPC and AAC entered into the Merger Agreement. The
Merger Agreement provides, among other things, for the merger of AAC with and
into IPC, with IPC as the Surviving Corporation, concurrently with the closing
of the Offering. Under the terms of the Merger Agreement, subject to
dissenters' rights, each share of IPC Common Stock will be converted at the
election of the holder thereof into either (i) the right to receive $21.00 in
cash or (ii) the right to retain one share of Surviving Corporation Common
Stock, subject to proration in certain circumstances. The Merger is subject to
majority stockholder approval and regulatory approval. As a result of the
Merger, AAC's parent, CSH LLC, a majority of whose membership interests are
owned by CVC and others, will receive in exchange for its shares of common
stock of AAC not less than 50.25% nor more than 86.25% (prior to the IXnet
Exchange) of the number of shares of Surviving Corporation Common Stock
expected to be outstanding after the Merger. See "The Merger and the
Financings."
The Notes are part of the financings to consummate the Merger. The balance
of the proceeds necessary to consummate the Merger Transactions will be funded
by the Equity Investment. Such amounts will be used to (a) pay up to $217.5
million to those IPC stockholders who choose to convert their shares of IPC
Common Stock into cash, (b) repay existing indebtedness of the Company under
the Existing Bank Credit Facilities, of which there was no outstanding balance
at December 31, 1997, and certain other liabilities of the Company, and (c)
pay an estimated $25.6 million in transaction fees and expenses, of which
$23.4 million will be paid upon the consummation of the Merger. Any remaining
proceeds will be used for working capital and other purposes. The issuance of
the Notes is conditioned upon the closing of the Merger, the Equity Investment
and the Revolving Credit Facility. See "The Merger and Financings" and
"Certain Relationships and Other Related Transactions."
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<PAGE>
The Company believes that cash flows from operations and existing Revolving
Credit Facility would be sufficient to meet its working capital and capital
expenditure needs for the near future. The Company does not rule out seeking
additional debt or equity for other corporate purposes.
On February 13, 1998, the Company purchased by the issuance of a promissory
note in the amount of $6.7 million, plus accrued interest, due on April 8,
1998, all of the issued and outstanding common stock of MXNet, a wholly owned
subsidiary of National Discount Brokers Group, Inc. In addition, MXNet entered
into employment agreements with four MXNet executives which included signing
and retention bonuses in the aggregate amount of $1.1 million payable over two
years. This acquisition will be accounted for as a purchase and will result in
approximately $5.5 million of goodwill.
QUARTERLY FLUCTUATIONS AND THE EFFECTS OF INFLATION
The size and lead time of new orders can vary substantially and, since the
Company generally recognizes revenue from the sale and installation of turret
systems and I.T.S. on the completion of an installation, the Company's
quarterly results of operations may fluctuate significantly. Management does
not believe that inflation has a significant effect on the Company's results.
FOREIGN EXCHANGE
The Company's shipments to foreign distributors are generally invoiced in
U.S. Dollars. As a result, the Company believes its foreign exchange
transaction exposure caused by these shipments is insignificant. However, if
the U.S. Dollar appreciates significantly relative to the currency in which
the Company's customers receive revenues, it could have an impact on the
Company's customers' ability to make payments to the Company. Sales to the
Company's customers in the United Kingdom are denominated in British Pounds
Sterling. The Company does not hedge its net asset exposure to fluctuations in
the U.S. Dollar/British Pound Sterling exchange rate. Accordingly, the Company
is subject to risks associated with such fluctuation. However, adjustments to
the Company's financial position as a result of currency fluctuations have not
been significant.
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<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited consolidated pro forma financial information (the
"Pro Forma Financial Information") of the Company is based on historical
consolidated financial statements of the Company and gives effect to the
Merger Transactions. The unaudited consolidated pro forma statements of
operations for the quarter ended December 31, 1997 and year ended September
30, 1997 give effect to the Merger Transactions as if they had occurred at
October 1, 1996. The unaudited pro forma balance sheets give effect to the
Merger Transactions as if they had occurred on December 31, 1997 and September
30, 1997. The pro forma adjustments are based upon available information and
upon certain assumptions that management believes are reasonable under the
circumstances. One of these assumptions is that a minimum number of IPC shares
of Common Stock (380,952) will be retained in the Surviving Corporation Common
Stock. However, if the IPC stockholders elect to retain the maximum number of
IPC shares (1,752,381 shares) in the Surviving Corporation Common Stock there
would be no effect on the Pro Forma Consolidated Balance Sheet or Pro Forma
Consolidated Statement of Operations at and for the periods ended December 31,
1997 and September 30, 1997, respectively. The Pro Forma Financial Information
and accompanying notes should be read in conjunction with the historical
consolidated financial statements of the Company, including the notes thereto,
and other financial information pertaining to the Company. The Pro Forma
Financial Information does not purport to represent what the Company's actual
results of operations or actual financial position would have been if the
Merger Transactions in fact occurred on such dates or to project the Company's
results of operations or financial position for any future period or date.
In connection with the proposed Merger Transactions, the Company will incur
various one-time costs currently estimated at $25.6 million. These costs
consist primarily of professional fees, printing costs and other expenses.
While the exact timing, nature and amount of these costs are subject to
change, the Company will incur a one-time pre-tax charge of approximately $8.3
million in the quarter in which the Merger is consummated. This one-time
charge consists of certain change in control bonuses and severance payments
aggregating $2.5 million and the payment, upon cancellation of stock options,
aggregating $5.8 million. As a result of the foregoing, the Company will incur
a net loss in the quarter in which the Merger is recorded. Because this loss
will result directly from the one-time charge incurred in connection with the
Merger Transactions, the Company does not expect this loss to materially
impact its liquidity or ongoing operations. For a discussion of the
consequences of the incurrence of indebtedness in connection with the Merger
Transactions, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
The pro forma adjustments were applied to the respective historical
consolidated financial statements of the Company to reflect and account for
the Merger as a recapitalization; accordingly, the historical basis of the
Company's assets and liabilities has not been impacted thereby.
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<PAGE>
IPC INFORMATION SYSTEMS, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................ $ 3,655 $ 7,998 (a) $ 11,653
Trade receivables, less allowance of
$1,515.................................. 65,887 65,887
Inventories.............................. 36,883 36,883
Prepaid expenses and other current
assets.................................. 13,333 (3,894)(e) 9,439
-------- --------- --------
Total current assets..................... 119,758 4,104 123,862
Property, plant and equipment, net........ 40,420 40,420
12,290 (e)
Other assets, net......................... 9,610 5,333 (i) 27,233
-------- --------- --------
Total assets............................. $169,788 $ 21,727 $191,515
======== ========= ========
Current liabilities:
Accounts payable......................... $ 14,333 -- $ 14,333
Accrued liabilities...................... 28,408 $ (3,667)(f) 21,563
(3,096)(e)
(1,500)(g)
1,418 (f)
Customer advances and deferred revenue... 23,843 -- 23,843
Current portion of capital leases........ 3,363 -- 3,363
-------- --------- --------
Total current liabilities................ 69,947 (6,845) 63,102
Senior secured revolving credit........... -- -- --
Long-term debt, net of current portion.... 2,124 -- 2,124
Lease obligations, net of current portion. 11,085 -- 11,085
Senior unsecured notes.................... -- 180,000 (b) 180,000
Other liabilities......................... 5,318 (1,625)(g) 3,693
-------- --------- --------
Total liabilities........................ 88,474 171,530 260,004
-------- --------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock--$0.01 par value,
authorized 10,000,000 shares, none
issued and outstanding
Common stock--$0.01 par value, authorized
25,000,000 shares; issued December 31,
1997--10,979,964 shares, pro forma--
4,063,492 shares; outstanding December
31, 1997--10,737,779, pro forma--
4,063,492 shares........................ 110 34 (c) 41
(103)(d)
(3)(h)
3 (i)
Paid-in capital.......................... 48,600 71,966 (c) 5,330
5,330 (i)
(120,566)(d)
Retained earnings (deficit).............. 33,322 (96,824)(d) (73,860)
(4,977)(e)
(4,666)(f)
(715)(h)
Less treasury stock, at cost, December
31, 1997--242,185 shares, pro forma--
none.................................... (718) 718 (h) --
-------- --------- --------
Total stockholders' equity (deficit).... 81,314 (149,803) (68,489)
-------- --------- --------
Total liabilities and stockholders'
equity (deficit)....................... $169,788 $ 21,727 $191,515
======== ========= ========
</TABLE>
See Notes to Pro Forma Consolidated Financial Information.
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<PAGE>
IPC INFORMATION SYSTEMS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Revenue:
Product sales and installation............ $38,441 -- $38,441
Service................................... 28,611 -- 28,611
------- ------- -------
67,052 -- 67,052
Cost of revenue:
Product sales and installation............ 22,185 -- 22,185
Service................................... 18,240 -- 18,240
------- ------- -------
40,425 -- 40,425
------- ------- -------
Gross profit............................ 26,627 -- 26,627
Research and development expenses........... 2,404 -- 2,404
Selling, general and administrative
expenses................................... 16,557 $ 191 (i) 16,748
------- ------- -------
Income from operations.................. 7,666 (191) 7,475
Interest income (expense), net.............. (440) (5,360)(k) (6,160)
(360)(j)
Other income (expense), net................. (39) -- (39)
------- ------- -------
Income before provision for income
taxes.................................. 7,187 (5,911) 1,276
Provision (benefit) for income taxes........ 3,593 (2,601)(l) 992
------- ------- -------
Net income.............................. $ 3,594 $(3,310) $ 284
======= ======= =======
Basic earnings per share.................... $ 0.34 $ 0.07
------- -------
Basic weighted average shares outstanding... 10,711 4,063
------- -------
Diluted earnings per share.................. $ 0.33 $ 0.07
------- -------
Diluted weighted average shares outstanding. 10,865 4,063
------- -------
</TABLE>
See Notes to Pro Forma Consolidated Financial Information.
122
<PAGE>
IPC INFORMATION SYSTEMS, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA PRO
HISTORICAL ADJUSTMENTS FORMA
---------- ----------- --------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.......................... $ 1,465 $ 4,618 (a) $ 6,083
Trade receivables, less allowance of $1,515........ 61,791 -- 61,791
Inventories........................................ 33,557 -- 33,557
Prepaid expenses and other current assets.......... 13,426 -- 13,426
-------- --------- --------
Total current assets............................ 110,239 4,618 114,857
Property, plant and equipment, net.................. 38,314 -- 38,314
Other assets, net................................... 9,809 12,290 (e) 27,432
5,333 (i)
-------- --------- --------
Total assets.................................... $158,362 $ 22,241 $180,603
======== ========= ========
Current liabilities:
Note payable....................................... $ 3,200 $ (3,200)(a) $ --
Accounts payable................................... 18,042 18,042
Accrued liabilities................................ 21,395 (3,667)(f) 17,646
(1,500)(g)
1,418 (f)
Customer advances and deferred revenue............. 17,682 17,682
Current portion of capital leases.................. 2,987 2,987
-------- --------- --------
Total current liabilities....................... 63,306 (6,949) 56,357
Senior secured revolving credit..................... -- -- --
Long-term debt, net of current portion.............. 2,133 -- 2,133
Lease obligations, net of current portion........... 10,336 -- 10,336
Senior unsecured notes.............................. -- 180,000 (b) 180,000
Other liabilities................................... 5,677 (2,000)(g) 3,677
-------- --------- --------
Total liabilities............................... 81,452 171,051 252,503
-------- --------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock--
$0.01 par value, authorized 10,000,000 shares, none
issued and outstanding ............................ -- -- --
Common stock--$0.01 par value, authorized 25,000,000
shares; issued September 30, 1997--10,932,675
shares, Pro Forma--4,063,492 shares; outstanding
September 30, 1997--10,690,490, Pro Forma--
4,063,492 shares................................... 109 34 (c) 40
(103)(d)
(3)(h)
3 (i)
Paid-in capital.................................... 47,922 71,966 (c) 5,330
5,330 (i)
(119,888)(d)
Retained earnings (deficit)........................ 29,597 (96,509)(d) (77,270)
(4,977)(e)
(4,666)(f)
(715)(h)
Less treasury stock, at cost, September 30, 1997--
242,185 shares, Pro Forma--none.................. (718) 718 (h) --
-------- --------- --------
Total stockholders' equity (deficit)............ 76,910 (148,810) (71,900)
-------- --------- --------
Total liabilities and stockholders' equity
(deficit)...................................... $158,362 $ 22,241 $180,603
======== ========= ========
</TABLE>
See Notes to Pro Forma Consolidated Financial Information.
123
<PAGE>
IPC INFORMATION SYSTEMS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Revenue:
Product sales and installation............ $179,978 -- $179,978
Service................................... 90,345 -- 90,345
-------- -------- --------
270,323 -- 270,323
Cost of revenue:
Product sales and installation............ 127,212 -- 127,212
Service................................... 62,897 -- 62,897
-------- -------- --------
190,109 -- 190,109
-------- -------- --------
Gross profit............................ 80,214 -- 80,214
Research and development expenses........... 9,976 -- 9,976
Selling, general and administrative ex-
penses..................................... 60,697 $ 762 (i) 61,459
-------- -------- --------
Income from operations.................. 9,541 (762) 8,779
Interest income (expense), net.............. (1,844) (19,948)(n) (23,234)
(1,442)(m)
Other income (expense), net................. 417 (312)(p) 105
-------- -------- --------
Income (loss) before provision for in-
come taxes............................. 8,114 (22,464) (14,350)
Provision (benefit) for income taxes........ 4,280 (9,747)(o) (5,467)
-------- -------- --------
Net income (loss)....................... $ 3,834 $(12,717) $ (8,883)
======== ======== ========
Basic earnings (loss) per share............. $ 0.36 $ (2.19)
-------- --------
Basic weighted average shares outstanding... 10,664 4,063
-------- --------
Diluted earnings (loss) per share........... $ 0.36 $ (2.19)
-------- --------
Diluted weighted average shares outstanding. 10,704 4,063
-------- --------
</TABLE>
See Notes to Pro Forma Consolidated Financial Information.
124
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(a) Represents the cash available after application of the proceeds from the
Notes and the Equity Investment to fund the repurchase of IPC Common
Stock, repay certain other obligations and related fees and expenses due
on consummation of the Merger Transactions.
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1997
------------ -------------
<S> <C> <C>
Proceeds from Notes............................. $ 180,000 $ 180,000
Equity Investment............................... 72,000 72,000
Repurchase of IPC Common Stock.................. (217,493) (216,500)
Repayment of Note payable....................... -- (3,200)
Repayment of certain other obligations.......... (3,125) (3,500)
Fees and expenses............................... (23,384) (24,182)
--------- ---------
Cash available from Merger Transactions....... $ 7,998 $ 4,618
========= =========
</TABLE>
The following table reconciles the total costs and expenses related to the
Merger Transactions to the amount due upon consummation of the Merger.
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1997
------------ -------------
<S> <C> <C>
Total professional fees, printing costs and
other expenses................................ $ 17,267 $ 17,267
Less: Amounts paid on account.................. 798 --
----------- -----------
Net due on consummation of Merger............ 16,469 17,267
----------- -----------
Change of control costs........................ 8,333 8,333
Less: amounts payable over two years subsequent
to consummation of the Merger.............. (1,418) (1,418)
----------- -----------
Net due on consummation of Merger............ 6,915 6,915
----------- -----------
Total due on consummation of Merger.......... $ 23,384 $ 24,182
=========== ===========
In connection with the repurchase and cancelation of IPC Common Stock, the
issuance of Surviving Corporation Common Stock related to the Equity
Investment and the exchange of the IXnet Common Stock for Surviving
Corporation Common Stock, the following table reconciles the pre-Merger
outstanding shares of IPC Common Stock to the pro forma Surviving
Corporation Common Stock issued and outstanding, assuming (1) the minimum
number of shares of IPC Common Stock will be retained and (2) all such
transactions occurred at December 31, 1997 and September 30, 1997,
respectively.
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1997
------------ -------------
<S> <C> <C>
Pre-merger shares outstanding.................. 10,737,779 10,690,490
Repurchase and cancelation of IPC Common Stock. (10,356,827) (10,309,538)
Issuance of Surviving Corporation Common Stock
related to the Equity Investment.............. 3,428,572 3,428,572
Exchange of 560 shares of IXnet Common Stock
for Surviving Corporation Common Stock........ 253,968 253,968
----------- -----------
Pro forma issued and outstanding shares of
Surviving Corporation Common Stock............ 4,063,492 4,063,492
=========== ===========
</TABLE>
The Unaudited Pro Forma Consolidated Financial Information has been
prepared on the basis that the minimum number of shares of IPC Common Stock
(380,952 shares) are retained as Surviving Corporation Common Stock. There
would be no effect on the Pro Forma Consolidated Balance Sheet or Pro Forma
125
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(CONT.)
Consolidated Statements of Operations at and for the periods ended December
31, 1997 and September 30, 1997, respectively, if the IPC stockholders
elected to retain the maximum number of IPC shares (1,752,381 shares).
(b) Represents the gross proceeds to the Company from the issuance of the
Notes.
(c) Represents the issuance of 3,428,572 shares of Surviving Corporation
Common Stock at $21 per share.
(d) Represents the repurchase and cancelation by the Company of 10,356,827
shares of IPC Common Stock at December 31, 1997 and 10,309,538 shares of
IPC Common Stock at September 30, 1997 at $21 per share.
(e) In connection with the Merger Transactions, the Company will incur
approximately $25,600 in fees and expenses. These fees and expenses
include $8,333 of change in control costs (see notes (a) (f)) and $17,267
(see note (a)) of professional fees, printing costs and other expenses. Of
the $17,267 in anticipated costs, $3,894 was included in prepaid expenses
and other current assets and $3,096 was included in accrued liabilities at
December 31, 1997. The $17,267 of fees are as follows:
<TABLE>
<S> <C>
Fees and other expenses related to the Revolving Credit Facility,
to be amortized over five years commencing with the Merger...... $ 2,125
Fees and other expenses related to the Notes, to be amortized
over ten years commencing with the Merger....................... 10,165
-------
Prepaid debt issuance costs..................................... $12,290
Fees and other expenses related to the Merger Agreement, to be
charged to paid-in-capital upon the Merger...................... 4,977
-------
Total professional fees, printing costs and other expenses..... $17,267
=======
</TABLE>
(f) The Company will incur $8,333 of change of control costs related to the
cancellation of stock options in the amount of $5,808 and change of
control severances and bonuses of $2,525. Of the $2,525 in change of
control severances and bonuses, $1,418 will be paid in periods subsequent
to the Merger. The pro forma consolidated balance sheets at December 31,
1997 and September 30, 1997 reflect the above change of control costs, net
of a $3,667 tax benefit.
Because these change of control expenses are non-recurring, they have been
excluded from the pro forma consolidated statements of operations for the
three months ended December 31, 1997 and the year ended September 30, 1997.
(g) In connection with the change of control, the payment of certain other
obligations in the amount of $3,125 at December 31, 1997 and $3,500 at
September 30, 1997 become due upon the Merger.
(h) Represents the cancelation, upon the Merger, of 242,185 shares of IPC
Common Stock held in treasury.
(i) Represents the purchase of the minority interest in IXnet, a subsidiary of
the Company, by the Company for 253,968 shares of Surviving Corporation
Common Stock having an aggregate value of $5,333 at $21 per share. Such
amount has been allocated to goodwill and is being amortized over seven
years. The pro forma amortization for the three months ended December 31,
1997 and the year ended September 30, 1997 was $191 and $762,
respectively.
(j) Represents the amortization of debt issuance cost over the respective
terms of the debt financings, for the three months ended December 31,
1997.
<TABLE>
<S> <C>
Revolving Credit Facility............................................ $106
Notes................................................................ 254
----
$360
====
</TABLE>
126
<PAGE>
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(CONT.)
(k) Represents (i) the interest expense on the Notes, at an assumed interest
rate of 10%, compounded semi-annually and (ii) interest income on cash
available from the Merger Transactions, at an assumed effective interest
rate of 5.25% for the three months ended December 31, 1997.
<TABLE>
<S> <C>
Notes.............................................................. $5,005
Accretion of discount on the Notes................................. 460
Less interest income............................................... 105
------
$5,360
======
</TABLE>
A change of 0.5% in the assumed interest rate would result in a change of
$277 in interest expense for the Notes for the three months ended December
31, 1997.
(l) Represents the income tax benefit related to the pro forma adjustments,
for the three months ended December 31, 1997, at the Company's federal and
state incremental tax rate of 44%.
(m) Represents the amortization of debt issuance cost over the respective
terms of the debt financings, for the year ended September 30, 1997.
<TABLE>
<S> <C>
Revolving Credit Facility.......................................... $ 425
Notes.............................................................. 1,017
------
$1,442
======
</TABLE>
(n) Represents the interest expense on (i) the Notes, at an assumed interest
rate of 10%, compounded semi-annually, (ii) accretion of discount on the
Notes, and (iii) interest income on cash available from the Merger
Transactions, at an assumed effective interest rate of 5.25% for the year
ended September 30, 1997.
<TABLE>
<S> <C>
Notes............................................................. $18,490
Accretion of discount on the Notes................................ 1,700
Less interest income.............................................. 242
-------
$19,948
=======
</TABLE>
A change of 0.5% in the assumed interest rate would result in a change of
$950 in interest expense for the Notes for the year ended September 30,
1997.
(o) Represents the income tax benefit related to the pro forma adjustments,
for the year ended September 30, 1997, at the Company's federal and state
incremental tax rate of 44%.
(p) Represents the reversal of the after-tax minority interest benefit
associated with IXnet's losses for the year ended September 30, 1997.
127
<PAGE>
DESCRIPTION OF IPC CAPITAL STOCK
The authorized capital stock of IPC consists of 25,000,000 shares of common
stock, $.01 par value per share, and 10,000,000 shares of preferred stock,
$.01 par value per share. At the Record Date, there were shares of IPC
Common Stock outstanding, held of record by stockholders, and no shares of
preferred stock outstanding. IPC has reserved for issuance (i) 1,579,337
shares pursuant to the Stock Option Plan, as amended, of which 1,382,000
options have been granted and 229,476 have been canceled as of December 31,
1997; (ii) 526,813 shares pursuant to the Stock Purchase Plan of which 49,420
shares have been issued pursuant to such plan and (iii) 31,857 shares pursuant
to an employment agreement between IPC and a former employee. The following
description of the capital stock of IPC and certain provisions of the Existing
Certificate of Incorporation and Bylaws is a summary and is qualified by the
provisions of the Existing Certificate of Incorporation and Bylaws, a copy of
each of which is on file with the Commission.
COMMON STOCK
Holders of IPC 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 ratably such dividends, if any, as may
be declared from time to time by the IPC Board out of funds legally available
therefor. See "STOCK PRICE AND DIVIDEND INFORMATION." In the event of a
liquidation, dissolution or winding up of IPC, holders of IPC Common Stock are
entitled to share ratably in all assets remaining after payment of IPC's
liabilities and the liquidation preference, if any, of any outstanding shares
of preferred stock. Holders of IPC Common Stock have no preemptive or other
subscription rights and no rights to convert their IPC Common Stock into any
other securities, and there are no redemptive provisions with respect to such
shares. All of the outstanding shares of IPC Common Stock are, and the shares
of Surviving Corporation will be, fully paid and non-assessable. The rights,
preferences and privileges of holders of IPC Common Stock are subject to, and
may be adversely affected by, the rights of the holders of shares of any
series of preferred stock which IPC or the Surviving Corporation may designate
and issue in the future.
PREFERRED STOCK
The IPC Board has the authority, without any further vote or action by the
stockholders, to provide for the issuance of up to 10,000,000 shares of
preferred stock from time to time in one or more series, to establish the
number of shares to be included in each such series, to fix the designations,
preferences, limitations and relative, participating, optional or other
special rights and qualifications or restrictions of the shares of each
series, and to determine the voting powers, if any, of such shares. The
issuance of preferred stock, while providing flexibility in connection with
possible acquisitions and other corporate purposes, could adversely effect,
among other things, the rights of existing stockholders or could have the
effect of delaying, deferring or preventing a "change in control" of IPC
without further action by the stockholders. In addition, the issuance of
preferred stock could decrease the amount of earnings and assets available for
distribution to holders of IPC Common Stock. IPC has no current plans to issue
any preferred stock.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
Section 203 of the DGCL ("Section 203") generally 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. The statute could prohibit or delay the
accomplishment of mergers or other takeover or "change in control" attempts
with respect to IPC and, accordingly, may discourage attempts to acquire IPC.
However, IPC has waived the provisions of Section 203 by an amendment
128
<PAGE>
to IPC's Bylaws adopted on May 9, 1994 by the stockholders of record on that
date. Such amendment became effective on May 9, 1995. The Surviving
Corporation's Bylaws also provide for a waiver of Section 203.
Pursuant to the Investors Agreement, the Surviving Corporation Board will
consist of nine members, (i) three of whom shall be nominated by CSH
stockholders; (ii) two of whom shall be nominated by the CSH stockholders and
shall be individuals who are not "Affiliates" or "Associates" (as those terms
are used within the meaning of Rule 12b-2 of the General Rules and Regulations
under the Exchange Act) of any party to the Investors Agreement or any
Affiliate thereof; (iii) two of whom shall be nominated by the CSH
stockholders and shall be individuals who are executive officers of IPC or its
subsidiaries; and (iv) two of whom shall be nominated by Richard P.
Kleinknecht and his Permitted Transferees. Each of the parties to the
Investors Agreement and its Permitted Transferees has agreed to vote its
shares of IPC Common Stock in favor of the persons so nominated, provided that
none of the parties will be required to vote for another party's nominees if
the number of shares of Surviving Corporation Common Stock held by the person
or group making the nomination is (A) in the case of the CSH stockholders,
less than 5% of the then outstanding number of shares of Surviving Corporation
Common Stock or (B) in the case of Richard P. Kleinknecht and his Permitted
Transferees, less than 50% of such person's or group's Initial Ownership.
CAPITAL STOCK OF THE SURVIVING CORPORATION
If the Certificate Amendment is approved by the requisite vote of the
stockholders of IPC Common Stock at the Annual Meeting, at the Effective Time
of the Merger, the Existing Certificate of Incorporation of IPC will be
amended and restated to read as set forth in Annex B, and, as so amended,
until thereafter further amended as provided therein, will be the certificate
of incorporation of the Surviving Corporation. After the Merger, the Surviving
Corporation will have the same authorized capital stock as the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for IPC Common Stock is, and for the
Surviving Corporation will be, ChaseMellon Shareholder Services, L.L.C., New
York, New York.
129
<PAGE>
COMPARISON OF CERTAIN RIGHTS OF STOCKHOLDERS
GENERAL
Both IPC and the Surviving Corporation are Delaware corporations subject to
the provisions of DGCL. At the Effective Time, stockholders of IPC whose
rights are currently governed by the Existing Certificate of Incorporation,
IPC's Bylaws and DGCL who retain Surviving Corporation Common Stock under the
exchange procedures set forth herein, will, if the Merger Agreement is adopted
at the Annual Meeting, and upon consummation of the Merger, become
stockholders of the Surviving Corporation, and their rights as stockholders
will be determined by the Surviving Corporation's Bylaws and DGCL and the
Existing Certificate of Incorporation (as amended by the Ballot Amendment) or,
if the proposal for the Certificate Amendment is approved at the Annual
Meeting, the Certificate Amendment.
The following is a summary of the material differences in the rights of
stockholders of IPC and the Surviving Corporation. The following discussion
does not purport to be a complete discussion of, and is qualified by reference
to, the governing laws, the Existing Certificate of Incorporation, IPC's
Bylaws, the Certificate Amendment and the Surviving Corporation's Bylaws.
ELECTION OF DIRECTORS WITHOUT A WRITTEN BALLOT
IPC. Under the IPC Certificate of Incorporation, there is no provision for
election of directors without a written ballot. Under DGCL, directors must be
elected by written ballot unless the Certificate of Incorporation specifically
provides otherwise.
Surviving Corporation. The Surviving Corporation's Certificate of
Incorporation, whether or not the Certificate Amendment is approved, will
provide that votes taken in the election of directors need not be, unless
required by law or the Bylaws, by written ballot.
SPECIAL MEETINGS OF STOCKHOLDERS
IPC. Under IPC's Bylaws, special meetings of stockholders may be called by
the Chairman or the Vice-Chairman of the IPC Board or by the Secretary of IPC
upon the written request of stockholders owning at least a majority of IPC
Common Stock issued and outstanding.
Surviving Corporation. The Surviving Corporation's Bylaws provide that
special meetings of stockholders may be called only by the Surviving
Corporation Board or by the Chairman of the Surviving Corporation.
CLASSIFICATION OF THE BOARD; REMOVAL OF DIRECTORS
IPC. As a result of the classified board, IPC's Bylaws provide that any
director or the entire IPC Board may be removed by the holders of a majority
of shares entitled to vote for the election of directors only for cause. Upon
the removal of a director, such vacancy can only be filled by a majority of
directors then in office.
Surviving Corporation. The Surviving Corporation's Bylaws permit
stockholders to remove directors, with or without cause, at a special meeting
of stockholders called for that purpose. Vacancies created by the removal of
directors may be filled by stockholders at such special meeting. If the
stockholders do not fill such vacancy at the special meeting, a majority of
directors then in office may fill the vacancy.
For a discussion of the differences between the structure of the IPC Board
and the Surviving Corporation Board, see "PROPOSAL 2--CERTIFICATE AMENDMENT--
Classification of the Board."
BYLAW AMENDMENTS
IPC. IPC's Bylaws provide that IPC's Bylaws may be amended or repealed by
the vote of two-thirds of the whole IPC Board or by stockholders, subject to
the supermajority voting requirements which are necessary to alter, amend,
rescind or repeal certain of the IPC Bylaws (which include provisions
concerning the number, election and tenure, vacancies, removal and resignation
of directors).
Surviving Corporation. The Surviving Corporation's Bylaws provide that
bylaws may be altered, amended or repealed, or new bylaws adopted by the
affirmative vote of a majority of the members of the Surviving Corporation
Board or by the holders of a majority of Surviving Corporation Common Stock
entitled to vote at any annual or special meeting.
130
<PAGE>
LEGAL MATTERS
The validity of the Surviving Corporation Common Stock to be retained in
connection with the Merger will be passed upon for IPC by Thacher Proffitt &
Wood, New York, New York, counsel to the Company. Thacher Proffitt & Wood has
delivered an opinion as to certain Federal income tax matters relating to the
Merger.
EXPERTS
The consolidated financial statements and financial statement schedule of
IPC and subsidiaries as of September 30, 1997 and 1996 and for each of three
years in the period ended September 30, 1997 included in this Proxy
Statement/Prospectus, and in the Registration Statement of which this Proxy
Statement/Prospectus is a part, have been included herein in reliance on the
report of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
131
<PAGE>
IPC INFORMATION SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND FOR THE THREE
MONTHS
ENDED DECEMBER 31, 1997 AND 1996 (UNAUDITED)
<TABLE>
<S> <C>
Consolidated Balance Sheets (unaudited) at December 31, 1997 and September
30, 1997................................................................. F-2
Consolidated Statements of Operations (unaudited) for the Three Months
Ended December 31, 1997 and 1996......................................... F-3
Consolidated Statements of Cash Flows (unaudited) for the Three Months
Ended December 31, 1997 and 1996......................................... F-4
Notes to Consolidated Financial Statements (unaudited).................... F-5
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
Report of Independent Accountants......................................... F-7
Consolidated Balance Sheets as of September 30, 1997 and 1996............. F-8
Consolidated Statements of Operations for the Years Ended
September 30, 1997, 1996 and 1995........................................ F-9
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1997, 1996 and 1995........................................ F-10
Consolidated Statements of Stockholders' Equity for the Years Ended
September 30, 1995, 1996 and 1997........................................ F-11
Notes to Consolidated Financial Statements................................ F-12
SCHEDULE
Schedule II Valuation and Qualifying Accounts............................. F-25
</TABLE>
F-1
<PAGE>
IPC INFORMATION SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1997
------------ -------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents.......................... $ 3,655 $ 1,465
Trade receivables, less allowance of $1,515........ 65,887 61,791
Inventories........................................ 36,883 33,557
Prepaid expenses and other current assets.......... 13,333 13,426
-------- --------
Total current assets............................ 119,758 110,239
Property, plant and equipment, net.................. 40,420 38,314
Other assets, net................................... 9,610 9,809
-------- --------
Total assets.................................... $169,788 $158,362
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Note payable....................................... $ -- $ 3,200
Accounts payable................................... 14,333 18,042
Accrued liabilities................................ 28,408 21,395
Customer advances and deferred revenue............. 23,843 17,682
Current portion of capital leases.................. 3,363 2,987
-------- --------
Total current liabilities....................... 69,947 63,306
Long-term debt, net of current portion............. 2,124 2,133
Lease obligations, net of current portion.......... 11,085 10,336
Other liabilities.................................. 5,318 5,677
-------- --------
Total liabilities............................... 88,474 81,452
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock--$0.01 par value, authorized 10,000,000 shares,
none issued and outstanding
Common stock--$0.01 par value, authorized 25,000,000 shares;
issued 10,979,964 and 10,932,675 shares; outstanding 10,737,779 and
10,690,490 at December 31, 1997 and September 30,
1997, respectively............................... 110 109
Paid-in capital.................................... 48,600 47,922
Retained earnings.................................. 33,322 29,597
Less treasury stock, at cost, 242,185 shares...... (718) (718)
-------- --------
Total stockholders' equity...................... 81,314 76,910
-------- --------
Total liabilities and stockholders' equity...... $169,788 $158,362
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
IPC INFORMATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Revenue:
Product sales and installation........................... $ 38,441 $ 39,798
Service.................................................. 28,611 19,613
--------- ---------
67,052 59,411
--------- ---------
Cost of revenue:
Product sales and installation........................... 22,185 28,333
Service.................................................. 18,240 13,504
--------- ---------
40,425 41,837
--------- ---------
Gross profit.......................................... 26,627 17,574
Research and development expenses......................... 2,404 2,372
Selling, general and administrative expenses.............. 16,557 13,847
--------- ---------
Income from operations................................ 7,666 1,355
Interest income/(expense), net............................ (440) (463)
Other income/(expense), net............................... (39) 261
--------- ---------
Income before provision for income taxes.............. 7,187 1,153
Provision for income taxes................................ 3,593 587
--------- ---------
Net income............................................ $ 3,594 $ 566
========= =========
Basic earnings per share.................................. $ 0.34 $ 0.05
--------- ---------
Basic weighted average shares outstanding................. 10,711 10,647
--------- ---------
Diluted earnings per share................................ $ 0.33 $ 0.05
--------- ---------
Diluted weighted average shares outstanding............... 10,865 10,758
--------- ---------
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
IPC INFORMATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 3,594 $ 566
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization expense.................. 2,418 1,478
Other amortization..................................... 369 229
Provision for doubtful accounts........................ 267 5
Changes in operating assets and liabilities:
Trade receivables...................................... (4,076) 1,859
Inventories............................................ (3,094) (5,792)
Prepaid expenses and other current assets.............. 2,773 (159)
Other assets........................................... (152) (394)
Accounts payable....................................... (3,877) 7,458
Accrued liabilities and other liabilities.............. 4,603 (2,016)
Customer advances and deferred revenue................. 6,020 5,125
--------- ---------
Net cash provided by operating activities.......... 8,845 8,359
Cash flows from investing activities:
Capital expenditures.................................. (2,212) (2,614)
Contingent acquisition payments to Bridge Electronics,
Inc.................................................. (375) (375)
--------- ---------
Net cash (used in) investing activities............ (2,587) (2,989)
Cash flows from financing activities:
Net repayments of note payable......................... (3,200) (6,000)
Principal payments on capital leases................... (978) (431)
Repayment of long-term debt............................ (9) --
Proceeds from exercise of stock options................ 416 40
--------- ---------
Net cash (used in) financing activities............ (3,771) (6,391)
Effect of exchange rate changes on cash................ (297) (39)
--------- ---------
Net increase (decrease) in cash........................ 2,190 (1,060)
Cash and cash equivalents, beginning of period......... 1,465 2,306
--------- ---------
Cash and cash equivalents, end of period............... $ 3,655 $ 1,246
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
IPC INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. In the opinion of management, the accompanying unaudited consolidated
financial statements include all necessary adjustments (consisting of normal
recurring accruals) and present fairly IPC Information Systems, Inc.'s ("IPC"
or the "Company") financial position as of December 31, 1997, and the results
of its operations for the three months ended December 31, 1997 and 1996, and
its cash flows for the three months ended December 31, 1997 ("1997 period")
and 1996 ("1996 period"), in conformity with generally accepted accounting
principles for interim financial information applied on a consistent basis.
The results of operations for the 1997 period are not necessarily indicative
of the results to be expected for the full year. These financial statements
should be read in conjunction with IPC's Form 10-K for the fiscal year ended
September 30, 1997.
2. Components of inventories:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1997
------------ -------------
(DOLLAR AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Parts, subassemblies and manufacturing work in
process........................................ $11,090 $10,917
Inventory on customer sites awaiting installa-
tion........................................... 17,883 14,230
Parts and maintenance supplies in field......... 7,910 8,410
------- -------
$36,883 $33,557
======= =======
</TABLE>
3. The Company maintains short-term credit facilities with various banks up
to $35.0 million of which none was outstanding at December 31, 1997. The
weighted average interest rate was 6.63% during the 1997 period as compared to
6.43% in the 1996 period.
4. The following is a reconciliation of the numerators and denominators for
the computations of basic and diluted earnings per share:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
-------------- --------------
(DOLLAR AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
BASIC EARNINGS PER SHARE COMPUTATION
<S> <C> <C>
Numerator............................... $ 3,594 $ 566
-------------- --------------
Denominator:
Weighted average common shares
outstanding........................... 10,711 10,647
-------------- --------------
Total shares............................ 10,711 10,647
-------------- --------------
Basic EPS............................... $ 0.34 $ 0.05
============== ==============
DILUTED EARNINGS PER SHARE COMPUTATION
Numerator............................... $ 3,594 $ 566
-------------- --------------
Denominator:
Weighted average common shares
outstanding........................... 10,711 10,647
Common stock equivalent of stock
options............................... 154 111
-------------- --------------
Total shares............................ 10,865 10,758
-------------- --------------
Diluted EPS............................. $ 0.33 $ 0.05
============== ==============
</TABLE>
Approximately 150,000 and 65,500 options were outstanding for the 1997
period and 1996 period, respectively, which were not included in the
computation of diluted EPS because the options exercise price exceeded the
average market price of the Company's common stock for each period.
F-5
<PAGE>
IPC INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. On December 18, 1997, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") by and between the Company and Arizona
Acquisition Corp., a Delaware corporation ("AAC"), pursuant to which AAC will
be merged with and into the Company, with the Company being the surviving
corporation (the "Merger"). AAC is a subsidiary owned by Cable Systems
Holding, LLC, a Delaware limited liability company ("CSH LLC") and its
subsidiaries, including Cable Systems International, Inc., a Delaware
corporation ("CSI"). CSH LLC is a Delaware limited liability company, a
majority of whose membership interests are owned by Citicorp Venture Capital,
Ltd., a New York corporation ("CVC"), officers and employees thereof, and
members of management of CSH LLC and CSI.
The Merger will be accounted for as a leveraged recapitalization. The Merger
Agreement is subject to regulatory review and approval by stockholders
representing a majority of outstanding shares at a meeting of stockholders to
be held shortly after the second fiscal quarter ending March 31, 1998. In
accordance therewith, stockholders may elect to retain shares in the surviving
company (subject to a maximum aggregate share retention of 46% of outstanding
shares as of an election date to be determined) or to receive $21.00 cash for
each outstanding share. Not more than 90% of outstanding shares may receive
cash consideration and the maximum total cash consideration to stockholders,
assuming no change to shares outstanding as of January 26, 1998 will be $217.5
million.
At the Merger, in accordance with certain commitments to the Company and
assuming the maximum number of shares electing cash consideration, AAC will be
capitalized with $72.0 million (the "Equity Financing Commitments"), to be
funded by CVC (together with affiliates) to purchase securities of CSH LLC and
then invested by CSH LLC into AAC. The Company will also raise up to $180
million through the issuance of unsecured senior debt securities and up to
$75.0 million through a revolving credit facility. Morgan Stanley & Co.
Incorporated and Morgan Stanley Senior Funding, Inc. have committed to CVC and
AAC to provide $157 million of the unsecured senior debt securities and
revolving credit facilities, respectively, subject to certain terms and
conditions (collectively, the "Debt Financing Commitments"). The Debt
Financing Commitments will be assigned to the Company which will borrow these
funds to consummate this transaction. The proceeds of the Debt Financing
Commitments and the Equity Financing Commitment will be used in part to pay
stockholders who elect to receive cash and will also provide working capital
for the Company after the Merger.
In connection with the execution of the Merger Agreement, AAC entered into a
Stockholders Agreement with Richard P. Kleinknecht, Peter J. Kleinknecht,
Russell G. Kleinknecht and certain family members and trusts controlled by
said persons, pursuant to which these individuals and trusts, subject to
certain conditions, have agreed to vote all of the 6,906,554 shares of Company
common stock owned or controlled by them in favor of the transaction and
against certain actions which can reasonably be expected to impede or
adversely affect the Merger. The 6,906,554 shares represent approximately
64.3% of the 10,739,446 shares of Company common stock outstanding on January
26, 1998. At December 31, 1997, the Company has deferred $3.4 million of cost
related to the proposed merger and financing, of which approximately $1.0
million has been paid.
F-6
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders
of IPC Information Systems, Inc.:
We have audited the accompanying consolidated balance sheets of IPC
Information Systems, Inc. as of September 30, 1997 and 1996 and the related
consolidated statements of operations, cash flows and stockholders' equity for
each of the three years in the period ended September 30, 1997. We have also
audited the financial statement schedule listed in the index on page F-1 of
this Form S-4. These financial statements and financial statement schedule are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of IPC
Information Systems, Inc. as of September 30, 1997 and 1996 and the
consolidated results of their operations and their cash flows for the years
ended September 30, 1997, 1996 and 1995 in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be included therein.
COOPERS & LYBRAND L.L.P.
New York, New York
December 4, 1997, except for Note 13,
for which the date is December 19, 1997
F-7
<PAGE>
IPC INFORMATION SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents................................. $ 1,465 $ 2,306
Trade receivables, less allowance of $1,515 in 1997 and
$1,521 in 1996........................................... 61,791 66,468
Inventories............................................... 33,557 36,367
Prepaid expenses and other current assets................. 13,426 8,204
-------- --------
Total current assets................................... 110,239 113,345
Property, plant and equipment, net......................... 38,314 21,867
Other assets, net.......................................... 9,809 6,665
-------- --------
Total assets........................................... $158,362 $141,877
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Note payable.............................................. $ 3,200 $ 13,900
Accounts payable.......................................... 18,042 14,369
Accrued liabilities....................................... 21,395 13,883
Customer advances and deferred revenue.................... 17,682 19,446
Current portion of capital leases ........................ 2,987 940
-------- --------
Total current liabilities.............................. 63,306 62,538
Long-term debt, net of current portion..................... 2,133 --
Lease obligations, net of current portion.................. 10,336 3,429
Other liabilities.......................................... 5,677 4,195
-------- --------
Total liabilities...................................... 81,452 70,162
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock--$0.01 par value, authorized 10,000,000 shares,
none issued and outstanding
Common stock--$0.01 par value, authorized 25,000,000 shares;
issued 10,932,675 and 10,860,000 shares; outstanding 10,690,490 and
10,617,815 at September 30, 1997 and 1996, respectively.. 109 109
Paid-in capital........................................... 47,922 46,831
Retained earnings......................................... 29,597 25,493
Less treasury stock, at cost, 242,185 shares............. (718) (718)
-------- --------
Total stockholders' equity............................. 76,910 71,715
-------- --------
Total liabilities and stockholders' equity............. $158,362 $141,877
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-8
<PAGE>
IPC INFORMATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
SEPTEMBER 30,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Product sales and installation................... $179,978 $178,513 $139,947
Service.......................................... 90,345 70,995 66,307
-------- -------- --------
270,323 249,508 206,254
Cost of revenue:
Product sales and installation................... 127,212 122,897 95,174
Service.......................................... 62,897 49,793 47,907
-------- -------- --------
190,109 172,690 143,081
-------- -------- --------
Gross profit................................... 80,214 76,818 63,173
Research and development expenses.................. 9,976 11,467 10,108
Selling, general and administrative expenses....... 60,697 45,143 31,038
-------- -------- --------
Income from operations......................... 9,541 20,208 22,027
Interest income/(expense), net..................... (1,844) (678) 233
Other income/(expense), net........................ 417 591 226
-------- -------- --------
Income before provision for income taxes....... 8,114 20,121 22,486
Provision for income taxes......................... 4,280 7,992 9,219
-------- -------- --------
Net income..................................... $ 3,834 $ 12,129 $ 13,267
======== ======== ========
Earnings per share................................. $ 0.36 $ 1.15 $ 1.26
-------- -------- --------
Weighted average shares outstanding................ 10,664 10,590 10,506
-------- -------- --------
</TABLE>
See Notes to Consolidated Financial Statements.
F-9
<PAGE>
IPC INFORMATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................ $ 3,834 $ 12,129 $ 13,267
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization............ 7,653 4,351 2,058
Other amortization....................... 1,090 2,037 1,782
Provision for doubtful accounts.......... 338 240 861
Deferred income taxes.................... 83 674 (1,084)
Changes in operating assets and
liabilities:
Trade receivables........................ 4,909 (16,385) (11,804)
Inventories.............................. 3,240 (1,678) 15,440
Prepaid expenses and other current
assets.................................. (2,926) (1,208) (1,606)
Other assets............................. (45) 130 (342)
Accounts payable......................... 1,330 (30) (717)
Accrued liabilities and other
liabilities............................. 6,628 (4,691) (630)
Customer advances and deferred revenue... (1,988) (10,306) (9,882)
---------- ---------- ----------
Net cash provided by (used in) operat-
ing activities........................ 24,146 (14,737) 7,343
---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures...................... (12,974) (11,747) (6,499)
Purchase of short-term investment......... -- -- (2,007)
Proceeds from sale of short-term invest-
ment..................................... -- 2,007 --
Contingent acquisition payments to Bridge
Electronics, Inc......................... (1,500) (2,997) --
---------- ---------- ----------
Net cash (used in) investing activi-
ties.................................. (14,474) (12,737) (8,506)
---------- ---------- ----------
Cash flows from financing activities:
Net repayment of note payable............. (10,700) -- --
Net proceeds from note payable............ -- 13,900 --
Principal payments on capital leases...... (1,822) (221) --
Proceeds from long-term debt.............. 2,182 -- --
Repayment of long-term debt............... (4) -- (10,663)
Repayment of notes payable to affiliates.. -- -- (1,411)
Proceeds from the exercise of stock op-
tions.................................... 301 106 --
Proceeds from the sale of common stock.... -- -- 45,337
Purchase of treasury stock................ -- -- (396)
S corporation distribution................ -- -- (18,530)
---------- ---------- ----------
Net cash (used in) provided by financ-
ing activities........................ (10,043) 13,785 14,337
Effect of exchange rate changes on cash.... (470) 209 (4)
---------- ---------- ----------
Net (decrease) increase in cash............ (841) (13,480) 13,170
Cash and cash equivalents, beginning of pe-
riod...................................... 2,306 15,786 2,616
---------- ---------- ----------
Cash and cash equivalents, end of period... $ 1,465 $ 2,306 $ 15,786
========== ========== ==========
Supplemental disclosures of cash flow in-
formation:
Cash paid during the year for--
Income taxes............................. $ 4,100 $ 6,863 $ 9,876
Interest................................. $ 1,040 $ 756 $ 18
Non-cash investing and financing activi-
ties--
Capital lease obligations entered into
during the year......................... $ 10,776 $ 4,369 --
Additional amount payable in connection
with the acquisition of Bridge Electron-
ics, Inc................................ $ 3,500 -- --
Issuance of stock for the acquisition of
Bridge Electronics, Inc................... -- $ 700 --
</TABLE>
See Notes to Consolidated Financial Statements.
F-10
<PAGE>
IPC INFORMATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PAID- TOTAL
COMMON IN RETAINED TREASURY STOCKHOLDERS'
STOCK CAPITAL EARNINGS STOCK EQUITY
------ ------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
Beginning balance, October 1,
1994.......................... $ 75 $ 8,986 $12,383 ($322) $21,122
Translation adjustment........ -- -- (34) -- (34)
Net income.................... -- -- 13,267 -- 13,267
Net proceeds from initial pub-
lic offering................. 32 42,219 -- -- 42,251
Issuance of common stock under
employment contract.......... -- 824 -- -- 824
Purchase of treasury stock.... -- -- -- (396) (396)
S corporation distribution.... -- (6,176) (12,354) -- (18,530)
---- ------- ------- ----- -------
Consolidated balance, September
30, 1995...................... 107 45,853 13,262 (718) 58,504
Translation adjustment........ -- -- 102 -- 102
Net income.................... -- -- 12,129 -- 12,129
Issuance of common stock in
acquisition.................. 1 699 -- -- 700
Issuance of common stock under
stock purchase plan.......... 1 171 -- -- 172
Issuance of common stock under
stock option plan............ -- 108 -- -- 108
---- ------- ------- ----- -------
Consolidated balance, September
30, 1996...................... 109 46,831 25,493 (718) 71,715
Translation adjustment........ -- -- 270 -- 270
Net income.................... -- -- 3,834 -- 3,834
Issuance of common stock under
employment contracts......... -- 478 -- -- 478
Issuance of common stock under
stock purchase plan.......... -- 312 -- -- 312
Issuance of common stock under
stock option plan............ -- 301 -- -- 301
---- ------- ------- ----- -------
Consolidated balance, September
30, 1997...................... $109 $47,922 $29,597 ($718) $76,910
==== ======= ======= ===== =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-11
<PAGE>
IPC INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. THE COMPANY:
IPC Information Systems, Inc. (the "Company") provides globally integrated
telecommunications products and services to the financial services industry.
The Company is in the business of designing, manufacturing, installing and
servicing trading room voice communication workstations and installing and
servicing comprehensive Local Area Networks. In addition, International
Exchange Networks Ltd. ("IXnet"), a subsidiary of the Company, has implemented
a facilities-based global network designed for the specialized international
telecommunications requirements of the financial services industry.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. Intercompany balances and transactions have been
eliminated.
Revenue Recognition
Revenue from product sales and installation is recognized upon completion of
the installation except for revenue from sales to distributors, which is
recognized upon shipment. Under contract provisions, customers are progress-
billed prior to the completion of the installations. The revenue related to
these advance payments is deferred until the system installations are
completed. Contracts for maintenance are billed in advance, and are recorded
as deferred revenue and recognized ratably over the contractual periods.
Revenue from network services are recognized in the month the related service
is provided.
Cash and Cash Equivalents
The Company places cash with several high quality financial institutions and
thereby limits the amount of credit exposure to any single financial
institution. Temporary cash investments with original maturities of three
months or less are considered cash equivalents and consist of high grade
municipal bond funds and time deposits. Temporary cash investments are stated
at cost, which approximates fair value. These investments are not subject to
significant market risk.
Trade Receivables
Trade accounts receivable potentially expose the Company to concentrations
of credit risk, as a large volume of business is conducted with several major
financial institutions, primarily companies in the brokerage, banking and
financial services industries. To help reduce this risk, customers are
progress-billed prior to the completion of the contract.
Inventories
Inventories are stated at the lower of FIFO (first in, first out) cost or
market. Inventory costs include all direct manufacturing costs and applied
overhead.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and depreciated on a
straight-line basis over their estimated useful lives. Network switching
equipment is stated at cost. Various costs are capitalized during the
installation and expansion of the network. Depreciation is calculated using
the straight-line method over the estimated useful
F-12
<PAGE>
IPC INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
lives beginning in the year the asset was placed into service. Amortization of
network switching equipment under capital leases is calculated using the
straight-line method over the lease term and is included in depreciation and
amortization expense.
Intangible Assets
Intangible assets, which are carried at cost less accumulated amortization,
consist primarily of acquired technology and goodwill. Goodwill represents the
excess of the cost over the fair value of the identifiable tangible and
intangible assets acquired in various acquisitions. Costs allocated to
technology and goodwill acquired in acquisitions are amortized on a straight-
line basis over the periods benefited, principally 7 to 10 years. The Company
measures the recoverability of acquired technology and goodwill based on
anticipated gross operating income.
Research and Development
Research and development expenditures are charged to expense as incurred.
Income Taxes
In accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"), the Company recognizes
deferred income taxes for the tax consequences in future years of differences
between the tax basis of assets and liabilities and their financial reporting
amounts at each year end, based on enacted tax laws and statutory tax rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount that is "more likely than not" to be
realized. Provision for income taxes is the tax payable for the period and the
change during the period in deferred tax assets and liabilities.
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,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Financial Instrument
The Company is a party to a financial instrument with off-balance sheet
risk, that was entered into in the normal course of business to reduce
exposure to fluctuations in interest rates. The counterparty to this
instrument is a major financial institution. The fair value of the interest
rate swap agreement is determined by the cost to terminate the swap agreement.
Foreign Currency Translation Adjustment
The balance sheets and statements of operations of the Company's foreign
operations are measured using the local currency as the functional currency.
Assets and liabilities of these foreign operations are translated at the year-
end exchange rate and revenue and expense amounts are translated at the
average rate of exchange prevailing during the year. Translation adjustments
arising from the use of differing exchange rates from period to period are
included in the cumulative translation adjustment account in stockholders'
equity.
F-13
<PAGE>
IPC INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Earnings Per Share
Earnings per share are based on the weighted average number of shares of
common stock and common stock equivalents outstanding during the period,
computed in accordance with the treasury stock method.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share",
which simplifies existing computational guidelines, revises disclosure
requirements and increases the comparability of earnings per share data on an
international basis. The impact of adoption of SFAS No. 128 on the Company's
financial statements is not expected to be significant. This statement is
effective for financial statements issued for periods ending after December
15, 1997 and requires restatement of prior-period earnings per share data.
Reclassifications
Certain reclassifications have been made to the 1996 financial statements in
order to conform to the current year's presentation.
3. ACQUISITIONS:
During June 1995, the Company acquired a controlling interest in IXnet. The
Company acquired 80% of IXnet by providing $5,500 in working capital. The
acquisition was accounted for using the purchase method of accounting.
Included in other assets is $860 and $1,041 at September 30, 1997 and 1996,
respectively, representing the excess of the cost over the fair value of the
identifiable tangible assets acquired, allocated to acquired technology.
During April 1995, the Company acquired the assets of Bridge Electronics,
Inc. ("IPC Bridge"). The terms of the acquisition included a payment in
January 1996 of $2,025 in cash and 76,923 shares of the Company's common
stock, valued at $700 and amounts contingent on meeting certain performance
levels up to a maximum of $6,000. During fiscal 1996 and 1997, the maximum
contingent performance levels for IPC Bridge were achieved. Amounts paid
pursuant to the contingent performance levels under this agreement were $1,500
and $1,000, during fiscal 1997 and 1996, respectively. At September 30, 1997,
an additional $3,500 is included in liabilities. The acquisition was accounted
for using the purchase method of accounting. Included in other assets is
$7,621 and $3,202 at September 30, 1997 and 1996, respectively, representing
the excess of the cost over the fair value of the identifiable tangible and
intangible assets acquired.
4. INVENTORIES
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------
1997 1996
------- -------
<S> <C> <C>
Components and manufacturing work in process................ $10,917 $13,913
Inventory on customer sites awaiting installation........... 14,230 12,503
Parts and maintenance supplies.............................. 8,410 9,951
------- -------
$33,557 $36,367
======= =======
</TABLE>
F-14
<PAGE>
IPC INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. PROPERTY, PLANT AND EQUIPMENT:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------
1997 1996
------- -------
<S> <C> <C>
Building................................................... $ 2,442 --
Machinery and Equipment.................................... 24,514 $19,479
Furniture and Fixtures..................................... 2,437 2,006
Leasehold Improvements..................................... 8,470 5,424
Network Switching Equipment................................ 2,843 1,600
Network Switching Equipment under capital leases........... 14,303 4,619
------- -------
Total depreciable property, plant and equipment............ 55,009 33,128
Less, accumulated depreciation and amortization........... (20,941) (13,376)
------- -------
34,068 19,752
Land....................................................... 558 329
Construction in Progress................................... 3,688 1,786
------- -------
$38,314 $21,867
======= =======
</TABLE>
6. NOTE PAYABLE:
In April 1996, the Company signed a promissory note with a bank increasing
the Company's short-term credit facility from $15,000 to $25,000. In July
1997, the Company further increased its short-term credit facility to $35,000
by entering into an unsecured line of credit with an additional bank for
$10,000. At September 30, 1997 and 1996, there was $3,200 and $13,900 of the
short-term credit facility outstanding, respectively. The weighted average
interest rate on these borrowings was 6.46% and 6.31%, respectively.
7. LONG-TERM DEBT AND FINANCIAL INSTRUMENT:
In April 1997, the Company purchased its sole manufacturing facility and
related land in Westbrook, Connecticut for $2,540 using the Company's short-
term credit facility. In July 1997, $2,182 was refinanced through a mortgage
agreement with a bank. The term of the mortgage is for eight years with a
twenty-year payout bearing interest at LIBOR plus 125 basis points. The
mortgage is collateralized by the building and the land.
Future minimum principal payments at September 30, 1997 are as follows:
<TABLE>
<S> <C>
1998.................................................................. $ 45
1999.................................................................. 49
2000.................................................................. 52
2001.................................................................. 57
2002.................................................................. 61
Thereafter............................................................ 1,914
------
$2,178
======
</TABLE>
Interest Rate Swap Agreement
In connection with the mortgage agreement, the Company entered into an
interest rate swap agreement with its bank in order to fix the interest rate
over the eight-year term at an effective interest rate of 7.85%. The swap
contract expires on July 31, 2005. The interest rate swap is an exchange of
floating-rate payments for fixed-rate
F-15
<PAGE>
IPC INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
payments. Floating-rates received are based on rates tied to prevailing short-
term interest rates. If the Company terminates the swap agreement, a gain or
loss is recorded as an adjustment to the basis of the underlying asset and
liability. At September 30, 1997, the unrealized fair value of the interest
rate swap was insignificant.
The following table indicates the type of swap in use as of September 30,
1997. Average variable rates are those in effect at the reporting date and may
change significantly over the life of the contract. There were no interest
rate swap agreements at September 30, 1996.
<TABLE>
<CAPTION>
1997
------
<S> <C>
Variable to fixed swaps:
Notional Amount....................................................... $2,182
Average pay (fixed) rate.............................................. 7.85%
Average receive (variable) rate....................................... 6.89%
</TABLE>
8. DEFERRED COMPENSATION AND OTHER BENEFIT PLANS:
Deferred Compensation
The Company has deferred compensation agreements with certain past key
officers and employees. Amounts to be paid range from $20-$75 per individual
per annum and are non-interest-bearing, with the payments commencing on
specified dates. Payments began in 1992 and continue through 2019. The gross
and discounted present value (using an interest rate of 7.5%), net of cash
payments, of the amounts to be paid under these agreements, aggregated $7,114
and $3,828 at September 30, 1997 and $7,500 and $3,732 at September 30, 1996,
respectively.
Approximate payments for subsequent annual periods related to the deferred
compensation agreements, at September 30, 1997, are as follows:
<TABLE>
<S> <C>
1998.................................................................. $ 225
1999.................................................................. 280
2000.................................................................. 320
2001.................................................................. 390
2002.................................................................. 471
Thereafter............................................................ 5,428
------
$7,114
======
</TABLE>
Pension Plans
In April 1995, IPC terminated its participation in a defined contribution
plan sponsored by Kleinknecht Electric Company ("KEC"), an affiliated company,
and adopted its own plan for all eligible US employees. According to plan
provisions, IPC contributions are discretionary and are subject to approval by
the Board of Directors. Eligible employees may contribute up to 15% of their
annual compensation. IPC contributed $404, $556 and $520 to the plan for the
years ended September 30, 1997, 1996 and 1995, respectively.
IPC-UK has a defined contribution plan covering all UK employees. Employee
contributions are limited by statute, generally not to exceed 17.5% of base
salary. IPC-UK contributions, net of forfeitures, for the years ended
September 30, 1997, 1996 and 1995 were $172, $229, and $92, respectively.
The Company paid to KEC and Kleinknecht Electric Company--New Jersey ("KEC-
NJ"), also an affiliated company, in accordance with labor pooling agreements,
approximately $7,550, $7,750, and $5,074 for
F-16
<PAGE>
IPC INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
the years ended September 30, 1997, 1996 and 1995, respectively, representing
pass-through contributions to various union sponsored pension plans.
Stock Option and Incentive Plan
A summary of the Company's stock option plan as of September 30, 1997, 1996
and 1995 and changes during the years ended on those dates is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTION EXERCISE OPTION EXERCISE OPTION EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding -
Opening balance........ 826,201 $16.09 247,500 $14.90 -- --
Granted................. 395,500 $14.83 573,000 $14.23 263,500 $14.91
Granted................. -- -- 25,000 $25.00 -- --
Granted................. -- -- 25,000 $40.00 -- --
Exercised............... (19,865) $14.00 (8,964) $14.77 -- --
Forfeited............... (178,236) $16.36 (35,335) $15.19 (16,000) $15.00
--------- ------ ------- ------ ------- ------
Options outstanding-
September 30........... 1,023,600 $15.62 826,201 $16.09 247,500 $14.90
========= ======= =======
Options Exercisable at
September 30........... 272,495 $14.88 66,535 $14.85 -- --
========= =======
Weighted average fair
value of options
granted during the
year................... $ 6.76 $ 6.58 --
</TABLE>
The following table summarizes information about stock options outstanding
at September 30, 1997:
<TABLE>
<S> <C> <C> <C> <C> <C>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- ---------------------
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF SHARES CONTRACTUAL EXERCISE SHARES EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
---------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$13.31 to $20.50 973,600 8.4 years $14.75 272,495 $14.88
$25.00 25,000 8.1 years $25.00 -- $25.00
$40.00 25,000 8.1 years $40.00 -- $40.00
--------- --------- ------ ------- ------
1,023,600 272,495
========= =======
</TABLE>
Employees generally vest in stock options over a period of three to five
years. As of September 30, 1997, the Company had reserved 526,813 shares of
common stock for the future grant of options.
The option plan also provides for the issuance of stock appreciation rights
and restricted stock awards under which shares of common stock may be issued
to eligible employees. No such awards have been made.
Employee Stock Purchase Plan
In 1994, the Company adopted an employee stock purchase plan and reserved
526,813 shares of common stock for issuance thereunder. Under the stock
purchase plan, the Company's employees may purchase shares of
F-17
<PAGE>
IPC INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
common stock at a price per share that is the lesser of the common stock fair
market value on the first business day of the purchase period or 90% of the
common stock fair market value on the last day of the purchase period, but in
no event less than 85% of the common stock fair market value on either the
option grant date or option exercise date. Through September 30, 1997, 31,326
shares have been issued and 495,487 shares are reserved for future issuance
under this plan.
Stock-Based Compensation
The Company 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 cost has been
recognized for the stock option and employee stock purchase plans. The Company
has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation". Had compensation cost for the Company's stock
option plan and employee stock purchase plan been determined based on the fair
value at the grant date for awards in fiscal 1997 and 1996 consistent with the
provisions of SFAS No. 123, the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated below.
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------
1997 1996
------ -------
<S> <C> <C>
Net income--as reported...................................... $3,834 $12,129
Net income--pro forma........................................ $2,934 $11,632
Earnings per share--as reported.............................. $ 0.36 $ 1.15
Earnings per share--pro forma................................ $ 0.28 $ 1.10
</TABLE>
The fair value of each option grant is estimated on the date of the grant
using the "Black-Sholes option-pricing model" with the following weighted
average assumptions used for grants for the years ended September 30, 1997 and
1996; zero dividend yield; expected volatility of 50%; a weighted average
risk-free interest rate of 6.03% in fiscal 1997 and 5.95% in fiscal 1996; and
expected lives of 4 years.
9. COMMITMENTS AND CONTINGENCIES:
Litigation
During the fiscal year ended September 30, 1996, Knight Ventures, Inc.
("KVI"), a company principally owned by Richard P. Kleinknecht and Peter J.
Kleinknecht (the "Principal Stockholders"), and the former parent of the
Company, agreed to settle its litigation with Contel Corporation ("Contel")
over, among other claims, responsibility for taxes, tax liens, tax assessments
and tax warrants with respect to Contel IPC, for periods prior to the
acquisition of the Company from Contel.
As of May 9, 1994, the Company, KVI and the Principal Stockholders entered
into a Tax Allocation and Indemnification Agreement (the "Tax Agreement")
relating to their respective income tax liabilities and certain related
matters as a consequence of the Company's termination of its S Corporation
status and its initial public offering. In addition, the Company, KVI and the
Principal Stockholders agreed, to the extent that either KVI or the Principal
Stockholders receives any cash proceeds or other benefit in the form of a
reduction in amounts payable to Contel, as a consequence of the litigation,
they will pay to the Company the lesser of (i) such benefit or (ii) the amount
paid by the Company for taxes and related charges subject to the dispute, plus
the amount of any expenses of such litigation incurred by the Company
following the consummation of the Company's initial public offering.
F-18
<PAGE>
IPC INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
As of May 15, 1996, Contel, KVI, the Principal Stockholders and the Company,
although not a party to the litigation, entered into a settlement agreement
and mutual releases. In connection with this settlement agreement, KVI has
executed, and the Principal Stockholders have guaranteed, a note payable to
the Company, in the amount of $1,300, to fulfill obligations under the Tax
Agreement.
Operating Leases
The Company has entered into various operating leases for real estate,
equipment and automobiles.
Rental expenses under operating leases (excluding rentals on vacant
facilities) were $6,431, $6,513 and $5,587 for the years ended September 30,
1997, 1996 and 1995, respectively. Future minimum annual rental payments
required under noncancellable operating leases (including rentals on vacant
facilities) at September 30, 1997 are as follows:
<TABLE>
<S> <C>
1998................................................................. $5,261
1999................................................................. 3,867
2000................................................................. 3,249
2001................................................................. 2,880
2002................................................................. 2,446
Thereafter........................................................... 2,884
-------
$20,587
=======
</TABLE>
The Company has accrued for the minimum annual rental and estimated building
operating costs under noncancellable operating leases for vacated facilities.
These leases extend through May 1998. The liability was approximately $500 and
$1,200 at September 30, 1997 and 1996, respectively.
Capital Leases
IXnet has entered into capital lease agreements for certain network
switching equipment. Additionally, the Company has entered into lease
agreements for certain computer equipment and software. Future minimum lease
payments required under noncancellable capital leases at September 30, 1997
are as follows:
<TABLE>
<S> <C>
1998................................................................. $ 4,186
1999................................................................. 4,062
2000................................................................. 3,854
2001................................................................. 3,116
2002................................................................. 1,106
-------
16,324
Less, amount representing interest................................... 3,001
-------
Present value of net minimum lease payments under capital leases..... $13,323
=======
</TABLE>
Employment Agreements
The Company has executed employment contracts for future services, that vary
in length up to 5 years, with certain senior executives for which the Company
has a minimum commitment aggregating approximately $4,300 at September 30,
1997.
F-19
<PAGE>
IPC INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. RELATED PARTY TRANSACTIONS:
Services Provided
Affiliated companies performed various services and provided certain
equipment to the Company. Services and/or equipment provided by affiliates are
billed to the Company and settled through a periodic cash transfer to the
respective affiliate.
Effective October 1, 1993, the Company formalized in writing existing
arrangements with KEC and KEC-NJ with respect to a pool of field technicians
utilized by all three companies. KEC and KEC-NJ are responsible for
administering the payroll and related services for these technical and
clerical workers and the Company reimburses all compensation and benefits paid
by KEC and KEC-NJ attributable to services performed for the Company plus a
fee equal to 2.5% of such costs. Effective for the fiscal year 1997, the
parties amended these agreements to provide a fixed fee payment of $50 per
month in lieu of the fee payment of 2.5%. Approximately $52,653, $52,592 and
$38,666 of technical labor, and $2,221, $2,327 and $2,083 of administrative
labor was provided through agreements with KEC and KEC-NJ during the years
ended September 30, 1997, 1996 and 1995, respectively.
For the years ended September 30, 1997, 1996 and 1995, KEC and KEC-NJ billed
the Company payroll administrative services of $600, $1,374 and $1,024,
respectively. Included in prepaid expenses and other current assets is a net
related party receivable of $2,092 and $920 as of September 30, 1997 and 1996,
respectively.
A portion of the Company's New York branch operation was co-located with KEC
in a building owned by the Principal Stockholders. For each of the years ended
September 30, 1997, 1996 and 1995, the Company was charged approximately $189,
$430 and $430 for rent expense. For the years ended September 30, 1996 and
1995, the Company rented on a month-to-month basis, two other facilities from
entities controlled by the Principal Stockholders for which the Company was
charged approximately $30 and $55, respectively.
Equipment Rentals
There were no equipment rentals from an affiliated company during fiscal
year ended September 30, 1997. Equipment rentals were $898 and $975 for the
years ended September 30, 1996 and 1995, respectively.
Subcontracts and Other
The Company and other companies controlled by the Principal Stockholders
periodically subcontract certain work to one another. Amounts charged to
companies controlled by the Principal Stockholders under subcontracts with IPC
for the years ended September 30, 1997, 1996 and 1995 were approximately $66,
$993 and $2,220, respectively, while amounts charged to IPC under subcontracts
with companies controlled by the Principal Stockholders were approximately
$265, $703 and $587, respectively.
In addition to the foregoing, the Company, KEC and KEC-NJ entered into a
twenty-year agreement dated May 9, 1994, with respect to business
opportunities regarding cabling of communication infrastructures. KEC and KEC-
NJ have agreed not to bid for or accept cabling jobs in competition with the
Company, if it intends to bid or accept such work. In addition, because the
Company is not a licensed electrical contractor, it has agreed to refrain from
bidding for or accepting without the consent of KEC or KEC-NJ, as the case may
be, all opportunities that combine both electrical and cabling work. The
Company has also agreed to continue to refer to KEC and KEC-NJ certain
electrical contracting bid opportunities identified from time to time.
Pursuant to such agreement, all estimates for cabling work shall be generated
by the Company on behalf of KEC, and KEC will pay the Company a nominal amount
for preparing such estimates.
F-20
<PAGE>
IPC INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Company and companies controlled by the Principal Stockholders also
charge each other certain miscellaneous expenses, including, but not limited
to, office equipment rentals and certain other administrative expenses.
11. INCOME TAXES
Pretax earnings consisted of the following:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
SEPTEMBER 30,
----------------------
1997 1996 1995
------ ------- -------
<S> <C> <C> <C>
United States......................................... $1,689 $10,020 $17,158
Foreign............................................... 6,425 10,101 5,328
------ ------- -------
Total pretax earnings................................. $8,114 $20,121 $22,486
====== ======= =======
</TABLE>
The provision (benefit) for income taxes consisted of the following:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
SEPTEMBER 30,
----------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Current:
Federal............................................. $ (182) $1,844 $5,887
State and local..................................... 2,037 1,967 2,558
Foreign............................................. 2,342 3,507 1,858
------ ------ ------
4,197 7,318 10,303
------ ------ ------
Deferred:
Federal............................................. 323 513 (673)
State and local..................................... 9 207 (359)
Foreign............................................. (249) (46) (52)
------ ------ ------
83 674 (1,084)
------ ------ ------
Income tax provision................................ $4,280 $7,992 $9,219
====== ====== ======
</TABLE>
The components of net deferred tax assets are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------------------------
1997 1996
---------------------- ---------------------
US FOREIGN TOTAL US FOREIGN TOTAL
------ ------- ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Deferred tax assets:
Excess of book over tax depre-
ciation...................... $ 819 $213 $1,032 $ 917 $ 59 $ 976
Amortization of intangibles... 247 -- 247 66 -- 66
Inventory and receivables..... 2,035 432 2,467 2,172 221 2,393
Accrued expenses.............. 1,459 152 1,611 1,228 5 1,233
------ ---- ------ ------ ---- ------
Total deferred tax assets..... 4,560 797 5,357 4,383 285 4,668
------ ---- ------ ------ ---- ------
Deferred tax liabilities:
Excess of tax over book
depreciation................. (508) (264) (772) -- -- --
------ ---- ------ ------ ---- ------
Net deferred tax assets....... $4,052 $533 $4,585 $4,383 $285 $4,668
====== ==== ====== ====== ==== ======
</TABLE>
F-21
<PAGE>
IPC INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
These net deferred tax assets arise from temporary differences between
financial versus tax reporting purposes related to depreciation, the
amortization of intangible assets, the allowance for doubtful accounts,
inventory valuation and the Company's various accruals. No valuation allowance
was required at September 30, 1997 and 1996.
A reconciliation between the statutory US federal income tax rate and the
Company's effective tax rate, excluding minority interest, is as follows:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
SEPTEMBER 30,
--------------
1997 1996
------ ------
<S> <C> <C>
Statutory US federal tax rate................................ 35.0% 35.0%
State and local income taxes, net of federal benefit......... 16.4 6.8
Other, net................................................... 1.4 (2.1)
------ ------
52.8% 39.7%
====== ======
</TABLE>
12. OPERATIONS BY GEOGRAPHIC AREAS:
Information about the Company's operations by geographic area is as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
----------------------------------
<S> <C> <C> <C>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
United States........................... $ 219,274 $ 202,926 $ 186,355
United Kingdom.......................... 51,049 46,582 19,899
---------- ---------- ----------
$270,323 $ 249,508 $ 206,254
========== ========== ==========
Operating Profits:
United States........................... $ 15,243 $ 24,485 $ 30,714
United Kingdom.......................... 6,537 9,745 4,192
Corporate............................... (12,239) (14,022) (12,879)
---------- ---------- ----------
$ 9,541 $ 20,208 $ 22,027
========== ========== ==========
Identifiable Assets:
United States........................... $ 97,438 $ 112,749 $ 98,228
United Kingdom.......................... 38,789 17,547 25,417
Corporate............................... 22,135 11,581 4,391
---------- ---------- ----------
$158,362 $ 141,877 $ 128,036
========== ========== ==========
</TABLE>
Included in the United States revenues are export sales to unaffiliated
customers of $13,264, $16,126 and $17,063 for the years ended September 30,
1997, 1996 and 1995, respectively. Transfers from the United States to the
United Kingdom, eliminated in consolidation, were $15,156, $12,681 and $7,999
for the years ended September 30, 1997, 1996 and 1995, respectively.
For the year ended September 30, 1997, no single customer accounted for 10%
or more of total revenues. For the year ended September 30, 1996,
approximately 13% of total revenues were from one customer. Corporate assets
are principally prepaids, intangibles and other assets.
F-22
<PAGE>
IPC INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. SUBSEQUENT EVENT:
On December 18, 1997, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") by and between the Company and Arizona
Acquisition Corp., a Delaware corporation ("AAC") pursuant to which AAC will
be merged with and into the Company, with the Company being the surviving
corporation (the "Merger"). AAC is a subsidiary owned by Cable Systems
Holding, LLC, a Delaware limited liability company ("CSH LLC") and its
subsidiaries, including Cable Systems International, Inc., a Delaware
corporation ("CSI"). CSH LLC is a Delaware limited liability company, a
majority of whose membership interests are owned by Citicorp Venture Capital,
Ltd., a New York corporation ("CVC"), officers and employees thereof, and
members of management of CSH LLC and CSI.
The Merger will be accounted for as a leveraged recapitalization. The Merger
Agreement is subject to regulatory review and approval by stockholders
representing a majority of outstanding shares at a meeting of stockholders to
be held during, or shortly after, the second fiscal quarter ending March 31,
1998. In accordance therewith, stockholders may elect to retain shares in the
surviving company (subject to a maximum aggregate share retention of 46% of
outstanding shares as of an election date to be determined) or to receive
$21.00 cash for each outstanding share. Not more than 90% of outstanding
shares may receive cash consideration and the maximum total cash consideration
to stockholders, assuming no change to shares outstanding as of the December
18, 1997, will be $202,516.
At the Merger, in accordance with certain commitments to the Company and
assuming the maximum stock for cash election, AAC will be capitalized with
$72,000 (the "Equity Financing Commitments"), to be funded by CVC (together
with affiliates) to purchase securities of CSH LLC and then invested by CSH
LLC into AAC. The Company will also raise $157,000 through the issuance of
senior debt securities and up to $75,000 through a revolving credit facility.
Morgan Stanley & Co. Incorporated and Morgan Stanley Senior Funding, Inc. have
committed to CVC and AAC to provide the senior debt securities and revolving
credit facilities, respectively, subject to certain terms and conditions
(collectively, the "Debt Financing Commitments"). The Debt Financing
Commitments will be assigned to the Company which will borrow these funds to
consummate this transaction. The proceeds of the Debt Financing Commitments
and the Equity Financing Commitment will be used in part to pay stockholders
who elect to receive cash and will also provide working capital for the
Company after the Merger.
In connection with the execution of the Merger Agreement, AAC entered into a
Stockholders Agreement with Richard P. Kleinknecht, Peter J. Kleinknecht,
Russell G. Kleinknecht and certain family members and trusts controlled by
said persons, pursuant to which these individuals and trusts, subject to
certain conditions, have agreed to vote all of the 6,952,768 shares of Company
common stock owned or controlled by them in favor of the transaction and
against certain actions which can reasonably be expected to impede or
adversely affect the Merger. The 6,952,768 shares represent approximately
64.9% of the 10,715,119 shares of Company common stock outstanding on December
18, 1997.
F-23
<PAGE>
IPC INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
The following tables set forth unaudited quarterly financial information for
the years ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
----------- -------- ------- ------------
<S> <C> <C> <C> <C>
YEARS ENDED SEPTEMBER 30, 1997:
Net Revenues....................... $59,411 $66,182 $68,882 $75,848
Gross Profit....................... 17,574 20,814 20,725 21,101
Net Earnings....................... 566 1,241 1,187 840
Earnings per Share................. $0.05 $0.12 $0.11 $0.08
YEARS ENDED SEPTEMBER 30, 1996:
Net Revenues....................... $59,750 $62,198 $69,424 $58,136
Gross Profit....................... 18,537 19,279 20,740 18,262
Net Earnings....................... 3,482 3,641 3,701 1,305
Earnings per Share................. $0.33 $0.34 $0.35 $0.12
</TABLE>
The quarterly earnings per share information is computed separately for each
period. Therefore, the sum of such quarterly per share amounts may differ from
the total for the year.
F-24
<PAGE>
SCHEDULE II
IPC INFORMATION SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- --------- --------------------- ---------- --------
ADDITIONS
---------------------
BALANCE BALANCE
AT CHARGED TO CHARGED AT END
BEGINNING COSTS TO OTHER OF
DESCRIPTION OF PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- --------- ------------ -------- ---------- --------
<S> <C> <C> <C> <C> <C>
For the Year Ended Septem-
ber 30, 1995:
Provision for Doubtful
Accounts............... $1,331 $ 861 -- $ 620(1) $1,572
====== ====== === ====== ======
Provision for Inventory
Obsolescence........... $5,560 $3,052 -- $1,123(2) $7,489
====== ====== === ====== ======
For the Year Ended Septem-
ber 30, 1996:
Provision for Doubtful
Accounts............... $1,572 $ 240 -- $ 291(1) $1,521
====== ====== === ====== ======
Provision for Inventory
Obsolescence........... $7,489 $1,143 -- $2,267(2) $6,365
====== ====== === ====== ======
For the Year Ended Septem-
ber 30, 1997:
Provision for Doubtful
Accounts............... $1,521 $ 338 -- $ 344(1) $1,515
====== ====== === ====== ======
Provision for Inventory
Obsolescence........... $6,365 $2,106 -- $1,965(2) $6,506
====== ====== === ====== ======
</TABLE>
- --------
(1) Doubtful Accounts Written Off, Net of Cash Recovered
(2) Inventory Written Off
F-25
<PAGE>
---------------------------------------------------------------
---------------------------------------------------------------
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
BETWEEN
ARIZONA ACQUISITION CORP.
AND
IPC INFORMATION SYSTEMS, INC.
DECEMBER 18, 1997
---------------------------------------------------------------
---------------------------------------------------------------
<PAGE>
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
1. Definitions.......................................................... 4
2. Basic Transaction.................................................... 11
(a)The Merger........................................................ 11
(b)The Closing....................................................... 11
(c)Actions at the Closing............................................ 11
(d)Effect of Merger.................................................. 12
(e)Elections......................................................... 13
(f)Proration......................................................... 14
(g)Procedure for Payment............................................. 15
(h)Dissenting Shares................................................. 16
(i)Fractional Shares................................................. 17
(j)Closing of Transfer Records....................................... 17
3. Representations and Warranties of the Company........................ 17
(a)Organization, Qualification, and Corporate Power.................. 17
(b)Capitalization.................................................... 18
(c)Authorization of Transaction...................................... 18
(d)Noncontravention.................................................. 18
(e)Filings with the SEC.............................................. 19
(f)Financial Statements.............................................. 19
(g)[Intentionally left blank]........................................ 19
(h)Undisclosed Liabilities........................................... 19
(i)Brokers' Fees..................................................... 19
(j)Absence of Certain Changes........................................ 19
(k)Litigation........................................................ 20
(l)Taxes............................................................. 20
(m)Compliance with Laws.............................................. 21
(n)Permits........................................................... 21
(o)Contracts......................................................... 21
(p)Intellectual Property Rights...................................... 22
(q)Board Approval; Fairness Opinion.................................. 22
(r)ERISA............................................................. 23
(s)Labor and Employment Matters...................................... 24
(t)Real Estate....................................................... 24
(u)Environmental Matters............................................. 25
4. Representations and Warranties of AAC................................ 25
(a)Organization...................................................... 25
(b)Financing......................................................... 25
(c)Authorization of Transaction...................................... 26
(d)Noncontravention.................................................. 26
(e)Brokers' Fees..................................................... 26
(f)Capitalization.................................................... 26
5. Covenants............................................................ 27
(a)General........................................................... 27
(b)Notices and Consents.............................................. 27
(c)Regulatory Matters and Approvals.................................. 27
(d)Financing......................................................... 28
(e)Accounting Treatment.............................................. 29
</TABLE>
(i)
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
(f)Cooperation....................................................... 29
(g)Operation of the Company's Business............................... 29
(h)Full Access....................................................... 30
(i)Notice of Developments............................................ 30
(j)No Solicitation................................................... 30
(k)Insurance and Indemnification..................................... 31
(l)Employees......................................................... 32
(m)Disclosure........................................................ 32
(n)Comfort Letters................................................... 33
(o)Affiliate Letters................................................. 33
(p)Continued Registration............................................ 33
(q)Operation of AAC's Business....................................... 33
(r)No Amendment of Ancillary Agreements.............................. 33
(s)Solvency Opinion.................................................. 33
6. Conditions to Obligation to Close.................................... 34
(a)Conditions to Obligation of AAC................................... 34
(b)Conditions to Obligation of the Company........................... 35
7. Termination.......................................................... 35
(a)Termination of Agreement.......................................... 35
(b)Effect of Termination............................................. 36
(c)Termination Fee; Expenses......................................... 36
8. Miscellaneous........................................................ 37
(a)Survival.......................................................... 37
(b)Press Releases and Public Announcements........................... 37
(c)No Third Party Beneficiaries...................................... 37
(d)Entire Agreement.................................................. 37
(e)Succession and Assignment......................................... 37
(f)Counterparts...................................................... 37
(g)General Interpretive Principles................................... 37
(h)Notices........................................................... 38
(i)Governing Law; Forum Selection; and Waiver of Jury Trial.......... 39
(j)Amendments and Waivers............................................ 40
(k)Severability...................................................... 40
(l)Expenses.......................................................... 40
(m)Incorporation of Exhibits, Schedule and Disclosure Schedules...... 40
(n)Transfer Taxes.................................................... 40
(o)Limited Recourse.................................................. 40
</TABLE>
<TABLE>
<C> <S>
Company Disclosure Schedule......
AAC Disclosure Schedule..........
List of Directors of the Surviving
Schedule A....................... Corporation
Amended and Restated Certificate of
Exhibit A-1...................... Incorporation
Exhibit A-2...................... Amended and Restated Certificate of
Incorporation (with 80% supermajority
voting)
Exhibit B........................ Bylaws
Exhibit C........................ Stock Option Plan
Exhibit D........................ Affiliate Letters
</TABLE>
(ii)
<PAGE>
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
Amended and Restated Agreement and Plan of Merger (the "Agreement") entered
into as of December 18, 1997, by and between Arizona Acquisition Corp., a
Delaware corporation ("AAC"), and IPC Information Systems, Inc., a Delaware
corporation (the "Company"). AAC and the Company are referred to collectively
herein as the "Parties."
This Agreement is intended by both Parties to amend and restate the
Agreement and Plan of Merger, dated as of December 18, 1997, by and between
the Company and AAC (the "Original Agreement").
This Agreement contemplates the merger of AAC with and into the Company.
Concurrently with the execution of the Original Agreement, and as an
inducement to AAC and the Company to enter into the Original Agreement, (i)
AAC and certain principal stockholders of the Company have entered into the
Stockholders Agreement pursuant to which such stockholders have agreed, among
other things, not to sell, transfer, pledge, assign or otherwise dispose of
any shares of Company Common Stock owned or held by them, or enter into any
agreement to accomplish any of the foregoing prior to the Closing, with
certain exceptions and (ii) one or more of the parties thereto and/or others
have entered into the other Ancillary Agreements.
It is intended that the Merger be recorded as a recapitalization for
financial reporting purposes, and both Parties, after discussion with their
auditors, believe that the Merger is eligible for such accounting treatment.
It is intended that the Merger constitute a tax-free reorganization within
the meaning of Section 368(a)(1)(E) of the Code.
Now, therefore, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the Parties agree as follows.
1. DEFINITIONS.
"AAC" has the meaning set forth in the preface above.
"AAC Disclosure Schedule" has the meaning set forth in (S)4.
"AAC-owned Share" means any Company Common Stock that AAC beneficially owns.
"AAC Comfort Letter" has the meaning set forth in (S)5(n).
"AAC Common Stock" has the meaning set forth in (S)4(f).
"AAC Stockholders Agreement" means the AAC Stockholders Agreement, dated as
of December 18, 1997 between CSH LLC, as shareholder of AAC, and the Company.
"Acquisition Proposal" has the meaning set forth in (S)5(j).
"Acquisition Transaction" has the meaning set forth in (S)5(j).
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
"Agent" has the meaning set forth in (S)8(i).
"Agreement" has the meaning set forth in the preface above.
4
<PAGE>
"Ancillary Agreements" means the Stockholders Agreement, the Investors
Agreement, the Share Exchange and Termination Agreement, the Starr Termination
Agreement, the Walsh Employment Agreement, the Servidio Employment Agreement,
the KEC-NY Labor Pool Agreement, the KEC-NJ Labor Pool Agreement, the
Corporate Opportunity Agreement, the Richard P. Kleinknecht Employment
Agreement, the Peter J. Kleinknecht Employment Agreement and the AAC
Stockholders Agreement.
"Annual Meeting" has the meaning set forth in (S)5(c)(ii).
"Benefit Plan" means any Plan, other than a Multiemployer Plan, existing at
the Closing Date or prior thereto, established or to which contributions have
at any time been made by the Company or any Subsidiary, or any predecessor of
the Company or any Subsidiary, under which any employee, former employee or
director of the Company or any Subsidiary, or any beneficiary thereof is
covered, is eligible for coverage or has benefit rights in respect of service
to the Company or any Subsidiary.
"Business Day" means any day on which the principal offices of the SEC in
Washington, D.C., are open to accept filings or, in the case of determining a
date when any payment is due, any day other than a day on which banks in New
York, New York, are required or authorized to be closed.
"Capital Lease" means a lease with respect to which the lessee is required
concurrently to recognize the acquisition of an asset and the incurrence of a
liability in accordance with GAAP.
"Capital Lease Obligation" means, with respect to any Person and a Capital
Lease, the amount of the obligation of such Person as the lessee under such
Capital Lease which would, in accordance with GAAP, appear as a liability on a
balance sheet of such Person.
"Cash Electing Shares" has the meaning set forth in (S)2(d)(viii).
"Cash Election Price" has the meaning set forth in (S)2(d)(viii).
"Cash Proration Factor" has the meaning set forth in (S)2(f)(iii).
"Certificate Amendment" means a proposal to be considered and voted upon at
the Annual Meeting to amend and restate the Company's certificate of
incorporation.
"Certificate of Merger" has the meaning set forth in (S)2(c).
"Closing" has the meaning set forth in (S)2(b).
"Closing Date" has the meaning set forth in (S)2(b).
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" has the meaning set forth in the preface above.
"Company Comfort Letter" has the meaning set forth in (S)5(n).
"Company Common Stock" means any share of the common stock, $0.01 par value
per share, of the Company.
"Company Disclosure Schedule" has the meaning set forth in (S)3.
"Company Stockholder" means any Person who or which holds any shares of
Company Common Stock.
5
<PAGE>
"Confidential Information" means any information concerning the businesses
and affairs of the Company and its Subsidiaries that is not already generally
available to the public or is otherwise required to be disclosed by law or
court order.
"Confidentiality/Standstill Letter Agreement" means the
confidentiality/standstill letter agreement, dated as of November 13, 1997,
between AAC and the Company.
"Contracts" means, with respect to any Person, any agreement, contract,
obligation, note, bond, mortgage, indenture, option, Lease, promise or
undertaking that is legally binding on such Person or to which such Person is
a party.
"Corporate Opportunity Agreement" means the Amended and Restated Corporate
Opportunity Agreement, dated as of December 18, 1997, among the Company, KEC-
NY and KEC-NJ.
"CSH LLC" means Cable Systems Holding, LLC, a Delaware limited liability
company.
"CSI" means Cable Systems International, Inc., a Delaware corporation.
"CVC" means Citicorp Venture Capital, Ltd., a New York corporation.
"Debt" with respect to any Person means, at any time, without duplication,
(a) its liabilities for borrowed money and its redemption obligations in
respect of mandatorily redeemable preferred stock;
(b) its liabilities for the deferred purchase price of property acquired
by such Person (excluding accounts payable arising in the Ordinary Course
of Business but including all liabilities created or arising under any
conditional sale or other title retention agreement with respect to any
such property);
(c) all Capital Lease Obligations of such Person;
(d) all liabilities for borrowed money secured by any Lien with respect
to any property owned by such Person (whether or not such Person has
assumed or otherwise become liable for such liabilities);
(e) all its liabilities in respect of letters of credit or instruments
serving a similar function issued or accepted for its account by banks and
other financial institutions (whether or not representing obligations for
borrowed money);
(f) Swap Obligations of such Person; and
(g) any Guaranty of such Person with respect to liabilities of a type
described in any of clauses (a) through (f) hereof.
"Debt Financing Commitments" has the meaning set forth in (S)4(b).
"Definitive Proxy Materials" means the definitive proxy materials relating
to the Annual Meeting.
"Delaware General Corporation Law" means the General Corporation Law of the
State of Delaware, as amended.
"Dissenting Shares" has the meaning set forth in(S)2(h).
"Election Date" has the meaning set forth in (S)2(e)(i).
"Effective Time" has the meaning set forth in (S)2(d)(i).
"Environmental Law" means any and all current federal, state, local, foreign
and provincial statutes, ordinances, rules and regulations relating to the
protection of the environment, and/or governing the generation,
6
<PAGE>
treatment, storage, transportation, disposal, manufacture, or release of
Hazardous Materials, and any common law doctrine, including but not limited
to, negligence, nuisance, trespass, personal injury, or property damage
related to, or arising out of, the presence, release, or exposure to a
Hazardous Material.
"Equity Financing Commitment" has the meaning set forth in (S)4(b).
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and the rules and regulations promulgated thereunder.
"ERISA Affiliate" means any Person who is, or was, a member of a controlled
group (within the meaning of Section 412(n)(6) of the Code) that includes, or
at any time included, the Company or any Subsidiary, or any predecessor of any
of the foregoing.
"Exchange Agent" has the meaning set forth in (S)2(e)(ii).
"Exchange Fund" has the meaning set forth in (S)2(g).
"Form of Election" has the meaning set forth in(S)2(e)(iii).
"GAAP" means United States generally accepted accounting principles as in
effect from time to time consistently applied.
"Goldman" has the meaning set forth in (S)4(b).
"Governmental Body" means any government or political subdivision thereof,
whether foreign or domestic, federal, state, provincial, county, local,
municipal or regional, or any other governmental entity, any agency,
authority, department, division or instrumentality of any such government,
political subdivision, or other governmental entity, any court, arbitral
tribunal or arbitrator, and any non-governmental regulating body, to the
extent that the rules, regulations or orders of such body have the force of
law.
"Guaranties" by any Person means all obligations (other than endorsements in
the Ordinary Course of Business of negotiable instruments for deposit or
collection) of such Person guaranteeing, or in effect guaranteeing, any Debt,
cash dividend or other monetary obligation of any other Person (the "primary
obligor") in any manner, whether directly or indirectly, including, without
limitation, all obligations incurred through an agreement, contingent or
otherwise, by such Person: (i) to purchase such Debt or obligation or any
property or assets constituting security therefor; (ii) to advance or supply
funds for the purchase or payment of such Debt or obligation; (iii) to lease
property or to purchase securities or other property or services primarily for
the purpose of assuring the owner of such Debt or obligation of the ability of
the primary obligor to make payment of the Debt or obligation; or (iv)
otherwise to assure the owner of the Debt or obligation of the primary obligor
against loss in respect thereof. For the purposes of all computations made
under this Agreement, a Guaranty in respect of any Debt for borrowed money
shall be deemed to be Debt equal to the principal amount of such Debt for
borrowed money which has been guaranteed, and a Guaranty in respect of any
other obligation or liability or any dividend shall be deemed to be Debt equal
to the maximum aggregate amount of such obligation, liability or dividend
unless such Guaranty is limited.
"Hart-Scott-Rodino Act" means the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended.
"Hazardous Material" means any materials, substances or wastes defined as or
included in the definition of "hazardous substances," "hazardous materials,"
"hazardous wastes," "extremely hazardous wastes," "restricted hazardous
wastes," "toxic substances," "toxic pollutants," "pollutants," "regulated
substances," or "contaminants" or words of similar import, under any
Environmental Law.
"Intellectual Property" shall mean all trademarks and trademark rights,
trade names and trade name rights, service marks and service mark rights,
service names and service name rights, copyrights and copyright rights,
7
<PAGE>
patents and patent rights, brand names, trade dress, business and product
names, logos, slogans, trade secrets, inventions, processes, formulae,
industrial models, processes, designs, specifications, data, technology,
methodologies, computer programs (including all source codes), confidential
and proprietary information, whether or not subject to statutory registration,
and all related technical information, manufacturing, engineering and
technical drawings, know-how and all pending applications for and
registrations of patents, trademarks, service marks and copyrights, and the
right to sue for past infringement, if any, in connection with any of the
foregoing, and all documents, disks and other media on which any of the
foregoing is stored.
"Investors Agreement" means the Amended and Restated Investors Agreement,
dated as of December 18, 1997, by and among the Company, CSH LLC, CSI and
certain other persons named therein.
"IXNET" means International Exchange Networks, Ltd., a Delaware corporation.
"Joint Disclosure Document" means the disclosure document combining the
Prospectus and the Definitive Proxy Materials.
"KEC-NJ" means Kleinknecht Electric Company, Inc., a New Jersey corporation.
"KEC-NJ Labor Pool Agreement" means the Amended and Restated Labor Pool
Agreement, dated as of December 18, 1997, between KEC-NJ and the Company.
"KEC-NY" means Kleinknecht Electric Company, Inc., a New York corporation.
"KEC-NY Labor Pool Agreement" means the Amended and Restated Labor Pool
Agreement, dated as of December 18, 1997, between KEC-NY and the Company.
"Kleinknechts" means Richard P. Kleinknecht and Peter J. Kleinknecht.
"Knowledge" means actual or constructive knowledge without independent
investigation of any current director or current executive officer.
"Lease" means any lease of real property made under which the Company or a
Subsidiary thereof is a tenant.
"Lien" means any lien, claim, restriction, security interest, preemptive
right, covenant, easement, mortgage, other encumbrance or any claim of any
third party other than (a) mechanic's, materialman's, and similar liens, (b)
liens for taxes not yet due and payable or for taxes that the taxpayer is
contesting in good faith through appropriate proceedings, (c) purchase money
liens and liens securing rental payments under capital lease arrangements, and
(d) other liens arising in the Ordinary Course of Business and not incurred in
connection with the borrowing of money.
"Material Adverse Effect" means any material adverse effect on the financial
condition or operations, business, assets, or results of operations of the
Company and its Subsidiaries taken as a whole, or AAC, as the context in this
Agreement requires, but excluding any change resulting from general industry
or economic conditions.
"Maximum Stock Election Number" has the meaning set forth in (S)2(f)(i).
"Merger" has the meaning set forth in (S)2(a).
"Merger Consideration" has the meaning set forth in (S)2(d)(viii).
"Minimum Stock Election Number" has the meaning set forth in (S)2(f)(i).
"Most Recent Fiscal Year End" has the meaning set forth in (S)3(f).
8
<PAGE>
"MSCI" has the meaning set forth in (S)4(b).
"Multiemployer Plan" means a multiemployer plan within the meaning of
Section 4001(a)(3) of ERISA with respect to which the Company or any ERISA
Affiliate has an obligation to contribute or has or could have withdrawal
liability under (S)4201 of ERISA.
"New Stock Incentive Plan" has the meaning set forth in (S)5(l)(iii).
"Non-Stock Electing Shares" has the meaning set forth in (S)2(f)(iii).
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity
and frequency).
"Owned Real Property" has the meaning set forth in (S)3(t).
"Party" has the meaning set forth in the preface above.
"Permits" means each material license (other than with respect to
Intellectual Property), franchise, permit, certificate, approval, consent or
other similar authorization affecting, or relating in any way to, the assets
or business of the Company and its Subsidiaries.
"Person" means an individual, a partnership, a limited liability company, a
corporation, an association, a joint stock company, a trust, an estate, a
joint venture, an unincorporated organization, or other entity or a
Governmental Body.
"Peter J. Kleinknecht Employment Agreement" means the Amended and Restated
Employment Agreement, dated as of December 18, 1997, between the Company and
Peter J. Kleinknecht.
"Plan" means any bonus, incentive compensation, deferred compensation,
pension, profit sharing, retirement, stock purchase, stock option, stock
ownership, stock appreciation rights, phantom stock, leave of absence, layoff,
vacation, day or dependent care, legal services, cafeteria, life, health,
accident, disability, workmen's compensation or other insurance, severance,
separation or other employee benefit plan, practice, policy or arrangement of
any kind, whether written or oral, or whether for the benefit of a single
individual or more than one individual including, but not limited to, without
limitation, any "employee benefit plan" within the meaning of Section 3(3) of
ERISA (whether or not subject thereto).
"Predecessor Site" means any of the real properties of any predecessors of
the Company or any Subsidiary thereof or any entities previously owned by the
Company or any Subsidiary thereof.
"Preliminary Proxy Materials" has the meaning set forth in (S)5(c)(i).
"Prospectus" means the final prospectus relating to the registration of the
Surviving Corporation Common Stock under the Securities Act.
"Proceeding" has the meaning set forth in (S)8(i).
"Public Reports" has the meaning set forth in (S)3(e).
"Registration Statement" has the meaning set forth in (S)5(c)(i).
"Requisite Stockholder Approval" means the affirmative vote of at least a
majority of the outstanding shares of Company Common Stock in favor of this
Agreement and the Merger in accordance with the Delaware General Corporation
Law.
9
<PAGE>
"Requisite Super-Majority Stockholder Approval" means the affirmative vote
of at least 80% of the outstanding shares of Company Common Stock in favor of
the Certificate Amendment in accordance with Delaware General Corporation Law.
"Richard P. Kleinknecht Employment Agreement" means the Amended and Restated
Employment Agreement, dated as of December 18, 1997, between the Company and
Richard P. Kleinknecht.
"Schedule 13E-3" has the meaning set forth in (S)5(c)(i).
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Servidio" means Anthony Servidio.
"Servidio Employment Agreement" means the Second Amended and Restated
Employment Agreement, dated as of December 18, 1997, between Servidio and
IXNET.
"Share Exchange and Termination Agreement" means the Share Exchange and
Termination Agreement, dated as of December 18, 1997, among Walsh, Servidio,
IXNET and the Company.
"Site" means any of the real properties currently or previously owned,
leased or operated by the Company or any Subsidiary thereof, including all
soil, subsoil, surface waters and groundwater thereat.
"Solvency Opinion" means the opinion from an independent advisor confirming
that, upon the consummation of the transactions contemplated hereby, the
Surviving Corporation (on a consolidated basis) (i) will not be left with
unreasonably small capital, (ii) will not have incurred debts beyond its
ability to pay such debts as they mature, and (iii) will have a fair value and
present fair salable value of its assets in excess of its stated liabilities
and identified contingent liabilities.
"Starrs" mean Gerald and Robert Starr.
"Starr Termination Agreement" means the Termination Agreement, dated as of
December 18, 1997, among the Starrs and the Company.
"Stock Electing Shares" has the meaning set forth in (S)2(d)(viii).
"Stock Election" has the meaning set forth in (S)2(e)(i).
"Stock Election Price" has the meaning set forth in (S)2(d)(viii).
"Stock Proration Factor" has the meaning set forth in (S)2(f)(ii).
"Stockholders Agreement" means the Stockholders Agreement, dated as of
December 18, 1997, by and among, inter alia, the Kleinknechts, AAC and Russell
G. Kleinknecht.
"Subsidiary" means any corporation with respect to which a specified Person
(or a Subsidiary thereof) owns a majority of the common stock or has the power
to vote or direct the voting of sufficient securities to elect a majority of
the directors.
"Superior Acquisition Proposal" has the meaning set forth in (S)7(a)(iv).
"Surviving Corporation" has the meaning set forth in (S)2(a).
10
<PAGE>
"Surviving Corporation Common Stock" has the meaning set forth in
(S)2(d)(vi).
"Swap Obligations" means, with respect to any Person, payment obligations
with respect to interest rate swaps, currency swaps and similar obligations
obligating such Person to make payments, whether periodically or upon the
happening of a contingency. For the purposes of this Agreement, the amount of
any Swap Obligation shall be the amount determined in respect thereof as of
the end of the then most recently ended fiscal quarter of such Person, based
on the assumption that such Swap Obligation had terminated at the end of such
fiscal quarter, and, in making such determination, if any agreement relating
to such Swap Obligation provides for the netting of amounts payable by and to
such Person thereunder or if any such agreement provides for the simultaneous
payment of amounts by and to such Person, then, in each such case, the amount
of such obligation shall be the net amount so determined.
"Taxes" means all federal, state, local and foreign income, profits,
franchise, gross receipts, environmental, customs duty, capital stock,
severance, stamp, payroll, sales, employment, unemployment, disability, use,
property, withholding, excise, production, value added, occupancy and other
taxes, duties or assessments of any nature whatsoever together with all
interest, penalties, fines and additions to tax imposed with respect to such
amounts and any interest in respect of such penalties and additions to tax.
"Tax Returns" means all returns and reports (including elections, claims,
declarations, disclosures, schedules, estimates, computations and information
returns) required to be supplied to a Tax authority in any jurisdiction
relating to Taxes.
"Termination Fee" has the meaning set forth in(S)7(c).
"Third Party" means any "group," as described in Rule 13d-5(b) promulgated
under the Securities Exchange Act, or Person, other than AAC or any of its
Affiliates.
"Walsh" means David Walsh.
"Walsh Employment Agreement" means the Second Amended and Restated
Employment Agreement, dated as of December 18, 1997, between Walsh and IXNET.
2. BASIC TRANSACTION.
(a) The Merger. Subject to the terms and conditions of this Agreement and in
accordance with the Delaware General Corporation Law, AAC will merge with and
into the Company (the "Merger") at the Effective Time. Upon the Effective
Time, the separate existence of AAC shall cease and the Company shall be the
corporation surviving the Merger and shall continue under the name IPC
Information Systems, Inc. (the "Surviving Corporation").
(b) The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Morgan, Lewis &
Bockius LLP in New York City commencing at 9:00 a.m., local time, on the
second Business Day following the satisfaction or waiver of all conditions to
the obligations of the Parties to consummate the transactions contemplated
hereby (other than conditions with respect to actions the respective Parties
will take at the Closing itself) or such other date as the Parties may
mutually determine (the "Closing Date").
(c) Actions at the Closing. On the day of the Closing (which Closing
satisfies the requirements of (S)2(b)), immediately following the satisfaction
or waiver of the conditions to the obligations of the Parties to consummate
the transactions contemplated hereby, (i) the Company will file with the
Secretary of State of the State of Delaware a Certificate of Merger (the
"Certificate of Merger"), and (ii) AAC will cause the Exchange Fund to be
delivered to the Exchange Agent in the manner provided below in this (S)2.
11
<PAGE>
(d) Effect of Merger.
(i) General. The Merger shall become effective at the time (the
"Effective Time") the Company duly files the Certificate of Merger with the
Secretary of State of the State of Delaware or at such later time as is
specified in the Certificate of Merger. The Merger shall have the effect
set forth in the Delaware General Corporation Law. The Surviving
Corporation may, at any time after the Effective Time, take any action
(including executing and delivering any document) in the name and on behalf
of either the Company or AAC in order to carry out and effectuate the
transactions contemplated by this Agreement.
(ii) Certificate of Incorporation. At the Effective Time, and without any
further action on the part of the Company or AAC, (a) the certificate of
incorporation of the Company in effect immediately prior to the Effective
Time, in the event that the Requisite Super-Majority Stockholder Approval
is obtained, shall be amended as of the Effective Time to read as set forth
in Exhibit A-1 and as so amended shall be the certificate of incorporation
of the Surviving Corporation until thereafter amended in accordance with
applicable law, or (b) the certificate of incorporation of the Company in
effect immediately prior to the Effective Time, in the event that the
Requisite Super-Majority Stockholder Approval is not obtained, shall be
amended as of the Effective Time to read as set forth in Exhibit A-2 and as
so amended shall be the Certificate of Incorporation of the Surviving
Corporation until thereafter amended in accordance with applicable law.
(iii) Bylaws. At the Effective Time and without any further action on the
part of the Company or AAC, the bylaws of the Company, as amended and
restated, a copy of which is set forth as Exhibit B, and in effect
immediately prior to the Effective Time, shall be the bylaws of the
Surviving Corporation, until amended in accordance with applicable law.
(iv) (A) Directors. (1) Subject to applicable law, in the event that the
Requisite Super-Majority Stockholder Approval is obtained, the directors of
the Surviving Corporation at the Effective Time shall be the directors as
set forth on Schedule A hereto; provided, that in the event any such
director is unable, or becomes unable to serve, a replacement director
shall be designated by AAC.
(2) In the event that the Requisite Stockholder Approval is obtained:
(a) Subject to applicable law, (i) the vacancies on the board of
directors of the Company created by the resignations of directors at
the Closing and (ii) the vacancies created by an increase in the
size of the board of directors of the Company from six to nine in
accordance with the bylaws of the Surviving Corporation, in each
case, shall be filled by the individuals set forth on Schedule A
hereto; provided, that in the event any such individual is unable,
or becomes unable to serve, a replacement director shall be
designated by AAC.
(b) AAC will supply to the Surviving Corporation in writing and be
solely responsible for any information provided by AAC with respect
to itself and its nominees, officers, directors and Affiliates
required by Section 14(f) of the Securities Exchange Act and Rule
14f-1 promulgated thereunder.
(B) Officers. Subject to applicable law and the provisions of
applicable Ancillary Agreements, the officers of the Surviving
Corporation at the Effective Time shall be the officers of the Company
immediately prior to the Effective Time.
(v) Treasury Stock and AAC-owned Shares. At and as of the Effective Time,
by virtue of the Merger and without any action on the part of the Company
or AAC or any holder of shares of Company Common Stock or AAC Common Stock,
each share of Company Common Stock owned by the Company or any subsidiary
as treasury stock and each AAC-owned Share held immediately prior to the
Effective Time shall be canceled and cease to exist, and no consideration
shall be delivered or deliverable with respect thereto.
12
<PAGE>
(vi) Conversion of AAC Common Stock. At and as of the Effective Time, by
virtue of the Merger and without any action on the part of the Company or
AAC or any holder of shares of Company Common Stock or AAC Common Stock,
each share of AAC Common Stock shall be converted into one share of common
stock, $0.01 par value per share, of the Surviving Corporation (the
"Surviving Corporation Common Stock").
(vii) Company Stock Options. Each option to purchase shares of Company
Common Stock that is outstanding immediately prior to the Effective Time
(whether or not vested or exercisable) shall, at the Effective Time, be
canceled, and in exchange therefor, each option holder shall receive a cash
payment which, prior to deduction for applicable withholding taxes, is in
an amount equal to the product of (A) the excess, if any, of the Cash
Election Price over the per share exercise price of the option and (B) the
number of shares subject to the option (whether or not vested). AAC shall
make such payment on or after the Closing Date immediately upon receipt of
a written agreement from the option holder to accept such payment in full
settlement of such option holder's rights with respect to the option. If
the per share exercise price of any option equals or exceeds the Cash
Election Price, such option shall be canceled without any payment required
thereunder.
(viii) Conversion Option (or Retention) of Company Common Stock. At and
as of the Effective Time, by virtue of the Merger and without any action on
the part of the Company or AAC or any holder of shares of Company Common
Stock or AAC Common Stock, each share of Company Common Stock outstanding
immediately prior to the Effective Time shall, except as otherwise provided
in (S)2(d)(v)-(vii) or as provided in (S)2(h) with respect to Dissenting
Shares as to which appraisal rights have been exercised, be converted into
the following (the "Merger Consideration"), subject to (S)2(f):
(A) for each such share with respect to which an election to retain
Surviving Corporation Common Stock has been effectively made and not
revoked or lost pursuant to (S) 2(e)(iii), (iv) and (v) (the "Stock
Electing Shares"), the right to retain one share of Surviving
Corporation Common Stock (the "Stock Election Price"); and
(B) for each such share ("Cash Electing Shares") (other than Stock
Electing Shares), the right to receive in cash from the Surviving
Corporation following the Merger an amount equal to $21 (the "Cash
Election Price").
(e) Elections.
(i) Each Person who, on or prior to the Business Day next preceding the
date of the Annual Meeting (the "Election Date"), is a record holder of
shares of Company Common Stock will be entitled, with respect to any or all
such shares, to make an unconditional election on or prior to such Election
Date to retain the Stock Election Price (a "Stock Election") on the basis
hereinafter set forth.
(ii) Prior to the mailing of the Joint Disclosure Document, the Company
shall appoint an agent reasonably acceptable to AAC (the "Exchange Agent")
for the purpose of exchanging certificates representing shares of Company
Common Stock for the Merger Consideration.
(iii) The Company shall prepare and mail a form of election, which form
shall be subject to the reasonable approval of AAC (the "Form of
Election"), with the Joint Disclosure Document to the record holders of
shares of Company Common Stock as of the record date for the Annual
Meeting, which Form of Election shall be used by each record holder of
shares who makes a Stock Election with respect to any or all such holder's
shares. The Company will use its reasonable best efforts to make the Form
of Election and the Joint Disclosure Document available to all persons who
become holders of shares during the period between such record date and the
Election Date. Any such holder's Stock Election shall have been properly
made only if the Exchange Agent shall have received at its designated
office, by 5:00 p.m., New York City time, on the Election Date, a Form of
Election properly completed and signed and accompanied by certificates for
the shares of Company Common Stock to which such Form of Election relates,
duly endorsed
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in blank or otherwise in form acceptable for transfer on the books of the
Company (or by an appropriate guarantee of delivery of such certificates as
set forth in such Form of Election from a firm which is a member of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc. or a commercial bank or trust company having an
office or correspondent in the United States, provided such certificates
are in fact delivered to the Exchange Agent within three New York Stock
Exchange trading days after the date of execution of such guarantee of
delivery).
(iv) Any Form of Election may be revoked by the holder submitting it, or
causing it to be submitted, to the Exchange Agent only by written notice
received by the Exchange Agent (i) prior to 5:00 p.m., New York City time,
on the Election Date or (ii) after the Election Date, if (and to the extent
that) the Exchange Agent is legally required to permit revocations, and the
Effective Time shall not have occurred prior to such date. In addition, all
Forms of Election shall automatically be revoked if the Exchange Agent is
notified in writing by AAC or the Company that the Merger has been
abandoned or this Agreement has been terminated. If a Form of Election is
revoked, the certificate or certificates (or guarantees of delivery, as
appropriate) for the shares to which such Form of Election relates shall be
promptly returned by the Exchange Agent to the stockholder submitting the
same to the Exchange Agent.
(v) The good faith determination of the Exchange Agent shall be binding
as to whether or not Stock Elections have been properly made or revoked
pursuant to this (S)2(e) with respect to shares and when elections and
revocations were received by it. If the Exchange Agent determines that any
Stock Election either (x) was not properly made or (y) was not submitted to
or received by the Exchange Agent with respect to any shares, such shares
shall be converted into Merger Consideration in accordance with
(S)2(d)(viii)(B). The Exchange Agent shall also make all computations as to
the allocation and the proration contemplated by (S)2(f), and any such
computation shall be conclusive and binding on the holders of shares. The
Exchange Agent may, with the mutual agreement of AAC and the Company, make
such rules as are consistent with this (S)2(e) for the implementation of
the elections provided for herein as shall be necessary or desirable fully
to effect such elections.
(f) Proration.
(i) Notwithstanding anything to the contrary contained in this Agreement
but subject to (S)2(d)(v) and (S)2(h),
(A) the minimum number of shares of Company Common Stock to be
converted into the right to retain Surviving Corporation Common Stock
shall be equal to 380,952 shares (the "Minimum Stock Election Number"),
and
(B) the maximum number of shares of Company Common Stock to be
converted into the right to retain Surviving Corporation Common Stock
shall be equal to 1,752,381 shares (the "Maximum Stock Election
Number").
(ii) If the number of Stock Electing Shares exceeds in the aggregate the
Maximum Stock Election Number, then the Stock Electing Shares for each
Stock Election shall be converted into the right to retain the Stock
Election Price or the right to receive the Cash Election Price in
accordance with the terms of (S)2(d)(viii) in the following manner:
(A) A stock proration factor (the "Stock Proration Factor") shall be
determined by dividing the Maximum Stock Election Number by the total
number of Stock Electing Shares.
(B) The number of Stock Electing Shares covered by each Stock
Election to be converted into the right to retain the Stock Election
Price shall be determined by multiplying the Stock Proration Factor by
the total number of Stock Electing Shares covered by such Stock
Election.
(C) Each Stock Electing Share, other than any shares converted into
the right to receive the Stock Election Price in accordance with
(S)2(f)(ii)(B), shall be converted into the right to receive the
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Cash Election Price as if such shares were not Stock Electing Shares in
accordance with the terms of (S)2(d)(viii)(B).
(iii) If the number of Stock Electing Shares is less in the aggregate
than the Minimum Stock Election Number, then:
(A) All Stock Electing Shares shall be converted into the right to
receive the Stock Election Price in accordance with (S)2(d)(viii)(A).
(B) Such number of shares with respect to which a Stock Election is
not in effect ("Non-Stock Electing Shares") shall be converted into the
right to retain the Stock Election Price (and a Stock Election shall be
deemed to have been made with respect to such shares) in accordance
with (S)2(d)(viii)(A) in the following manner:
(1) a cash proration factor (the "Cash Proration Factor") shall be
determined by dividing (x) the difference between the Minimum Stock
Election Number and the number of Stock Electing Shares by (y) the
total number of shares other than Stock Electing Shares and
Dissenting Shares; and
(2) the number of shares (in addition to Stock Electing Shares) to
be converted into the right to retain the Stock Election Price shall
be determined by multiplying the Cash Proration Factor by the total
number of shares other than Stock Electing Shares and Dissenting
Shares so that the aggregate number of Stock Electing Shares and
Non-Stock Electing Shares converted into such right equals the
Minimum Stock Election Number.
(g) Procedure for Payment.
(i) At the Closing, AAC will cause to be furnished to the Exchange Agent
a corpus (the "Exchange Fund") consisting of cash sufficient in the
aggregate for the Exchange Agent to make full payment of the cash portion
of the Merger Consideration to the holders of all of the issued and
outstanding shares of Company Common Stock (other than any Dissenting
Shares and AAC-owned Shares). Immediately after the Effective Time, the
Company will cause the Exchange Agent to mail a letter of transmittal (with
instructions for its use) to each record holder of issued and outstanding
shares of Company Common Stock who did not make a timely and valid Stock
Election in order to permit the Exchange Agent to pay such record holder
the cash portion of the Merger Consideration. No interest will accrue or be
paid to the holder of any issued and outstanding shares of Company Common
Stock.
(ii) If any portion of the Merger Consideration is to be paid to a Person
other than the registered holder of the shares represented by the
certificate or certificates surrendered in exchange therefor, it shall be a
condition to such payment that the certificate or certificates so
surrendered shall be properly endorsed or otherwise be in proper form for
transfer and that the Person requesting such payment shall pay to the
Exchange Agent any transfer or other Taxes required as a result of such
payment to a Person other than the registered holder of such shares or
establish to the satisfaction of the Exchange Agent that such Tax has been
paid or is not payable.
(iii) After the Effective Time, there shall be no further registration of
transfers of shares of Company Common Stock. If, after the Effective Time,
certificates representing shares of Company Common Stock are presented to
the Surviving Corporation, they shall be canceled and exchanged for the
cash portion of the Merger Consideration provided for in accordance with
the procedures set forth herein.
(iv) Any portion of the Merger Consideration made available to the
Exchange Agent to pay for shares of Company Common Stock for which
appraisal rights have been perfected shall be paid to the Surviving
Corporation, upon demand.
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(v) The Surviving Corporation may cause the Exchange Agent to pay over to
the Surviving Corporation any portion of the Exchange Fund (including any
earnings thereon) remaining 180 days after the Effective Time, and
thereafter each remaining Company Stockholder shall be entitled to look
only to the Surviving Corporation (subject to abandoned property, escheat,
and other similar laws) as a general creditor thereof with respect to the
cash payable upon surrender of such Company Stockholder's certificates. To
the extent permitted by applicable law, neither the Surviving Corporation
nor the Exchange Agent shall be liable to any Person in respect of any
shares of Company Common Stock (or dividends or distributions with respect
thereto) or cash from the Exchange Fund delivered to a public official
pursuant to any applicable abandoned property, escheat or similar law. Any
amounts remaining unclaimed by holders of shares of Company Common Stock
two years after the Effective Time (or such earlier date immediately prior
to such time as such amounts would otherwise escheat to or become property
of any Governmental Body) shall, to the extent permitted by applicable law,
become the property of Surviving Corporation free and clear of any claims
or interest of any Person previously entitled thereto.
(vi) No dividends or other distributions with respect to Company Common
Stock with a record date after the Effective Time shall be paid to the
holder of any unsurrendered certificate for shares of Company Common Stock
with respect to the shares of Company Common Stock represented thereby, and
no cash payment in lieu of fractional shares shall be paid to any such
holder pursuant to (S)2(i) until the surrender of such certificate in
accordance with this Article 2. Subject to the effect of applicable laws,
following surrender of any such certificate, there shall be paid to the
holder of the certificate representing whole shares of Company Common Stock
issued in exchange therefor, without interest, (A) the amount of dividends
and other distributions with a record date after the Effective Time
theretofore paid with respect to such whole shares of Company Common Stock,
and (B) at the appropriate payment date, the amount of dividends or other
distributions with a record date after the Effective Time but prior to such
surrender and a payment date subsequent to such surrender payable with
respect to such whole shares of Company Common Stock.
(vii) The Exchange Agent shall invest any cash included in the Exchange
Fund as directed by the Company or the Surviving Corporation, as the case
may be, provided that such investment shall be in (A) securities issued or
directly and fully guaranteed or insured by the United States Government or
any agency or instrumentality thereof having maturities not more than six
months from the Effective Time of the Merger, (B) certificates of deposit,
Eurodollar time deposits and bankers' acceptances with maturities not
exceeding six months and overnight bank deposits with any commercial bank,
depository institution or trust company incorporated or doing business
under the laws of the United States of America, any state thereof or the
District of Columbia, provided that such commercial bank, depository
institution or trust company has, at the time of investment, (1) capital
and surplus exceeding $250 million and (2) outstanding short-term debt
securities which are rated at least A-1 by Standard & Poor's Ratings Group,
a Division of the McGraw- Hill Companies, Inc., or at least P-1 by Moody's
Investors Service, Inc. or carry an equivalent rating by a nationally
recognized rating agency if both of the two named rating agencies cease to
publish ratings of investment, (C) repurchase obligations with a term of
not more than 30 days for underlying securities of the types described in
clauses (A) and (B) above entered into with any financial institution
meeting the qualifications specified in clause (B) above, (D) commercial
paper having a rating in the highest rating categories from Standard &
Poor's Ratings Group, a Division of the McGraw-Hill Companies, Inc. or
Moody's Investors Service, Inc., or carrying an equivalent rating by a
nationally recognized rating agency if both of the two named rating
agencies cease to publish ratings of investments and in each case maturing
within six months of the Effective Time and (E) money market mutual or
similar funds having assets in excess of $1 billion. Any interest and other
income resulting from such investments shall be paid to the Company or the
Surviving Corporation, as the case may be.
(viii) The Surviving Corporation shall pay all charges and expenses of
the Exchange Agent.
(h) Dissenting Shares. Notwithstanding (S)2(d), shares of Company Common
Stock which are issued and outstanding immediately prior to the Effective Time
and which are held by a Company Stockholder who has not voted such shares in
favor of the Merger, who shall have delivered a written demand for appraisal
of such shares
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<PAGE>
in the manner provided by the Delaware General Corporation Law and who, as of
the Effective Time, shall not have effectively withdrawn or lost such right to
appraisal ("Dissenting Shares") shall not be converted into a right to receive
the Merger Consideration. The holders thereof shall be entitled only to such
rights as are granted by Section 262 of the Delaware General Corporation Law.
Each holder of Dissenting Shares who becomes entitled to payment for such
shares pursuant to Section 262 of the Delaware General Corporation Law shall
receive payment therefor from the Surviving Corporation in accordance with the
Delaware General Corporation Law; provided, however, that (i) if any such
holder of Dissenting Shares shall have failed to establish his entitlement to
appraisal rights as provided in Section 262 of the Delaware General
Corporation Law, (ii) if any such holder of Dissenting Shares shall have
effectively withdrawn his demand for appraisal of such shares or lost his
right to appraisal and payment for his shares under Section 262 of the
Delaware General Corporation Law or (iii) if neither any holder of Dissenting
Shares nor the Surviving Corporation shall have filed a petition demanding a
determination of the value of all Dissenting Shares within the time provided
in Section 262 of the Delaware General Corporation Law, such holder shall
forfeit the right to appraisal of such shares and each such share shall be
treated as if it had been a Non-Stock Electing Share and had been converted,
as of the Effective Time, into a right to receive the Merger Consideration,
without interest thereon, from the Surviving Corporation as provided in
(S)2(d) hereof. The Company shall give AAC prompt notice of any demands
received by the Company for appraisal of shares, and, until the Effective
Time, AAC shall have the right to participate in all negotiations and
proceedings with respect to such demands. The Company shall not, except with
the prior written consent of AAC, make any payment with respect to, or settle
or offer to settle, any such demands.
(i) Fractional Shares.
(i) No certificates or scrip representing fractional shares of Surviving
Corporation Common Stock shall be issued upon the surrender for exchange of
certificates representing shares of Company Common Stock, and such
fractional interests shall not entitle the owner thereof to vote or to any
rights of a stockholder of the Surviving Corporation.
(ii) Notwithstanding any other provision of this Agreement, each holder
of shares of Company Common Stock exchanged pursuant to the Merger who
would otherwise be entitled to receive a fraction of a share of Surviving
Corporation Common Stock (after taking into account all shares of Company
Common Stock delivered by such holder) shall receive, in lieu thereof, a
cash payment (without interest) representing (A) the applicable fraction of
Surviving Corporation Common Stock multiplied by (B) $21, payable as soon
as practicable on or after the Effective Time.
(j) Closing of Transfer Records. After the close of business on the Closing
Date, transfers of Company Common Stock outstanding prior to the Effective
Time shall not be made on the stock transfer books of the Surviving
Corporation.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to AAC that the statements contained in
this (S)3 are correct and complete as of the date of this Agreement, except as
set forth in the disclosure schedule prepared by the Company accompanying this
Agreement (the "Company Disclosure Schedule"). The Company Disclosure Schedule
will be arranged in paragraphs corresponding to the lettered and numbered
paragraphs contained in this (S)3.
(a) Organization, Qualification, and Corporate Power. Each of the Company
and its Subsidiaries is a corporation duly organized, validly existing, and
in good standing under the laws of the jurisdiction of its incorporation.
Each of the Company and its Subsidiaries is duly authorized to conduct
business and is in good standing under the laws of each jurisdiction where
such qualification is required, except where the lack of such qualification
would not have a Material Adverse Effect or a material adverse effect on
the ability of the Parties to consummate the transactions contemplated by
this Agreement. Each of the Company and its Subsidiaries has full corporate
power and authority to carry on the businesses in which it is engaged
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<PAGE>
and to own and use the properties owned and used by it. Each of the Company
and its Subsidiaries is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction where the
character of the property owned or leased by it or the nature of its
activities makes such qualification necessary, except for those
jurisdictions where the failure to be so qualified would not, individually
or in the aggregate, have a Material Adverse Effect.
(b) Capitalization. The authorized capital stock of the Company consists
of 25,000,000 shares, $0.01 par value per share, of Company Common Stock
and 10,000,000 shares, $0.01 par value per share, of preferred stock (the
"Company Preferred Stock"). As of the date of this Agreement: (i)
10,715,119 shares of Company Common Stock were issued and outstanding, and
no shares of Company Preferred Stock were issued or outstanding, (ii) no
shares of Company Common Stock were reserved for issuance except that (A)
1,579,337 shares of Company Common Stock have been reserved for issuance
pursuant to the 1994 Company Stock Option and Incentive Plan, of which
1,082,334 may be issued in the future upon the exercise of options
currently outstanding and (B) 526,813 shares of Company Common Stock have
been reserved for issuance pursuant to the 1994 Company Employee Stock
Purchase Plan, of which 19,037 shares are estimated to be the number of
shares of Company Common Stock which will be issued pursuant to
contributions by employees of the Company under the 1994 Company Employee
Stock Purchase Plan during calendar year 1997, and (C) 31,857 shares of
Company Common Stock have been reserved for issuance at par value on or
about September 30, 1997 pursuant to an employment agreement with a former
employee, (iii) no shares of Company Preferred Stock were reserved for
issuance and (iv) 242,185 shares of Company Common Stock were held by the
Company in its treasury. All of the issued and outstanding shares of
Company Common Stock have been duly authorized and are validly issued,
fully paid, and nonassessable. Except as indicated hereinabove, there are
no outstanding or authorized options, warrants, purchase rights,
subscription rights, conversion rights, exchange rights, or other contracts
or commitments that could require the Company or any Subsidiary thereof to
issue, sell, or otherwise cause to become outstanding any of its capital
stock or the capital stock of any Subsidiary thereof. There are no
outstanding or authorized stock appreciation, phantom stock, profit
participation, or similar rights with respect to the Company or any of its
Subsidiaries. After giving effect to the transactions contemplated by the
Share Exchange and Termination Agreement, all shares of capital stock of
Subsidiaries of the Company are wholly owned directly or indirectly by the
Company and have been duly authorized and are validly issued, fully paid
and nonassessable.
(c) Authorization of Transaction. The Company has full power and
authority (including full corporate power and authority) to execute and
deliver this Agreement and to perform its obligations hereunder, subject to
the Requisite Stockholder Approval or Requisite Super-Majority Stockholder
Approval, as the case may be. The execution and delivery by the Company of
this Agreement and the Merger, and the performance of the Company's
obligations hereunder, have been duly authorized by all requisite corporate
action, subject to the Requisite Stockholder Approval or Requisite Super-
Majority Stockholder Approval, as the case may be, and this Agreement has
been executed and delivered by the Company. This Agreement constitutes the
valid and legally binding obligation of the Company, enforceable in
accordance with its terms and conditions. The Company has heretofore duly
elected, pursuant to Section 203 of the Delaware General Corporation Law,
not to be governed by such Section.
(d) Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby,
will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
Governmental Body or court to which any of the Company and its Subsidiaries
is subject or any provision of the certificate of incorporation or bylaws
of any of the Company and its Subsidiaries or (ii) conflict with, result in
a breach of, constitute a default under, result in the acceleration of,
create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice under any Contract to which any of the Company and
its Subsidiaries is a party or by which it is bound or to which any of its
assets is subject, except where the violation, conflict, breach, default,
acceleration, termination, modification, cancellation, or failure to give
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<PAGE>
notice would not have a Material Adverse Effect or a material adverse
effect on the ability of the Parties to consummate the transactions
contemplated by this Agreement. Other than in connection with the
provisions of the Hart-Scott-Rodino Act, the Delaware General Corporation
Law, the Securities Exchange Act, the Securities Act, the state securities
laws, the Communications Act of 1934, as amended, and as set forth on (S)
3(d) of the Company Disclosure Schedule, none of the Company and its
Subsidiaries needs to give any notice to, make any filing with, or obtain
any authorization, consent, or approval of any Governmental Body in order
for the Parties to consummate the transactions contemplated by this
Agreement or execute, deliver and perform its obligations under this
Agreement, except where the failure to give notice, to file, or to obtain
any authorization, consent, or approval would not have a Material Adverse
Effect or a material adverse effect on the ability of the Parties to
consummate the transactions contemplated by this Agreement.
(e) Filings with the SEC. Since October 1, 1994, the Company has made all
filings with the SEC that it has been required to make under the Securities
Act and the Securities Exchange Act (collectively the "Public Reports").
Each of the Public Reports has complied with the Securities Act and the
Securities Exchange Act and the rules and regulations promulgated
thereunder in all material respects. None of the Public Reports, as of
their respective dates, contained any untrue statement of a material fact
or omitted to state a material fact necessary in order to make the
statements made therein, in light of the circumstances under which they
were made, not misleading.
(f) Financial Statements. The Company has delivered to AAC a draft, in
substantially final form, of an Annual Report on Form 10-K for the fiscal
year ended September 30, 1997 (the "Most Recent Fiscal Year End"). The
financial statements included in or incorporated by reference into these
Public Reports (including the related notes and schedules) have been
prepared in accordance with GAAP and present fairly the financial condition
of the Company and its Subsidiaries as of the indicated dates and the
results of operations of the Company and its Subsidiaries for the indicated
periods.
(g) [Intentionally left blank.]
(h) Undisclosed Liabilities. Except as set forth in the Public Reports
and except for (i) liabilities which have arisen after the Most Recent
Fiscal Year End in the Ordinary Course of Business and (ii) liabilities
under this Agreement, neither the Company nor any of its Subsidiaries has
any material liabilities of any nature (whether accrued, absolute,
contingent or otherwise) required by GAAP to be set forth on a financial
statement or in the notes thereto and which individually or in the
aggregate would have a Material Adverse Effect. To the extent that any
provision of this (S)3(h) conflicts with any representation made by the
Company having a Knowledge qualification contained in any subsection of
this (S)3, the provisions of that subsection shall apply.
(i) Brokers' Fees. Other than fees related to financial advisory services
performed for the Company to be paid to the Persons set forth on (S)3(i) of
the Company Disclosure Schedule, neither the Company nor any of its
Subsidiaries has any liability or obligation to pay any fees or commissions
to any broker, finder, or agent with respect to the transactions
contemplated by this Agreement. The Company has furnished to AAC true,
correct and complete copies of engagement letters relating to such
services.
(j) Absence of Certain Changes. Since September 30, 1997, the Company and
its Subsidiaries have conducted their business in the Ordinary Course of
Business and there has not been:
(i) any event, occurrence or development of a state of facts which,
to the Company's Knowledge, individually or in the aggregate, could
reasonably be expected to have a Material Adverse Effect, except,
however, any event, occurrence or development related to, arising out
of or resulting from this Agreement and the transactions and activities
contemplated hereby;
(ii) any declaration, setting aside or payment of any dividend or
other distribution with respect to any shares of capital stock of the
Company, or (other than (A) any retirement of, or issuance of
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Company Common Stock pursuant to the exercise of options to acquire
shares of Company Common Stock granted to employees or directors, or
(B) contemplated pursuant to this Agreement), any repurchase,
redemption or other acquisition by the Company or any Subsidiary
thereof of any outstanding shares of capital stock or other securities
of, or other ownership interests in, the Company or any Subsidiary
thereof;
(iii) any amendment of any material term of any outstanding equity
security of the Company or any Subsidiary thereof;
(iv) any incurrence, assumption or guarantee by the Company or any
Subsidiary thereof of any indebtedness for borrowed money, other than
in the Ordinary Course of Business in amounts and on terms consistent
with past practices;
(v) any damage, destruction or other casualty loss (whether or not
covered by insurance) affecting the business or assets of the Company
or any Subsidiary thereof which, individually or in the aggregate,
could reasonably be expected to have a Material Adverse Effect;
(vi) any material change in any method of accounting or accounting
practice by the Company or any Subsidiary thereof which, individually
or in the aggregate, could reasonably be expected to have a Material
Adverse Effect;
(vii) any (A) grant of any severance or termination pay to any
director, officer or employee of the Company or any Subsidiary thereof,
(B) entering into of any employment, deferred compensation or other
similar agreement (or any amendment to any such existing agreement)
with any director, officer or employee of the Company or any Subsidiary
thereof, (C) increase in benefits payable under any existing severance
or termination pay policies or employment agreements or (D) increase in
compensation, bonus or other benefits payable to directors, officers or
employees of the Company or any Subsidiary thereof; in each case, other
than in the Ordinary Course of Business; or
(viii) any cancellation of any Permits or Contracts to which the
Company or any Subsidiary thereof is a party, or any written or oral
notification to the Company or any Subsidiary thereof that any party to
any such arrangement intends to cancel or not renew such arrangement
beyond its expiration date as in effect on the date hereof, which
cancellation or notification, individually or in the aggregate, could
reasonably be expected to have a Material Adverse Effect.
(k) Litigation. There is no action, suit or proceeding pending against,
or, to the Knowledge of the Company, any action, suit, investigation or
proceeding threatened against or affecting, the Company or any Subsidiary
thereof or any of their respective properties before any Governmental Body,
which could reasonably be expected to have a Material Adverse Effect or
which in any manner challenges or seeks to prevent, enjoin, alter or
materially delay the Merger or any of the other transactions contemplated
hereby.
(l) Taxes. (i) The Company and each of its Subsidiaries have duly and
timely filed (taking into account any extension of time within which to
file) all material Tax Returns required to be filed by any of them and all
such filed Tax Returns are complete and accurate in all material respects;
(ii) the Company and each of its Subsidiaries have paid all Taxes required
to be paid by it including Taxes that the Company and its Subsidiaries are
obligated to withhold from amounts owing to any employee, creditor or third
party, except with respect to matters contested in good faith or for such
amounts that, individually or in aggregate, could not reasonably be
expected to have a Material Adverse Effect; (iii) as of the date of this
Agreement, there are no pending or, to the Knowledge of the Company,
threatened in writing audits, examinations, investigations or other
proceedings in respect of Taxes or Tax matters relating to the Company or
any of its Subsidiaries which, if determined adversely to the Company or
its Subsidiaries, could reasonably be expected to have a Material Adverse
Effect; (iv) there are no deficiencies or claims for any Taxes that have
been proposed, asserted or assessed against the Company or any of its
Subsidiaries which, if such
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deficiencies or claims were finally resolved against the Company or any of
its Subsidiaries, could reasonably be expected, individually or in the
aggregate, to have a Material Adverse Effect; (v) there are no material
Liens for Taxes upon the assets of the Company or any of its Subsidiaries,
other than Liens for current Taxes not yet due and payable and Liens for
Taxes that are being contested in good faith by appropriate proceedings;
(vi) none of the Company or any of its Subsidiaries has made an election
under Section 341(f) of the Code; (vii) except as set forth in(S)3(l) of
the Company Disclosure Schedule, no extension of the statute of limitations
on the assessment of any Taxes has been granted by the Company or any of
its Subsidiaries and is currently in effect; (viii) except as set forth in
(S)3(l) of the Company Disclosure Schedule none of the Company or its
Subsidiaries is a party to any agreement or arrangement that could
reasonably be expected to result, separately or in the aggregate, in the
actual or deemed payment by the Company or a Subsidiary of any "excess
parachute payments" within the meaning of Section 280G or 162(m) of the
Code; (ix) none of the Company or its Subsidiaries has been a United States
real property holding corporation within the meaning of Section 897(c)(2)
of the Code during the applicable period specified in Section
897(c)(1)(A)(ii) of the Code; (x) all Taxes required to be withheld,
collected or deposited by or with respect to the Company and its
Subsidiaries have been timely withheld, collected or deposited, as the case
may be, and, to the extent required, have been paid to the relevant taxing
authority, except, in each case, to the extent that failing to so withhold,
collect, deposit or pay would not have a Material Adverse Effect; (xi) none
of the Company or its Subsidiaries has issued or assumed (A) any
obligations described in Section 279(b) of the Code, (B) any applicable
high yield discount obligations, as defined in Section 163(i) of the Code,
or (C) any registration- required obligations, within the meaning of
Section 163(f)(2) of the Code, that is not in registered form; (xii) there
are no requests for information currently outstanding that could affect the
Taxes of the Company and its Subsidiaries; and (xiii) there are no proposed
reassessments of any property owned by the Company or its Subsidiaries or
other proposals that could increase the amount of any Tax to which the
Company, its Subsidiaries or any such Person would be subject.
(m) Compliance with Laws. Neither the Company nor any Subsidiary thereof
is in violation of, or has since September 30, 1997 violated, and, to the
Knowledge of the Company, none of them is under investigation with respect
to or has been threatened to be charged with or given notice of any
violation by any Governmental Body of any applicable law, rule, regulation,
judgment, injunction, order or decree, except for violations that could not
reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect.
(n) Permits. Except as could not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect, (i) the
Permits are valid and in full force and effect, (ii) neither the Company
nor any Subsidiary thereof is in default under, and no condition exists
that with notice or lapse of time or both would constitute a default under,
the Permits and (iii) none of the Permits will be terminated or impaired or
become terminable, in whole or in part, as a result of the transactions
contemplated hereby. The Company and each of its Subsidiaries have all
Permits necessary to carry on its business as currently conducted or as
proposed to be conducted, except to the extent that the failure to so have
them would not have a Material Adverse Effect.
(o) Contracts. (S)3(o) of the Company Disclosure Schedule sets forth a
list of the following Contracts to which the Company or any of its
Subsidiaries is a party or by or to which it or its assets are bound or
subject: (i) Contracts relating to the borrowing of money; (ii) Contracts
with any current or former officer or director of the Company; (iii) joint
venture agreements between the Company or any of its Subsidiaries and an
unaffiliated third party; (iv) any Contracts providing for two or more
fiscal year payments to or from the Company or any Subsidiary thereof of
$200,000 or more; (v) any license agreements (except with respect to
Intellectual Property), distribution agreements, franchise agreements or
agreements in respect of similar rights granted to or held by the Company
or any of its Subsidiaries; (vi) any Contract that materially limits the
freedom of the Company or any Subsidiary thereof to compete in any line of
business or with any Person or in any geographical area or which would so
materially limit the freedom of the Company or any Subsidiary thereof so to
compete after the Effective Time; (vii) any other Contract not made in the
Ordinary
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Course of Business which Contract is material to the Company and the
Subsidiaries taken as a whole; or (viii) any Tax sharing agreement or other
arrangement. The Company has heretofore made available to AAC true and
complete copies of each of the Contracts set forth in (S)3(o) of the
Company Disclosure Schedule. Except for Contracts that could not reasonably
be expected to have, individually or in the aggregate, a Material Adverse
Effect, all Contracts disclosed in (S)3(o) of the Company Disclosure
Schedule are valid and binding Contracts of the Company or a Subsidiary
thereof, are in full force and effect (except for those that have
terminated or will terminate by their own terms), and neither the Company,
any Subsidiary thereof nor, to the Knowledge of the Company, any other
party thereto, is in default in any material respect under the terms of any
such Contract.
(p) Intellectual Property Rights.
(i) (S)3(p) of the Company Disclosure Schedule sets forth a complete
list of all (A) patents and patent applications, (B) trademarks,
trademark registrations and applications to register any trademarks,
and (C) copyright registrations and copyright applications of the
Company and its Subsidiaries, in each case, whether currently used or
not used by the Company and its Subsidiaries in connection with the
business of the Company and its Subsidiaries as currently conducted.
(S)3(p) also sets forth a complete list of all material licenses with
respect to Intellectual Property owned or licensed by the Company or
any Subsidiary thereof and used in the operation of the current
products of the Company or any Subsidiary thereof.
(ii) The Company and its Subsidiaries own or have the right to use
all material Intellectual Property currently used by the Company and
its Subsidiaries in the business of the Company and its Subsidiaries as
currently conducted. To the Knowledge of the Company, the Company and
its Subsidiaries own or have the right to use all other Intellectual
Property currently used by the Company and its Subsidiaries in the
business of the Company and its Subsidiaries as currently conducted.
(iii) The Company has no Knowledge of any unresolved claims made by
any third party that the Company or any Subsidiary thereof is
infringing the Intellectual Property rights of any Person as a result
of the Company's or any Subsidiary's use of any Intellectual Property.
To the Company's Knowledge, the use of the Company's or any
Subsidiary's Intellectual Property does not infringe the rights of any
third party.
(iv) The Company and its Subsidiaries have taken reasonable security
measures to protect the secrecy, confidentiality and value of any trade
secret of the Company or any Subsidiary thereof necessary for the
operation of the Company's or any Subsidiary's business.
(v) To the Knowledge of the Company, the Company and its Subsidiaries
are not, nor have they received any notice that they are, in default
or, with the giving of notice or lapse of time or both, would be in
default under any material license to use any Intellectual Property
listed in (S)3(p) of the Disclosure Schedule.
(vi) To the Company's Knowledge, (A) the Company or any Subsidiary
thereof is not infringing any Intellectual Property of any other Person
in connection with the conduct of the Company's or any Subsidiary's
business as presently conducted and (B) no Person is infringing any
Intellectual Property either owned or licensed by the Company or any
Subsidiary thereof which is material to the operation of the Company's
or any Subsidiary's business.
(q) Board Approval; Fairness Opinion. The board of directors of the
Company has determined that, as of the date hereof, this Agreement and the
transactions contemplated hereby are fair to, and in the best interest of,
the Company Stockholders. Deutsche Morgan Grenfell Inc. has delivered to
the board of directors of the Company its opinion that, as of the date
hereof, the consideration to be paid to the Company Stockholders in the
Merger is fair from a financial point of view to the Company Stockholders.
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(r) ERISA. Each Benefit Plan and Multiemployer Plan with an annualized
cost to the Company in excess of $100,000 are listed in (S)3(r) of the
Company Disclosure Schedule, and copies of all material documentation
relating to such Benefit Plans during the last three (3) years have been
delivered to AAC (including copies of written Benefit Plans, written
descriptions of oral Benefit Plans, summary plan descriptions, trust
agreements, the three most recent annual returns, employee communications,
and IRS determination letters). Except as disclosed in(S)3(r) of the
Disclosure Schedule:
(i) each Benefit Plan has at all times been maintained and
administered in accordance with its terms and with the requirements of
all applicable laws, including ERISA and the Code (except to the extent
that a failure to so maintain and administer would have a Material
Adverse Effect), and each Benefit Plan intended to qualify under
section 401(a) of the Code has a current determination letter on which
the Company may rely;
(ii) no Benefit Plan is a "defined benefit plan" within the meaning
of section 414(j) of the Code, other than a Benefit Plan described in
Section 401(a)(1) of ERISA;
(iii) no direct, contingent or secondary liability has been incurred
or is expected to be incurred by the Company or any Subsidiary under
Title IV of ERISA to any party with respect to any Benefit Plan, or, to
the Company's Knowledge, with respect to any other Plan presently or
heretofore maintained or contributed to by any ERISA Affiliate;
(iv) with respect to each Multiemployer Plan (A) no withdrawal
liability has been incurred by the Company or, to the Company's
Knowledge, any ERISA Affiliate, and the Company or any Subsidiary
thereof has no reason to believe that any such liability will be
incurred, prior to the Closing Date, (B), to the Knowledge of the
Company, no such plan is in "reorganization" (within the meaning of
Section 4241 of ERISA), (C) no notice has been received that increased
contributions may be required to avoid a reduction in plan benefits or
the imposition of an excise tax, or that the plan is or may become
"insolvent" (within the meaning of Section 4241 of ERISA), (D), to the
Knowledge of the Company, no proceedings have been instituted by the
Pension Benefit Guaranty Corporation against the plan, (E) there is no
contingent liability for withdrawal liability by reason of a sale of
assets pursuant to Section 4204 of ERISA, and (F) except as disclosed
in (S)3(r) of the Company Disclosure Schedule, if the Company or any
ERISA Affiliate were to have a complete or partial withdrawal under
Section 4203 of ERISA as of the Closing, no obligation to pay
withdrawal liability would exist on the part of the Company or, to the
Company's Knowledge, any ERISA Affiliate.
(v) neither the Company nor, to the Company's Knowledge, any ERISA
Affiliate has incurred any liability for any tax imposed under section
4971 through 4980B of the Code or civil liability under section 502(i)
or (l) of ERISA;
(vi) no benefit under any Benefit Plan, including, without
limitation, any severance or parachute payment plan or agreement, will
be established or become accelerated, vested or payable by reason of
any transaction contemplated under this Agreement;
(vii) no tax has been incurred under section 511 of the Code with
respect to any Benefit Plan (or trust or other funding vehicle pursuant
thereto).
(viii) no Benefit Plan provides health or death benefit coverage
beyond the termination of an employee's employment, except as required
by Part 6 of Subtitle B of Title I of ERISA or section 4980B of the
Code or any State or local laws requiring continuation of benefits
coverage following termination of employment;
(ix) no suit, actions or other litigation (excluding claims for
benefits incurred in the ordinary course of plan activities) have been
brought or, to the Knowledge of the Company, threatened against
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or with respect to any Benefit Plan, and there are no facts or
circumstances to the Knowledge of the Company that could reasonably be
expected to give rise to any such suit, action or other litigation; and
(x) all contributions to Benefit Plans and Multiemployer Plans that
were required to be made under such Plans by the Company or any
Subsidiary thereof have been made and each of the Company and each
Subsidiary has performed all material obligations required to be
performed under all such Plans.
(s) Labor and Employment Matters.
(i) (A) No employee of the Company or any Subsidiary thereof is
represented by a labor union, no labor union has been certified or
recognized as a representative of any such employee, and neither the
Company nor any Subsidiary thereof has any obligation under any
collective bargaining agreement or other agreement with any labor union
or any obligation to recognize or deal with any labor union, and there
are no such contracts or agreements pertaining to or which determine
the terms or conditions of employment of any employee of the Company or
any Subsidiary thereof; (B) there are no pending or threatened
representation campaigns, elections or proceedings; (C) the Company has
no Knowledge of any strikes, slowdowns, or work stoppages of any kind,
or threats thereof, and no such activities occurred during the 24-month
period preceding the date hereof; (D) neither the Company nor any
Subsidiary thereof has engaged in, admitted committing or been held to
have committed any unfair labor practice; and (E) there are no
controversies or grievances between the Company or any Subsidiary
thereof and any of its employees or representatives thereof, the
outcome of which could result in a Material Adverse Effect.
(ii) (S)3(s) of the Company Disclosure Schedule sets forth all
Contracts under which the Company or any Subsidiary thereof has any
obligation to provide compensation or remuneration of any kind (other
than obligations to make current wage or salary payments that are
terminable at will without notice or that are less than $100,000
annually per person) to or on behalf of any employee or consultant.
(iii) The Company and each of its Subsidiaries have at all times
complied in all material respects, and is in material compliance with,
all applicable laws, rules and regulations respecting employment,
wages, hours, compensation, benefits, occupational health and safety,
and payment and withholding of taxes in connection with employment,
except to the extent that failure to so comply would not have a
Material Adverse Effect.
(t) Real Estate.
(i) (S)3(t) of the Company Disclosure Schedule is a true and complete
list (including, without limitation, legal descriptions) of all real
property owned in fee by the Company or any Subsidiary thereof
(together with all buildings and improvements thereon, the "Owned Real
Property"). Such Owned Real Property is not subject to any Liens
(including, without limitation, Leases, occupancy agreements,
possessory rights, options and rights of first refusal) except as
listed on (S)3(t) of the Company Disclosure Schedule. Neither the
Company nor any Subsidiary thereof leases all or any part of any Owned
Real Property.
(ii) Neither the Company nor any Subsidiary thereof has assigned,
pledged or otherwise transferred, or has sublet (as sublessor) the
premises demised by, any Lease. The Company or a Subsidiary thereof is
in possession of the premises demised by the Leases. No tenant or
landlord under any Lease has exercised any option or right to (i)
cancel or terminate such Lease or shorten the term thereof, (ii) lease
additional premises, (iii) reduce or relocate the premises demised by
such Lease, or (iv) purchase any property. All brokerage commissions
payable by the Company or any Subsidiary thereof with respect to any
Lease have been fully paid.
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(u) Environmental Matters. To the Knowledge of the Company:
(i) Neither the Company nor any of its Subsidiaries is in violation
of any Environmental Laws such that the violation would have a Material
Adverse Effect;
(ii) The Company and each of its Subsidiaries have obtained all
permits and licenses that are required under Environmental Laws and are
not in violation of any applicable permit or license such that the
failure to have such permits or licenses or the violation thereof would
have a Material Adverse Effect;
(iii) Neither the Company nor any of its Subsidiaries has received
any written notices that are currently pending or outstanding alleging
that the Company, any Subsidiary of the Company, any predecessor of the
Company, or any entity previously owned by the Company, is in violation
of or has any liabilities under any Environmental Laws, except for any
violation or liabilities that would not have a Material Adverse Effect;
and
(iv) There have been no releases of any Hazardous Materials at, from,
in, to, on or under any Site or, to the Company's Knowledge, any
Predecessor Site, that would have a Material Adverse Effect.
4. REPRESENTATIONS AND WARRANTIES OF AAC
AAC represents and warrants to the Company that the statements contained in
this (S)4 are correct and complete as of the date of this Agreement, except as
set forth in the disclosure schedule prepared by AAC (the "AAC Disclosure
Schedule"). The AAC Disclosure Schedule will be arranged in paragraphs
corresponding to the numbered and lettered paragraphs contained in this (S)4.
(a) Organization. AAC is a corporation duly organized, validly existing,
and in good standing under the laws of the jurisdiction of its
incorporation. AAC is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the lack of such qualification would not have a
Material Adverse Effect or a material adverse effect on the ability of the
Parties to consummate the transactions contemplated by this Agreement. AAC
has full corporate power and authority to carry on the businesses in which
it is engaged and to own and use the properties owned and used by it. AAC
was formed solely for the purpose of engaging in the transactions
contemplated hereby, has engaged in no other business activities and has
conducted its operations only as contemplated hereby. AAC has not engaged,
nor prior to the Effective Time will it engage, in any business activities
other than the business activities contemplated hereby (including business
activities contemplated by or reasonably incident to the Financing). AAC
has conducted and, prior to the Effective Time, will conduct its operations
only as contemplated hereby (including activities contemplated by or
reasonably incident to the Financing). AAC has no Subsidiaries and, during
the period commencing with the date hereof and ending at the Effective
Time, AAC will have no Subsidiaries. AAC does not have, nor at the
Effective Time will it have, any liabilities or material obligations not
expressly contemplated pursuant to this Agreement or the transactions
contemplated hereby.
(b) Financing. AAC has delivered to the Company true and complete copies
of (i) a commitment letter, dated December 17, 1997, from Morgan Stanley
Senior Funding, Inc. relating to a $75 million senior secured revolving
credit facility, (ii) a commitment letter, dated December 17, 1997, from
Morgan Stanley & Co. Incorporated ("MSCI") pursuant to which MSCI has
committed, subject to the terms and conditions set forth therein, to use
its best efforts to complete the public offering or the private placement
of senior unsecured notes of the Company for an aggregate amount equal to
$157,000,000 or, under certain circumstances set forth therein, to purchase
such senior unsecured notes, and (iii) an amended and restated commitment
letter, dated January 12, 1998, from MSCI and Goldman, Sachs & Co.
("Goldman"), which replaced and superseded the commitment letter from MSCI
referred to in (ii) above, pursuant to which
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MSCI and Goldman have committed, subject to the terms and conditions set
forth therein, to use their best efforts to complete the public offering or
the private placement of senior unsecured notes of the Company for an
aggregate amount equal to $157,000,000 or, under certain circumstances to
purchase such senior unsecured notes. The commitment letters referred to in
clauses (i) and (iii) above shall be collectively referred to as the "Debt
Financing Commitments" and the financing under the Debt Financing
Commitments shall be referred to as the "Financing". In addition, AAC has
delivered to the Company a true and complete copy of a commitment letter,
dated December 17, 1997, from CVC pursuant to which CVC (together with its
Affiliates) has committed, subject to the terms and conditions set forth
therein, to purchase securities of CSH LLC not exceeding $72 million in the
aggregate (the "Equity Financing Commitment"), the proceeds of which shall,
pursuant to the terms of the Equity Financing Commitment, be invested by
CSH LLC in AAC in furtherance of the consummation by AAC of the
transactions contemplated hereby. The aggregate proceeds to be made
available pursuant to the Debt Financing Commitments and the Equity
Financing Commitment (including any funds which may be made available to
AAC by one or more Subsidiaries of CSH LLC as contemplated by the Equity
Financing Commitment) are in an amount sufficient to consummate the
transactions contemplated hereby. None of the Debt Financing Commitments
and the Equity Financing Commitment has been withdrawn and AAC knows of no
facts or circumstances that reasonably may be expected to result in any of
the conditions set forth in the Debt Financing Commitments and the Equity
Financing Commitment not being satisfied.
(c) Authorization of Transaction. AAC has full power and authority
(including full corporate power and authority) to execute and deliver this
Agreement and to perform its obligations hereunder. The execution and
delivery by AAC, and the performance of its obligations hereunder have been
duly authorized by all requisite corporate action other than the requisite
stockholder approval, and this Agreement has been duly executed and
delivered by AAC. This Agreement constitutes the valid and legally binding
obligation of AAC, enforceable in accordance with its terms and conditions.
(d) Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby,
will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
Governmental Body to which AAC is subject or any provision of the
certificate of incorporation or bylaws of AAC or (ii) conflict with, result
in a breach of, constitute a default under, result in the acceleration of,
create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice under Contract, or other arrangement to which AAC is
a party or by which it is bound or to which any of its assets is subject,
except where the violation, conflict, breach, default, acceleration,
termination, modification, cancellation or failure to give notice would not
have a Material Adverse Effect or a material adverse effect on the ability
of the Parties to consummate the transactions contemplated by this
Agreement. Other than in connection with the provisions of the Hart-Scott-
Rodino Act, the Delaware General Corporation Law, the Securities Exchange
Act, the Securities Act, and the state securities laws, AAC is not required
to give any notice to, make any filing with, or obtain any authorization,
consent, or approval of any Governmental Body in order for the Parties to
consummate the transactions contemplated by this Agreement, except where
the failure to give notice, to file, or to obtain any authorization,
consent, or approval would not have a material adverse effect on the
ability of the Parties to consummate the transactions contemplated by this
Agreement. Neither AAC nor any Affiliate or Subsidiary thereof is a
"telecommunications carrier" as defined in Section 3(44) of the
Communications Act of 1934, as amended, or a "foreign carrier" or any
affiliate thereof as defined in Section 63.18(h) of the rules of the
Federal Communications Commission.
(e) Brokers' Fees. AAC has no liability or obligation to pay any fees or
commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement for which any of the Company
and its Subsidiaries could become liable or obligated.
(f) Capitalization. The authorized capital stock of AAC consists of
4,000,000 shares, $.01 par value, of common stock (the "AAC Common Stock").
As of the moment immediately prior to the Effective Time, the number of
shares of AAC Common Stock that will be outstanding will equal the sum of
(A)
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3,809,524 minus (B) the final aggregate number of Stock Electing Shares
immediately prior to the Effective Time (after giving effect to the
provisions of (S)2(f)). All of the issued and outstanding shares of AAC
Common Stock have been duly authorized and are validly issued, fully paid
and nonassessable. AAC is a Subsidiary owned by one or more of CSH LLC and
its Subsidiaries. Immediately following the Effective Time, David Kirby, a
private investor and U.S. citizen, will own 25.5% of the voting interests
relating to the units of CSH LLC attributable to CSH LLC's ownership of IPC
(the "IPC Units"), John O'Mara, a private investor and U.S. citizen, will
own 25.5% of the voting interests relating to the IPC Units, and CVC will
own 49% of the voting interests relating to the IPC Units. There are no
outstanding or authorized options, warrants, purchase rights, subscription
rights, conversion rights, exchange rights, or other contracts or
commitments that could require AAC to issue, sell, or otherwise cause to
become outstanding any of its capital stock. There are no outstanding or
authorized stock appreciation, phantom stock, profit participation, or
similar rights with respect to AAC. Except as otherwise provided in the
Ancillary Agreements, neither CSH LLC nor any of its Subsidiaries has
entered into any direct or indirect agreements related to the voting or
transferability of the Surviving Corporation Common Stock.
5. COVENANTS
The Parties agree as follows with respect to the period from and after the
execution of this Agreement.
(a) General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper, or advisable in
order to consummate and make effective the transactions contemplated by
this Agreement (including satisfaction, but not waiver, of the closing
conditions set forth in (S)6 below); provided, however, that no director or
officer of the Company shall be required either to violate any requirement
imposed by law in connection therewith or to take any action such director
or officer deems, after consultation with outside counsel, not consistent
with such director's or officer's fiduciary duty.
(b) Notices and Consents. The Company will give any notices (and will
cause each of its Subsidiaries to give any notices) to third parties, and
will use its reasonable best efforts to obtain (and will cause each of its
Subsidiaries to use its reasonable best efforts to obtain) any required
third party consents, that AAC reasonably may request in connection with
the matters referred to in (S)3(d) above.
(c) Regulatory Matters and Approvals. Each of the Parties will (and the
Company will cause each of its Subsidiaries to) give any notices to, make
any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in (S)3(d) and(S)4(d)
above. Without limiting the generality of the foregoing:
(i) Securities Act, Securities Exchange Act, and State Securities
Laws.
(A) The Company will prepare and file with the SEC preliminary
proxy materials ("Preliminary Proxy Materials") under the Securities
Exchange Act relating to the Annual Meeting. The Company will use
its best efforts to respond to the comments of the SEC thereon and
will make any further filings (including amendments and supplements)
in connection therewith that may be necessary, proper or advisable.
AAC will provide the Company with whatever information and
assistance in connection with the foregoing filings that the Company
may request.
(B) The Company and AAC shall each use its reasonable best efforts
to take, or cause to be taken, (i) all actions necessary, proper or
advisable by such Party with respect to the prompt preparation and
filing with the SEC of a registration statement on Form S-4 relating
to the Surviving Corporation Common Stock (the "Registration
Statement") and a Rule 13e-3 Transaction Statement on Schedule 13E-3
with respect to the Merger (together with any supplements or
amendments thereto, collectively, the "Schedule 13E-3"), (ii) such
actions as may be required to have the Registration Statement
declared effective under the Securities Act and to have the
Preliminary Proxy Materials cleared by the SEC, in each case as
promptly as practicable,
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and (iii) such actions as may be required to be taken under state
securities or applicable Blue Sky laws in connection with the
issuance of the securities contemplated hereby.
(C) Concurrently with the filing of the Preliminary Proxy
Materials, the Company shall, and shall cause its Affiliates to,
file with the SEC a Schedule 13E-3. AAC and the Company each agrees
to correct any information provided by it (and each agrees to cause
any information provided by its respective Affiliates to be
corrected) for use in the Schedule 13E-3, if and to the extent that
it shall have become false and misleading in any material respect.
The Company agrees to take all steps necessary to cause the Schedule
13E-3 as so corrected to be filed with the SEC and to be
disseminated to holders of the Company Common Stock, in each case as
and to the extent required by applicable federal securities laws.
AAC and its counsel shall be given reasonable opportunity to review
and comment on Schedule 13E-3 prior to its being filed with the SEC.
(ii) Delaware General Corporation Law; Annual Meeting. The Company
will (A) call an annual meeting of its stockholders (the "Annual
Meeting"), as soon as reasonably practicable in order that such
stockholders may consider and vote upon (i) the adoption of this
Agreement and the approval of the Merger in accordance with the
Delaware General Corporation Law, (ii) the Certificate Amendment, (iii)
the New Stock Incentive Plan, (iv) the election of two directors and
(v) the ratification of the appointment of Coopers & Lybrand L.L.P. as
the Company's auditors for the fiscal year ending September 30, 1998,
and (B) mail the Joint Disclosure Document to its stockholders as soon
as reasonably practicable, which Joint Disclosure Document will contain
the affirmative recommendation of the board of directors of the Company
in favor of the adoption of this Agreement and the approval of the
Merger; provided, however, that any provision of this Agreement to the
contrary notwithstanding, the Company will not have any obligation to
call the Annual Meeting or mail the Joint Disclosure Document to its
stockholders (x) if such action would require any director or officer
of the Company either to violate any requirement imposed by law in
connection therewith or, after consultation with and advice from its
outside counsel, any director or officer of the Company determines in
good faith that to take such action would be inconsistent with such
director's or officer's fiduciary duty or (y) until the board of
directors of the Company shall have received from Deutsche Morgan
Grenfell Inc. a supplemental written confirmation of its opinion that
the consideration to be paid in the Merger is fair to the Company
Stockholders from a financial point of view, such confirmation to be
dated as of a date within two Business Days of the date that the Joint
Disclosure Document is to be mailed.
(iii) Hart-Scott-Rodino Act. Each of the Parties will file (and the
Company will cause each of its Subsidiaries to file) any Notification
and Report Forms and related material that it may be required to file
with the Federal Trade Commission and the Antitrust Division of the
United States Department of Justice under the Hart-Scott-Rodino Act,
will use its best efforts to obtain (and the Company will cause each of
its Subsidiaries to use its best efforts to obtain) an early
termination of the applicable waiting period, and will make (and the
Company will cause each of its Subsidiaries to make) any further
filings pursuant thereto that may be necessary, proper, or advisable.
(d) Financing. AAC will use its reasonable best efforts to (i) satisfy
all the conditions necessary to be satisfied by it and/or its Affiliates to
obtain the full proceeds under the Debt Financing Commitments and the
Equity Financing Commitment, (ii) assist the Company in obtaining the
Financing, and (iii) obtain the equity contributions contemplated under the
Equity Financing Commitment. Subject to the Company having received the
proceeds, or the immediate right to receive the proceeds, of the Financing,
AAC at the Closing will be capitalized with equity contributions in an
amount at least equal to $80,000,000 minus the product of (i) the final
aggregate number of Stock Electing Shares immediately prior to the
Effective Time (after giving effect to the provisions of (S)2(f)) and (ii)
$21. AAC will not amend the Debt Financing Commitments or the Equity
Financing Commitment in any way materially adverse to the Company, or the
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Company's interest as successor to AAC, without the written consent of the
Company, which consent shall not be unreasonably withheld.
(e) Accounting Treatment. The Company and AAC shall cooperate with any
reasonable requests of the other or the SEC related to the recording of the
Merger as a recapitalization for financial reporting purposes, including,
without limitation, to assist AAC and its Affiliates with any presentation
to the SEC with regard to such recording and to include appropriate
disclosure with regard to such recording in all filings with the SEC and
all mailings to shareholders made in connection with the Merger. In
furtherance of the foregoing, the Company shall provide to AAC for the
prior review of AAC's advisors any description of the transactions
contemplated by this Agreement which is meant to be filed with the SEC.
(f) Cooperation. The Company agrees to provide, and will cause its
Subsidiaries and its and their respective officers, employees and advisors
to provide, all necessary and appropriate cooperation in connection with
the arrangement of the Financing. In conjunction with the obtaining of the
Financing, the Company agrees, at the request of AAC, (i) to call for
prepayment or redemption of all or a portion of the indebtedness disclosed
in (S)3(o) of the Company Disclosure Schedule, but, only to the extent that
such call for prepayment or redemption is permitted under the applicable
agreement representing such indebtedness, or (ii) to prepay or redeem all
or a portion of any then existing indebtedness of the Company or its
Subsidiaries described in (S)3(o) of the Company Disclosure Schedule,
provided that no such prepayment or redemption shall themselves actually be
made (nor shall the Company be required to incur any liability in respect
of such prepayment or redemption) until contemporaneously with the
Effective Time.
(g) Operation of the Company's Business. Without the written consent of
AAC, the Company will not (and will not cause or permit any of its
Subsidiaries to) engage in any practice, take any action, or enter into any
transaction outside the Ordinary Course of Business, including, without
limitation, the following:
(i) authorizing or effecting any change in its charter or bylaws
(other than as contemplated by this Agreement);
(ii) granting any options, warrants, or other rights to purchase or
obtain any of its capital stock or issuing, selling, or otherwise
disposing of any of its capital stock (except upon the conversion or
exercise of options and other rights and obligations currently
outstanding);
(iii) declaring, setting aside, or paying any dividend or
distribution with respect to its capital stock (whether in cash or in
kind), or redeeming, repurchasing, or otherwise acquiring any of its
capital stock, in either case, outside the Ordinary Course of Business;
(iv) issuing any note, bond, or other debt security or creating,
incurring, assuming, or guaranteeing any indebtedness for borrowed
money or capitalized lease obligation (except for inter- company loans
or advances from the Company to, or guarantees on behalf of, any one or
more of its Subsidiaries), outside the Ordinary Course of Business;
(v) imposing any Lien upon any of its assets outside the Ordinary
Course of Business;
(vi) other than pursuant to the transactions contemplated by this
Agreement, making any material change in employment terms for any of
its directors, officers and employees outside the Ordinary Course of
Business;
(vii) except pursuant to existing agreements or arrangements as of
the date hereof, making any capital investment in, making any loan to,
or acquiring the securities or assets of any other Person outside the
Ordinary Course of Business;
(viii) adopting or amending any bonus, profit sharing, compensation,
severance, termination, stock option, pension, retirement, deferred
compensation, employment or employee benefit plan,
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agreement, trust, plan, fund or other arrangement for the benefit and
welfare of any director, officer or employee, except for normal
increases in the Ordinary Course of Business and that, in the
aggregate, do not result in a material increase in benefits or
compensation expense to the Company or any Subsidiary;
(ix) revaluing in any material respect any significant portion of its
assets, including, without limitation, writing down the value of
inventory in any material amount or write-off of notes or accounts
receivable in any material amount;
(x) paying, discharging or satisfying any material liabilities
(whether matured, unmatured, absolute, accrued, asserted or unasserted,
contingent or otherwise) other than the payment, discharge or
satisfaction in the Ordinary Course of Business of liabilities
reflected or reserved against in the consolidated financial statements
of the Company and set forth in the Public Reports or incurred in the
Ordinary Course of Business;
(xi) making any Tax election with respect to or settling or
compromising any material income Tax liability;
(xii) taking any action other than in the Ordinary Course of Business
with respect to accounting policies or procedures; and
(xiii) committing to any of the foregoing.
(h) Full Access. The Company will (and will cause each of its
Subsidiaries to) permit representatives of AAC to have full access at all
reasonable times, and in a manner so as not to interfere with the normal
business operations of the Company and its Subsidiaries, to all premises,
properties, personnel, books, records (including tax records), contracts,
and documents of or pertaining to each of the Company and its Subsidiaries.
AAC will keep confidential and hold as such any Confidential Information it
receives from any of the Company and its Subsidiaries in the course of the
reviews contemplated by this (S)5(h), will not use any of the Confidential
Information except in connection with this Agreement, and, if this
Agreement is terminated for any reason whatsoever, will return to the
Company all tangible embodiments (and all copies) thereof which are in
AAC's possession, and AAC acknowledges that it and its Representatives (as
defined therein) will be bound to the Confidentiality/Standstill Letter
Agreement.
(i) Notice of Developments. Each Party will give prompt written notice to
the others of any event giving rise to a Material Adverse Effect and
causing a breach of any of its own representations and warranties in (S)3
and (S)4 above. No disclosure by any Party pursuant to this (S)5(i),
however, shall be deemed to amend or supplement the Company Disclosure
Schedule, or the AAC Disclosure Schedule, as the case may be, or to prevent
or cure any misrepresentation, breach of warranty, or breach of covenant.
(j) No Solicitation.
(i) The Company shall not, and shall not permit any of its
Subsidiaries to (whether directly or indirectly through advisors,
agents or other intermediaries), and
(ii) the Company shall not, and shall not permit any of its
Subsidiaries to, authorize or knowingly permit any of its or their
officers, directors, agents, representatives, advisors or Subsidiaries,
solicit, initiate or knowingly encourage the submission of inquiries,
proposals or offers from any Third Party relating to (A) any acquisition of
10% or more of the consolidated assets of the Company and its Subsidiaries
or of over 10% of any class of equity securities of the Company or any of
its Subsidiaries, (B) any tender offer (including a self tender offer) or
exchange offer that if consummated would result in any Third Party
beneficially owning 10% or more of any class of equity securities of the
Company or any of its Subsidiaries, (C) any merger, consolidation, business
combination, recapitalization, liquidation,
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dissolution or similar transaction involving the Company or any of its
Subsidiaries whose assets, individually or in the aggregate, constitute
more than 10% of the consolidated assets of the Company, other than the
transactions contemplated by this Agreement or (D) any other transaction
the consummation of which would, or could reasonably be expected to impede,
interfere with, prevent or materially delay the Merger or which would, or
could reasonably be expected to, materially dilute the benefits to AAC of
the transactions contemplated hereby (collectively, the "Acquisition
Proposals" and which, if consummated, will be an "Acquisition Transaction")
or enter into or participate in any discussions (except as may be necessary
to inform a Third Party of the provisions of this (S)5(j)) or negotiations
regarding any of the foregoing, or furnish to any Third Party any
information with respect to the business, properties or assets of the
Company in connection with the foregoing, or otherwise cooperate in any way
with, or knowingly assist or participate in, facilitate or encourage, any
effort or attempt by any Third Party to do or seek any of the foregoing;
provided, however, that the provisions of this (S)5(j) shall not limit or
prohibit the Company or its board of directors from (i) engaging in
discussions or negotiations with such a Third Party who has made a Superior
Acquisition Proposal but only if the board of directors of the Company,
after consultation with and advice from its outside counsel, determines in
good faith that, in the exercise of its fiduciary responsibilities, such
discussions or negotiations should be commenced or such information should
be furnished or such facilitation undertaken; (ii) furnishing information
pursuant to an appropriate and customary confidentiality letter concerning
the Company and its businesses, properties or assets to a Third Party who
has made a Superior Acquisition Proposal as to which a prior determination
of the board of directors of the Company as contemplated under clause (i)
above has been made; provided, further, that (A) the board of directors of
the Company shall not, and shall not authorize any officers or
representatives to, take any of the foregoing actions until notice to AAC
of the Company's intent to take such action shall have been given; and (B)
if the board of directors of the Company receives a Superior Acquisition
Proposal, to the extent it may do so without breaching its fiduciary duties
as determined in good faith after consultation with its outside counsel,
and without violating any of the conditions of such Superior Acquisition
Proposal, then the Company shall promptly inform AAC of the material terms
and conditions of such proposal and the identity of the Third Party making
it; or (iii) taking a position on a tender offer by a Third Party, as
required by Rule 14e-2 under the Securities Exchange Act (provided no such
position shall constitute a recommendation of such transaction if it does
not constitute a Superior Acquisition Proposal), or complying with its
duties of disclosure under applicable state law. As of the date hereof, the
Company shall immediately cease and cause each of its Subsidiaries and its
and their advisors, agents and other intermediaries to cease, any and all
existing activities, discussions or negotiations with any Third Party
conducted heretofore with respect to any of the foregoing.
(k) Insurance and Indemnification.
(i) For a period of 6 years after the Effective Time, the Surviving
Corporation shall indemnify and hold harmless the present and former
officers and directors of the Company and its Subsidiaries in respect
of acts or omissions occurring prior to the Effective Time to the
maximum extent provided under the Company's certificate of
incorporation and bylaws, or any Subsidiary's certificate of
incorporation or bylaws, in either case, as in effect on the date
hereof; provided that such indemnification shall be subject to any
limitation imposed from time to time under applicable law.
(ii) For a period of 6 years after the Effective Time, the Surviving
Corporation shall provide officers' and directors' liability insurance
in respect of acts or omissions occurring prior to the Effective Time
covering each such Person currently covered by the Company's or any
Subsidiary's officers' and directors' liability insurance policy on
terms with respect to coverage and amount no less favorable than those
of such policy in effect on the date hereof (or, if such insurance
policy cannot be obtained, such insurance policy on terms with respect
to coverage and amount as favorable as can be obtained, subject to the
proviso at the conclusion of this sentence), provided that, in
satisfying its obligation under this Section, the Surviving Corporation
shall not be obligated to pay premiums in excess of,
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150% of the amount per annum the Company paid in its last full fiscal
year, which amount has been disclosed to AAC.
(l) Employees.
(i) For a period of one year following the Effective Time, the
Surviving Corporation will not adopt or make effective any change in
any "employee benefit plan" (within the meaning of Section 3(3) of
ERISA) that would terminate or substantially reduce any benefits
provided thereunder or materially increase the cost to any employee of
participation thereunder without any notice to all affected employees
at least 60 days in advance.
(ii) The Surviving Corporation shall assume and perform the
obligations of the Company and its Subsidiaries under the employment
and severance contracts specified in (S)3(h) of the Company Disclosure
Schedule.
(iii) Prior to the Effective Time, the Company shall adopt, effective
at the Effective Time, a stock incentive plan substantially in the form
attached as Exhibit C hereto (the "New Stock Incentive Plan"), and
shall reserve for issuance under the New Stock Incentive Plan a number
of shares, equal to 12% of Surviving Corporation Common Stock after
giving effect to the reservation of shares for issuance under the New
Stock Incentive Plan and the transactions contemplated under the Share
Exchange and Termination Agreement. To the extent required by law or
NASDAQ listing requirements or necessary to obtain customary tax
benefits for the Company or the holders of options, the adoption of the
New Stock Incentive Plan shall be contingent on approval by the holders
of Company Common Stock. The Company shall use its best efforts to
secure such approval not later than the Effective Time. On or
immediately after the Effective Time, the Surviving Corporation shall
grant options to purchase at least 10.0% of Surviving Corporation
Common Stock under the New Stock Incentive Plan pursuant to the terms
and conditions set forth in(S)5 of the New Stock Incentive Plan to such
Persons and in such amounts as determined by the board of directors of
the Surviving Corporation or its Compensation Committee. Within
eighteen months following the Effective Time, the Surviving Corporation
shall grant options to purchase at least 2.0% of Surviving Corporation
Common Stock (except with respect to options that expire by their own
terms). As soon as practicable after the adoption of the New Stock
Incentive Plan, the Surviving Corporation shall file a registration
statement on Form S-8 (or other appropriate form) with respect to the
Surviving Corporation Common Stock to be issued pursuant to the New
Stock Incentive Plan and shall use its best efforts to maintain the
effectiveness of such registration statement (and maintain the currency
of any related prospectus) for so long as options are outstanding or
may be granted under the New Stock Incentive Plan.
(iv) Prior to the Effective Time, the Company shall (A) take such
action as may be necessary to terminate the Company's 1994 Stock Option
and Incentive Plan, and (B) use its reasonable efforts under the
circumstances to enter into a written agreement with each Person who
holds an option to purchase shares of Company Common Stock whereby each
such option holder agrees that such option will be canceled immediately
prior to the Effective Time in exchange for the cash payment specified
in (S)2(d)(vii). If the per share exercise price of any option equals
or exceeds the Cash Election Price, such agreement shall provide for
the cancellation of such option without any corresponding payment.
(m) Disclosure.
(i) Disclosure by Company. The Joint Disclosure Documents prepared by
the Company will comply with the Securities Exchange Act in all
material respects. The Joint Disclosure Documents will not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made therein, in the light of
the circumstances under which they will be made, not misleading;
provided, however, that the Company makes no representation or warranty
with respect
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to any information that AAC and its Affiliates will supply specifically
for use in the Joint Disclosure Documents.
(ii) Disclosure by AAC. The Joint Disclosure Documents will not
contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements made therein,
in the light of the circumstances under which they will be made, not
misleading; provided, however, that AAC makes no representation or
warranty with respect to any information that the Company will supply
specifically for use in the Joint Disclosure Documents.
(n) Comfort Letters. The Company will deliver to AAC on or before the
date the Joint Disclosure Document is mailed to the Company Stockholders a
letter from its accountants, Coopers & Lybrand, L.L.P. stating its
conclusions as to the accuracy of certain information derived from the
financial records from the Company and its Subsidiaries and contained in
the Joint Disclosure Document (the "Company Comfort Letter"). The Company
Comfort Letter shall be reasonably satisfactory to AAC in form and
substance. AAC will deliver to the Company on or before the date the Joint
Disclosure Document is mailed to the Stockholders of the Company a letter
from its accountants, Coopers & Lybrand, L.L.P., stating its conclusions as
to the accuracy of certain information derived from the financial records
of AAC and contained in the Joint Disclosure Document (the "AAC Comfort
Letter"). The AAC Comfort Letter shall be reasonably satisfactory to the
Company in form and substance. Each of the Company Comfort Letter and the
AAC Comfort Letter shall cover such matters as are customarily covered in
transactions of the type contemplated hereby.
(o) Affiliate Letters. Not later than the tenth Business Day following
the mailing of the Joint Disclosure Document, the Company shall deliver to
AAC, after consultation with legal counsel, a list of the names and
addresses of those persons it deems to be "Affiliates" of the Company
within the meaning of Rule 145 promulgated under the Securities Act and a
letter, substantially in the form attached hereto as Exhibit D, restricting
the disposition of shares retained by such Affiliate as part of the Merger
Consideration.
(p) Continued Registration. The Surviving Corporation will use
commercially reasonable efforts, for at least two years after the Effective
Time of the Merger, to cause the Surviving Corporation Common Stock not to
be de-listed from The NASDAQ National Market System ("NASDAQ"); provided,
however, that the Surviving Corporation may cause or permit the Surviving
Corporation Common Stock to be de-listed in connection with any transaction
which results in the termination of registration of such securities under
Section 12 of the Securities Exchange Act; provided, however, that nothing
in this (S)5(p) shall require the Surviving Corporation to take any
affirmative action to prevent the Surviving Corporation Common Stock from
being de-listed by NASDAQ if the Surviving Corporation Common Stock ceases
to meet the applicable listing standards.
(q) Operation of AAC's Business. Except as expressly permitted by this
Agreement or contemplated in the Ancillary Agreements, the Debt Financing
Commitments and the Equity Financing Commitment, AAC will not incur any
liabilities or material obligations not set forth in (S)5(q) of the AAC
Disclosure Schedule.
(r) No Amendment of Ancillary Agreements. From the date hereof through
the Effective Time, neither AAC nor the Company shall amend in any manner
adverse to the other Party in any material respect any of the Ancillary
Agreements without the other Party's prior written consent, which consent
shall not be unreasonably withheld.
(s) Solvency Opinion. The Company shall use its commercially reasonable
efforts to obtain the Solvency Opinion.
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6. CONDITIONS TO OBLIGATION TO CLOSE.
(a) Conditions to Obligation of AAC. The obligation of AAC to consummate the
transactions to be performed by it in connection with the Closing is subject
to satisfaction of the following conditions:
(i) the representations and warranties set forth in (S)3 above shall be
true and correct in all respects at and as of the Effective Time, except
(A) for those representations and warranties which address matters only as
of a particular date (which shall have been true and correct as of such
date, subject to clause (B)), and (B) where the failure of such
representations and warranties taken together without regard to any
materiality or Knowledge qualification set forth therein to be true and
correct could reasonably be expected to have a Material Adverse Effect,
with the same force and effect as if made on and as of the Effective Time;
(ii) the Company shall have performed and complied with all of its
covenants hereunder in all material respects through the Closing;
(iii) there shall not be any judgment, order, decree, stipulation,
injunction, or charge in effect preventing consummation of any of the
transactions contemplated by this Agreement; provided, however, that AAC
shall use its reasonable best efforts to have any such judgment, order,
decree, stipulation, injunction or charge vacated or reversed;
(iv) the Company shall have delivered to AAC a certificate to the effect
that each of the conditions specified above in (S)6(a)(i)-(iii) is
satisfied in all respects;
(v) this Agreement and the Merger shall have received the Requisite
Stockholder Approval;
(vi) the holders of not more than 3% of the outstanding shares of Company
Common Stock shall have demanded appraisal of such shares in accordance
with the Delaware General Corporation Law;
(vii) the Company shall have delivered to AAC written consents to the
transactions contemplated hereby from third parties who are parties to
Contracts set forth on (S)6(a) of the Company Disclosure Schedule;
(viii) all applicable waiting periods (and any extensions thereof) under
the Hart-Scott-Rodino Act shall have expired or otherwise been terminated
and the Parties shall have received all other authorizations, consents, and
approvals of Governmental Bodies referred to in (S)3(d) above;
(ix) AAC shall be reasonably satisfied that the Merger will be recorded
as a recapitalization for financial reporting purposes;
(x) Total Debt of the Company and its Subsidiaries determined on a
consolidated basis in accordance with GAAP as of the Effective Time shall
not exceed $38 million;
(xi) the Company shall have received the proceeds of the Financing on
terms and conditions set forth in the Debt Financing Commitments or upon
terms and conditions which are substantially equivalent thereto;
(xii) the Company shall have received and accepted the resignations of
all directors of the Company other than Richard P. Kleinknecht;
(xiii) the Stockholders Agreement shall be in full force and effect and
the parties thereto shall have taken the actions required to be taken
pursuant to Section 5 thereof; and
(xiv) each of the Investors Agreement, Share Exchange and Termination
Agreement, the Starr Termination Agreement, the Walsh Employment Agreement,
the KEC-NJ Labor Pool Agreement, the Corporate Opportunity Agreement, and
the KEC-NY Labor Pool Agreement shall be in full force and effect.
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To the extent permitted by applicable law, AAC may waive any condition
specified in this (S)6(a) if it executes and delivers to the Company
written notice so stating at or prior to the Closing.
(b) Conditions to Obligation of the Company. The obligation of the Company
to consummate the transactions to be performed by it in connection with the
Closing is subject to satisfaction of the following conditions:
(i) the representations and warranties set forth in (S)4 above, without
regard to any materiality or Knowledge qualification set forth therein,
shall be true and correct in all respects at and as of the Effective Time,
except (A) for those representations and warranties which address matters
only as of a particular date (which shall have been true and correct as of
such date, subject to clause (B)) , and (B) where the failure of such
representations and warranties taken together without regard to any
materiality or Knowledge qualification set forth therein to be true and
correct could reasonably be expected to have a Material Adverse Effect,
with the same force and effect as if made on and as of the Effective Time;
(ii) AAC shall have performed and complied with all of its covenants
hereunder in all material respects through the Closing;
(iii) there shall not be any judgment, order, decree, stipulation,
injunction, or charge in effect preventing consummation of any of the
transactions contemplated by this Agreement; provided, however, that
Company shall use its reasonable best efforts to have any such judgment,
order, decree, stipulation, injunction or charge vacated or reversed;
(iv) AAC shall have delivered to the Company a certificate to the effect
that each of the conditions specified above in (S)6(b)(i)-(iii) is
satisfied in all respects;
(v) this Agreement and the Merger shall have received the Requisite
Stockholder Approval;
(vi) the AAC Stockholders Agreement shall be in full force and effect;
(vii) all applicable waiting periods (and any extensions thereof) under
the Hart-Scott-Rodino Act shall have expired or otherwise been terminated
and the Parties shall have received all other authorizations, consents, and
approvals of Governmental Bodies referred to in (S)3(d) above;
(viii) the Company shall be reasonably satisfied that the Merger will be
recorded as a recapitalization for financial reporting purposes; and
(ix) the board of directors of the Company shall have received the
Solvency Opinion.
To the extent permitted by applicable law, the Company may waive any
condition specified in this (S)6(b) if it executes and delivers to AAC
written notice so stating at or prior to Closing.
7. TERMINATION.
(a) Termination of Agreement. Any of the Parties may terminate this
Agreement, and the Merger contemplated hereby may be abandoned, with the prior
authorization of its board of directors (whether before or after stockholder
approval), as provided below:
(i) the Parties may terminate this Agreement by mutual written consent at
any time prior to the Effective Time;
(ii) AAC may terminate this Agreement by giving written notice to the
Company at any time prior to the Effective Time (A) in the event the
Company has breached any material representation, warranty, or
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covenant contained in this Agreement when made or at any time prior to the
Closing in any material respect, AAC has notified the Company of the
breach, and the breach has continued without cure for a period of 15 days
after the notice of breach, or (B) if the Closing shall not have occurred
on or before April 30, 1998, by reason of the failure of any condition
precedent under (S)6(a) hereof (unless the failure results from AAC
breaching any of its representations, warranties, or covenants contained in
this Agreement);
(iii) the Company may terminate this Agreement by giving written notice
to AAC at any time prior to the Effective Time (A) in the event AAC has
breached any material representation, warranty, or covenant contained in
this Agreement when made or at any time prior to the Closing in any
material respect, the Company has notified AAC of the breach, and the
breach has continued without cure for a period of 15 days after the notice
of breach, or (B) if the Closing shall not have occurred on or before April
30, 1998, by reason of the failure of any condition precedent under (S)6(b)
hereof (unless the failure results from the Company breaching any of its
representations, warranties, or covenants contained in this Agreement);
(iv) the Company may terminate this Agreement by giving written notice to
AAC, at any time prior to the Effective Time, in the event that a Person
has made an Acquisition Proposal that the board of directors of the Company
determines, in good faith, and after consultation with and advice from its
financial advisors, is reasonably likely to be subject to completion and
would, if consummated, result in a transaction more favorable, from a
financial point of view, to the Company's Stockholders than this Agreement
and the Merger (a "Superior Acquisition Proposal");
(v) either Party may terminate this Agreement by giving written notice to
the other Party at any time after the Annual Meeting in the event this
Agreement and the Merger fail to receive the Requisite Stockholder
Approval;
(vi) AAC may terminate this Agreement by giving written notice to the
Company if (A) the board of directors of the Company shall have withdrawn
or modified or amended, in a manner adverse to AAC, either its approval or
recommendation of this Agreement and the Merger or its recommendation that
the Company Stockholders adopt and approve this Agreement and the Merger,
(B) the board of directors of the Company shall have approved, recommended
or endorsed any Superior Acquisition Proposal, or (C) if the Company has
failed to duly call the Annual Meeting;
(vii) the Company may terminate this Agreement by giving written notice
to AAC if (A) the board of directors of the Company shall have withdrawn or
modified or amended, in a manner adverse to AAC, its approval and
recommendation of this Agreement and the Merger or its recommendation that
the Company Stockholders adopt and approve this Agreement and the Merger,
or (B) the board of directors of the Company shall have approved,
recommended or endorsed any Superior Acquisition Proposal, provided that
the Company shall be in compliance with (S)5(j).
(b) Effect of Termination. If any Party terminates this Agreement pursuant
to (S)7(a) above, all rights and obligations of the Parties hereunder shall
terminate without any liability of any Party (or its directors, officers or
stockholders) to any other Party (except for any liability of any Party then
in breach); provided, however, that (i) this (S)7(b), (ii) (S)7(c), (iii) the
confidentiality provisions contained in (S)5(h) above, (iv) the
Confidentiality/Standstill Letter Agreement, and (v) the provisions of
(S)8(b), (S)8(h), (S)8(i) and (S)8(l), shall, in each case, survive any such
termination.
(c) Termination Fee; Expenses. Upon the occurrence of any one of the
following, the Company shall pay AAC a Termination Fee (as defined below) and
certain expenses (as described below):
(i) this Agreement having been terminated by the Company or AAC, as the
case may be, pursuant to (S)7(a)(iv), (S)7(a)(vi)(B) or (S)7(a)(vii)(B); or
(ii) a Third Party having made an Acquisition Proposal (whether prior to
or following the termination of this Agreement) and this Agreement having
been terminated pursuant to (S)7(a)(vi)(A), (S)7(a)(vi)(C) or
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(S)7(a)(vii)(A), the Company consummates an Acquisition Transaction within
12 months following termination of this Agreement.
The termination fee referred to in the preceding sentence shall be equal to
$3.37 million (the "Termination Fee") and shall be payable, if at all, upon
the occurrence of the relevant event under clause (i) or (ii) above. The
expenses referred to in the first sentence of this (S)7(c) shall mean that
amount, not to exceed $2.2 million in the aggregate, of all reasonable out-of-
pocket costs, fees and expenses, including, without limitation, the reasonable
fees and disbursements of banks, investment banks, accountants or legal
counsel. Notwithstanding anything to the contrary contained in this (S)7(c),
the expenses referred to in the previous sentence shall be payable upon
termination of this Agreement under (S)7(a)(iv), (S)7(a)(vi) or (S)7(a)(vii)
above within ten (10) Business Days of receipt by the Company of reasonably
satisfactory documentation detailing such costs, fees and expenses.
8. MISCELLANEOUS.
(a) Survival. Except for the provisions of (S)7(b),(S)7(c) and the
provisions of (S)8 (and the provisions referred to in (S)7(b), (S)7(c) and
(S)8) none of the representations, warranties, and covenants of the Parties
will survive the Effective Time.
(b) Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement without the prior written approval of the other Parties; provided,
however, that any Party may make any public disclosure it believes in good
faith is required by applicable law or any listing or trading agreement
concerning its publicly-traded securities (in which case the disclosing Party
will use its reasonable best efforts to advise the other Party prior to making
the disclosure).
(c) No Third Party Beneficiaries. This Agreement shall not confer any rights
or remedies upon any Person other than the Parties and their respective
successors and permitted assigns; provided, however, that (i) the provisions
in (S)2 above concerning payment of the Merger Consideration are intended for
the benefit of the Company's Stockholders; (ii) the provisions in (S)5(k)
above concerning insurance and indemnification are intended for the benefit of
the individuals specified therein and their respective heirs and legal
representatives; (iii) the provisions of (S)5(l) are for the benefit of
continuing employees; (iv) the provisions of (S)2(d)(vii) are for the benefit
of the holders of options to purchase shares of Company Common Stock; and (v)
the provisions of (S)5(p) are intended for the benefit of the holders of
Surviving Corporation Common Stock other than the stockholders of AAC.
(d) Entire Agreement. This Agreement (including the Exhibits and the
Schedule hereto, the Company Disclosure Schedule and AAC Disclosure Schedule
and the attachments thereto) and the Confidentiality/Standstill Letter
Agreement, constitute the entire agreement between the Parties and supersede
any prior understandings, agreements, or representations by or between the
Parties, written or oral, to the extent they related in any way to the subject
matter hereof. References in this Agreement to transactions contemplated by
this Agreement shall include transactions contemplated by the Ancillary
Agreements.
(e) Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of the other Party.
(f) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
(g) General Interpretive Principles. For purposes of this Agreement, except
as otherwise expressly provided or unless the context otherwise requires:
(i) the terms defined in this Agreement include the plural as well as the
singular, and the use of any gender herein shall be deemed to include the
other gender;
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(ii) accounting terms not otherwise defined herein have the meanings
given to them in accordance with GAAP;
(iii) references herein to "articles," "sections," "(S)'s,"
"subsections," and other subdivisions without reference to a document are
to designated articles, sections, (S)'s, subsections, and other
subdivisions of this Agreement;
(iv) a reference to a subsection without further reference to a section
is a reference to such subsection as contained in the same section in which
the reference appears, and this rule shall also apply to paragraphs and
other subdivisions;
(v) the words "herein," "hereof," "hereunder" and other words of similar
import refer to this Agreement as a whole and not to any particular
provision;
(vi) the term "include" or "including" shall mean without limitation by
reason of enumeration;
(vii) the headings in this Agreement are solely for convenience of
reference and shall be given no effect in the construction or
interpretation of this Agreement;
(viii) any reference to any federal, state, local, or foreign statute or
law shall be deemed also to refer to all rules and regulations promulgated
thereunder, unless the context otherwise requires; and
(ix) the Parties have participated jointly in the negotiation and
drafting of this Agreement, and, in the event an ambiguity or question of
intent or interpretation arises, this Agreement shall be construed as if
drafted jointly by the Parties and no presumption or burden of proof shall
arise favoring or disfavoring either Party by virtue of the authorship of
any of the provisions of this Agreement.
(h) Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given if (and
then two Business Days after) it is sent by registered or certified mail,
return receipt requested, postage prepaid, and addressed to the intended
recipient as set forth below:
If to the Company: IPC Information Systems, Inc.
Wall Street Plaza
88 Pine Street
New York, New York 10005
Facsimile:(212) 858-7959
Attention:Daniel Utevsky, Esq.
Copy to: Thacher Proffitt & Wood
Two World Trade Center
New York, New York 10048
Facsimile:(212) 912-7751
Attention:Thomas N. Talley, Esq.
38
<PAGE>
If to AAC: Arizona Acquisition Corp.
c/o Cable Systems Holding LLC
505 North 51st Avenue
Phoenix, Arizona 85043-2701
Facsimile:(602) 233-5782
Attention:President
Copies to: Citicorp Venture Capital, Ltd.
399 Park Avenue
New York, New York 10043
Facsimile:(212) 888-2940
Attention:Richard M. Cashin, Jr.
Morgan, Lewis & Bockius LLP
101 Park Avenue
New York, New York 10178-0060
Facsimile:(212) 309-6273
Attention:Philip H. Werner, Esq.
Either Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth
above using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Party notice in the manner herein set forth.
(i) Governing Law; Forum Selection; and Waiver of Jury Trial. (i) This
Agreement shall be governed by and construed in accordance with the
domestic laws of the State of New York without giving effect to any choice
or conflict of law provision or rule (whether of the State of New York or
any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of New York; except, however, the
Delaware General Corporation Law shall apply to matters governed
exclusively thereby.
(ii) The Parties hereto agree that any action, suit or proceeding (a
"Proceeding") arising out of the transactions contemplated by this
Agreement shall be commenced and litigated exclusively in the United States
District Court for the District of Delaware or in a state court of the
State of Delaware.
(iii) Each of the Parties hereto hereby irrevocably and unconditionally
(A) consents to submit to the exclusive jurisdiction of the federal and
state courts in the State of Delaware for any Proceeding (and each such
Party agrees not to commence any Proceeding, except in such courts), (B)
waives any objection to the laying of venue of any Proceeding in the courts
of the State of Delaware, and (C) waives, and agrees not to plead or to
make, any claim that any Proceeding brought in any court of the State of
Delaware has been brought in an improper or otherwise inconvenient forum.
(iv) Each of the Parties hereby irrevocably designates and appoints RL&F
Service Corp., with offices on the date hereof at One Rodney Square,
Wilmington, Delaware 19801 (hereinafter called the "Agent"), as its
attorney-in-fact to receive service of process in such Proceeding, it being
agreed that service upon such attorney-in-fact shall constitute valid
service upon each of the Parties or its successors or assigns. Each of the
Parties agrees that (A) the sole responsibilities of the Agent shall be (1)
to receive such process, (2) to send a copy of any such process so received
to the relevant Party, by registered airmail, return receipt requested, at
the address set forth in (S)8(h) hereof, or at the last address filed in
writing by such Party with the Agent and (3) to give prompt telegraphic
notice of receipt thereof to such Party at such address, and (B) the Agent
shall have no responsibility for the receipt or non-receipt by such Party
of such process, nor for any performance or non-performance by such Party
or any other Party to this Agreement or their successors
39
<PAGE>
or assigns. Each of the Parties hereby agrees to pay to the Agent such
compensation as shall be agreed upon from time to time for services of the
Agent hereunder. Each of the Parties hereby agrees that its submission to
jurisdiction and its designation of the Agent set forth above is made for
the express benefit of each of the Parties hereto. Each of the Parties
further agrees that a final judgment against a Party in any such action or
proceeding shall be conclusive, and may be enforced in other jurisdictions
by suit on the judgment or in any other manner provided by law, a certified
or true copy of which final judgment shall be conclusive evidence of the
fact and of the amount of any indebtedness or liability of such Party
herein described; provided that nothing in this (S)8(i)(iv) shall affect
the right of any Party or its successors or assigns to serve legal process
in any other manner permitted by law. Each of the Parties further covenants
and agrees that so long as this Agreement shall be in effect, each of the
Parties shall maintain a duly appointed agent for the service of summonses
and other legal processes in Wilmington, Delaware and will notify the other
parties hereto of the name and address of such agent if it is no longer the
Agent.
(v) Each of the Parties hereto agrees that it shall not seek a jury trial
in any Proceeding based upon or arising out of or otherwise related to this
Agreement or any of the other documents and instruments contemplated hereby
and each of the Parties hereto hereby waives any and all right to any such
jury trial.
(j) Amendments and Waivers. The Parties may mutually amend any provision of
this Agreement at any time prior to the Effective Time with the prior
authorization of their respective boards of directors; provided, however, that
any amendment effected subsequent to stockholder approval will be subject to
the restrictions contained in the Delaware General Corporation Law. No
amendment of any provision of this Agreement shall be valid unless the same
shall be in writing and signed by both Parties. No waiver by either Party of
any default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence. No waiver shall be valid unless the same shall be
in writing and signed by both Parties.
(k) Severability. Any term or provision of this Agreement that is invalid or
unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction; provided, however, that if the
invalidity of any covenant, agreement or provision shall deprive any party of
the economic benefit intended to be conferred by this Agreement, the Parties
shall negotiate in good faith to amend the Agreement in a manner so that the
economic effect of the Agreement, as amended, is as nearly as possible the
same as the economic effect of this Agreement.
(l) Expenses. Each of the Parties will bear its own costs and expenses
(including legal fees and expenses) incurred in connection with this Agreement
and the transactions contemplated hereby, whether or not the Merger is
consummated.
(m) Incorporation of Exhibits, Schedule and Disclosure Schedules. The
Exhibits, Schedule, the Company Disclosure Schedule and the AAC Disclosure
Schedule identified in this Agreement are incorporated herein by reference and
made a part hereof.
(n) Transfer Taxes. Any liability arising out of the New York City or New
York State Real Property Transfer Tax, if applicable and due with respect to
the Merger, shall be borne by the Surviving Corporation and expressly shall
not be a liability of the Company Stockholders.
(o) Limited Recourse. Notwithstanding anything in this Agreement or any
Ancillary Agreement to the contrary (except as otherwise provided in the
Ancillary Agreements), (i) the obligations and liabilities of the Parties
hereunder and thereunder shall be without recourse to any stockholder of such
Party or any of such stockholder's Affiliates (other than the Parties), or any
of their respective directors, employees, officers, representatives or agents
(in each case, in their capacity as such) and shall be limited to the assets
of such Party and (ii) the stockholders of AAC have made no (and shall not be
deemed to have made any) representations,
40
<PAGE>
warranties or covenants (express or implied) under or in connection with this
Agreement or any Ancillary Agreement.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
IPC Information Systems, Inc.
By: ______________________________
Title: ________________________________
President and C.E.O.
Arizona Acquisition Corp.
By: ______________________________
Title: ________________________________
President
41
<PAGE>
SCHEDULE A
DIRECTORS OF SURVIVING CORPORATION
Peter Woog
Richard Cashin, Jr.
David Y. Howe
Robert J. McInerney
Richard Kleinknecht
Terry Clontz
David Walsh
2 independent directors to be designated by AAC
42
<PAGE>
AMENDED AND RESTATED EXHIBIT A-1
CERTIFICATE OF INCORPORATION
OF
IPC INFORMATION SYSTEMS, INC.
IPC Information Systems, Inc., a Delaware corporation incorporated August
29, 1985 under the name IPC Merger Corporation, does hereby amend and restate
its certificate of incorporation to read in its entirety as set forth below:
1. Name. The name of the corporation is IPC Information Systems, Inc. (the
"Corporation").
2. Registered Office and Agent. The address of the Corporation's registered
office in the State of Delaware is Corporation Trust Center, 1209 Orange
Street, in the City of Wilmington, County of New Castle. The name of the
Corporation's registered agent at such address is The Corporation Trust
Company.
3. Purpose. The nature of the business and purpose or purposes to be
conducted or promoted by the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
4. Capital Stock.
4.1 Shares, Classes, and Series Authorized. The total number of shares of
all classes of capital stock which the Corporation shall have authority to
issue is thirty-five million (35,000,000) shares, of which ten million
(10,000,000) shares shall be preferred stock, par value one cent ($.01) per
share (the "Preferred Stock"), and twenty five million (25,000,000) shares
shall be common stock, par value one cent ($.01) per share (the "Common
Stock"). The Preferred Stock and Common Stock are sometimes hereinafter
collectively referred to as the "Capital Stock."
4.2 Designations, Powers, Preferences, Rights, Qualification, Limitations
and Restrictions Relating to the Capital Stock. The following is a statement
of the designations, powers, preferences and rights in respect of the classes
of the Capital Stock, and the qualifications, limitations or restrictions
thereof, and of the authority with respect thereto expressly vested in the
Board of the Corporation.
(a) Preferred Stock. The Preferred Stock may be issued from time to time in
one or more series, the number of shares and any designation of each series
and the powers, preferences and rights of the shares of each series, and the
qualifications, limitations or restrictions thereof, to be as stated and
expressed in a resolution or resolutions providing for the issue of such
series adopted by the Board of Directors, subject to the limitations
prescribed by law. The Board of Directors in any such resolution or
resolutions is expressly authorized to state for each such series:
(i)the voting powers, if any, of the holders of stock of such series in
addition to any voting rights affirmatively required by law;
(ii)the rights of stockholders in respect of dividends, including,
without limitation, the rate or rates per annum and the time or times at
which (or the formula or other method pursuant to which such rate or rates
and such time or times may be determined) and conditions upon which the
holders of stock of such series shall be entitled to receive dividends and
other distributions, and whether any such dividends shall be cumulative or
noncumulative and, if cumulative, the terms upon which such dividends shall
be cumulative;
B-1
<PAGE>
(iii)whether the stock of each such series shall be redeemable by the
Corporation at the option of the Corporation or the holder thereof or upon
the occurrence of a specified event or events, and, if redeemable, the
terms and conditions upon which the stock of such series may be redeemed;
(iv)the amount payable and the rights or preferences to which the holders
of the stock of such series shall be entitled upon any voluntary or
involuntary liquidation, dissolution or winding up of the Corporation;
(v)the terms, if any, upon which shares of stock of such series shall be
convertible into, or exchangeable for, shares of stock of any other class
or classes or of any other series of the same or any other class or
classes, including the price or prices or the rate or rates of conversion
or exchange and the terms of adjustment, if any; and
(vi)any other designations, preferences, and relative, participating,
optional or other special rights, and qualifications, limitations or
restrictions thereof, so far as they are not inconsistent with the
provisions of this Restated Certificate of Incorporation and to the full
extent now or hereafter permitted by the laws of the State of Delaware.
All shares of the Preferred Stock of any one series shall be identical to
each other in all respects, except that shares of any one series issued at
different times may differ as to the dates from which dividends thereon, if
cumulative, shall be cumulative.
Subject to any limitations or restrictions stated in the resolution or
resolutions of the Board of Directors originally fixing the number of shares
constituting a series, the Board of Directors may by resolution or resolutions
likewise adopted increase (but not above the total number of authorized shares
of that class) or decrease (but not below the number of shares of the series
then outstanding) the number of shares of the series subsequent to the issue
of shares of that series; and if the number of shares of any series shall be
so decreased, the shares constituting the decrease shall resume that status
that they had prior to the adoption of the resolution originally fixing the
number of shares constituting such series.
(b) Common Stock. All shares of Common Stock shall be identical to each
other in every respect. The shares of Common Stock shall entitle the holders
thereof to one vote for each share on all matters on which stockholders have
the right to vote. The holders of Common Stock shall not be permitted to
cumulate their votes for the election of directors.
Subject to the preferences, privileges and powers with respect to each class
or series of Capital Stock having any priority over the Common Stock, and the
qualifications, limitations or restrictions thereof, the holders of the Common
Stock shall have and possess all rights pertaining to the Common Stock. No
holder of shares of Common Stock shall be entitled as such, as a matter of
preemptive right, to subscribe for, purchase or otherwise acquire any part of
any new or additional issue of stock of any class or series whatsoever of the
Corporation, or of securities convertible into stock of any class or series
whatsoever of the Corporation, or of any warrants or other instruments
evidencing rights or options to subscribe for, purchase or otherwise acquire
such stock or securities, whether now or hereafter authorized or whether
issued for cash or other consideration or by way of dividend.
5. Board of Directors.
5.1 Number of Directors. The total number of directors which shall
constitute the whole board of directors shall be determined in accordance with
the By-laws of the Corporation, but shall not be less than two (2) nor more
than nine (9).
5.2 Written Ballot. Unless and to the extent that the By-Laws so provide,
elections of directors need not be by written ballot.
6. Limitation of Director Liability.
6.1 Limitation. A director of the Corporation shall not be personally liable
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except to the extent such exemption from
liability or limitation thereof is expressly prohibited by the General
Corporation Law of the State of Delaware as the same exists or may hereafter
be amended.
B-2
<PAGE>
6.2 No Retroactive Changes. Any amendment, termination or repeal of this
Paragraph 6 or any provisions hereof shall not adversely affect or diminish in
any way any right or protection of a director of the Corporation existing with
respect to any act or omission occurring prior to the time of the final
adoption of such amendment, termination or repeal.
6.3 Amendment of this Paragraph. In addition to any requirements of law or
of any other provisions of this Restated Certificate of Incorporation, the
affirmative vote of the holders of not less than seventy percent (70%) of the
total number of votes eligible to be cast by the holders of all outstanding
shares of Capital Stock entitled to vote thereon shall be required to amend,
alter, rescind or repeal any provision of this Paragraph 6.
7. Amendments.
7.1 Amendments of Certificate of Incorporation. In addition to any
affirmative vote required by applicable law and any voting rights granted to
or held by holders of Preferred Stock, any alteration, amendment, repeal or
rescission (collectively, any "Change") of any provision of this Restated
Certificate of Incorporation must be approved by a majority of the directors
of the Corporation then in office and by the affirmative vote of the holders
of a majority (or such greater proportion as may otherwise be required
pursuant to any specific provision of this Restated Certificate of
Incorporation) of the total votes eligible to be cast by the holders of all
outstanding shares of Capital Stock entitled to vote thereon.
Except as may otherwise be provided in this Restated Certificate of
Incorporation, the Corporation reserves the right at any time, and from time
to time, to amend, alter, change or repeal any provision contained in this
Restated Certificate of Incorporation, and to add or insert herein any other
provisions authorized by the laws of the State of Delaware at the time in
force, in the manner now or hereafter prescribed by law, and all rights,
preferences and privileges of any nature conferred upon stockholders,
directors or any other persons whomsoever by and pursuant to this Restated
Certificate of Incorporation in its present form or as hereafter amended are
granted subject to the provisions contained in this Paragraph 7.1.
7.2 Amendments of By-laws. In furtherance and not in limitation of the
powers conferred by statute, the Board of Directors of the Corporation is
expressly authorized to make, alter, amend, rescind or repeal from time to
time any of the By-laws of the Corporation in accordance with the terms
thereof; provided, however, that any By-law made by the Board may be altered,
amended, rescinded, or repealed by the holders of a majority of the shares of
Capital Stock entitled to vote thereon at any annual meeting or at any special
meeting called for that purpose. Notwithstanding the foregoing, any provision
of the By-laws that contains a supermajority voting requirement shall only be
altered, amended, rescinded, or repealed by a vote of the Board or holders of
shares of Capital Stock entitled to vote thereon that is not less than the
supermajority specified in such provision.
The foregoing Restated Certificate of Incorporation was duly adopted in
accordance with the provisions of Sections 228, 242 and 245 of the General
Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, IPC Information Systems, Inc. has caused this Restated
Certificate of Incorporation to be duly executed by , its , and
attested to by , its Secretary, this day of , 199 .
IPC Information Systems, Inc.
By______________________________
Attest:
By______________________________
B-3
<PAGE>
EXHIBIT A-2
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
IPC INFORMATION SYSTEMS, INC.
IPC Information Systems, Inc., a Delaware corporation incorporated August
29, 1985 under the name IPC Merger Corporation, does hereby amend and restate
its certificate of incorporation to read in its entirety as set forth below:
1. Name. The name of the corporation is IPC Information Systems, Inc. (the
"Corporation").
2. Registered Office and Agent. The address of the Corporation's registered
office in the State of Delaware is Corporation Trust Center, 1209 Orange
Street, in the City of Wilmington, County of New Castle. The name of the
Corporation's registered agent at such address is The Corporation Trust
Company.
3. Purpose. The nature of the business and purpose or purposes to be
conducted or promoted by the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
4. Capital Stock.
4.1 Shares, Classes and Series Authorized. The total number of shares of
all classes of capital stock which the Corporation shall have authority to
issue is thirty-five million (35,000,000) shares, of which ten million
(10,000,000) shares shall be preferred stock, par value one cent ($.01) per
share (the "Preferred Stock"), and twenty five million (25,000,000) shares
shall be common stock, par value one cent ($.01) per share (the "Common
Stock"). The Preferred Stock and Common Stock are sometimes hereinafter
collectively referred to as the "Capital Stock."
4.2 Designations, Powers, Preferences, Rights, Qualifications,
Limitations and Restrictions Relating to the Capital Stock. The following
is a statement of the designations, powers, preferences and rights in
respect of the classes of the Capital Stock, and the qualifications,
limitations or restrictions thereof, and of the authority with respect
thereto expressly vested in the Board of the Corporation.
(a) Preferred Stock. The Preferred Stock may be issued from time to
time in one or more series, the number of shares and any designation of
each series and the powers, preferences and rights of the shares of
each series, and the qualifications, limitations or restrictions
thereof, to be as stated and expressed in a resolution or resolutions
providing for the issue of such series adopted by the Board of
Directors, subject to the limitations prescribed by law. The Board of
Directors in any such resolution or resolutions is expressly authorized
to state for each such series:
(i) the voting powers, if any, of the holders of stock of such
series in addition to any voting rights affirmatively required by
law;
(ii) the rights of stockholders in respect of dividends,
including, without limitation, the rate or rates per annum and the
time or times at which (or the formula or other method pursuant to
which such rate or rates and such time or times may be determined)
and conditions upon which the holders of stock of such series shall
be entitled to receive dividends and other distributions, and
whether any such dividends shall be cumulative or noncumulative and,
if cumulative, the terms upon which such dividends shall be
cumulative;
(iii) whether the stock of each such series shall be redeemable by
the Corporation at the option of the Corporation or the holder
thereof or upon the occurrence of a specified event or events, and,
if redeemable, the terms and conditions upon which the stock of such
series may be redeemed;
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<PAGE>
(iv) the amount payable and the rights or preferences to which the
holders of the stock of such series shall be entitled upon any
voluntary or involuntary liquidation, dissolution or winding up of
the Corporation;
(v) the terms, if any, upon which shares of stock of such series
shall be convertible into, or exchangeable for, shares of stock of
any other class or classes or of any other series of the same or any
other class or classes, including the price or prices or the rate or
rates of conversion or exchange and the terms of adjustment, if any;
and
(vi) any other designations, preferences, and relative,
participating, optional or other special rights, and qualifications,
limitations or restrictions thereof, so far as they are not
inconsistent with the provisions of this Restated Certificate of
Incorporation and to the full extent now or hereafter permitted by
the laws of the State of Delaware.
All shares of the Preferred Stock of any one series shall be
identical to each other in all respects, except that shares of any one
series issued at different times may differ as to the dates from which
dividends thereon, if cumulative, shall be cumulative.
Subject to any limitations or restrictions stated in the resolution
or resolutions of the Board of Directors originally fixing the number
of shares constituting a series, the Board of Directors may by
resolution or resolutions likewise adopted increase (but not above the
total number of authorized shares of that class) or decrease (but not
below the number of shares of the series then outstanding) the number
of shares of the series subsequent to the issue of shares of that
series; and if the number of shares of any series shall be so
decreased, the shares constituting the decrease shall resume that
status that they had prior to the adoption of the resolution originally
fixing the number of shares constituting such series.
(b) Common Stock. All shares of Common Stock shall be identical to
each other in every respect. The shares of Common Stock shall entitle
the holders thereof to one vote for each share on all matters on which
stockholders have the right to vote. The holders of Common Stock shall
not be permitted to cumulate their votes for the election of directors.
Subject to the preferences, privileges and powers with respect to
each class or series of Capital Stock having any priority over the
Common Stock, and the qualifications, limitations or restrictions
thereof, the holders of the Common Stock shall have and possess all
rights pertaining to the Capital Stock.
No holder of shares of Common Stock shall be entitled as such, as a
matter of preemptive right, to subscribe for, purchase or otherwise
acquire any part of any new or additional issue of stock of any class
or series whatsoever of the Corporation, or of securities convertible
into stock of any class or series whatsoever of the Corporation, or of
any warrants or other instruments evidencing rights or options to
subscribe for, purchase or otherwise acquire such stock or securities,
whether now or hereafter authorized or whether issued for cash or other
consideration or by way of dividend.
5. Board of Directors.
5.1 Number of Directors. The total number of directors which shall
constitute the whole board of directors shall be determined in accordance
with the By-laws of the Corporation, but shall not be less than two (2) nor
more than nine (9).
5.2 Classification of Board. Subject to the rights of any holders of any
series of Preferred Stock that may be issued by the Corporation pursuant to
a resolution or resolutions of the Board of Directors providing for such
issuance, the directors of the Corporation shall be divided into three
classes with respect to the term of office, each class to contain, as near
as may be possible, one- third of the whole number of
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<PAGE>
the Board, with the terms of office of one class expiring each successive
year. At each annual meeting of stockholders, the successors to the class
of directors whose term expires at that time shall be elected by the
stockholders to serve until the annual meeting of stockholders held three
years next following and until their successors shall be elected and
qualified.
In the event of any intervening changes in the authorized number of
directors, the Board of Directors shall designate the class or classes to
which the increases or decreases in directorships shall be apportioned and
may designate one or more directorships as directorships of another class
in order more nearly to achieve equality of number of directors among the
classes; provided, however, that no such apportionment or redesignation
shall shorten the term of any incumbent director.
Unless and to the extent that the By-laws so provide, elections of
directors need not be by written ballot.
5.3 Vacancies. Subject to the limitations prescribed by law and this
Restated Certificate of Incorporation, all vacancies in the office of
director, including vacancies created by newly created directorships
resulting from an increase in the authorized number of directors, may be
filled only by a vote of a majority of the directors then holding office,
although less than a quorum, or by a sole remaining director; and any
director so elected shall serve for the remainder of the full term of the
class of directors in which the new directorship was created or the vacancy
occurred and until such director's successor is duly elected and shall
qualify or until such director's earlier resignation or removal.
5.4 Amendment to this Paragraph. In addition to any requirements of law
or of any other provisions of this Restated Certificate of Incorporation,
the affirmative vote of the holders of not less than eighty percent (80%)
of the total number of votes eligible to be cast by the holders of all
outstanding shares of Capital Stock entitled to vote thereon shall be
required to amend, alter, rescind or repeal any provision of this Paragraph
5.
5.5 Written Ballot. Unless and to the extent that the By-Laws so provide,
elections of directors need not be by written ballot.
6. Limitation of Director Liability.
6.1 Limitation. A director of the Corporation shall not be personally
liable to the Corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director, except to the extent such exemption
from liability or limitation thereof is expressly prohibited by the General
Corporation Law of the State of Delaware as the same exists or may
hereafter be amended.
6.2 No Retroactive Changes. Any amendment, termination or repeal of this
Paragraph 6 or any provisions hereof shall not adversely affect or diminish
in any way any right or protection of a director of the Corporation
existing with respect to any act or omission occurring prior to the time of
the final adoption of such amendment, termination or repeal.
6.3 Amendment of this Paragraph. In addition to any requirements of law
or of any other provisions of this Restated Certificate of Incorporation,
the affirmative vote of the holders of not less than seventy percent (70%)
of the total number of votes eligible to be cast by the holders of all
outstanding shares of Capital Stock entitled to vote thereon shall be
required to amend, alter, rescind or repeal any provision of this Paragraph
6.
7. Amendments.
7.1 Amendments of Certificate of Incorporation. In addition to any
affirmative vote required by applicable law and any voting rights granted
to or held by holders of Preferred Stock, any alteration, amendment, repeal
or rescission (collectively, any "Change") of any provision of this
Restated Certificate
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of Incorporation must be approved by a majority of the directors of the
Corporation then in office and by the affirmative vote of the holders of a
majority (or such greater proportion as may otherwise be required pursuant
to any specific provision of this Restated Certificate of Incorporation) of
the total votes eligible to be cast by the holders of all outstanding
shares of Capital Stock entitled to vote thereon.
Except as may otherwise be provided in this Restated Certificate of
Incorporation, the Corporation reserves the right at any time, and from
time to time, to amend, alter, change or repeal any provision contained in
this Restated Certificate of Incorporation, and to add or insert herein any
other provisions authorized by the laws of the State of Delaware at the
time in force, in the manner now or hereafter prescribed by law, and all
rights, preferences and privileges of any nature conferred upon
stockholders, directors or any other persons whomsoever by and pursuant to
this Restated Certificate of Incorporation in its present form or as
hereafter amended are granted subject to the provisions contained in this
Paragraph 7.1.
7.2 Amendments of By-laws. In furtherance and not in limitation of the
powers conferred by statute, the Board of Directors of the Corporation is
expressly authorized to make, alter, amend, rescind or repeal from time to
time any of the By-laws of the Corporation in accordance with the terms
thereof; provided, however, that any By-law made by the Board may be
altered, amended, rescinded, or repealed by the holders of a majority of
the shares of Capital Stock entitled to vote thereon at any annual meeting
or at any special meeting called for that purpose. Notwithstanding the
foregoing, any provision of the By-laws that contains a supermajority
voting requirement shall only be altered, amended, rescinded, or repealed
by a vote of the Board or holders of shares of Capital Stock entitled to
vote thereon that is not less than the supermajority specified in such
provision.
The foregoing Restated Certificate of Incorporation was duly adopted in
accordance with the provisions of Sections 228, 242 and 245 of the General
Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, IPC Information Systems, Inc. has caused this Restated
Certificate of Incorporation to be duly executed by Richard P. Kleinknecht,
its Chairman and Chief Executive Officer, and attested to by Daniel Utevsky,
its Secretary, this 9th day of May, 1994.
IPC Information Systems, Inc.
By: /s/ Richard P. Kleinknecht
----------------------------
Richard P. Kleinknecht, Chairmanand
Chief Executive Officer
Attest:
/s/ Daniel Utevsky
- ---------------------------------------
Daniel Utevsky, Secretary
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ANNEX C
IPC INFORMATION SYSTEMS, INC.
STOCK OPTION PLAN
SECTION 1. PURPOSE
The Plan authorizes the Compensation Committee of the Board to provide
employees, directors and consultants of the Corporation or its Subsidiaries,
who are in a position to contribute to the long-term success of the
Corporation and its Subsidiaries, with Options to acquire Common Stock of the
Corporation. The Corporation believes that this incentive program will cause
those persons to increase their interest in the welfare of the Corporation and
its Subsidiaries, and aid in attracting and retaining employees and
consultants of outstanding ability.
SECTION 2. DEFINITIONS
Unless the context clearly indicates otherwise, the following terms, when
used in the Plan, shall have the meanings set forth in this Section:
(a) "Board" means the Board of Directors of the Corporation.
(b) "Cause" means any of the following: (i) commission of any act of
fraud or dishonesty with respect to the business of the Corporation or its
Subsidiaries, (ii) willful misconduct or gross negligence in connection
with the performance of a Grantee's duties to the Corporation and its
Subsidiaries, (iii) indictment for, or conviction of, any crime or an
offence involving moral turpitude, (iv) commission of any act injurious to
the interest of the Corporation, or (v) breach of any material provision of
any applicable employment or consulting agreement. Notwithstanding the
foregoing, if any Grantee is party to an employment or consulting agreement
governing the terms of his employment or consultancy with the Corporation
or its Subsidiaries, and such agreement includes a definition of cause,
then for purposes hereof, cause shall have the meaning ascribed thereto in
such agreement.
(c) "Change in Control" shall mean (i) approval by the stockholders of
the Corporation of a transaction that would result in the reorganization,
merger or consolidation of the Corporation with one or more persons, and,
upon consummation thereof, would result in persons who, immediately prior
to such transaction, beneficially owned (within the meaning of Rule 13d-3
promulgated under the Securities Exchange Act of 1934) at least 50% of the
securities entitled to vote generally in the election of directors of the
Corporation, beneficially owning (within the meaning of Rule 13d-3
promulgated under the Securities Exchange Act of 1934) in the aggregate
immediately after such transaction less than 50% of the securities entitled
to vote generally in the election of directors of the entity resulting from
such transaction; (ii) the acquisition of all or substantially all of the
assets of the Corporation or beneficial ownership (within the meaning of
Rule 13d-3 promulgated under the Securities Exchange Act of 1934) of at
least 50% of the outstanding securities of the Corporation entitled to vote
generally in the election of directors by any person or by any persons
acting in concert, or approval by the stockholder of the Corporation of any
transaction which would result in such an acquisition (other than by any
person or persons who beneficially own (within the meaning of Rule 13d-3
promulgated under the Securities Exchange Act of 1934), immediately after
the closing date of transactions contemplated by the Merger Agreement at
least 50% of the outstanding securities of the Corporation entitled to vote
generally in the election of directors); or (iii) a complete liquidation or
dissolution of the Corporation, or approval of the Corporation of a plan
for such liquidation or dissolution; provided, however, that in no event
shall any of the transactions contemplated by the Merger Agreement (or
shareholder approval thereof) constitute a Change in Control.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means the Compensation Committee of the Board; provided,
however, that with respect to any Option granted or to be granted to any
member of the Compensation Committee, Committee shall mean the Board acting
through a majority of its members who are not members of the Compensation
Committee.
(f) "Common Stock" means the common stock par value $.01 per share, of
the Corporation.
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(g) "Consultant" means any person who is engaged to perform services for
the Corporation or any of its Subsidiaries, or has agreed to perform
services for the Corporation or any of its Subsidiaries, other than as an
Employee or Director.
(h) "Corporation" means IPC Information Systems, Inc., a Delaware
corporation.
(i) "Director" means any member of the Board.
(j) "Disability" means a physical or mental impairment that causes the
Grantee to be unable to engage in any substantial gainful activity and that
is expected to result in death or is expected to last for a continuous
period of at least 12 months. Notwithstanding the foregoing, if any Grantee
is party to an employment or consulting agreement governing the terms of
his employment or consultancy with the Corporation or its Subsidiaries, and
such agreement includes a definition of disability, then for purposes
hereof, disability shall have the meaning ascribed thereto in such
agreement.
(k) "Employee" means any employee of the Corporation or any of its
Subsidiaries, or any person who has agreed to become an employee of the
Corporation or any of its Subsidiaries. The term Employee shall include
directors who are otherwise employed by the Corporation or any Subsidiary.
(l) "Fair Market Value" means, as of any date, the fair market value of a
share of Common Stock as determined by the Committee acting in good faith
in its sole discretion; provided, however, that if the Common Stock is
listed on a national securities exchange or quoted in an interdealer
quotation system, the fair market value shall be based on the last sales
price or, if unavailable, the average of the closing bid and asked prices
per share of the Common Stock on such date (or, if there was no trading or
quotation in the Common Stock on such date, on the next preceding date on
which there was trading or quotation) as provided by one of such
organizations. Notwithstanding the foregoing, the Fair Market Value of a
share of Common Stock on the closing date of the transactions contemplated
by the Merger Agreement shall be deemed to be the "Cash Election Price" as
defined in the Merger Agreement.
(m) "Grantee" means a person granted an Option under the Plan.
(n) "Incentive Stock Option" means an Option designated by the Committee
as an Option that is intended to be an incentive stock option within the
meaning of Section 422(b) of the Code.
(o) "Merger Agreement" means the Agreement and Plan of Merger, dated as
of December 18, 1997 by and between the Corporation and Arizona Acquisition
Corp., a Delaware Corporation.
(p) "Nonqualified Stock Option" means an Option that is not an Incentive
Stock Option, or an Incentive Stock Option that, subsequent to the date of
grant thereof, fails to satisfy the requirements of Section 422(b) or (d)
of the Code.
(q) "Option" means an option granted pursuant to the Plan to purchase
shares of the Common Stock.
(r) "Plan" means this Stock Option Plan as set forth herein and as
amended from time to time.
(s) "Securities Act" means the Securities Act of 1933, as amended, and
the rules and regulations thereunder as presently in effect or hereafter
amended.
(t) "Stock Option Agreement" shall mean a written agreement between the
Corporation and the Grantee, or a certificate accepted by the Grantee,
evidencing the grant of an Option hereunder and containing such terms and
conditions, not inconsistent with the Plan, as the Committee shall approve.
(u) "Subsidiary" shall mean (i) any corporation with respect to which the
Corporation owns, directly or indirectly, 50% or more of the total combined
voting power of all classes of stock of such corporation, or (ii) any
entity which the Committee reasonably expects to become a Subsidiary within
the meaning of clause (i).
SECTION 3. SHARES OF COMMON STOCK SUBJECT TO THE PLAN
Subject to adjustment as provided in Section 7, the Common Stock which may
be issued pursuant to Options granted under the Plan shall not exceed
[554,112] shares in the aggregate [12% of outstanding on a fully diluted
basis.] Common Stock issuable under the Plan may be authorized but unissued
shares or reacquired shares of Common Stock. Common Stock subject to Options
that are forfeited, lapse or terminate in whole or in part for any reason,
shall be available for issuance pursuant to other Options.
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SECTION 4. ADMINISTRATION OF THE PLAN
(a) Authority of the Committee. The Plan shall be administered by the
Committee. The Committee shall have full and final authority to take the
following actions, in each case subject to and consistent with the provisions
of the Plan:
(i)to select the Employees, Directors and Consultants to whom Options may
be granted;
(ii)to determine the number of shares of Common Stock subject to each
such Option; provided, however, that during any calendar year, no
individual may be granted Options with respect to more than 250,000 shares
of Common Stock.
(iii)to determine whether an Option shall be an Incentive Stock Option or
a Nonqualified Stock Option;
(iv)to determine the terms and conditions of any Option granted under the
Plan (including, but not limited to, the exercise price, the period, if
any, over which Options shall vest and become exercisable (which period may
be accelerated at any time in the discretion of the Committee), and
performance conditions relating to an Option, based in each case on such
considerations as the Committee shall determine), and all other matters to
be determined in connection with an Option;
(v)to determine whether, to what extent and under what circumstances an
the exercise price of an Option may be paid, in cash, Common Stock, or
other property, or an Option may expire or be canceled, forfeited, or
surrendered;
(vi)to determine the restrictions or conditions related to the delivery,
holding and disposition of shares of Common Stock received upon exercise of
an Option,
(vii)to prescribe the form of each Stock Option Agreement, which need not
be identical for each Grantee;
(viii)to adopt, amend, suspend, waive and rescind such rules and
regulations and appoint such agents as the Committee may deem necessary or
advisable to administer the Plan;
(ix)to correct any defect or supply any omission or reconcile any
inconsistency in the Plan and to construe and interpret the Plan and any
Option, Stock Option Agreement or other instrument hereunder; and
(x)to make all other decisions and determinations as may be required
under the terms of the Plan or as the Committee may deem necessary or
advisable for the administration of the Plan.
The Committee may, at any time, grant new or additional options to any
eligible Employee, Director or Consultant who has previously received Options
under the Plan, or options under other plans, whether such prior Options or
other options are still outstanding, have been exercised previously in whole
or in part, or have been canceled. The exercise price of such new or
additional Options may be established by the Committee, without regard to such
previously granted Options or other options.
Other provisions of the Plan notwithstanding, the Board may perform any
function of the Committee under the Plan, including without limitation for the
purpose of ensuring that transactions under the Plan by Grantees who are then
subject to Section 16 of the Securities Exchange Act of 1934 in respect of the
Corporation are exempt under Rule 16b-3 thereunder. In any case in which the
Board is performing a function of the Committee under the Plan, each reference
to the Committee herein shall be deemed to refer to the Board.
(b) Manner of Exercise of Committee Authority. Any action of the Committee
with respect to the Plan shall be final, conclusive and binding on all
persons, including the Corporation, Subsidiaries, Grantees, any person
claiming any rights under the Plan from or through any Grantee and
stockholders, except to the extent the Committee may subsequently modify, or
take further action not consistent with, its prior action. If not specified in
the Plan, the time at which the Committee must or may make any determination
shall be determined by the Committee, and any such determination may
thereafter by modified by the Committee (subject to Section
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10). The express grant of any specific power to the Committee, and the taking
of any action by the Committee, shall not be construed as limiting any power
or authority of the Committee. The Committee may delegate to officers or
managers of the Corporation or any subsidiary of the Corporation the
authority, subject to such terms as the Committee shall determine, to perform
such functions as the Committee may determine, to the extent permitted under
applicable law.
(c) Limitation of Liability. Each member of the Committee shall be entitled
to, in good faith, rely or act upon any report or other information furnished
to him by any officer or other employee of the Corporation or any subsidiary,
the Corporation's independent certified public accountants or any executive
compensation consultant, legal counsel or other professional retained by the
Corporation to assist in the administration of the Plan. To the fullest extent
permitted by applicable law, no member of the Committee, nor any officer or
employee of the Corporation acting on behalf of the Committee, shall be
personally liable for any action, determination or interpretation taken or
made in good faith with respect to the Plan, and all members of the Committee
and any officer or employee of the Corporation acting on its behalf shall, to
the extent permitted by law, be fully indemnified and protected by the
Corporation with respect to any such action, determination or interpretation.
SECTION 5. OPTION TERMS
Unless otherwise determined by the Committee and set forth in a Stock Option
Agreement, Options granted under the Plan shall contain the following terms
and conditions:
(a) Type of Option. Each Option shall be an Incentive Stock Option to the
maximum extent permitted by Section 422(d) of the Code, and any excess over
such maximum shall be a Nonqualified Stock Option.
(b) Exercise Price. The exercise price per share of Common Stock subject
to each Option shall equal the Fair Market Value on the date the Option is
granted.
(c) Vesting. Each Option shall vest and become exercisable in five equal
installments on each of the first five anniversaries on the date the Option
is granted; provided, however that the Option shall be vested and
exercisable as to no less than 75% of the shares of Common Stock subject
thereto as of the end of any period of 30 consecutive trading days during
which the Fair Market Value averages at least 300% of the Fair Market Value
on the date the Option is granted, and shall be vested and exercisable as
to 100% of the shares of Common Stock subject thereto as of the end of any
period of 30 consecutive trading days during which the Fair Market Value
averages at least 450% of the Fair Market Value on the date the Option is
granted; and provided further that each Option shall become vested and
exercisable in full immediately prior to a Change in Control.
(d) Termination. Options held by any Grantee shall terminate upon the
earliest of:
(i)the termination of the Grantee's employment, directorship or
consultancy with the Corporation and its Subsidiaries for Cause;
(ii)the later of (x) 180 days after the Grantee's termination of
employment, directorship or consultancy with the Corporation and its
Subsidiaries (which shall be deemed to include the sale of any
Subsidiary of the Corporation that employs such Grantee) for any reason
other than Cause, death or Disability; or (y) 180 days following the
end of any "blackout period" imposed by the Corporation's general
counsel that is in effect on the date of such termination; provided,
however, that during any such 180-day period, the Options shall be
exercisable only to the extent vested and exercisable as of the date of
such termination;
(iii) one year after the Grantee's termination of employment,
directorship or consultancy with the Corporation and its Subsidiaries
by reason of death or Disability; provided, however, that during any
such one year period, the Options shall be exercisable to the extent
such Options would have been vested and exercisable pursuant to Section
5(c) (but without regard to the provisos contained therein) as of the
anniversary of the date of grant next following such termination,
assuming such termination had not occurred;
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(iv)the tenth anniversary of the date of grant; and
(v)upon the consummation of any transaction whereby the Corporation
(or any successor to the Corporation or substantially all of its
business) becomes a wholly-owned subsidiary of any other corporation
(but after giving effect to Section 5(c)), unless such other
corporation shall continue or assume the Plan as it relates to Options
then outstanding (in which case such other corporation shall be treated
as the Corporation for all purposes hereunder, and, pursuant to Section
7, the Committee of such other corporation shall make appropriate
adjustment in the number and kind of shares of Common Stock subject
thereto and the exercise price per share thereof to reflect
consummation of such transaction). If the Plan is not to be so assumed,
the Corporation shall notify the Grantee of consummation of such
transaction at least ten days in advance thereof. If such other
corporation is an affiliate of the Corporation immediately prior to
consummation of any such transaction, Options shall not terminate and
shall remain Options to purchase Common Stock of the Corporation unless
the Plan is in fact so continued or assumed by such other corporation.
SECTION 6. EXERCISE OF OPTIONS
A Grantee shall exercise an Option by delivery of written notice to the
Corporation setting forth the number of shares with respect to which the
Option is to be exercised, together with cash, certified check, bank draft,
wire transfer, or postal or express money order payable to the order of the
Corporation for an amount equal to the exercise price of such shares and any
income tax required to be withheld. The Committee may, in its sole discretion,
permit a Grantee to pay all or a portion of the exercise price or tax
withholding obligation by delivery of Common Stock or other property
(including notes or other contractual obligations of the Grantee to make
payment on a deferred basis, such as through "cashless exercise" arrangements,
to the extent permitted by applicable law), and the methods by which Common
Stock will be delivered or deemed to be delivered by the Grantee.
SECTION 7. ADJUSTMENT UPON CHANGES IN CAPITALIZATION
In the event any recapitalization, forward or reverse split, reorganization,
merger, consolidation, spin-off, combination, repurchase, or exchange of
Common Stock or other securities, Common Stock dividend or other special and
nonrecurring dividend or distribution (whether in the form of cash, securities
or other property), liquidation, dissolution, or other similar corporate
transaction or event, affects the Common Stock such that an adjustment is
appropriate in order to prevent dilution or enlargement of the rights of
Grantees under the Plan, then the Committee shall, in such manner as it may
deem equitable, adjust any or all of (i) the number and kind of shares of
Common Stock deemed to be available thereafter for grants of Options under
Section 3, (ii) the number and kind of shares of Common Stock that may be
delivered or deliverable in respect of outstanding Options, (iii) the number
of shares with respect to which Options may be granted to a given Grantee in
the specified period as set forth in Section 4(a)(ii), and (iv) the exercise
price. In addition, the Committee is authorized to make adjustments in the
terms and conditions of, and the criteria included in, Options (including,
without limitation, cancellation of Options in exchange for the in-the-money
value, if any, of the vested portion thereof, or substitution of Options using
stock of a successor or other entity) in recognition of unusual or
nonrecurring events (including, without limitation, events described in the
preceding sentence) affecting the Corporation or any Subsidiary or the
financial statements of the Corporation or any Subsidiary, or in response to
changes in applicable laws, regulations, or accounting principles.
SECTION 8. RESTRICTIONS ON ISSUANCE OF SHARES.
The Corporation shall not be obligated to deliver Common Stock upon the
exercise or settlement of any Option or take any other action under the Plan
until the Corporation shall have determined that applicable federal and state
laws, rules, and regulations have been complied with and such approvals of any
regulatory or governmental agency have been obtained and contractual
obligations to which the Option may be subject haver been satisfied. The
Corporation, in its discretion, may postpone the issuance or delivery of
Common Stock under
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any Option until completion of such stock exchange listing or registration or
qualification of Common Stock or other required action under any federal or
state law, rule, or regulation as the Corporation may consider appropriate,
and may require any Grantee to make such representations and furnish such
information as it may consider appropriate in connection with the issuance or
delivery of Common Stock under the Plan. The Corporation shall file a
registration statement on Form S-8 (or other appropriate form) with respect to
the Common Stock to be issued pursuant to the Plan and shall use its best
efforts to maintain the effectiveness of such registration statement (and
maintain the currency of any related prospectus) for so long as Options are
outstanding or may be granted under the Plan.
SECTION 9. GENERAL PROVISIONS
(a) Each Option grant shall be evidenced by a Stock Option Agreement.
(b) The grant of an Option in any year shall not give the Grantee any right
to similar grants in future years or any right to continue such Grantee's
employment relationship with the Corporation. All Grantees shall remain
subject to discharge to the same extent as if the Plan were not in effect.
(c) No Grantee, and no beneficiary or other persons claiming under or
through the Grantee shall have any right, title or interest by reason of any
Option to any particular assets of the Corporation, or any shares of Common
Stock allocated or reserved for the purposes of the Plan or subject to any
Option except as set forth herein. The Corporation shall not be required to
establish any fund or make any other segregation of assets to assure the
payment of any Option.
(d) Unless otherwise permitted in the discretion of the Committee with
respect to Nonqualified Stock Options, no Option or other right under the Plan
may be sold, transferred, assigned, pledged or otherwise encumbered, except by
will or the laws of descent and distribution, and an Option shall be
exercisable during the Grantee's lifetime only by the Grantee.
(e) The Corporation shall have the right to require that the Grantee make
such provision, or furnish the Corporation such authorization, necessary or
desirable so that the Corporation may satisfy its obligation, under applicable
laws, to withhold or otherwise pay for income or other taxes of the Grantee
attributable to the grant, exercise or cancellation of Options granted under
the Plan or the sale of Common Stock issued with respect to Options. This
authority shall include authority to withhold or receive Common Stock or other
property and to make cash payments in respect thereof in satisfaction of a
Grantee's tax obligations.
SECTION 10. AMENDMENT OR TERMINATION
The Board may alter, amend, suspend, discontinue or terminate the Plan at
any time; provided, however, that no such action shall adversely affect the
rights of Grantees of Options previously granted hereunder and, provided
further, however, that any stockholder approval necessary or desirable in
order to comply with applicable law, regulation or listing requirement shall
be obtained in the manner required therein.
SECTION 11. EFFECTIVE DATE OF PLAN
The Plan shall be effective immediately after the closing of the
transactions contemplated by the Merger Agreement, subject to the approval of
the Plan by the Corporation's shareholders either before or after such
effective date.
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ANNEX D
EXECUTION COPY
STOCKHOLDERS AGREEMENT
AGREEMENT, dated as of December 18, 1997 by and between Arizona Acquisition
Corp., a Delaware corporation ("Merger Subsidiary"), and the other parties
signatory hereto (each, a "Stockholder"). Capitalized terms used but not
defined herein shall have the meanings set forth in the Agreement and Plan of
Merger, dated the date hereof (as such agreement may be amended from time to
time, the "Merger Agreement").
WHEREAS, concurrently herewith, Merger Subsidiary and IPC Information
Systems, Inc., a Delaware corporation (the "Company"), are entering into a
Merger Agreement, pursuant to which Merger Subsidiary will be merged with and
into the Company (the "Merger"), whereby each share of common stock, par value
$.01 per share, of the Company ("Company Common Stock") issued and outstanding
immediately prior to the Effective Time will be converted into either (A) the
right to retain at the election of the holder thereof and subject to the terms
of the Merger Agreement, common stock, par value $.01 per share, of the
Company or (B) the right to receive cash, other than (i) shares of Company
Common Stock owned, directly or indirectly, by the Company or any Subsidiary
of the Company or by Merger Subsidiary and (ii) Dissenting Shares.
WHEREAS, as a condition to Merger Subsidiary's entering into the Merger
Agreement, Merger Subsidiary requires that each Stockholder enter into, and
each such Stockholder has agreed to enter into, this Agreement with Merger
Subsidiary.
NOW, THEREFORE, in order to implement the foregoing and in consideration of
the mutual agreements contained herein, the parties hereby agree as follows:
Section 1. Certain Definitions. The following terms, when used in this
Agreement, shall have the following meanings (such definitions to be equally
applicable to both singular and plural terms of the terms defined):
"Affiliate" means, with respect to any Person, any other Person directly or
indirectly controlling, controlled by, or under common control with such
Person, provided that no securityholder of the Company shall be deemed an
Affiliate of any other securityholder solely by reason of any investment in
the Company. For the purpose of this definition, the term "control" (including
with correlative meanings, the terms "controlling", "controlled by" and "under
common control with"), as used with respect to any Person, shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of stock, as a trustee or executor, by contract or credit
arrangement or otherwise.
"Amended and Restated Labor Pooling Agreements" has the meaning ascribed
thereto in Section 5(e) of this Agreement.
"Beneficially Own" or "Beneficial Ownership" with respect to any securities
shall mean having "beneficial ownership" of such securities (as determined
pursuant to Rule 13d-3 under the Exchange Act), including pursuant to any
agreement, arrangement or understanding, whether or not in writing. Without
duplicative counting of the same securities by the same holder, securities
Beneficially Owned by a Person shall include securities Beneficially Owned by
all other Persons with whom such Person would constitute a "group" as
described in Section 13(d)(3) of the Exchange Act.
"Business" means (i) the design, manufacture, sale, distribution and/or
maintenance of voice and/or data communications products, including, but not
limited to, turret or dealerboard systems used within the financial services,
energy, transportation or emergency services industries, Private Branch
Exchange (PBX) and/or key telephone systems, voice recording systems and video
teleconferencing products; (ii) the furnishing of
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communications cabling or voice or data communications products, including the
design and/or installation of local and wide area networks or the provision of
maintenance services for said communications cabling or products; (iii) the
design, furnishing, installation and/or maintenance of low voltage cabling
systems (such as would not require an electrical license for the installation
thereof); and (iv) the provision of long distance telecommunications network
services.
"Company" has the meaning ascribed thereto in the recitals of this
Agreement.
"Company Common Stock" has the meaning ascribed thereto in the recitals of
this Agreement.
"Control" (including the terms "Controlled By" and "Under Common Control
With") means the possession, directly or indirectly or as a trustee or
executor, of the power to direct or cause the direction of the management or
policies of a Person, whether through the ownership of stock, as a trustee or
executor, by contract or credit arrangement or otherwise.
"Existing Shares" has the meaning ascribed thereto in Section 2(a)(i).
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended.
"KEC-NY" means Kleinknecht Electric Company, Inc., a New York corporation.
"KEC-NJ" means Kleinknecht Electric Company, Inc., a New Jersey corporation.
"Kleinknechts" means Richard Kleinknecht and Peter Kleinknecht.
"Merger" has the meaning ascribed thereto in the recitals of this Agreement.
"Merger Subsidiary" has the meaning ascribed thereto in the introductory
paragraph of this Agreement.
"Person" means an individual, corporation, partnership, limited liability
company, limited partnership, association, trust, unincorporated organization
or other entity or group (as defined in Section 13(d)(3) of the Exchange Act).
"Rollover Stockholder" means Richard Kleinknecht.
"Shares" means the Existing Shares, together with any shares of Company
Common Stock acquired of record or beneficially by such Stockholder in any
capacity after the date hereof and prior to the termination hereof, whether
upon exercise of options, conversion of convertible securities, purchase,
exchange or otherwise; provided, however, that in the event of a stock
dividend or distribution, or any change in the Company Common Stock by reason
of any stock dividend, split-up, recapitalization, combination, exchange of
shares or the like, the term "Shares" shall be deemed to refer to and include
the Shares as well as all such stock dividends and distributions and any
shares into which or for which any or all of the Shares may be changed or
exchanged.
"Stockholder" has the meaning ascribed thereto in the introductory paragraph
to this Agreement.
"Subsidiary" means, with respect to any Person, any entity of which
securities or other ownership interests having ordinary voting power to elect
a majority of the board of directors or other persons performing similar
functions are at the time directly or indirectly owned by such Person.
"Termination Date" has the meaning ascribed thereto in Section 12 of this
Agreement.
"Trustee" has the meaning ascribed thereto in Section 2(a)(i) of this
Agreement.
Section 2. Representations and Warranties of Stockholders. Each Stockholder
hereby, severally and not jointly, represents and warrants to Merger
Subsidiary as follows:
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(a) (i) Such Stockholder is either (A) the record holder or beneficial
owner of the number of, or (B) trustee of a trust that is the record holder
or beneficial owner of, and whose beneficiaries are the beneficial owners
(such trustee, a "Trustee"), shares of Company Common Stock as is set forth
opposite such Stockholder's name on Schedule I hereto (the "Existing
Shares").
(ii) On the date hereof, the Existing Shares set forth opposite such
Stockholder's name on Schedule I hereto constitute all of the outstanding
shares of Company Common Stock owned of record or beneficially by such
Stockholder. Such Stockholder does not have record or beneficial ownership
of any Shares not set forth on Schedule I hereto.
(iii) Such Stockholder has sole power of disposition with respect to all
of the Existing Shares set forth opposite such Stockholder's name on
Schedule I and sole voting power with respect to the matters set forth in
Section 4 hereof and sole power to demand dissenter's or appraisal rights,
in each case with respect to all of the Existing Shares set forth opposite
such Stockholder's name on Schedule I, with no restrictions on such rights,
subject to applicable federal securities laws and the terms of this
Agreement.
(iv) Such Stockholder will have sole power of disposition with respect to
Shares other than Existing Shares, if any, which become beneficially owned
by such Stockholder and will have sole voting power with respect to the
matters set forth in Section 4 hereof and sole power to demand dissenter's
or appraisal rights, in each case with respect to all Shares other than
Existing Shares, if any, which become beneficially owned by such
Stockholder with no restrictions on such rights, subject to applicable
federal securities laws and the terms of this Agreement.
(b) Such Stockholder has the legal capacity, power and authority to enter
into and perform all of such Stockholder's obligations under this
Agreement. The execution, delivery and performance of this Agreement by
such Stockholder will not violate any other agreement to which such
Stockholder is a party or by which such Stockholder is bound including,
without limitation, any trust agreement, voting agreement, stockholders
agreement, voting trust, partnership or other agreement. This Agreement has
been duly and validly executed and delivered by such Stockholder and
constitutes a valid and binding agreement of such Stockholder, enforceable
against such Stockholder in accordance with its terms, except as limited by
(a) bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to creditor's rights generally, (b) general principles of
equity, whether such enforceability is considered in a proceeding in equity
or at law, and to the discretion of the court before which any proceeding
therefore may be brought, or (c) public policy considerations or court
decisions which may limit the rights of the parties thereto for
indemnification. All necessary consents of any beneficiary of or holder of
interest in any trust of which a Stockholder is Trustee to the execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby have been obtained. If such Stockholder is married and
such Stockholder's Shares constitute community property, this Agreement has
been duly authorized, executed and delivered by, and constitutes a valid
and binding agreement of, such Stockholder's spouse, enforceable against
such person in accordance with its terms.
(c) Except for filings under the HSR Act, if applicable, (i) no filing
with, and no permit, authorization, consent or approval of, any state or
federal public body or authority is necessary for the execution of this
Agreement by such Stockholder and the consummation by such Stockholder of
the transactions contemplated hereby and (ii) neither the execution and
delivery of this Agreement by such Stockholder nor the consummation by such
Stockholder of the transactions contemplated hereby nor compliance by such
Stockholder with any of the provisions hereof shall (x) conflict with or
result in any breach of any applicable trust, partnership agreement or
other agreements or organizational documents applicable to such
Stockholder, (y) result in a violation or breach of, or constitute (with or
without notice or lapse of time or both) a default (or give rise to any
third party right of termination, cancellation, material modification or
acceleration) under any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, license, contract, commitment, arrangement,
understanding, agreement or other instrument or obligation of any kind to
which such Stockholder is a party or by which such Stockholder or any of
such
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Stockholder's properties or assets may be bound or (z) violate any order,
writ, injunction, decree, judgment, statute, rule or regulation applicable
to such Stockholder or any of such Stockholder's properties or assets.
(d)Except for the shares of Company Common Stock owned by the
Kleinknechts identified in Schedule II hereto (the "Pledged Shares"), such
Stockholder's Shares and the certificates representing such Shares are now
and at all times during the term hereof will be held by such Stockholder,
or by a nominee or custodian for the benefit of such Stockholder, free and
clear of all liens, claims, security interests, proxies, voting trusts or
agreements, understandings or arrangements or any other encumbrances
whatsoever, except for any such encumbrances or proxies arising hereunder.
(e)No broker, investment banker, financial adviser or other person is
entitled to any broker's, finder's, financial adviser's or other similar
fee or commission in connection with the transactions contemplated hereby
based upon arrangements made by or on behalf of such Stockholder in his or
her capacity as such.
(f)Such Stockholder understands and acknowledges that Merger Subsidiary
is entering into the Merger Agreement in reliance upon such Stockholder's
execution and delivery of this Agreement with Merger Subsidiary.
Section 3. Representations and Warranties of Merger Subsidiary. Merger
Subsidiary hereby represents and warrants to each Stockholder as follows:
(a)Merger Subsidiary is a corporation duly organized, validly existing
and in good standing under the laws of the jurisdiction of its formation.
(b)Merger Subsidiary has all necessary power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated
hereby. The execution, delivery and performance by Merger Subsidiary of
this Agreement and the consummation by Merger Subsidiary of the
transactions contemplated hereby have been duly and validly authorized and
approved by all required corporate action other than shareholder approval
which shall be effected prior to the Effective Time. This Agreement has
been duly executed and delivered by Merger Subsidiary, and (assuming due
authorization, execution and delivery by the Stockholders) constitutes a
valid and binding obligation of Merger Subsidiary, enforceable against it
in accordance with its terms, except as limited by (a) bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to
creditor's rights generally, (b) general principles of equity, whether such
enforceability is considered in a proceeding in equity or at law, and to
the discretion of the court before which any proceeding therefor may be
brought, or (c) public policy considerations or court decisions which may
limit the rights of the parties thereto for indemnification.
(c) Except for the filing of a pre-merger notification and report form
under the HSR Act, the execution and delivery of this Agreement do not, and
the consummation by Merger Subsidiary of the transactions contemplated by
this Agreement and compliance by Merger Subsidiary with the provisions of
this Agreement will not, conflict with, or result in any breach or
violation of, or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or acceleration
of or "put" right with respect to any obligation or to loss of a material
benefit under, or result in the creation of any lien upon any of the
properties or assets of Merger Subsidiary under, (i) any charter or by-laws
of Merger Subsidiary, (ii) any loan or credit agreement, note, bond,
mortgage, indenture, lease or other agreement, instrument, permit,
concession, franchise or license applicable to Merger Subsidiary or its
properties or assets or (iii) any judgment, order, decree, statute, law,
ordinance, rule, regulation or arbitration award applicable to Merger
Subsidiary or its properties or assets. No consent, approval, order or
authorization of, or registration, declaration or filing with, or notice
to, any state or federal public body or authority is required by or with
respect to Merger Subsidiary in connection with the execution and delivery
of this Agreement by Merger Subsidiary or the consummation by Merger
Subsidiary of any of the transactions contemplated by this Agreement.
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Section 4. Agreement to Vote; Proxy
(a) Each Stockholder hereby, severally and not jointly, agrees that, until
the Termination Date (as defined in Section 12), at any meeting of the Company
Stockholders, however called, or in connection with any written consent of the
Company Stockholders, such Stockholder shall vote (or cause to be voted) the
Shares held of record or beneficially by such Stockholder (i) in favor of the
Merger, the execution and delivery by the Company of the Merger Agreement and
the approval of the terms thereof and each of the other actions contemplated
by the Merger Agreement and this Agreement and any actions required in
furtherance hereof and thereof; (ii) against any action or agreement that
would result in a breach of any covenant, representation or warranty or any
other obligation or agreement of the Company under the Merger Agreement or
this Agreement; (iii) in favor of the incentive stock option plan referred to
in Section 5(l) of the Merger Agreement; and (iv) against the following
actions (other than the Merger and the transactions contemplated by the Merger
Agreement or any such actions identified in writing by Merger Subsidiary in
advance): (A) any extraordinary corporate transaction, including, without
limitation, a merger, consolidation or other business combination involving
the Company or its Subsidiaries; (B) a sale, lease or transfer of a material
amount of assets of the Company or its Subsidiaries or a reorganization,
recapitalization, dissolution or liquidation of the Company or its
Subsidiaries; (C) any change in the majority of the board of directors of the
Company; (D) any material change in the present capitalization of the Company
or any amendment of the Company's Certificate of Incorporation or By-Laws; (E)
any other material change in the Company's corporate structure or business; or
(F) any other action which is intended, or could reasonably be expected, to
impede, interfere with, delay, postpone, discourage or materially adversely
affect the Merger or the transactions contemplated by the Merger Agreement or
this Agreement. Such Stockholder shall not enter into any agreement or
understanding with any person or entity to vote or give instructions in any
manner inconsistent with clauses (i), (ii) or (iii) of the preceding sentence.
(b) EACH STOCKHOLDER HEREBY GRANTS TO, AND APPOINTS, MERGER SUBSIDIARY AND
ANY DESIGNEE OF MERGER SUBSIDIARY, EACH OF THEM INDIVIDUALLY, SUCH
STOCKHOLDER'S IRREVOCABLE (UNTIL THE TERMINATION DATE) PROXY AND ATTORNEY-IN-
FACT (WITH FULL POWER OF SUBSTITUTION) TO VOTE THE SHARES AS SET FORTH IN
SECTION 4.1 ABOVE. EACH STOCKHOLDER INTENDS THIS PROXY TO BE IRREVOCABLE
(UNTIL THE TERMINATION DATE) AND COUPLED WITH AN INTEREST AND WILL TAKE SUCH
FURTHER ACTION AND EXECUTE SUCH OTHER INSTRUMENTS AS MAY BE NECESSARY TO
EFFECTUATE THE INTENT OF THIS PROXY AND HEREBY REVOKES ANY PROXY PREVIOUSLY
GRANTED BY SUCH STOCKHOLDER WITH RESPECT TO SUCH STOCKHOLDER'S SHARES.
Section 5. Certain Covenants of Stockholders. Except in accordance with the
terms of this Agreement, each Stockholder hereby severally covenants and
agrees as follows:
(a)Prior to the Termination Date, no Stockholder shall, in its capacity
as such, directly or indirectly (including through advisors, agents or
other intermediaries), solicit (including by way of furnishing information)
or respond to any inquiries or the making of any proposal by any person or
entity (other than Merger Subsidiary or any Affiliate thereof) with respect
to the Company that constitutes or could reasonably be expected to lead to
an Acquisition Proposal (as defined in Section 5(j) of the Merger
Agreement), provided, however, that the foregoing shall not restrict a
Stockholder who is also a director of the Company from taking any actions
in such Stockholder's capacity as a director. If any Stockholder in its
capacity as such receives any such inquiry or proposal, then such
Stockholder shall promptly inform Merger Subsidiary of the material terms
and conditions, if any, of such inquiry or proposal and the identity of the
person making it. Each Stockholder, in its capacity as such, will
immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted heretofore with
respect to any of the foregoing.
(b)Prior to the Termination Date, no Stockholder shall, directly or
indirectly (i) except pursuant to the terms of the Merger Agreement or this
Agreement, offer for sale, sell, transfer, tender, pledge, encumber, assign
or otherwise dispose of, enforce or permit the execution of the provisions
of any redemption
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agreement with the Company or enter into any contract, option or other
arrangement or understanding with respect to or consent to the offer for
sale, sale, transfer, tender, pledge, encumbrance, assignment or other
disposition of, or exercise any discretionary powers to distribute, any or
all of such Stockholder's Shares or any interest therein, including any
trust income or principal, except in each case to a Permitted Transferee
who is or agrees to become bound by this Agreement; (ii) except as
contemplated hereby, grant any proxies or powers of attorney with respect
to any Shares, deposit any Shares into a voting trust or enter into a
voting agreement with respect to any Shares; or (iii) take any action that
would make any representation or warranty of such Stockholder contained
herein untrue or incorrect or have the effect of preventing or disabling
such Stockholder from performing such Stockholder's obligations under this
Agreement.
(c)Each Stockholder hereby waives any rights of appraisal or rights to
dissent from the Merger that such Stockholder may have. Each Trustee
represents that no beneficiary who is a beneficial owner of Shares under
any trust has any right of appraisal or right to dissent from the Merger
which has not been so waived.
(d)Subject to the terms and provisions of the Merger Agreement, in
connection with the Merger, the Rollover Stockholder hereby agrees to elect
to retain an aggregate of 380,952 shares of Surviving Corporation Common
Stock upon conversion of, and with respect to, 380,952 of such Rollover
Stockholder's Shares (the "Rollover Shares") unless otherwise agreed with
Merger Subsidiary.
(e)The Kleinknechts shall cause (i) KEC-NY to enter into the Amended and
Restated Labor Pooling Agreement between KEC-NY and the Company,
substantially in the form of Exhibit A-1 attached to the Merger Agreement,
and (ii) KEC-NJ to enter into the Amended and Restated Labor Pooling
Agreement between KEC-NJ and the Company, substantially in the form of
Exhibit A-2 attached hereto (collectively, the "Amended and Restated Labor
Pooling Agreements").
(f)Richard Kleinknecht shall enter into the Investors Agreement among the
Company, Cable Systems Holding LLC, Cable Systems International Inc. and
certain other parties named therein.
(g)Unless, in connection therewith, the Shares held by any trust which
are presently subject to the terms of this Agreement are transferred to one
or more Stockholders and remain subject in all respects to the terms of
this Agreement, or other Permitted Transferees who upon receipt of such
Shares become signatories to this Agreement, the Stockholders who are
Trustees shall not take any action to terminate, close or liquidate any
such trust and shall take all steps necessary to maintain the existence
thereof at least until the first to occur of (i) the Effective Time and
(ii) the Termination Date.
(h)The Rollover Stockholder shall take all actions necessary to cause any
Rollover Shares that constitute Pledged Shares, prior to the Effective
Time, to be free and clear of all liens, claims, security interests,
proxies, voting trusts or agreements, understandings or arrangements or any
other encumbrances whatsoever, except for any such encumbrances or proxies
arising hereunder.
Section 6. Non-Competition.
(a)For a period of three years after the Effective Time, except as
contemplated or permitted under the Merger Agreement, the Amended and Restated
Labor Pooling Agreements, the Corporate Opportunity Agreement, the Investors
Agreement, dated the date hereof, among the Company and the other parties
named therein, the Amended and Restated Employment Agreement, dated as of the
Effective Date between Richard Kleinknecht and the Company (the "Richard
Kleinknecht Employment Agreement"), or the Amended and Restated Employment
Agreement, dated the Effective Date, between Peter Kleinknecht and the Company
(the "Peter Kleinknecht Employment Agreement" and, together with the Richard
Kleinknecht Employment Agreement, the "Amended and Restated Employment
Agreements") each of the Kleinknechts severally agrees, and shall cause each
of their respective Affiliates, including, without limitation, KEC-NY and KEC-
NJ, to agree, that any such Person shall not, directly or indirectly, through
any Person Controlled by either of the Kleinknechts in any form or manner
within any jurisdiction in which the Company or any of its Affiliates are
doing business: (i) engage in the Business (as defined herein) for his or
their own account or for the account of any other Person, or (ii) become
interested in any Person engaged in the Business as a partner, shareholder,
member, principal, agent, employee, trustee, consultant or in any other
relationship or capacity; provided, however, that either of the
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Kleinknechts may own, directly or indirectly, solely as a passive investment,
securities of any Person if either of the Kleinknechts or any of their
respective Affiliates, as the case may be (1) is not a Person in Control of,
or a member of a group that Controls, such Person and (2) does not, directly
or indirectly, own 5% or more of any voting class of securities of such
Person.
(b)In perpetuity and on a worldwide basis, except as contemplated or
permitted under the Merger Agreement, each of the Kleinknechts severally
agrees, and shall cause each of their respective Affiliates including, without
limitation, KEC-NY or KEC-NJ to agree, that such Person shall not, directly or
indirectly, disclose to any other party, unless required to do so by law or
court order, any confidential, non-public or proprietary information relating
to the Company or to any Subsidiary or joint venture thereof which information
was acquired during the course of such Person's relationship with the Company,
except information which (i) becomes known to such Person from a source other
than the Company, its directors, officers or employees, which source is not
obligated to the Company to keep such information confidential or (ii) becomes
generally available to the public through no breach of this Agreement by the
Kleinknechts.
(c)For a period ending on the later to occur of (i) three years after the
Effective Time and (ii) the expiration or termination of the Amended and
Restated Labor Pooling Agreements, on a worldwide basis, except as
contemplated or permitted under the Merger Agreement or the Amended and
Restated Labor Pooling Agreements, each of the Kleinknechts severally agrees
that, without the prior written consent of the Company, the Kleinknechts, any
of their Affiliates or any business or enterprise with which either of the
Kleinknechts is associated as an officer, director or controlling shareholder
or other investor with the power to direct or cause the direction of the
management of such business or enterprise shall not employ or attempt to
employ an employee of the Company or any of its subsidiaries or joint ventures
(other than, with respect to Richard Kleinknecht, his executive assistant).
(d)If either of the Kleinknechts breaches, or threatens to commit a breach
of, any of the provisions contained in this Section 6, the Company shall have
the following rights and remedies with respect to Richard or Peter
Kleinknecht, as the case may be, each of which rights and remedies shall be
independent of the others and severally enforceable, and each of which is in
addition to, and not in lieu of, any other rights and remedies available to
the Company under law or in equity:
(i)the right and remedy to have the provisions of this Section 6
specifically enforced by any court of competent jurisdiction and Merger
Subsidiary shall be entitled to apply for and receive injunctive relief in
order to prevent the continuation of any existing breach or the occurrence
of any threatened breach, it being agreed that any breach or threatened
breach of the provisions of this Section 6 would cause irreparable injury
to the Company and that money damages would not provide an adequate remedy
to the Company.
(e)Each of the Kleinknechts agrees that the provisions of this Section 6 are
reasonable and valid in geographical and temporal scope and in all other
respects. If any court determines that the provisions of this Section 6, or
any part thereof, is unenforceable because of the duration or geographical
scope of such provision, such court shall have the power to reduce the
duration or scope of such provision, as the case may be, and, in its reduced
form, such provision shall be enforceable.
(f)If any court determines that the provisions of this Section 6, or any
part thereof, is invalid or unenforceable, the remainder of the provisions of
this Section 6 shall not thereby be affected and shall be given full effect
without regard to invalid portions.
Section 7. Termination of Certain Agreements. Effective immediately prior to
the Effective Time and without further action by the parties hereto, each of
(a) the Employment Agreement, dated May 9, 1994, between the Company and Peter
Kleinknecht, (b) the Employment Agreement, dated May 9, 1994, between the
Company and Richard Kleinknecht, (c) Registration Rights Agreement, dated as
of May 9, 1994, between the Company, Richard Kleinknecht and Peter Kleinknecht
and (d) all special compensation arrangements for the Kleinknechts (other than
those set forth in the Amended and Restated Employment Agreements), in each
case shall terminate without any obligation or liability to the Company and
shall be of no further force and effect.
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Section 8. Further Assurances. From time to time, at the other party's
request and without further consideration, each party hereto shall execute and
deliver such additional documents and take all such further action as may be
necessary or desirable to consummate and make effective, in the most
expeditious manner practicable, the transactions contemplated by this
Agreement.
Section 9. Certain Events. Each Stockholder agrees that this Agreement and
the obligations hereunder shall attach to such Stockholder's Shares and shall
be binding upon any person or entity to which legal or beneficial ownership of
such Shares shall pass, whether by operation of law or otherwise, including
without limitation such Stockholder's heirs, guardians, administrators or
successors or as a result of any divorce.
Section 10. Stop Transfer. Each Stockholder agrees with, and covenants to,
Merger Subsidiary that such Stockholder shall not request that the Company
register the transfer (book-entry or otherwise) of any certificate or
uncertificated interest representing any of such Stockholder's Shares, unless
such transfer is made in compliance with this Agreement.
Section 11. Rule 145 Affiliates. Each Stockholder who is an "affiliate" of
the Company for purposes of Rule 145 under the Securities Act of 1933, as
amended, hereby agrees to deliver to Merger Subsidiary, on or prior to the
Closing Date (as defined in the Merger Agreement) a written agreement as
contemplated by Section 5(o) of the Merger Agreement.
Section 12. Termination. The obligations of the Stockholders and the
irrevocable proxy contained in Section 4(b) of this Agreement shall terminate
upon the first to occur of (a) the Effective Time and (b) the date the Merger
Agreement is terminated in accordance with its terms (the "Termination Date");
provided that the provisions of Sections 2, 3 and 13 and any claim for breach
of any representation, warranty, covenant or other agreement under this
Agreement shall survive the Effective Time and/or the Termination Date, as
applicable.
Section 13. Miscellaneous.
(a)All notices, requests, claims, demands and other communications hereunder
shall be in writing and shall be given (and shall be deemed to have been duly
received if so given) by hand delivery, telegram, telex or telecopy, or by
mail (registered or certified mail, postage prepaid, return receipt requested)
or by any courier service providing proof of delivery. All communications
hereunder shall be delivered to the respective parties at the following
addresses:
<TABLE>
<S> <C>
If to the Stockholders:
Richard Kleinknecht
<CAPTION>
15 Banbury Lane
Huntington, NY 11743
<S> <C>
Telecopier:
copy to:
White & Case
1155 Avenue of the Americas
New York, NY 10036
Attn: Edward F. Rover, Esq.
Telecopier: (212)
354-8113
If to Merger Subsidiary:
Arizona Acquisition Corp.
c/o Cable Systems Holding LLC
505 North 51st Avenue
Phoenix, Arizona 85043-2701
Attn: President
Telecopier: 602-233-5782
</TABLE>
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<TABLE>
<S> <C>
copy to:
Citicorp Venture Capital, Ltd.
399 Park Avenue
14th Floor, Zone 4
New York, NY 10043
Attn: Richard M. Cashin, Jr.
Telecopier: 212-888-2940
and:
Morgan, Lewis & Bockius LLP
101 Park Avenue
New York, NY 10178
Attn: Philip H. Werner, Esq.
Telecopier: 212-309-6273
</TABLE>
or to such other address as the person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above.
(b)At any time prior to the Effective Time, any party hereto may, with
respect to any other party hereto, (i) extend the time for the performance of
any of the obligations or other acts, (ii) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto or (iii) waive compliance with any of the agreements or
conditions contained herein. Any such extension or waiver shall be valid if
set forth in an instrument in writing signed by the party or parties to be
bound thereby.
(c)The headings contained in this Agreement are for the convenience of
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
(d)If any term or other provision of this Agreement is invalid, illegal or
incapable of being enforced by any rule of law or public policy, all other
conditions and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic or legal substance of the
transactions contemplated by the Merger Agreement is not affected in any
manner adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties
hereto shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the parties as closely as possible in an acceptable
manner.
(e)This Agreement, including all exhibits, disclosure schedules and
schedules hereto, constitutes the entire agreement and supersedes all prior
agreements and undertakings, both written and oral, among the parties, or any
of them, with respect to the subject matter hereof and except as otherwise
expressly provided herein.
(f)Neither this Agreement nor any of the rights or obligations hereunder may
be assigned by any party (whether by operation of law or otherwise) without
the prior written consent of the other parties hereto. Subject to the
preceding sentence, this Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and permitted
assigns, and no other Person shall have any right, benefit or obligation under
this Agreement as a third party beneficiary or otherwise.
(g)The parties hereto agree that irreparable damage would occur in the event
that any of the provisions of this Agreement were not performed in accordance
with their specific terms. It is accordingly agreed that the parties hereto
shall be entitled to specific performance of the terms hereof, this being in
addition to any other remedy to which they are entitled at law or in equity.
(h)No failure or delay on the part of any party hereto in the exercise of
any right hereunder shall impair such right or be construed to be a waiver of,
or acquiescence in, any breach of any representation, warranty or agreement
herein, nor shall any single or partial exercise of any such right preclude
other or further exercise
D-9
<PAGE>
thereof or of any other right. All rights and remedies existing under this
Agreement are cumulative to, and not exclusive of, any rights or remedies
otherwise available.
(i)Notwithstanding anything herein to the contrary, no Person executing this
Agreement who is, or becomes during the term hereof, a director of the Company
makes any agreement or understanding herein in his or her capacity as such
director, and the agreements set forth herein shall in no way restrict any
director in the exercise of his or her fiduciary duties as a director of the
Company. Each Stockholder has executed this Agreement solely in his or her
capacity as the record or beneficial holder of such Stockholder's Shares or as
the trustee of a trust whose beneficiaries are the beneficial owners of such
Stockholder's Shares.
(j)Each party agrees to bear its own expenses in connection with the
transactions contemplated hereby.
(k)This Agreement shall be governed and construed in accordance with the
laws of the State of New York, without giving effect to any choice of law or
conflict of law provision or rule that would cause the application of the laws
of any jurisdiction other than the State of New York, except to the extent
that the General Corporation Law of the State of Delaware applies as a result
of the Company being incorporated in the State of Delaware, in which case such
General Corporation Law shall apply.
(l)EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL
BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT AND FOR ANY COUNTERCLAIM
THEREIN.
(m)This Agreement may be executed in one or more counterparts, and by the
different parties hereto in separate counterparts, each of which when executed
shall be deemed to be an original but all of which taken together shall
constitute one and the same agreement.
(n)Each of the Stockholders hereby acknowledges that, for purposes of Title
IV of the Employee Retirement Income Security Act of 1974, as amended, IPC and
IXNET may become members of a controlled group of corporations that includes
Citicorp Venture Capital, Ltd. and its Affiliates.
[SIGNATURE PAGE TO FOLLOW]
D-10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
Arizona Acquisition Corp.
/s/ Peter A. Woog
By:__________________________________
Name: Peter A. Woog
Title: President
Stockholders:
/s/ Richard Kleinknecht
_____________________________________
Richard Kleinknecht
/s/ Peter Kleinknecht
_____________________________________
Peter Kleinknecht
Kleinknecht 1997 Annuity Trust
/s/ Richard Kleinknecht
By:__________________________________
Name: Richard Kleinknecht
Title: Agent
Eric Kleinknecht Revocable Trust
/s/ Richard Kleinknecht
By:__________________________________
Name: Richard Kleinknecht
Title: Agent
Mark Kleinknecht Revocable Trust
/s/ Richard Kleinknecht
By:__________________________________
Name: Richard Kleinknecht
Title: Agent
D-11
<PAGE>
Lisa Kleinknecht Revocable Trust
/s/ Richard Kleinknecht
By:__________________________________
Name: Richard Kleinknecht
Title: Agent
/s/ Lisa Kleinknecht
_____________________________________
Lisa Kleinknecht
Peter J. Kleinknecht 1996
Grantor Retained
Annuity Trust
/s/ Peter Kleinknecht
By:__________________________________
Name: Peter Kleinknecht
Title:
Maureen Kleinknecht 1996 Grantor
Retained Annuity Trust
/s/ Maureenn Kleinknecht
BY:__________________________________
Name: Maureen Kleinknecht
Title:
/s/ Sabrina Kleinknecht
_____________________________________
Sabrina Kleinknecht
/s/ Gavin Kleinknecht
_____________________________________
Gavin Kleinknecht
/s/ Keir Kleinknecht
_____________________________________
Keir Kleinknecht
/s/ Russell G. Kleinknecht
_____________________________________
Russell G. Kleinknecht
D-12
<PAGE>
SCHEDULE I
EXISTING SHARES
<TABLE>
<CAPTION>
NO. OF
EXISTING
SHAREHOLDER SHARES
- ----------- ---------
<S> <C>
Richard P. Kleinknecht................................................ 1,552,273
Peter J. Kleinknecht.................................................. 2,240,999
Kleinknecht 1997 Annuity Trust........................................ 1,000,000
Eric Kleinknecht 1997 Revocable Trust................................. 300,575
Mark Kleinknecht Revocable Trust...................................... 300,275
Lisa Kleinknecht Revocable Trust...................................... 300,275
Lisa Kleinknecht...................................................... 298
Peter J. Kleinknecht 1996 Grantor Retained Annuity Trust.............. 155,637
Maureen Kleinknecht 1996 Grantor Retained Annuity Trust............... 155,637
Sabrina Kleinknecht................................................... 300,075
Gavin Kleinknecht..................................................... 300,075
Keir Kleinknecht...................................................... 300,075
Russell G. Kleinknecht................................................ 46,574
</TABLE>
D-13
<PAGE>
SCHEDULE II
PLEDGED SHARES
Any and all shares of Existing Shares pledged by the Kleinknechts pursuant
to (a) the Pledge Agreement, dated April 28, 1994, by the Kleinknechts and
Citibank, N.A. and National Westminster Bank NJ, (b) the Pledge Agreement,
dated October 6, 1995, between the Kleinknechts and The Chase Manhattan Bank
(National Association) and (c) the Pledge Agreement, dated April 15, 1996,
between Peter J. Kleinknecht and Maureen Kleinknecht and Smith Barney Inc.
D-14
<PAGE>
ANNEX E-1
MERGERS & ACQUISITIONS
STRICTLY PRIVATE & CONFIDENTIAL
December 17, 1997
IPC Information Systems, Inc.
Wall Street Plaza
88 Pine Street
New York, NY 10005
Members of the Board of Directors:
We understand that IPC Information Systems, Inc. ("IPC" or the "Company")
and Arizona Acquisition Corporation. ("AAC"), a wholly owned subsidiary of
Cable Systems Holdings, LLC which is majority owned by Citicorp Venture
Capital, Ltd., have entered into an Agreement and Plan of Merger, dated as of
December 18, 1997 (the "Merger Agreement"), pursuant to which AAC will be
merged with and into IPC, with the Company remaining as the surviving
corporation under the name of IPC Information Systems, Inc. (the "Merger").
Pursuant to the Merger Agreement, among other things, each share of AAC common
stock will be converted into one share of common stock, par value $.01 per
share of IPC ("IPC Common Stock"). Prior to the Merger, shareholders of IPC
will be granted a choice of receiving either $21 per share in cash or the
option of rolling over all of their equity, subject to proration as described
in the Merger Agreement, into IPC Common Stock ("Merger Consideration").
The terms and conditions of the Merger are more fully set forth in the
Merger Agreement.
You have asked for our opinion as to whether the Merger Consideration to be
paid to the holders of IPC Common Stock pursuant to the Merger Agreement is
fair from a financial point of view to such holders.
For purposes of the opinion set forth herein, we have:
1.Analyzed certain publicly available financial statements and other
information of IPC;
2.Reviewed and analyzed certain financial projections of IPC for the
period 1998-2002 prepared by the Company (the "Projections");
3.Discussed with senior management of IPC the current operations,
financial condition and the prospects of the Company;
4.Reviewed the reported stock prices and trading activity for IPC Common
Stock;
5.Compared the historical financial performance and market trading values
of IPC with that of certain other generally comparable publicly traded
companies and their securities;
6.Reviewed the financial terms, to the extent publicly available, of
certain comparable acquisition transactions;
7.Based on the Projections, performed a discounted cash flow analysis and
leveraged buy-out analysis of IPC;
8.Discussed with senior management of IPC other acquisition proposals and
related discussions the Company held with other parties;
E-1-1
<PAGE>
9.Reviewed the financial terms of the Merger Agreement; and
10.Performed such other financial analyses and examinations and
considered such other factors as we have deemed appropriate.
We have assumed and relied upon, without independent verification, the
accuracy and completeness of the information reviewed by us for the purposes
of this opinion. With respect to the Projections supplied by or confirmed by
the Company, we have further assumed that such Projections represent the best
currently available estimates and judgment of the management of the Company as
to the expected future financial performance of the Company. We have not made
any independent verification of information supplied by or confirmed by IPC to
us and have not undertaken any independent valuation or appraisal of the
assets or liabilities of IPC, nor have we been furnished with such appraisals.
Our opinion is necessarily based on economic, market, financial and other
conditions as in effect on, and the information made available to us as of,
the date hereof.
Deutsche Morgan Grenfell, Inc. has from time to time provided investment
banking and financial advisory services to IPC and has received fees for the
rendering of such services.
It is understood that this letter is for the information of the Board of
Directors of IPC and may not be used for any other purpose without our prior
written consent, except that this opinion may be included it its entirety in
any filing made by IPC with the SEC with respect to the transactions
contemplated by the Merger Agreement.
Based on our analysis of the foregoing and such other factors as we deem
relevant, including our assessment of current economic, market, financial and
other conditions, we are of the opinion that, as of the date hereof, the
Merger Consideration to be received by the holders of shares of IPC pursuant
to the Merger Agreement is fair from a financial point of view to such
holders.
Very truly yours,
Deutsche Morgan Grenfell Inc.
/s/ Louis B. Cooper
By___________________________________
Louis B. Cooper Director
/s/ Laurence B. Braham
By___________________________________
Laurence B. BrahamAssistant Vice
President
E-1-2
<PAGE>
ANNEX E-2
[DEUTSCHE MORGAN GRENFELL INC. LETTERHEAD]
April 6, 1998
Board of Directors
IPC Information Systems, Inc.
Wall Street Plaza
88 Pine Street
New York, NY 10005
Members of the Board of Directors:
Reference is made to our opinion, dated December 17, 1997 (the "Opinion"),
as to the fairness, from a financial point of view, to the holders of IPC
Common Stock (the "Shares"), of the proposed Merger Consideration to be
received by such holders in connection with the Merger referred to in our
Opinion. Capitalized terms used and not otherwise defined herein shall have
the meanings ascribed to them in the Opinion.
Based on and subject to the terms, conditions and qualifications set forth
in the Opinion, this will confirm that we are of the opinion that, as of the
date hereof, the proposed Merger Consideration to be received by the holders
of the Shares in the Merger is fair to such holders from a financial point of
view.
Very truly yours,
DEUTSCHE MORGAN GRENFELL INC.
/s/ Louis B. Cooper
By
-----------------------------------
Louis B. Cooper
Director
/s/ Clive R. Holmes
By
-----------------------------------
Clive R. Holmes
Director
E-2-1
<PAGE>
ANNEX F
DELAWARE GENERAL CORPORATION LAW, SECTION 262
262. APPRAISAL RIGHTS. (a) Any stockholder of a corporation of this State
who holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation,
who has otherwise complied with subsection (d) of this section and who has
neither voted in favor of the merger or consolidation nor consented thereto in
writing pursuant to (S)228 of this title shall be entitled to an appraisal by
the Court of Chancery of the fair value of the stockholder's shares of stock
under the circumstances described in subsections (b) and (c) of this section.
As used in this section, the word "stockholder" means a holder of record of
stock in a stock corporation and also a member of record of a nonstock
corporation; the words "stock" and "share" mean and include what is ordinarily
meant by those words and also membership or membership interest of a member of
a nonstock corporation; and the words "depository receipt" mean a receipt or
other instrument issued by a depository representing an interest in one or
more shares, or fractions thereof, solely of stock of a corporation, which
stock is deposited with the depository.
(b)Appraisal rights shall be available of the shares of any class or series
of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to (S)251 (other than a merger effected pursuant to
(S)251(g) of this title), (S)252, (S)254, (S)257, (S)258, (S)263 or (S)264 of
this title:
(1)Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of (S)251 of this title.
(2)Notwithstanding paragraph (l) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to (S)251,
252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:
a.Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b.Shares of stock of any corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c.Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph;
or
d.Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3)In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under (S)253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
F-1
<PAGE>
(c)Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d)Appraisal rights shall be perfected as follows:
(1)If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are
available pursuant to subsections (b) or (c) hereof that appraisal rights
are available for any or all of the shares of the constituent corporations,
and shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation,
a written demand for appraisal of his shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2)If the merger or consolidation was approved pursuant to (S)228 or
(S)253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
such notice, demand in writing from the surviving or resulting corporation
the appraisal of such holder's shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder and
that the stockholder intends thereby to demand the appraisal of such
holder's shares. If such notice did not notify stockholders of the
effective date of the merger or consolidation, either (i) each such
constituent corporation shall send a second notice before the effective
date of the merger or consolidation notifying each of the holders of any
class or series of stock of such constituent corporation that are entitled
to appraisal rights of the effective date of the merger or consolidation or
(ii) the surviving or resulting corporation shall send such a second notice
to all such holders on or within 10 days after such effective date;
provided, however, that if such second notice is sent more than 20 days
following the sending of the first notice, such second notice need only be
sent to each stockholder who is entitled to appraisal rights and who has
demanded appraisal of such holder's shares in accordance with this
subsection. An affidavit of the secretary or assistant secretary or of the
transfer agent of the corporation that is required to give either notice
that such notice has been given shall, in the absence of fraud, be prima
facie evidence of the facts stated therein. For purposes of determining the
stockholders entitled to receive either notice, each constituent
corporation may fix, in advance, a record date that shall be not more than
10 days prior to the date the notice is given, provided, that if the notice
is given on or after the effective date of the merger or consolidation, the
record date shall be such effective date. If no record date is fixed and
the notice is given prior to the effective date, the record date shall be
the close of business on the day next preceding the day on which the notice
is given.
F-2
<PAGE>
(e)Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied
with subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger
or consolidation, any stockholder shall have the right to withdraw his demand
for appraisal and to accept the terms offered upon the merger or
consolidation. Within 120 days after the effective date of the merger or
consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which
demands for appraisal have been received and the aggregate number of holders
of such shares. Such written statement shall be mailed to the stockholder
within 10 days after his written request for such a statement is received by
the surviving or resulting corporation or within 10 days after expiration of
the period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f)Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
(g)At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates
to submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as
to such stockholder.
(h)After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court
may, in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on
the list filed by the surviving or resulting corporation pursuant to
subsection (f) of this section and who has submitted his certificates of stock
to the Register in Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that he is not entitled to
appraisal rights under this section.
(i)The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as the
Court may direct. Payment shall be so made to each such stockholder in the
case of holders of uncertificated stock forthwith, and the case of holders of
shares represented by certificates upon the surrender to the corporation
F-3
<PAGE>
of the certificates representing such stock. The Court's decree may be
enforced as other decrees in the Court of Chancery may be enforced, whether
such surviving or resulting corporation be a corporation of this State or of
any state.
(j)The costs of the proceeding may be determined by the Court and taxed upon
the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k)From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed within
the time provided in subsection (e) of this section, of if such stockholder
shall deliver to the surviving or resulting corporation a written withdrawal
of his demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this section or thereafter with
the written approval of the corporation, then the right of such stockholder to
an appraisal shall cease. Notwithstanding the foregoing, no appraisal
proceeding in the Court of Chancery shall be dismissed as to any stockholder
without the approval of the Court, and such approval may be conditioned upon
such terms as the Court deems just.
(l)The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation. (Last amended by Ch. 120, L.
'97, eff. 7-1-97.)
F-4
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. 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 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 such person 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 shareholders 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 such person, and
incurred by such person in any such capacity, or arising out of such person's
status as such, whether or not the corporation would otherwise have the power
to indemnify such person under Section 145.
Section 6 of the Registrant's Restated Certificate of Incorporation provides
that a director shall not be personally liable to the Registrant or its
stockholders 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 DGCL. Article IX of the Registrant's Amended Bylaws
requires the Registrant, among other things, to indemnify to the fullest
extent permitted by DGCL, any person who is or was or has agreed to become a
director or officer of the Registrant, who was or is made a party to, or is
threatened to be made a party to, or has become a witness in, any threatened,
pending or completed action, suit or proceeding, including actions or suits by
or in the right of the Registrant, 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
written request of the Registrant.
Article IX also empowers the Registrant 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 the Registrant would have the power to indemnify those persons
against such liability under the law or the provisions set forth in the
Restated Certificate of Incorporation or Bylaws. The Registrant is also
authorized by its Amended Bylaws to enter into individual indemnification
contracts with directors and officers. The Registrant has obtained insurance
policies under which the Registrant's directors and officers are insured,
within the limits and subject to the limitations of the policies, against
certain expenses in connection with the defense of certain actions, suits or
proceedings, and certain liabilities which might be imposed as a result of
certain actions, suits or proceedings, to which they are parties by reason of
being or having been such directors or officers.
II-1
<PAGE>
The Registrant has also entered into employment agreements with certain
executive officers, which agreements require that the Registrant maintain a
directors' and officers' liability policy for the benefit of such officers and
that the Registrant will indemnify such officers to the fullest extent
permitted by law.
In addition, pursuant to the Merger Agreement, the Surviving Corporation has
agreed for a period of six years following the effective time of the Merger to
indemnify present and former directors and officers of the Registrant and its
subsidiaries with respect to acts or omissions occurring prior to the
effective time of the Merger to the maximum extent permitted under the
Registrant's Certificate of Incorporation and Bylaws. The Surviving
Corporation has also agreed in the Merger Agreement to maintain for a period
of six years following the effective time of the Merger the directors' and
officers' liability insurance coverage maintained by the Registrant (or
substantially equivalent coverage under substitute policies) with respect to
any claims arising out of any actions or omissions occurring prior to the
effective time of the Merger.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The exhibits and financial statement schedules filed as a part of this
Registration Statement are as follows:
(A) LIST OF EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
2.1 Amended and Restated Agreement and Plan of Merger, dated as of
December 18, 1997, by and between the Registrant and Arizona
Acquisition Corp. (included as Annex A to the Proxy
Statement/Prospectus).
2.2 Stockholders Agreement, dated as of December 18, 1997, by and
among Arizona Acquisition Corp., Richard P. Kleinknecht, Peter J.
Kleinknecht, Russell G. Kleinknecht and other signatories thereto.
(3)
3.1 Restated Certificate of Incorporation of Registrant. (1)
3.2 Amended and Restated Certificate of Incorporation of Registrant
(included as Annex B to the Proxy Statement/Prospectus).
3.3 Amended and Restated Bylaws of Registrant. (2)
3.4 Amended and Restated Bylaws of Registrant after the Merger.*
4.1 Specimen Stock Certificate of Common Stock of the Registrant. (1)
5.1 Opinion of Thacher Proffitt & Wood regarding legality. *
8.1 Opinion of Thacher Proffitt & Wood regarding tax matters. *
10.2 Employment Agreement, dated May 9, 1994, between the Registrant
and Richard P. Kleinknecht. (1)
10.2.1 Letter Agreement, dated October 17, 1995, amending the Employment
Agreement between the Registrant and Richard P. Kleinknecht. (2)
10.2.2 Amended and Restated Employment Agreement, dated as of December
18, 1997, between the Registrant and Richard P. Kleinknecht. (3)
10.3 Employment Agreement, dated May 9, 1994, between the Registrant
and Peter J. Kleinknecht. (1)
10.3.1 Letter Agreement, dated October 17, 1995, amending the Employment
Agreement between the Registrant and Peter J. Kleinknecht. (2)
10.3.2 Amended and Restated Employment Agreement, dated as of December
18, 1997, between the Registrant and Peter J. Kleinknecht. (3)
10.8 Labor Pool Agreement between the Registrant and KEC-NY. (1)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.8.1 Amended and Restated Labor Pool Agreement, dated as of December
18, 1997, by and between the Registrant and KEC-NY. (3)
10.9 Labor Pool Agreement between the Registrant and KEC-NJ. (1)
10.9.1 Amended and Restated Labor Pool Agreement, dated as of December
18, 1997, by and between the Registrant and KEC-NJ. (3)
10.10 Corporate Opportunity Agreement among the Registrant, KEC-NY and
KEC-NJ. (1)
10.10.1 Amended and Restated Corporate Opportunity Agreement, dated as of
December 18, 1997, by and among the Registrant, KEC-NY and KEC-NJ.
(3)
10.13 Registration Rights Agreement between the Registrant and Richard
P. Kleinknecht and Peter J. Kleinknecht. (1)
10.14 Employment Agreement, dated as of October 17, 1995, between the
Registrant and Steven Terrell Clontz. (2)
10.14.1 First Amendment to Employment Agreement, dated as of August 1,
1997, between the Registrant and Steven Terrell Clontz. (4)
10.15 Investors Agreement, dated as of December 18, 1997, by and among
the Registrant, Cable Systems Holding, LLC, Richard P.
Kleinknecht, David Walsh and Anthony Servidio. (3)
10.16 Share Exchange and Termination Agreement, dated as of December 18,
1997, by and among the Registrant, International Exchange
Networks, Ltd., David Walsh and Anthony Servidio. (3)
10.17 Amended and Restated Employment Agreement, dated as of December
18, 1997, by and between International Exchange Networks, Ltd. and
David Walsh. (3)
10.18 Amended and Restated Employment Agreement, dated as of December
18, 1997, by and between International Exchange Networks, Ltd. and
Anthony Servidio. (3)
10.19 Employment Agreement, dated as of April 20, 1995, by and between
IPC Bridge, Inc., a wholly-owned subsidiary of the Registrant, and
Gerald E. Starr. (4)
10.19.1 First Amendment to Employment Agreement between IPC Bridge, Inc.
and Gerald E. Starr, dated as of May 21, 1996. (4)
10.19.2 Second Amendment to Employment Agreement between IPC Bridge, Inc.
and Gerald E. Starr, dated as of August 1, 1997. (4)
10.20 Employment Agreement, dated as of October 1, 1997, by and between
the Registrant and Russell G. Kleinknecht. (4)
10.20.1 Letter Loan Agreement, dated as of October 1, 1997, by and between
the Registrant and Russell G. Kleinknecht. (4)
10.21 IPC Information Systems, Inc. 1998 Stock Incentive Plan (included
as Annex C to the Proxy Statement/Prospectus).
11.1 Statement regarding Computation of Per Share Earnings (4)
13.1 IPC Information Systems, Inc. Annual Report on Form 10-K for the
year ended September 30, 1997, as amended. (4)
21.1 Subsidiaries of IPC Information Systems, Inc. (4)
23.1 Consent of Thacher Proffitt & Wood (included in Exhibits 5.1 and
8.1). **
23.2 Consent of Coopers & Lybrand L.L.P. **
23.3 Consent of Deutsche Morgan Grenfell Inc. (included in Annex E-1 to
the Proxy Statement/Prospectus). **
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
99.1 Form of Proxy. *
99.2 Form of Stock Election. *
99.3 Form of Letter of Transmittal.*
</TABLE>
- --------
* Previously filed as an exhibit to the Registrant's Registration Statement
on Form S-4.
** Filed herewith.
(1) Previously filed as an exhibit to the Registrant's Registration Statement
on Form S-1, as amended (No. 33-78754) and incorporated herein by
reference.
(2) Previously filed as an exhibit to the Registrant's Current Report on Form
8-K, filed November 30, 1995, and incorporated herein by reference.
(3) Previously filed as an exhibit to the Registrant's Current Report on Form
8-K, filed December 24, 1997, and incorporated herein by reference.
(4) Previously filed as an exhibit to the Registrant's Annual Report on Form
10-K, filed January 13, 1998, and incorporated herein by reference.
(B) FINANCIAL STATEMENT SCHEDULES.
All schedules have either been incorporated by reference or have been
omitted as not applicable or not required under the rules of Regulation S-X.
(C) REPORTS, OPINIONS AND APPRAISALS OF OUTSIDE PARTIES.
The opinion of Deutsche Morgan Grenfell Inc. is included as Annex E to the
Proxy Statement/Prospectus.
ITEM 22. UNDERTAKINGS.
THE UNDERSIGNED REGISTRANT HEREBY UNDERTAKES:
(a)(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment 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 remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-4
<PAGE>
(b) For the purposes of determining any liability under the Securities
Act of 1933, each filing of the Registrant's annual report pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and each
filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Securities Exchange Act of 1934) that is incorporated by
reference in the registration statement shall be deemed 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.
(c)(1) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reoffering by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
(2) That every prospectus: (i) that is filed pursuant to paragraph
(c)(1) immediately preceding, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Securities Act of 1933 and is
used in connection with an offering of securities subject to Rule 415,
will be filed as part of an amendment to the registration statement and
will not be used until such amendment is effective, and that, for
purposes of determining any liability under the Securities Act of 1933,
each such post-effective amendment 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.
(d) To respond to requests for information that is incorporated by
reference into the Proxy Statement/ Prospectus pursuant to Item 4, 10(b),
11, or 13 of this Form, within one business day of receipt of such request,
and to send the incorporated documents by first class mail or other equally
prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the
date of responding to the request.
(e) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant 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 the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant 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, the
Registrant 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-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-4 and has duly caused this Amendment No. 2
to the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized in The City of New York, State of New York, on the
6th day of April, 1998.
IPC INFORMATION SYSTEMS, INC.
(Registrant)
/s/ S. Terry Clontz
By:__________________________________
S. Terry Clontz
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1933, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chairman and Director April 6, 1998
____________________________________
RICHARD P. KLEINKNECHT
* Vice Chairman and Director April 6, 1998
____________________________________
PETER J. KLEINKNECHT
/s/ S. Terry Clontz President, Chief Executive April 6, 1998
____________________________________ Officer
S. TERRY CLONTZ
/s/ Brian L. Reach Chief Financial Officer April 6, 1998
____________________________________ (Principal Financial
BRIAN L. REACH Officer)(Principal
Accounting Officer)
* Director April 6, 1998
____________________________________
THEODORE J. JOHNSON
* Director April 6, 1998
____________________________________
ROBERT J. MCINERNEY
* Director April 6, 1998
____________________________________
PETER M. STEIN
*/s/ Daniel Utevsky April 6, 1998
____________________________________
DANIEL UTEVSKY
Attorney-in-Fact
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NUMBER
------- ----------- -----------
<C> <S> <C>
2.1 Amended and Restated Agreement and Plan of Merger,
dated as of December 18, 1997, by and between the
Registrant and Arizona Acquisition Corp. (included as
Annex A to the Proxy Statement/Prospectus).
2.2 Stockholders Agreement, dated as of December 18,
1997, by and among Arizona Acquisition Corp., Richard
P. Kleinknecht, Peter J. Kleinknecht, Russell G.
Kleinknecht and other signatories thereto. (3)
3.1 Restated Certificate of Incorporation of Registrant.
(1)
3.2 Amended and Restated Certificate of Incorporation of
Registrant (included as Annex B to the Proxy
Statement/Prospectus).
3.3 Amended and Restated Bylaws of Registrant. (2)
3.4 Amended and Restated Bylaws of Registrant after the
Merger.*
4.1 Specimen Stock Certificate of Common Stock of the
Registrant. (1)
5.1 Opinion of Thacher Proffitt & Wood regarding
legality. *
8.1 Opinion of Thacher Proffitt & Wood regarding tax
matters. *
10.2 Employment Agreement, dated May 9, 1994, between the
Registrant and Richard P. Kleinknecht. (1)
10.2.1 Letter Agreement, dated October 17, 1995, amending
the Employment Agreement between the Registrant and
Richard P. Kleinknecht. (2)
10.2.2 Amended and Restated Employment Agreement, dated as
of December 18, 1997, between the Registrant and
Richard P. Kleinknecht. (3)
10.3 Employment Agreement, dated May 9, 1994, between the
Registrant and Peter J. Kleinknecht. (1)
10.3.1 Letter Agreement, dated October 17, 1995, amending
the Employment Agreement between the Registrant and
Peter J. Kleinknecht. (2)
10.3.2 Amended and Restated Employment Agreement, dated as
of December 18, 1997, between the Registrant and
Peter J. Kleinknecht. (3)
10.8 Labor Pool Agreement between the Registrant and KEC-
NY. (1)
10.8.1 Amended and Restated Labor Pool Agreement, dated as
of December 18, 1997, by and between the Registrant
and KEC-NY. (3)
10.9 Labor Pool Agreement between the Registrant and KEC-
NJ. (1)
10.9.1 Amended and Restated Labor Pool Agreement, dated as
of December 18, 1997, by and between the Registrant
and KEC-NJ. (3)
10.10 Corporate Opportunity Agreement among the Registrant,
KEC-NY and
KEC-NJ. (1)
10.10.1 Amended and Restated Corporate Opportunity Agreement,
dated as of December 18, 1997, by and among the
Registrant, KEC-NY and KEC-NJ. (3)
10.13 Registration Rights Agreement between the Registrant
and Richard P. Kleinknecht and Peter J. Kleinknecht.
(1)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NUMBER
------- ----------- -----------
<C> <S> <C>
10.14 Employment Agreement, dated as of October 17, 1995,
between the Registrant and Steven Terrell Clontz. (2)
10.14.1 First Amendment to Employment Agreement, dated as of
August 1, 1997, between the Registrant and Steven
Terrell Clontz. (4)
10.15 Investors Agreement, dated as of December 18, 1997,
by and among the Registrant, Cable Systems Holding,
LLC, Richard P. Kleinknecht, David Walsh and Anthony
Servidio. (3)
10.16 Share Exchange and Termination Agreement, dated as of
December 18, 1997, by and among the Registrant,
International Exchange Networks, Ltd., David Walsh
and Anthony Servidio. (3)
10.17 Amended and Restated Employment Agreement, dated as
of December 18, 1997, by and between International
Exchange Networks, Ltd. and David Walsh. (3)
10.18 Amended and Restated Employment Agreement, dated as
of December 18, 1997, by and between International
Exchange Networks, Ltd. and Anthony Servidio. (3)
10.19 Employment Agreement, dated as of April 20, 1995, by
and between IPC Bridge, Inc., a wholly-owned
subsidiary of the Registrant, and Gerald E. Starr.
(4)
10.19.1 First Amendment to Employment Agreement between IPC
Bridge, Inc. and Gerald E. Starr, dated as of May 21,
1996. (4)
10.19.2 Second Amendment to Employment Agreement between IPC
Bridge, Inc. and Gerald E. Starr, dated as of August
1, 1997. (4)
10.20 Employment Agreement, dated as of October 1, 1997, by
and between the Registrant and Russell G.
Kleinknecht. (4)
10.20.1 Letter Loan Agreement, dated as of October 1, 1997,
by and between the Registrant and Russell G.
Kleinknecht. (4)
10.21 IPC Information Systems, Inc. 1998 Stock Incentive
Plan (included as Annex C to the Proxy
Statement/Prospectus).
11.1 Statement regarding Computation of Per Share Earnings
(4)
13.1 IPC Information Systems, Inc. Annual Report on Form
10-K for the year ended September 30, 1997, as
amended. (4)
21.1 Subsidiaries of IPC Information Systems, Inc. (4)
23.1 Consent of Thacher Proffitt & Wood (included in
Exhibits 5.1 and 8.1). **
23.2 Consent of Coopers & Lybrand L.L.P. **
23.3 Consent of Deutsche Morgan Grenfell Inc. (included in
Annex E to the Proxy Statement/Prospectus).**
99.1 Form of Proxy. *
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NO. DESCRIPTION PAGE NUMBER
------- ----------- -----------
<C> <S> <C>
99.2 Form of Stock Election. *
99.3 Form of Letter of Transmittal. *
</TABLE>
- --------
* Previously filed as an exhibit to Registrant's Registration Statement on
Form S-4.
**Filed herewith.
(1) Previously filed as an exhibit to the Registrant's Registration Statement
on Form S-1, as amended (No. 33-78754) and incorporated herein by
reference.
(2) Previously filed as an exhibit to the Registrant's Current Report on Form
8-K, filed November 30, 1995, and incorporated herein by reference.
(3) Previously filed as an exhibit to the Registrant's Current Report on Form
8-K, filed December 24, 1997, and incorporated herein by reference.
(4) Previously filed as an exhibit to the Registrant's Annual Report on Form
10-K, filed January 13, 1998, and incorporated herein by reference.
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in Pre-Effective Amendment No. 2 to the Registration
Statement on Form S-4 of IPC Information Systems, Inc. (File No. 333-46296)
of our report dated December 4, 1997, except for Note 13, for which the date is
December 19, 1997, on our audits of the consolidated financial statements and
financial statement schedule of IPC Information Systems, Inc. We also consent to
the reference to our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
New York, New York
April 6, 1998
