<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 6, 1998
REGISTRATION NO. 333-46229
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
IPC INFORMATION SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 58-1636502
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYERIDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
WALL STREET PLAZA, 15TH FLOOR
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
VICE PRESIDENT AND GENERAL COUNSEL
IPC INFORMATION SYSTEMS, INC.
88 PINE STREET
NEW YORK, NEW YORK 10005
(212) 825-9060
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
COPIES TO:
THOMAS N. TALLEY DAVID P. BLEA JERRY V. ELLIOTT
THACHER PROFFITT & WOOD MORGAN, LEWIS & BOCKIUS JAMES S. SCOTT, SR.
TWO WORLD TRADE CENTER LLP SHEARMAN & STERLING
NEW YORK, NEW YORK 10048 101 PARK AVENUE 599 LEXINGTON AVENUE
(212) 912-7400 NEW YORK, NEW YORK 10178 NEW YORK, NEW YORK 10022
(212) 309-6000 (212) 848-4000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM
TITLE OF TO BE AGGREGATE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PRICE PER NOTE OFFERING PRICE REGISTRATION FEE
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<S> <C> <C> <C> <C>
Senior Discount Notes
Due 2008.............. $180,000,000 N/A $180,000,000 $53,100(2)
</TABLE>
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(1) Represents the original issue price of the Senior Discount Notes.
(2) $46,315 of which has been previously paid in connection with the initial
filing of the Registration Statement on February 13, 1998.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
[In frame #1 of the inside front page,there are two illustrations; (1)
the financial telecommunications network serviced by IPC, and (2) the advantages
of IXnet over the standard financial services telecommunications network. In
frames #2 and #3, there is a worldwide map illustrating the cities connected
through the IXnet Network.]
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued April 6, 1998
$180,000,000
LOGO
IPC Information Systems, Inc.
% SENIOR DISCOUNT NOTES DUE 2008
----------
The Notes are being issued at a substantial discount to their principal
amount at maturity and no cash interest will be payable thereon prior to
, 2001. Each Note will have a principal amount at maturity of
$1,000 and an initial accreted value of $ . Cash interest on
the Notes will be payable semiannually on and of each
year, commencing , 2001, at a rate of % per annum.
The Notes will be redeemable at the option of the Company, in whole or in
part, at any time on or after , 2003 at the redemption prices set forth
herein, plus accrued interest, if any, to the date of redemption. In
addition, at any time prior to , 2001 up to 35% of the Notes may be
redeemed by the Company with the proceeds of one or more equity
offerings at the redemption price set forth herein; provided,
however, that after any such redemption at least 65% of Notes
originally issued remain outstanding.
The Notes will be unsubordinated, unsecured indebtedness of the Company,
ranking pari passu in right of payment with all existing and future
unsubordinated, unsecured indebtedness of the Company and senior in right of
payment to all subordinated indebtedness of the Company. At December 31,
1997, on a pro forma basis after giving effect to the Merger Transactions
(as defined), the Company would have had on a consolidated basis
approximately $16.6 million of indebtedness outstanding (other than
the Notes), all of which would have been secured.
----------
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DESCRIPTION OF CERTAIN FACTORS
RELATING TO AN INVESTMENT IN THE NOTES.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------
PRICE % AND ACCRETED ORIGINAL ISSUE DISCOUNT
----------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO THE
PUBLIC(1) COMMISSIONS(2) COMPANY(1)(3)
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<S> <C> <C> <C>
Per Note............................... % % %
Total.................................. $ $ $
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(1) Plus accreted original issue discount, if any, from , 1998.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriters."
(3) Before deducting expenses payable by the Company estimated at $1,500,000.
----------
The Notes are offered, subject to prior sale, when, as and if accepted by the
Underwriters and subject to approval of certain legal matters by Shearman &
Sterling, counsel for the Underwriters. It is expected that delivery of the
Notes will be made on or about , 1998 at the offices of Morgan Stanley & Co.
Incorporated, New York, N.Y., against payment therefor in immediately available
funds.
----------
MORGAN STANLEY DEAN WITTER GOLDMAN, SACHS & CO.
, 1998
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITY OTHER THAN THE NOTES OFFERED HEREBY, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH A PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
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TABLE OF CONTENTS
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PAGE
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<S> <C>
Available Information............... 4
Forward Looking Statements.......... 4
Prospectus Summary.................. 6
Risk Factors........................ 14
The Merger and the Financings....... 22
Use of Proceeds..................... 24
Capitalization...................... 25
Unaudited Pro Forma Consolidated
Financial Information.............. 26
Selected Historical Consolidated
Financial and Other Information.... 34
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 37
</TABLE>
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PAGE
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Business.............................................................. 43
Management............................................................ 60
Security Ownership of Certain Beneficial Owners and Management........ 66
Certain Relationships and Other Related Transactions.................. 67
Description of Revolving Credit Facility.............................. 69
Description of the Notes.............................................. 70
Certain United States Income Tax Considerations....................... 96
Underwriters.......................................................... 100
Legal Matters......................................................... 101
Experts............................................................... 101
Index to Consolidated Financial Statements............................ F-1
</TABLE>
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The indenture pursuant to which the Notes will be issued (the "Indenture")
will require the Company, and the Company intends, to distribute to the
holders of the Notes annual reports containing consolidated financial
statements of the Company audited by its independent auditors and quarterly
reports containing unaudited consolidated financial statements for each of the
first three quarters of each fiscal year, whether or not the Company is
required to do so under the Securities Exchange Act of 1934, as amended.
----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE NOTES.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING,
AND MAY BID FOR, AND PURCHASE, NOTES IN THE OPEN MARKET. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITERS."
3
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-3 (herein, together with all
amendments, exhibits and schedules thereto, referred to as the "Registration
Statement") under the Securities Act with respect to the Notes offered hereby.
In accordance with the rules and regulations of the Commission, this
Prospectus does not contain all of the information set forth in the
Registration Statement and the schedules and exhibits thereto. Each statement
made in this Prospectus concerning a document filed as an exhibit to the
Registration Statement is qualified by reference to such exhibit for a
complete statement of its provisions. For further information pertaining to
the Company and the Notes, reference is made to such Registration Statement.
The Registration Statement may be inspected and copied at the public reference
facilities maintained by the Commission at its principal office at Judiciary
Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, or at its
regional offices at 500 West Madison Street, Suite 1400, Chicago, Illinois
60661 and at Seven World Trade Center, Suite 1300, New York, New York 10048.
Any interested party may obtain copies of all or any portion of the
Registration Statement and the exhibits thereto at prescribed rates from the
Public Reference Section of the Commission at its principal office at
Judiciary Plaza, 450 Fifth Street, Room 1024, Washington, D.C. 20549. In
addition, registration statements and other filings made with the Commission
through its Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system
are publicly available through the Commission's site on the Internet's World
Wide Web, located at http://www.sec.com.
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports and other information with the
Commission. Such reports and other information can be inspected and copied at
the public reference facilities maintained by the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549; 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661; and Seven World Trade Center,
Suite 1300, New York, New York 10048. Copies of such material can be obtained
from the Public Reference Section of the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
The shares of IPC Common Stock are included for quotation on the Nasdaq
National Market (the "Nasdaq"), using the ticker symbol "IPCI" 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.
----------------
FORWARD LOOKING STATEMENTS
The information herein contains forward-looking statements that involve a
number of risks and uncertainties. A number of important factors could cause
actual results, performance, achievements of the Company 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 Company'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 Company's and its subsidiaries' respective businesses;
inflation; changes in costs of goods and services; economic conditions in
general and in the Company's and its subsidiaries' specific market areas;
demographic changes; changes in or failure to comply with federal, state,
local and/or international government regulations; liability and other claims
asserted against the Company and its subsidiaries; changes in operating
strategy or development plans; the ability to attract and retain qualified
personnel; the significant indebtedness of the Company and its subsidiaries;
labor disturbances; changes in the Company's or its subsidiaries' acquisition
and capital expenditure plans; and other factors referenced herein. In
addition, such forward-looking statements are necessarily dependent upon
assumptions and estimates that may be incorrect or imprecise and involve known
and unknown risks, uncertainties and other factors. See "Risk Factors."
Accordingly, any forward-looking statements included herein do not purport to
be predictions of future
4
<PAGE>
events or circumstances and the results referred to therein 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," "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 its subsidiaries disclaim any obligations to
update 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, TraderConnect, MX Compact, TradePhone MX, The WorldTurret, IXLink,
DigiHoot, MetroLink, IXFrame, IXGlobal and IXPrime are trademarks of the
Company. Other trademarks or trade names referred to in this Prospectus are
the property of their respective owners.
5
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified by the more detailed information and
financial statements, including the notes thereto, appearing elsewhere in this
Prospectus. Pro forma financial information in this Prospectus assumes that IPC
stockholders choose to convert the maximum amount of IPC Common Stock into
cash, resulting in their retention of a 10% equity ownership interest in the
Surviving Corporation (as defined below). Unless the context otherwise
requires, references herein to the "Company" or "IPC" refer to IPC Information
Systems, Inc. and its consolidated subsidiaries after giving effect to the
Merger Transactions. For a discussion of important factors which could cause
actual results to differ materially from the results referred to in forward-
looking statements contained herein, see "Risk Factors."
THE COMPANY
IPC is a leader in providing integrated telecommunications equipment and
services that facilitate the execution of transactions by the financial trading
community. The Company designs, manufactures, installs and services trading
room voice communication systems ("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. 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. In 1997, the Company's total
revenues were approximately $270.3 million and total EBITDA was approximately
$18.3 million.
The Company's three major operating units are:
Turret Systems. The Company's sophisticated turret systems, consisting of
desktop consoles ("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, 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 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.
IXnet. IXnet operates and is expanding 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
6
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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, with limited capital
expenditures in advance of related revenues. However, the Company may
participate in the ownership 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, without needing to
access multiple disparate public networks. Through IXnet, the Company provides
a variety of telecommunications services, including dedicated private line,
managed data and switched voice communications among network subscribers. The
installation of a CAN in a customer location often leads to subsequent sales of
additional telecommunications services. As of December 31, 1997, the Company
provided telecommunications services to 150 customers and had 229 CANs.
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, 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 as the financial services industry expands and
consolidates. 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 completed development of two new products to meet the
needs of these customers: VS-MX, a turret system designed to be cost effective
for the smallest trading organizations; and TraderConnect, a Centrex-like
managed service. The Company believes that these products will enable it to
penetrate new geographic markets in Latin America and Asia, as well as smaller
trading operations in established markets. The Company also offers MX Compact,
a turret system designed for trading floors with 16 to 40 trading positions.
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 turret systems and established
relationships with many of the largest firms involved in global trading
activity. The Company believes its reputation for high quality service
7
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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 data networking 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 reduce 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 counterparts 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 equipment and leased 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 by extending its
geographic reach and also to improve its margins by increasing utilization of
the IXnet Network backbone over a broader customer base.
THE MERGER
On December 18, 1997, IPC and Arizona Acquisition Corp. ("AAC") entered into
an Agreement and Plan of Merger, as amended and restated as of December 18,
1997 (the "Merger Agreement"). The Merger
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Agreement provides, among other things, for the merger of AAC with and into IPC
(the "Merger"), with IPC as the surviving corporation (the "Surviving
Corporation"), concurrently with the closing of this offering (the "Offering").
Under the terms of the Merger Agreement, subject to dissenters' rights, each
share of common stock of the Company ("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 common stock of the Surviving
Corporation ("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, in connection with the
Equity Investment (as defined below), AAC's stockholders, comprised of AAC's
parent, Cable Systems Holdings, LLC ("CSH LLC"), whose membership interests are
owned by Citicorp Venture Capital, Ltd. ("CVC"), certain of CVC's officers,
employees and others, will receive in exchange for its shares of common stock
of AAC not less than 50.25% nor more than 86.25% of the number of shares of
Surviving Corporation Common Stock (prior to giving effect to the exchange by
the minority stockholders of IXnet of all of their shares of IXnet stock for
shares of Surviving Corporation Common Stock (the "IXnet Exchange")) expected
to be outstanding upon the Merger. See "The Merger and the Financings."
THE FINANCINGS
The Notes being offered hereby are part of the financings to consummate the
Merger. The balance of the proceeds necessary to consummate the Merger
Transactions (as defined below) will be funded by an equity investment in AAC
by CSH LLC of up to $72.0 million (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 its current bank credit facilities (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 Offering is
conditioned upon the closing of the Merger, the Equity Investment and the $75
million senior secured five-year revolving credit facility (the "Revolving
Credit Facility"). The Merger, the Offering, the Revolving Credit Facility, the
Equity Investment and the use of proceeds therefrom and the transactions
contemplated by the Ancillary Agreements (as defined below) are hereinafter
collectively referred to as the "Merger Transactions." See "The Merger and the
Financings" and "Certain Relationships and Other Related Transactions."
The estimated sources and uses of the funds in connection with the Merger
Transactions, assuming that the Merger occurred on December 31, 1997 are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
SOURCES OF FUNDS
----------------
<S> <C>
Notes.............................................................. $180,000
Equity Investment.................................................. 72,000
--------
Total Sources.................................................... $252,000
========
<CAPTION>
USES OF FUNDS
-------------
<S> <C>
Repayment of certain other obligations............................. $ 3,125
Cash merger consideration(1)....................................... 217,493
Transaction fees and expenses(2)................................... 23,384
Addition to cash balances.......................................... 7,998
--------
Total Uses....................................................... $252,000
========
</TABLE>
- --------
(1) Assumes IPC stockholders choose to convert the maximum amount of IPC Common
Stock into cash, resulting in their retention of a 10% equity ownership
interest in the Surviving Corporation.
(2) See "Unaudited Pro Forma Consolidated Financial Information" and the
accompanying notes included elsewhere in this Prospectus.
RECENT DEVELOPMENT
The Company recently acquired MXNet Inc. ("MXNet"), a provider of market data
distribution services of market data content providers, including 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.
9
<PAGE>
THE OFFERING
Issuer.................. IPC Information Systems, Inc.
Securities Offered......
$ aggregate principal amount at maturity ($180
million initial Accreted Value (as defined herein))
of Senior Discount Notes due 2008.
Maturity................ , 2008.
Yield and Interest...... The Notes are being sold at a substantial discount
from their principal amount at maturity, and there
will not be any payment of interest on the Notes
prior to , 2001. The Notes will bear interest,
which will be payable in cash, at a rate of % per
annum on each and , commencing , 2001. For a
discussion of the U.S. federal income tax treatment
of the Notes under the original issue discount rules,
see "Certain United States Federal Income Tax
Considerations--Tax Consequences to United States
Holders" and "--Original Issue Discount."
Optional Redemption..... On or after , 2003, the Notes will be redeemable
at the option of the Company, in whole or in part
from time to time, at the redemption prices set forth
herein. In addition, at any time prior to , 2001,
the Company may redeem up to 35% of the aggregate
principal amount at maturity of the Notes with the
proceeds of one or more Equity Offerings (as defined
herein) at % of their Accreted Value on the
redemption date; provided, however, that after any
such redemption, Notes representing at least 65% of
the Notes originally issued remain outstanding. See
"Description of the Notes--Optional Redemption."
Ranking.................
The Notes will be unsubordinated, unsecured
indebtedness of the Company, will rank pari passu in
right of payment with all existing and future
unsubordinated, unsecured indebtedness of the Company
and will be senior in right of payment to all future
subordinated indebtedness of the Company. At December
31, 1997, on a pro forma basis after giving effect to
the Merger Transactions, the Company would have had
on a consolidated basis approximately $16.6 million
of indebtedness outstanding (other than the Notes),
all of which would have been secured. See "Risk
Factors--Substantial Leverage and Debt Service," "--
Subordination of Notes to Secured Indebtedness" and
"Description of the Notes--Ranking."
Change of Control....... Upon a Change of Control (as defined herein), the
Company will be required to make an offer to purchase
the Notes at a purchase price equal to 101% of their
Accreted Value on the date of purchase, plus accrued
interest, if any. There can be no assurance that the
Company will have sufficient funds available at the
time of any Change of Control to make any required
repayment of indebtedness (including repurchase of
the Notes). See "Description of the Notes--Repurchase
of Notes upon a Change of Control."
Certain Covenants....... The Indenture will contain certain covenants that,
among other things, restrict the ability of the
Company and its Restricted Subsidiaries (as defined
herein) to incur additional indebtedness, create
liens, engage in sale-leaseback transactions, pay
dividends or make investments or
10
<PAGE>
certain other restricted payments, sell assets,
redeem capital stock, issue or sell stock of
Restricted Subsidiaries, enter into transactions with
stockholders or affiliates or effect a consolidation
or merger. However, these limitations will be subject
to a number of important qualifications and
exceptions. See "Description of the Notes--Certain
Covenants."
Use of Proceeds...........
The net proceeds from the Offering will be used to
fund the purchase of a portion of the Company's
outstanding shares in connection with the Merger,
repay indebtedness, if any, of the Company under the
Existing Bank Credit Facilities and certain other
liabilities of the Company and pay related
transaction fees and expenses. Any remaining proceeds
will be used for working capital and other purposes.
See "Use of Proceeds."
RISK FACTORS
See "Risk Factors" beginning on page 14 for a description of certain factors
relating to the Company, its business and an investment in the Notes.
11
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
The following table presents summary historical financial information for
each of the years in the three-year period ended September 30, 1997 and as of
December 31, 1997 and for the three months ended December 31, 1996 and 1997,
and has been derived from the financial statements of the Company. In addition,
the table presents summary pro forma financial information of the Company, as
adjusted to give effect to the Merger Transactions which has been derived from,
and should be read in conjunction with, the unaudited Pro Forma Consolidated
Financial Information, including the notes thereto, appearing elsewhere in this
Prospectus. See "Pro Forma Consolidated Financial Information." The summary pro
forma financial information is presented for illustrative purposes only and is
not necessarily indicative of the operating results or financial position that
would have occurred if the Merger Transactions had been consummated as of and
for the dates indicated, nor is it necessarily indicative of future operating
results or financial position. The audited consolidated balance sheets of the
Company as of September 30, 1996 and 1997 and the consolidated statements of
income, stockholders' equity and cash flows for each of the years in the three
year period ended September 30, 1997, together with the notes thereto are
included elsewhere herein. The information set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto of the Company included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, THREE MONTHS ENDED DECEMBER 31,
--------------------------------------- ----------------------------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA
---------------------------- --------- ----------------------- ---------------
1995 1996 1997 1997(1) 1996 1997 1997(1)
-------- -------- -------- --------- ---------- ----------- ---------------
(IN THOUSANDS, EXCEPT RATIO DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................. $206,254 $249,508 $270,323 $270,323 $ 59,411 $ 67,052 $ 67,052
Gross profit............ 63,173 76,818 80,214 80,214 17,574 26,627 26,627
Selling, general and
administrative expense. 31,038 45,143 60,697 61,459 13,847 16,557 16,748
Research and development
expense................ 10,108 11,467 9,976 9,976 2,372 2,404 2,404
Income from operations.. 22,027 20,208 9,541 8,779 1,355 7,666 7,475
Interest income
(expense), net......... 233 (678) (1,844) (23,234) (463) (440) (6,160)
Net income (loss)....... 13,267 12,129 3,834 (8,883) 566 3,594 284
STATEMENT OF CASH FLOWS
DATA:
Net cash provided by
(used in) operating
activities............. $ 7,343 $(14,737) $ 24,146 $ 11,429 $ 8,359 $ 8,845 $ 6,333
Net cash (used in)
investing activities... (8,506) (12,737) (14,474) (14,474) (2,989) (2,587) (2,587)
Net cash provided by
(used in) financing
activity............... 14,337 13,785 (10,043) (5,425) (6,391) (3,771) 3,429
OTHER DATA:
Depreciation and
amortization........... $ 3,840 $ 6,388 $ 8,743 $ 9,505 $ 1,707 $ 2,787 $ 2,978
EBITDA(2)(3)............ 25,867 26,596 18,284 18,284 3,062 10,453 10,453
EBITDA to interest
expense................ 61.6x 24.4x 9.0x 0.8x(4) 6.2x 19.3x 1.6x
Ratio of earnings to
fixed charges(5)....... 23.9x 12.2x 3.9x 0.4x 2.3x 11.2x 1.2x
<CAPTION>
DECEMBER 31, 1997
----------------------------
ACTUAL PRO FORMA(6)
----------- ---------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................................. $ 3,655 $ 11,653
Working capital....................................................... 49,811 60,760
Total assets.......................................................... 169,788 191,515
Long-term debt, net of current portion................................ 13,209 193,209
Stockholders' equity (deficit)........................................ 81,314 (68,489)
Book value per share.................................................. 7.57 (16.86)
Shares issued and outstanding......................................... 10,738 4,063
</TABLE>
(footnotes on following page)
12
<PAGE>
- --------
(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) 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.
(3) 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.
(4) 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 non-cash interest expense on the Notes. Cash
interest on the Notes will not be payable until 2001.
(5) The ratio of earnings to fixed charges is computed by dividing pretax
income from continuing operations before fixed charges (other than
capitalized interest) by fixed charges. Fixed charges consist of interest
charges and amortization of debt expense and discount or premium related to
indebtedness, whether expensed or capitalized, and 10% of rental expense
which the Company believes to be representative of interest. On a pro forma
basis, 1997 earnings would have been insufficient to cover fixed charges.
The difference between the Company's 1997 pro forma earnings and fixed
charges is $14.4 million. Cash interest on the Notes will not be payable
until 2001.
(6) The pro forma balance sheet information reflects the Merger Transactions as
if the transactions occurred on December 31, 1997. See the Company's
unaudited pro forma financial information included elsewhere in this
Prospectus.
13
<PAGE>
RISK FACTORS
SUBSTANTIAL LEVERAGE AND DEBT SERVICE
The Company will incur substantial indebtedness in connection with the
Merger and will have substantially more indebtedness than on a historical
basis. See "The Merger and the Financings" and "Capitalization." As of
December 31, 1997, after giving pro forma effect to the Merger Transactions,
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 the foregoing pro forma basis, the Company's
earnings would have been insufficient to cover its fixed charges for the
fiscal year ended September 30, 1997 by $14.5 million but would have been
sufficient for the three months ended December 31, 1997. Pro forma net loss
for the fiscal year ended September 30, 1997 would have been $8.9 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 $23.2 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. See "Capitalization" and "Unaudited Pro Forma
Consolidated Financial Information." 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
holders of the Notes, including the following: (i) during the cash pay period
of the Notes 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 (including the Notes) 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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources." 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, including
the Notes, 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.
PRIORITY OF SECURED CREDITORS
The Notes are unsecured and therefore will be effectively subordinated to
any secured indebtedness of the Company. The Revolving Credit Facility is
expected to be secured by substantially all of the real and personal property
of the Company and its subsidiaries, other than assets subject to capital
leases. Consequently, in the event of a bankruptcy, liquidation, dissolution,
reorganization or similar proceeding with respect to the Company,
14
<PAGE>
such assets would be used to satisfy obligations of the secured debt before
any payment could be made on the Notes. In addition, to the extent such assets
did not satisfy in full the secured indebtedness, the holders of such
indebtedness would have a claim for any shortfall that would be pari passu
with the Notes. Accordingly, there may only be a limited amount of assets
available to satisfy any claims of the holders of the Notes upon an
acceleration of the Notes. In addition, indebtedness under the Revolving
Credit Facility is expected to be guaranteed by the Company's material wholly
owned subsidiaries. All of the indebtedness incurred in connection with the
Revolving Credit Facility will become due prior to the time the principal
payment on the Notes will become due.
NEED TO DEVELOP NEW PRODUCTS AND SERVICES; CAPITAL REQUIREMENTS
The Company'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. The pursuit of such growth, while in the best interests of
stockholders, poses significant risks for noteholders. In order to develop and
roll out new products and services, the Company expects to make significant
expenditures for IXnet Network development, research and development for new
products and service 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
Company's future success will depend, in part, on its ability to effectively
use 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 and/or the Company's attempts
to do so could have a material adverse effect on the Company's financial
condition and results of operations and on its ability to pay interest and
principal on the Notes.
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 Company. 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
and its ability to make payments on the Notes. Competing with such companies
will require continued investment by the Company in engineering, research and
development, marketing and customer service and support. There can be no
assurance that the Company will successfully 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 "Business--
Competition."
CONCENTRATION OF CUSTOMERS
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 Company would experience a decline in revenues
which could have a material
15
<PAGE>
adverse effect on the Company's financial condition and results of operations
and on its ability to pay interest and principal on the Notes. In addition, in
fiscal 1996, approximately 13% of consolidated revenues were from one
customer.
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 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 Company's ability to acquire necessary technologies, the effect of
technological changes on the businesses of the Company cannot be predicted.
Thus, there can be no assurance that technological developments will not have
a material adverse effect on the Company and on its ability to pay interest
and principal on the Notes.
MANAGEMENT OF GROWTH; INTERNATIONAL EXPANSION
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 Company'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 Company
can increase revenues is in part dependent upon hiring and training a
sufficient number of suitably skilled employees. A failure by the Company to
manage growth effectively could have a material adverse effect on the
Company's financial condition and results of operations and on its ability to
pay interest and principal on the Notes.
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 Company's international operations.
In many countries, the Company may need to enter into a joint venture or other
strategic relationship with one or more third parties in order to successfully
conduct its operations. There can be no assurance that such factors will not
have an adverse effect on the Company'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 Company may be exposed to exchange losses based upon
such fluctuations, which losses could have a material adverse effect on the
Company's financial results and on its ability to make payments on the Notes.
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 Company's business, financial condition and
results of operations and on its ability to pay interest and principal on the
Notes.
MARKET ACCEPTANCE
Although IPC has strong relationships with its financial institution
customers from its 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 IPC's turrets. In addition, many of the traditional providers of
telecommunications
16
<PAGE>
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 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 Company expects this new
system to be installed during 1998. The inability of the Company 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 Company
to reach its objectives, on its financial condition and results of operations
and on its ability to pay interest and principal on the Notes.
The Company's new management information system will be year 2000 compliant.
However, if the systems of the Company's suppliers or customers are not year
2000 compliant, it would have a material adverse effect on the Company and its
ability to make payments on the Notes.
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 "Business--Year 2000 Compliance."
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 State Public Utility
Commissions 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.
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 state public utility commissions ("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
17
<PAGE>
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.
RESTRICTIVE LOAN COVENANTS
The Revolving Credit Facility and the Indenture will contain numerous
financial and operating covenants that will limit the discretion of the
Company's management with respect to certain business matters. These covenants
will place significant restrictions on, among other things, the ability of the
Company to incur additional indebtedness, to create liens or other
encumbrances, to make certain payments and investments, to sell or otherwise
dispose of assets and to merge or consolidate with other entities. However,
the Indenture covenants will be subject to important qualifications and
exceptions. See "Description of Certain Indebtedness" and "Description of the
Notes--Certain Covenants." The Revolving Credit Facility will also require the
Company to meet certain financial ratios and tests. A failure to comply with
the obligations contained in the Revolving Credit Facility or the Indenture
could result in an event of default under either the Revolving Credit Facility
or the Indenture, which could result in acceleration of the related debt and
the acceleration of debt under other instruments evidencing indebtedness that
may contain cross-acceleration or cross-default provisions.
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
18
<PAGE>
initiated in the future seeking damages or an injunction against the sale of
the Company's products or that the Company would prevail in any such
litigation. Any such litigation could be protracted and costly and, regardless
of its outcome, could have a material adverse effect on the Company's business
and results of operations and on its ability to pay interest and principal on
the Notes.
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 Company with
meaningful protection from competitors. The Company 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.
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 Company's results and operations, product development
efforts and ability to expand its businesses. There can be no assurance that
the Company 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 Company may lose key employees or be
forced to increase their compensation as a result.
DEPENDENCE UPON SUPPLIERS
The IXnet Network is dependent on third party suppliers for its leased
lines. These suppliers are or may become competitors of the Company.
The Company currently relies on 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 or
cause the Company to incur unanticipated expenses which could materially
adversely affect the Company and its ability to pay interest and principal on
the Notes.
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 Company's ability to manufacture
products or cause the Company to incur costs, including payment of 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 Company's financial condition and
results of operations and on its ability to pay interest and principal on the
Notes.
CONTROL BY PRINCIPAL STOCKHOLDERS
Following the Merger, no less than 50.25% nor more than 86.25% of the
outstanding shares of the common stock of the 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
19
<PAGE>
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 units of CSH LLC attributable to CSH LLC's ownership
of the Company (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. The
interests of the Company's stockholders may conflict with the interests of
noteholders. For example, the stockholders may be more willing to incur risks
in pursuit of growth.
IPC, CSH LLC, Richard P. Kleinknecht, David Walsh, Anthony Servidio and
certain other parties entered into an Investors Agreement (as defined) to be
effective only upon the consummation of the Merger. 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 Board of
Directors of the Surviving Corporation 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
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. See "Certain Relationships and Other Related Transactions."
CSH LLC is a Delaware limited liability company. A majority of the
membership interests in CSH LLC are owned by CVC, officers and employees
thereof, and members of the management of CSH LLC, its wholly owned
subsidiary, Cable Systems Holding Company, and Cable Systems International,
Inc. ("CSI").
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
The Company's revenues and operating results from turrets 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 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 Company
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 and on its
ability to make payments on the Notes.
FRAUDULENT TRANSFER CONSIDERATIONS
Under applicable provisions of the Bankruptcy Code or comparable provisions
of state fraudulent transfer or conveyance law, if the Company, at the time it
incurred the indebtedness represented by the Notes, (a) incurred such
indebtedness with the intent to hinder, delay or defraud creditors, or (b)(i)
received less than reasonably equivalent value or fair consideration and (ii)
(A) was insolvent at the time of such incurrence, (B) was rendered insolvent
by reason of such incurrence (and the application of the proceeds thereof),
(C) was engaged or was about to engage in a business or transaction for which
the assets remaining with the Company constituted unreasonably small capital
to carry on its business or (D) intended to incur, or believed that it would
incur, debts
20
<PAGE>
beyond its ability to pay such debts as they mature, then, in each such case,
a court could void, in whole or in part, the Notes or, in the alternative,
subordinate the Notes to existing and future indebtedness of the Company. The
measure of insolvency for purposes of the foregoing would likely vary
depending upon the law applied in such case. Generally, however, a debtor
would be considered insolvent if the sum of its debts, including contingent
liabilities, was greater than all of its assets at a fair valuation, or if the
present fair saleable value of its assets was less than the amount that would
be required to pay the probable liabilities on its existing debts, including
contingent liabilities, as such debts become absolute and matured. Management
of the Company believes that, for purposes of the United States Bankruptcy
Code and state fraudulent transfer or conveyance laws, the Notes are being
issued without the intent to hinder, delay or defraud creditors and for proper
purposes and in good faith, and that the Company will receive reasonably
equivalent value or fair consideration therefor, and that after the issuance
of the Notes and the application of the net proceeds therefrom, the Company
will be solvent, will have sufficient capital for carrying on its business and
will be able to pay its debts as they mature. However, there can be no
assurance that a court passing on such issues would agree with the belief of
the Company's management.
CHANGE OF CONTROL
The Indenture will provide that, upon the occurrence of a Change of Control,
the Company will make an offer to purchase all or any part of the Notes at a
price in cash equal to 101% of the Accreted Value thereof, plus accrued and
unpaid interest, if any, thereon to the date of purchase. There can be no
assurance that, in the event of a Change of Control, the Company would have
sufficient funds to purchase all Notes tendered. In addition, the Revolving
Credit Facility will prohibit the Company from repurchasing any Notes, except
with certain proceeds of one or more Equity Offerings and certain funds from
other sources. The Revolving Credit Facility will also provide that certain
change of control events with respect to the Company would constitute a
default thereunder. See "Description of the Notes--Change of Control."
ORIGINAL ISSUE DISCOUNT
The Notes will be issued at a substantial discount from their stated
principal amount at maturity. Consequently, although cash interest on the
Notes generally will not be payable prior to , 2001, original issue
discount ("OID") will be includable in the gross income of a holder of the
Notes for U.S. federal income tax purposes in advance of the receipt of such
cash payments on the Notes.
If a bankruptcy case is commenced by or against the Company under the United
States Bankruptcy Code (the "Bankruptcy Code") after the issuance of the
Notes, the claim of a holder of Notes with respect to the principal amount
thereof may be limited to an amount equal to the sum of (i) the initial
offering price and (ii) that portion of the OID that is not deemed to
constitute "unmatured interest" for purposes of the U.S. Bankruptcy Code. Any
OID that was not accrued as of any such bankruptcy filing would constitute
"unmatured interest."
LACK OF PRIOR MARKET FOR THE NOTES
There is currently no public market for the Notes and the Company has no
present plan to list any of the Notes on a national securities exchange or to
include any of the Notes for quotation through an interdealer quotation
system. There can be no assurance that such a market will develop or, if such
a market develops, as to the liquidity of such market. The Company has been
advised by the Underwriters that the Underwriters intend to make a market in
the Notes after consummation of the Offering, as permitted by applicable laws
and regulations; however, the Underwriters are not obligated to do so and any
such market making activities may be discontinued at any time without notice.
See "Underwriters."
21
<PAGE>
THE MERGER AND THE FINANCINGS
THE MERGER AGREEMENT
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. At the effective time of the Merger (the "Effective Time"),
subject to certain provisions with respect to shares of IPC Common Stock held
in treasury, fractional shares, shares owned by AAC and shares as to which
dissenters' rights have been exercised ("Dissenting Shares") and the effects
of proration, 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 and the conversion of fractional shares of Surviving
Corporation Common Stock into cash, the "Merger Consideration").
After the Effective Time of the Merger, the Surviving Corporation will
possess all the rights, privileges, powers and franchises and be subject to
all of the restrictions, disabilities and duties of IPC and AAC, all as
provided under Delaware law. The Merger is subject to customary conditions,
including the approval and adoption of the Merger Agreement by the
stockholders of IPC, approval by the FCC and the termination or expiration of
the relevant waiting period under the HSR Act.
Because the number of shares of Surviving Corporation Common Stock to be
retained by existing IPC stockholders in the aggregate must be not less than
10% nor more than 46% of the number of shares of Surviving Corporation Common
Stock outstanding after the Merger, the right to retain Surviving Corporation
Common Stock is subject to proration. 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 (10% of the outstanding shares of Surviving
Corporation Common Stock after the Merger), 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 and should 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 fractional 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. In addition, Peter J. Kleinknecht has indicated his
intent to elect to receive cash at $21.00 per share for his shares of IPC
Common Stock.
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.
22
<PAGE>
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.
THE STOCKHOLDERS AGREEMENT
Pursuant to the Stockholders Agreement, Peter J. Kleinknecht and certain
family members and affiliated parties and Richard P. Kleinknecht and certain
family members and affiliated parties (collectively, 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 Stockholder Agreement,
(iii) in favor of 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") 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 three years
after the Effective Time not to directly or indirectly engage in any
activities competitive in any material respect with the business of the
Surviving Corporation and its subsidiaries and affiliates competitive in any
material respect with the business of the Surviving Corporation and its
subsidiaries and affiliates or become a partner, stockholder or involved in
any capacity in an entity which engages in such activities. In addition
Richard P. Kleinknecht and Peter J. Kleinknecht have agreed not to employ or
solicit for employment any employee of the Surviving Corporation or any of its
subsidiaries or joint ventures for a period ending on the date that is the
later of (x) three years following the Effective Time and (y) the termination
of the Amended and Restated Labor Pool Agreements, each dated as of December
18, 1997, between IPC and each of 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")).
THE FINANCINGS
The Notes being offered herein are part of the financings to consummate the
Merger Transactions. 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 its 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 Offering is conditional upon the closing of
the Merger, the Equity Investment and the Revolving Credit Facility.
23
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the Notes, including discounts and
commissions to the Underwriters, but excluding professional and filing fees,
are estimated to be approximately $171.9 million. The proceeds from the
Offering, together with the Equity Investment, will be used upon consummation
of the Merger 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 its 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 $15.3
million in transaction fees and expenses expected to be incurred in connection
with the Merger, excluding discounts and commissions to the Underwriters
related to the Notes offered hereby. Any remaining proceeds will be used for
working capital and other purposes. See "The Merger and the Financings,"
"Capitalization" and "Unaudited Pro Forma Consolidated Financial Information."
24
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of December 31, 1997, and on a pro forma basis to give effect to
the Merger Transactions. This table should be read in conjunction with the
"Consolidated Financial Statements" and the Notes thereto, "Unaudited Pro
Forma Consolidated Financial Information" and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------
ACTUAL PRO FORMA
------- ---------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt............................................. $ 3,409 $ 3,409
======= ========
Current portion of long-term debt........................... $ 45 $ 45
======= ========
Long-term debt, excluding current portion:
Notes offered hereby...................................... $ -- $180,000
Capital lease obligations................................. 11,085 11,085
Other long-term debt...................................... 2,124 2,124
------- --------
Total long-term debt.................................... 13,209 193,209
------- --------
Stockholder's equity:
Preferred stock--$.01 par value, authorized 10,000,000
shares,
none issued and outstanding.............................. -- --
Common stock--$.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 41
Paid-in capital........................................... 48,600 5,330
Retained earnings (deficit)............................... 33,322 (73,860)
------- --------
Less treasury stock, at cost, December 31, 1997--242,185
shares, pro forma--none.................................... (718) --
------- --------
Total stockholders' equity (deficit).................... 81,314 (68,489)
------- --------
Total capitalization.................................. $94,523 $124,720
======= ========
</TABLE>
25
<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 give 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.
26
<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
Other assets, net........................... 9,610 12,290 (e) 27,233
5,333 (i)
-------- --------- --------
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 facility.... -- -- --
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 Unaudited Pro Forma Consolidated Financial Information.
27
<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 Unaudited Pro Forma Consolidated Financial Information.
28
<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 facility... -- -- --
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.............................. $158,362 $ 22,241 $180,603
======== ========= ========
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Financial Information.
29
<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 Unaudited Pro Forma Consolidated Financial Information.
30
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(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
=========== ===========
The following table reconciles the total costs and expenses related to the
Merger Transactions to the amount due upon consummation of the Merger.
<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 cancellation 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 retirement 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
31
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Consolidated Statements of Operations at and for the periods ended December
31, 1997 and September 30, 1997, respectively, if the IPC stockholders
elect 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 cancellation 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) and (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 Note, 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 the above 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 at the Merger.
(h) Represents the cancellation, 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 will be 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.
32
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(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>
(k) Represents (i) interest expense on the Notes, at an assumed interest rate
of 10%, compounded semi-annually, (ii) accretion of discount on Notes and
(iii) 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>
Interest expense on the 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 (i) interest expense on the Notes, at an assumed interest rate
of 10%, compounded semi-annually, (ii) accretion of discount on 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>
Interest expense on the 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.
33
<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)
34
<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 non-cash interest expense on the Notes. Cash
interest on the Notes will not be payable until 2001.
35
<PAGE>
(8) The ratio of earnings to fixed charges is computed by dividing pretax
income from continuing operations before fixed charges (other than
capitalized interest) by fixed charges. Fixed charges consist of interest
charges and amortization of debt expense and discount or premium related
to indebtedness, whether expensed or capitalized, and 10% of rental
expense which the Company believes to be representative of interest. On a
pro forma basis, 1997 earnings would have been insufficient to cover fixed
charges. The difference between the Company's 1997 pro forma earnings and
fixed charges is $14.4 million. Cash interest on the Notes will not be
payable until 2001.
(9) The pro forma balance sheet information reflects the Merger Transactions
as if the transactions occurred on December 31, 1997 and September 30,
1997. See the Company's unaudited pro forma financial information included
elsewhere in this Prospectus.
36
<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
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change in control bonuses and severance payments aggregating $2.5 million and
payment to option holders, upon 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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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
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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.
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.
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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.
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 54% nor more than 90% 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
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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 Offering 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."
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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BUSINESS
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 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. In 1997, the Company's total
revenues were approximately $270.3 million and total EBITDA was approximately
$18.3 million.
The Company's three major operating units are:
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, 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 I.T.S. division provides
cabling infrastructure, design, installation and maintenance services for high
speed voice and data networks, including LANs, WANs and data connectivity
applications. 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, 3Com, Bay Networks and
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 major customers.
IXnet. IXnet has deployed and continues to expand the IXnet Network
specifically designed to address the needs of the global financial community.
The IXnet Network uses uniform equipment platforms and includes NOCs and
switches located in New York and London, POPs and 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 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, without needing to access
multiple disparate public networks.
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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 telecommunications
services. 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 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.
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 PBX systems. In order to meet these specific
needs, a small number of manufacturers have developed 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.
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 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
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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.
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, 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 completed development of two new products to meet the
needs of these customers: VS-MX, a turret system designed to be cost effective
for the smallest trading organizations; and TraderConnect, 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. The Company also offers MX Compact, a turret system
designed for trading floors with 16 to 40 trading positions. 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 turret 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.
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Leverage I.T.S. Expertise. The Company intends to leverage I.T.S.'s
expertise in the design, integration and installation of data networking
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 reduce 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 counterparts 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
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 by extending its
geographic reach and also to improve its margins by increasing utilization of
the IXnet Network backbone over a broader customer base.
RECENT DEVELOPMENT
The Company recently acquired MXNet, a provider of market data distribution
services of market data content providers, including 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.
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
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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). These products and services represented 65.7%,
27.7% and 6.6%, respectively, for the fiscal year ended September 30, 1997 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 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 backroom 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 between 16
and 40 positions. The VS-MX, which the Company expects to begin shipping in
the spring of 1998, is designed for trading floors with 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 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 maintain a continually up-to-date system by 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.
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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 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 of 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. 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 traders. It provides connectivity to the MX system with the
feature functionality of a trading turret in a scaled-down unit that is
suitable for use off of the trading floor.
The World Turret. The World Turret 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.
Exchangefone. 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 reduce
the amount of cable required between the trading floor and backroom switching
equipment.
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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, 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 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
cut-over, 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 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, POPs, 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.
Transport Facilities. IXnet utilizes multiple carriers to provide access
facilities from customer premises to IXnet POPs. Such carriers include ILECs,
CAPs and 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.
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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. 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. 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 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. 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; Liquidity. IXFrame is a managed data service provided by IXnet
using basic frame relay as its underlying technology. Liquidity is a managed
inter-firm and intra-firm data network service which is also frame relay
based. Liquidity provides secure 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. 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. 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.
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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. 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, 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 reduce its involvement in the more
competitive and lower margin cabling infrastructure projects. The Company
places special emphasis on the testing and certification phases of 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
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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 its 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, financial
condition or liquidity.
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
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
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The Company also has distributors for its turret systems in the following
countries:
Argentina Indonesia Peru
Australia Ireland Philippines
Austria Italy Russia
Belgium Japan South Africa
Brazil Kuwait Singapore
Canada Luxembourg Switzerland
China Malaysia Taiwan
France Mexico Thailand
Germany Netherlands Turkey
Greece New Zealand
These distributors receive extensive training from the Company, are
qualified in turret sales and maintenance, 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 31,
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 consolidated revenue for the fiscal
years indicated:
<TABLE>
<CAPTION>
FOR THE YEARS 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, 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, interdealer 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 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.
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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,
1997, 1996 and 1995, the Company recorded expenses of $10.0, $11.5 and $10.1
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. 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 and on its ability to make
payments on the Notes. See "Risk Factors--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. 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
54
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resources, the Company believes that its strong market position is the result
of its consistent ability to produce high quality products, its established
reputation for 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 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 significant 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.
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
55
<PAGE>
global system platform that provides the common 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--
Competition."
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 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.
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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. 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
57
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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
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.
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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, 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 "Certain Relationships and Other 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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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age and position of each of the
directors and executive officers of the Company upon consummation of the
Merger.
<TABLE>
<CAPTION>
NAME(1) AGE(2) POSITION
------- ------ --------
<S> <C> <C>
Peter Woog.............. 55 Chairman of the Board
Richard P. Kleinknecht.. 59 Vice Chairman of the Board
Richard M. 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 L. 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. 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 P. Kleinknecht. Mr. Kleinknecht has served as Chairman and a
Director of the Company since its acquisition from Contel Corporation in
October 1991. Prior to the appointment of Mr. Clontz on December 3, 1995, Mr.
Kleinknecht also served as Chief Executive Officer of the Company. 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.
Richard M. Cashin, Jr.. 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. 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 Specialities Company and Furnishings International,
Inc.
Robert J. McInerney. Mr. McInerney serves as consultant to Merisel, Inc., a
leading distributor of computer hardware, networking, equipment and software,
where he was, from February 1997 until March 1997, employed as President and
Chief Operating Officer 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 Dome & 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. ("Arrow"), and served as President of Arrow's Commercial
Systems Group from 1987 to 1994.
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Terry Clontz. Mr. 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.
Russell G. Kleinknecht. Mr. Kleinknecht has served as Executive Vice
President, I.T.S. since October of 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. Mr. Starr has served as Executive Vice President, Turret
Systems since January of 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.
David A. Walsh. Mr. Walsh founded IXnet in 1993 and has served as its
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.
Brian L. Reach. Mr. 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. Mr. 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.
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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.
(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.
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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>
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% $14.50 10/31/06 227,974 577,732
Richard P. Kleinknecht.. 0 -- -- -- -- --
Peter J. Kleinknecht.... 0 -- -- -- -- --
Gerald E. Starr......... 20,000 5% 14.50 10/31/06 182,379 462,185
20,000 5% 13.31 02/14/07 167,412 424,254
Russell G. Kleinknecht.. 40,000 10% 14.50 10/31/06 364,759 924,371
</TABLE>
All Options granted during the fiscal year ended September 30, 1997 provided
a ten-year term, vest in equal amounts on the first three anniversaries of
their grant date and are exercisable at the fair market value of IPC Common
Stock on the date of grant.
63
<PAGE>
The following table sets forth certain information with respect to options
exercised under the Option Plan during the fiscal year ended September 30,
1997 by the Named Executive Officers of the Company who are named in the
Summary Compensation Table:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISABLE
SHARES VALUE OPTIONS/SARS AT FISCAL IN-THE-MONEY OPTIONS/SARS
ACQUIRED REALIZED YEAR-END AT FISCAL YEAR-END
ON EXERCISE ON EXERCISE (#) ($)
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>
DIRECTORS COMPENSATION
Prior to the Merger, each member of the Board of Directors who was not an
employee of the Company received an annual retainer of $5,000 contingent upon
attending at least 75% of the aggregate total number of meetings of the Board
and of each committee of which such director is a member. Additionally, each
non-employee director received a fee of $2,500 for each Board meeting or
committee meeting attended. However, if such director attended more than one
meeting in a single day, he received 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 Company's Restated Certificate of
Incorporation or Bylaws that have the effect of, nor has the Board adopted any
policy that has the effect of, imposing a maximum limitation on the total
compensation payable in any year to any director.
EMPLOYMENT AGREEMENTS UPON CONSUMMATION OF THE MERGER
Richard P. Kleinknecht has entered into an Amended and Restated Employment
Agreement with IPC, dated as of December 18, 1997, whereby he is to be
employed for a two-year term, commencing on the closing date of the
transactions contemplated by the Merger Agreement, as Vice-Chairman reporting
to the Board of Directors and Chairman of the Company. Richard P. Kleinknecht
is entitled to receive $420,000 in base salary, plus a possible discretionary
bonus as well as options to purchase 1.25% of the fully diluted shares of the
Company pursuant to the New Stock Incentive Plan. The Company has a right to
terminate the employment agreement with or without cause. If Richard P.
Kleinknecht's employment is terminated without cause, the Company 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 Company 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.
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 Board of Directors of the
Company. The terms and conditions are substantially the same as Richard P.
Kleinknecht's employment agreement except for the following distinctions: (i)
Peter J. Kleinknecht shall devote time to the Company 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 Company due to
death, disability or without cause, the Company 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.
64
<PAGE>
David Walsh has entered into an Amended and Restated Employment Agreement
with IXnet, dated as of December 18, 1997, under which he is to be employed on
a full time basis for a five-year term as Chief Executive Officer and Chairman
of the IXnet Board of Directors ("IXnet Board") reporting only to the full
IXnet Board or the Board of Directors of the Company. 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 is also entitled to receive options to purchase 2.36% of the
fully diluted shares of the Company and a "springing" options 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.) He
is entitled to lump sum severance payments payable if he is terminated
"without cause" or resigns for "good reason" equal to his base salary, plus
his average bonus previously paid for his then-remaining term of employment,
but not less than three years, discounted to present value. Walsh's benefits
under his employment agreement will continue during the severance period.
During his 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 his term, he is subject to nondisclosure and
confidentiality restrictions relating to the confidential information and
trade secrets of the Company and its affiliates.
Anthony 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.
NEW STOCK INCENTIVE PLAN
The Company has adopted, subject to approval by shareholders of the Company,
a New Stock Incentive Plan. The New Stock Incentive Plan, which will become
effective on Closing, provides for the grant of options to purchase Common
Stock of the Company to selected officers, employees, consultants and
directors. 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 Company to
increase their interest in the welfare of the Company and to aid in attracting
and retaining employees and consultants of outstanding ability.
The members of the compensation committee of the Company's Board of
Directors will administer the New Stock Incentive Plan and determine, within
the limitations of the New Stock Incentive Plan, the officers, employees,
consultants and directors to whom options will be granted and the amount,
timing and other terms and conditions applicable to such grants. Subject to
adjustment upon changes in capitalization, the Common Stock of the Company
which may be issued pursuant to options granted under the New Stock Incentive
Plan shall not exceed 554,112 shares in the aggregate.
65
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND 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
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.
(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 Investor 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.
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.
66
<PAGE>
CERTAIN RELATIONSHIPS AND OTHER RELATED TRANSACTIONS
CERTAIN AGREEMENTS IN CONNECTION WITH THE MERGER
In connection with the execution of the Merger Agreement, the following
agreements were entered into, each of which will become effective (except the
Stockholders' Agreement) only upon the consummation of the transactions
contemplated by the Merger Agreement (collectively, these agreements are
referred to as the "Ancillary Agreements").
Investors Agreement. The Investors Agreement, by and among IPC, CSH LLC,
Richard P. Kleinknecht, David A. Walsh ("Walsh") and Anthony Servidio
("Servidio") (Richard P. Kleinknecht, Walsh, 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 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. 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 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 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.
Amended and Restated Corporate Opportunity Agreement. Under the Amended and
Restated Corporate Opportunity Agreement, dated as of December 18, 1997 (the
"Corporate Opportunity Agreement"), by and among KEC-NY and KEC-NJ, KEC agrees
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, if such 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 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) (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. KEC-NY and KEC-NJ are each
parties to the Labor Pool Agreements (the "LPAs"), virtually identical labor
sharing agreements with IPC, whereby KEC acts as payroll agent for IPC's
Pooled Employees and serves as the signatory to collective bargaining
agreements with the Union Locals that represent these employees. Each of the
LPAs is for a term of 20 years. IPC has agreed to pay $45,000 to KEC-NY and
$5,000 to KEC-NJ in monthly fees under the respective LPAs. IPC will obtain a
standby letter of credit in favor of KEC in the amount of $1.5 million with
respect to KEC's payments for labor compensation and benefits related to
Pooled Employees. Under the LPAs, IPC has agreed to indemnify KEC-NJ and KEC-
NY. Each of the LPAs may be terminated by the Surviving Corporation with or
without cause upon 90 days written notice.
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 that would result in a breach of
any covenant, representation or warranty or any
67
<PAGE>
other obligation or agreement of IPC under the Merger Agreement or the
Stockholders under the Stockholder 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 Stockholder Agreement. Each Kleinknecht Stockholder
has also agreed, except as otherwise permitted by certain other ancillary
agreements, for a period of three years after the Effective Time not to
directly or indirectly engage in any activities competitive in any material
respect with the business of the Surviving Corporation and its subsidiaries
and affiliates competitive in any material respect with the business of the
Surviving Corporation and its subsidiaries and affiliates or become a partner,
stockholder or involved in any capacity in an entity which engages in such
activities. In addition Richard P. Kleinknecht and Peter J. Kleinknecht have
agreed not to employ or solicit for employment any employee of the Surviving
Corporation or any of its subsidiaries or joint ventures for a period ending
on the date that is the later of (x) three years following the Effective Time
and (y) the termination of the Amended and Restated Labor Pool Agreements
(other than, with respect to Richard P. Kleinknecht, his executive assistant),
each dated as of December 18, 1997, between IPC and each of KEC-NY and KEC-NJ.
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, or 12%, of IXnet capital stock for 152,381
shares of Surviving Corporation Common Stock and Servidio has agreed to
exchange 224 shares, or 8%, of IXnet capital 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 issued only upon delivery, by June 18, 1998, of certain releases
by three former shareholders of IXnet capital stock. The shares of IPC 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.
Starr Termination Agreement. Pursuant to a Termination Agreement, dated as
of December 18, 1997, among IPC and the Starrs, the Starrs have agreed to
terminate registration rights they formerly had with respect to IPC Common
Stock.
AGREEMENTS WITH RELATED PARTIES
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.
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. 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.
The Company has loaned Russell G. Kleinknecht $98,371, with interest
accruing at 6% per annum. As of December 31, 1997, the total amount
outstanding under this loan, together with employee advances in the principal
amount of $140,000, was $280,890, inclusive of accrued interest.
68
<PAGE>
DESCRIPTION OF REVOLVING CREDIT FACILITY
AAC, which will be merged into the Company as part of the recapitalization,
entered into the Commitment Letter with Morgan Stanley Senior Funding, Inc.
("MSSF") pursuant to which MSSF has agreed, subject to the terms and
conditions set forth in the Commitment Letter (including the consummation of
the Offering and negotiation of definitive loan documents), to provide the
Revolving Credit Facility to be used for working capital and other purposes.
The following summary of the material provisions of the Commitment Letter
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, the Commitment Letter, a copy of which is available
from the Company upon request. Defined terms that are used but not defined in
this section will have the meanings given to such terms in the loan
documentation for the Revolving Credit Facility.
The Revolving Credit Facility will initially provide the Company with up to
$75.0 million of revolving credit borrowings (subject to borrowing base and
other limitations). 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 Company's option, the
Administrative Agent's Base Rate plus 150 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 Company
and its subsidiaries on a consolidated basis.
The Revolving Credit Facility expires five years from the Effective Time.
The obligations of the Company under the Revolving Credit Facility are secured
by substantially all of the real and personal property of the Company and its
subsidiaries including inventory, accounts receivable and the proceeds of the
foregoing.
The Commitment Letter contemplates that the Revolving Credit Facility will
contain customary covenants of the Company 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 and (viii) transactions with affiliates (as
defined in the Revolving Credit Facility). Pursuant to the terms of the
Revolving Credit Facility, the Company would be in default under the Revolving
Credit Facility upon (i) 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, (ii) certain changes in control
of the ownership of the Company and (iii) various other events of default
described in the Revolving Credit Facility. If such an event of 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.
69
<PAGE>
DESCRIPTION OF THE NOTES
The Notes are to be issued under an Indenture, to be dated as of the Closing
Date, between the Company, as issuer, and (the "Trustee"). A copy of
the form of Indenture is filed as an exhibit to the Registration Statement of
which this Prospectus is a part. The following summary of certain provisions
of the Indenture does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all the provisions of the
Indenture, including the definitions of certain terms therein and those terms
made a part thereof by the Trust Indenture Act of 1939, as amended. Whenever
particular defined terms of the Indenture not otherwise defined herein are
referred to, such defined terms are incorporated herein by reference. For
definitions of certain capitalized terms used in the following summary, see
"--Certain Definitions." For purposes of this summary, the term "Company"
refers only to IPC Information Systems, Inc. and not to any of its
subsidiaries.
GENERAL
The Notes will be unsecured unsubordinated obligations of the Company,
initially limited to $180 million aggregate principal amount at maturity, and
will mature on , 2008. Although for federal income tax purposes a
significant amount of original issue discount, taxable as ordinary income,
will be recognized by a Holder as such discount accrues from the issue date of
the Notes, no interest will be payable on the Notes prior to , 2001. From
and after , 2001, interest on the Notes will accrue at the rate shown on
the front cover of this Prospectus from , 2001 or from the most recent
Interest Payment Date to which interest has been paid or provided for, payable
semiannually (to Holders of record at the close of business on the or
immediately preceding the Interest Payment Date) on and
of each year, commencing , 2001.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, the City of New York (which initially
will be the corporate trust office of the Trustee at ); provided
that, at the option of the Company, payment of interest may be made by check
mailed to the Holders at their addresses as they appear in the Security
Register.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 of principal amount at maturity and any integral
multiple thereof. See "--Book-Entry; Delivery and Form." No service charge
will be made for any registration of transfer or exchange of Notes, but the
Company may require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.
Subject to the covenants described below under "Covenants" and applicable
law, the Company may issue additional Notes under the Indenture. The Notes
offered hereby and any additional Notes subsequently issued would be treated
as a single class for all purposes under the Indenture.
OPTIONAL REDEMPTION
The Notes will be redeemable, at the Company's option, in whole or in part,
at any time or from time to time, on or after , 2003 and prior to
maturity, upon not less than 30 nor more than 60 days' prior notice mailed by
first class mail to each Holder's last address as it appears in the Security
Register, at the following Redemption Prices (expressed in percentages of
principal amount at maturity), plus accrued and unpaid interest, if any, to
the Redemption Date (subject to the right of Holders of record on the relevant
Regular Record Date that is on or prior to the Redemption Date to receive
interest due on an Interest Payment Date), if redeemed during the 12-month
period commencing , of the years set forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2003..................................................... %
2004.....................................................
2005.....................................................
2006 and thereafter...................................... 100.00%
</TABLE>
70
<PAGE>
In addition, at any time prior to , 2001, the Company may redeem up
to 35% of the principal amount at maturity of the Notes with the proceeds of
one or more Equity Offerings, at any time or from time to time in part, at a
Redemption Price (expressed as a percentage of Accreted Value) of %, plus
accrued and unpaid interest to the Redemption Date (subject to the rights of
Holders of record on the relevant Regular Record Date that is prior to the
Redemption Date to receive interest due on an Interest Payment Date); provided
that (i) Notes representing 65% of the principal amount of Notes initially
issued remain outstanding after each such redemption and (ii) notice of such
redemption is mailed within 60 days of the related Equity Offering.
In the case of any partial redemption, selection of the Notes for redemption
will be made by the Trustee in compliance with the requirements of the
principal national securities exchange, if any, on which the Notes are listed
or, if the Notes are not listed on a national securities exchange, by lot or
by such other method as the Trustee in its sole discretion shall deem to be
fair and appropriate; provided that no Note of $1,000 in principal amount at
maturity or less shall be redeemed in part. If any Note is to be redeemed in
part only, the notice of redemption relating to such Note shall state the
portion of the principal amount thereof to be redeemed. A new Note in
principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original Note.
SINKING FUND
There will be no sinking fund payments for the Notes.
RANKING
The Indebtedness evidenced by the Notes will rank pari passu in right of
payment with all existing and future unsubordinated indebtedness of the
Company and senior in right of payment to all existing and future subordinated
indebtedness of the Company. After giving pro forma effect to the Offering, as
of December 31, 1997, the Company and its subsidiaries would have had $
million of indebtedness outstanding. See "Capitalization." After giving pro
forma effect to the Offering and entry into the Credit Agreement, as of
December 31, 1997, the Company and its subsidiaries would have had $ million
of secured indebtedness outstanding, including $ million of indebtedness
under the Credit Agreement. The Credit Agreement is secured by substantially
all of the assets of the Company and its subsidiaries. The Notes will be
effectively subordinated to such indebtedness to the extent of such security
interests. In addition, all existing and future liabilities (including trade
payables) of the Company's subsidiaries will be effectively senior to the
Notes. After giving pro forma effect to the Offering, as of December 31, 1997,
the Company's subsidiaries would have had $ million of indebtedness and
other liabilities outstanding. See "Risk Factors--Substantial Leverage and
Debt Service."
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture. Reference is made to the
Indenture for the full definition of all terms as well as any other
capitalized term used herein for which no definition is provided.
"Accreted Value" means, for any Specified Date, the amount provided below
for each $1,000 principal amount at maturity of Notes:
(i) if the Specified Date occurs on one of the following dates (each a
"Semi-Annual Accrual Date"), the Accreted Value will equal the amount set
forth below for such Semi-Annual Accrual Date:
<TABLE>
<CAPTION>
SEMI-ANNUAL ACCRUAL DATE ACCRETED VALUE
------------------------ --------------
<S> <C>
, 1998............................................ $
, 1999............................................ $
, 1999............................................ $
, 2000............................................ $
, 2000............................................ $
, 2001............................................ $1,000.00
</TABLE>
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(ii) if the Specified Date occurs before the first Semi-Annual Accrual
Date, the Accreted Value will equal the sum of (a) the original issue price
and (b) an amount equal to the product of (1) the Accreted Value for the
first Semi-Annual Accrual Date less the original issue price multiplied by
(2) a fraction, the numerator of which is the number of days from the
Closing Date to the Specified Date, using a 360-day year of twelve 30-day
months, and the denominator of which is the number of days from the Closing
Date to the first Semi-Annual Accrual Date, using a 360-day year of twelve
30-day months;
(iii) if the Specified Date occurs between two Semi-Annual Accrual Dates,
the Accreted Value will equal the sum of (a) the Accreted Value for the
Semi-Annual Accrual Date immediately preceding such Specified Date and (b)
an amount equal to the product of (1) the Accreted Value for the
immediately following Semi-Annual Accrual Date less the Accreted Value for
the immediately preceding Semi-Annual Accrual Date multiplied by (2) a
fraction, the numerator of which is the number of days from the immediately
preceding Semi-Annual Accrual Date to the Specified Date, using a 360-day
year of twelve 30-day months, and the denominator of which is 180; or
(iv) if the Specified Date occurs after the last Semi-Annual Accrual
Date, the Accreted Value will equal $1,000.
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or assumed in connection with an
Asset Acquisition by a Restricted Subsidiary and not Incurred in connection
with, or in anticipation of, such Person becoming a Restricted Subsidiary or
such Asset Acquisition; provided that Indebtedness of such Person which is
redeemed, defeased, retired or otherwise repaid at the time of or immediately
upon consummation of the transactions by which such Person becomes a
Restricted Subsidiary or such Asset Acquisition shall not be Acquired
Indebtedness.
"Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of the Company and its Restricted Subsidiaries for such
period determined in conformity with GAAP; provided that the following items
shall be excluded in computing Adjusted Consolidated Net Income (without
duplication): (i) the net income of any Person that is not a Restricted
Subsidiary, except to the extent of the amount of dividends or other
distributions actually paid to the Company or any of its Restricted
Subsidiaries by such Person during such period; (ii) solely for the purposes
of calculating the amount of Restricted Payments that may be made pursuant to
clause (C) of the first paragraph of the "Limitation on Restricted Payments"
covenant described below (and in such case, except to the extent includable
pursuant to clause (i) above), the net income (or loss) of any Person accrued
prior to the date it becomes a Restricted Subsidiary or is merged into or
consolidated with the Company or any of its Restricted Subsidiaries or all or
substantially all of the property and assets of such Person are acquired by
the Company or any of its Restricted Subsidiaries; (iii) the net income of any
Restricted Subsidiary to the extent that the declaration or payment of
dividends or similar distributions by such Restricted Subsidiary of such net
income is not at the time permitted by the operation of the terms of its
charter or any agreement, instrument, judgment, decree, order, statute, rule
or governmental regulation applicable to such Restricted Subsidiary; (iv) any
gains or losses (on an after-tax basis) attributable to Asset Sales; (v)
except for purposes of calculating the amount of Restricted Payments that may
be made pursuant to clause (C) of the first paragraph of the "Limitation on
Restricted Payments" covenant described below, any amount paid or accrued as
dividends on Preferred Stock (other than accrued dividends which, pursuant to
the terms of the relevant governing documents, will not be payable prior to
the first anniversary after the Stated Maturity of the Notes) of the Company
or any Restricted Subsidiary owned by Persons other than the Company and any
of its Restricted Subsidiaries; and (vi) all extraordinary gains and
extraordinary losses.
"Adjusted Consolidated Net Tangible Assets" means the total amount of assets
of the Company and its Restricted Subsidiaries (less applicable depreciation,
amortization and other valuation reserves), except to the extent resulting
from write-ups of capital assets (excluding write-ups in connection with
accounting for acquisitions in conformity with GAAP), after deducting
therefrom (i) all current liabilities of the Company and its Restricted
Subsidiaries (excluding intercompany items) and (ii) all goodwill, trade
names, trademarks, patents, unamortized debt discount and expense and other
like intangibles, all as set forth on the most recent quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries,
prepared in conformity with
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GAAP and filed with the Commission or provided to the Trustee pursuant to the
"Commission Reports and Reports to Holders" covenant.
"Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and "under common control with"), as applied to any Person, means 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 voting securities, by contract or otherwise.
"Asset Acquisition" means (i) an investment by the Company or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person
shall become a Restricted Subsidiary or shall be merged into or consolidated
with the Company or any of its Restricted Subsidiaries; provided that such
Person's primary business is related, ancillary or complementary to the
businesses of the Company and its Restricted Subsidiaries on the date of such
investment or (ii) an acquisition by the Company or any of its Restricted
Subsidiaries of the property and assets of any Person other than the Company
or any of its Restricted Subsidiaries that constitute substantially all of a
division or line of business of such Person; provided that the property and
assets acquired are related, ancillary or complementary to the businesses of
the Company and its Restricted Subsidiaries on the date of such acquisition.
"Asset Sale" means any sale, transfer or other disposition (including by way
of merger, consolidation or sale-leaseback transaction) in one transaction or
a series of related transactions by the Company or any of its Restricted
Subsidiaries to any Person other than the Company or any of its Restricted
Subsidiaries of (i) all or any of the Capital Stock of any Restricted
Subsidiary, (ii) all or substantially all of the property and assets of an
operating unit or business of the Company or any of its Restricted
Subsidiaries or (iii) any other property and assets (other than the Capital
Stock or other Investment in an Unrestricted Subsidiary) of the Company or any
of its Restricted Subsidiaries outside the ordinary course of business of the
Company or such Restricted Subsidiary and, in each case, that is not governed
by the provisions of the Indenture applicable to mergers, consolidations and
sales of assets of the Company; provided that "Asset Sale" shall not include
(a) sales or other dispositions of inventory, receivables and other current
assets, (b) sales, transfers or other dispositions of assets constituting a
Restricted Payment permitted to be made under the "Limitation on Restricted
Payments" covenant, or (c) sales or other dispositions of assets for
consideration at least equal to the fair market value of the assets sold or
disposed of, to the extent that the consideration received would satisfy
clause (B) of the "Limitation on Asset Sales" covenant.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (a)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the
amount of such principal payment by (ii) the sum of all such principal
payments.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether outstanding on the
Closing Date or issued thereafter, including, without limitation, all Common
Stock and Preferred Stock.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present
value of the rental obligations of such Person as lessee, in conformity with
GAAP, is required to be capitalized on the balance sheet of such Person.
"Capitalized Lease Obligations" means the discounted present value of the
rental obligations under a Capitalized Lease.
"Change of Control" means such time as (i) a "person" or "group" (within the
meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) other than CVC (or
a "group" of which CVC is the majority member) becomes the ultimate
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of Voting
Stock
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representing more than 50% of the total voting power of the Voting Stock of
the Company on a fully diluted basis or (ii) individuals who on the Closing
Date constitute the Board of Directors (together with any new directors whose
election by the Board of Directors or whose nomination by the Board of
Directors for election by the Company's stockholders was approved by a vote of
at least two-thirds of the members of the Board of Directors then in office
who either were members of the Board of Directors on the Closing Date or whose
election or nomination for election was previously so approved ) cease for any
reason to constitute a majority of the members of the Board of Directors then
in office.
"Closing Date" means the date on which the Notes are originally issued under
the Indenture.
"Consolidated EBITDA" means, for any period, Adjusted Consolidated Net
Income for such period plus, to the extent such amount was deducted in
calculating such Adjusted Consolidated Net Income, (i) Consolidated Interest
Expense, (ii) income taxes (other than income taxes (either positive or
negative) attributable to extraordinary and non-recurring gains or losses or
sales of assets), (iii) depreciation expense, (iv) amortization expense and
(v) all other non-cash items reducing Adjusted Consolidated Net Income (other
than items that will require cash payments and for which an accrual or reserve
is, or is required by GAAP to be, made), less all non-cash items increasing
Adjusted Consolidated Net Income, all as determined on a consolidated basis
for the Company and its Restricted Subsidiaries in conformity with GAAP;
provided that, if any Restricted Subsidiary is not a Wholly Owned Restricted
Subsidiary, Consolidated EBITDA shall be reduced (to the extent not otherwise
reduced in accordance with GAAP) by an amount equal to (A) the amount of the
Adjusted Consolidated Net Income attributable to such Restricted Subsidiary
multiplied by (B) the percentage ownership interest in the income of such
Restricted Subsidiary not owned on the last day of such period by the Company
or any of its Restricted Subsidiaries.
"Consolidated Interest Expense" means, for any period, the aggregate amount
of interest in respect of Indebtedness (including, without limitation,
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in accordance with the
effective interest method of accounting; all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers'
acceptance financing; the net costs associated with Interest Rate Agreements;
and Indebtedness that is Guaranteed or secured by the Company or any of its
Restricted Subsidiaries) and all but the principal component of rentals in
respect of Capitalized Lease Obligations paid, accrued or scheduled to be paid
or to be accrued by the Company and its Restricted Subsidiaries during such
period; excluding, however, (i) any amount of such interest of any Restricted
Subsidiary if the net income of such Restricted Subsidiary is excluded in the
calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of
the definition thereof (but only in the same proportion as the net income of
such Restricted Subsidiary is excluded from the calculation of Adjusted
Consolidated Net Income pursuant to clause (iii) of the definition thereof)
and (ii) any premiums, fees and expenses (and any amortization thereof)
payable in connection with the offering of the Notes, all as determined on a
consolidated basis (without taking into account Unrestricted Subsidiaries) in
conformity with GAAP.
"Consolidated Leverage Ratio" means, on any Transaction Date, the ratio of
(i) the aggregate amount of Indebtedness of the Company and its Restricted
Subsidiaries on a consolidated basis outstanding on such Transaction Date to
(ii) the aggregate amount of Consolidated EBITDA for the then most recent four
fiscal quarters for which financial statements of the Company have been filed
with the Commission or provided to the Trustee pursuant to the "Commission
Reports and Reports to Holders" covenant described below (such four fiscal
quarter period being the "Four Quarter Period"); provided that, in making the
foregoing calculation, pro forma effect shall be given to the following events
which occur from the beginning of the Four Quarter Period through the
Transaction Date (the "Reference Period"): (i) the Incurrence of the
Indebtedness with respect to which the computation is being made and (if
applicable) the application of the net proceeds therefrom, including to
refinance other Indebtedness, as if such Indebtedness was incurred, and the
application of such proceeds occurred, at the beginning of the Four Quarter
Period; (ii) the Incurrence, repayment or retirement of any other Indebtedness
by the Company and its Restricted Subsidiaries since the first day of the Four
Quarter Period as if such Indebtedness was incurred, repaid or retired at the
beginning of the Four Quarter Period; (iii) in the case of Acquired
Indebtedness, the related acquisition, as if such acquisition occurred at the
beginning of the Four
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Quarter Period; (iv) any acquisition or disposition by the Company and its
Restricted Subsidiaries of any company or any business or any assets out of
the ordinary course of business, whether by merger, stock purchase or sale or
asset purchase or sale or any related repayment of Indebtedness, in each case
since the first day of the Four Quarter Period, assuming such acquisition or
disposition had been consummated on the first day of the Four Quarter Period;
and (v) the occurrence of any of the events described in clauses (i)-(iv)
above by any Person that has become a Restricted Subsidiary or has been merged
with or into the Company or any Restricted Subsidiary during the Four Quarter
Period.
"Consolidated Net Worth" means, at any date of determination, stockholders'
equity as set forth on the most recently available quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries
(which shall be as of a date not more than 90 days prior to the date of such
computation, and which shall not take into account Unrestricted Subsidiaries),
less any amounts attributable to Disqualified Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the principal amount of any promissory notes receivable from the sale of
the Capital Stock of the Company or any of its Restricted Subsidiaries, each
item to be determined in conformity with GAAP (excluding the effects of
foreign currency exchange adjustments under Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 52).
"Credit Agreement" means the revolving credit facility, dated the Closing
Date among the Company, Morgan Stanley Senior Funding, Inc. and the other
lenders party thereto.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
"CVC" means Citicorp Venture Capital, Ltd.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is (i) required to be redeemed prior to
the Stated Maturity of the Notes, (ii) redeemable at the option of the holder
of such class or series of Capital Stock at any time prior to the Stated
Maturity of the Notes or (iii) convertible into or exchangeable for Capital
Stock referred to in clause (i) or (ii) above or Indebtedness having a
scheduled maturity prior to the Stated Maturity of the Notes; provided that
any Capital Stock that would not constitute Disqualified Stock but for
provisions thereof giving holders thereof the right to require such Person to
repurchase or redeem such Capital Stock upon the occurrence of an "asset sale"
or "change of control" occurring prior to the Stated Maturity of the Notes
shall not constitute Disqualified Stock if the "asset sale" or "change of
control" provisions applicable to such Capital Stock are no more favorable to
the holders of such Capital Stock than the provisions contained in "Limitation
on Asset Sales" and "Repurchase of Notes upon a Change of Control" covenants
described below and such Capital Stock specifically provides that such Person
will not repurchase or redeem any such stock pursuant to such provision prior
to the Company's repurchase of such Notes as are required to be repurchased
pursuant to the "Limitation on Asset Sales" and "Repurchase of Notes upon a
Change of Control" covenants described below.
"Equity Offering" means any public or private sale of common stock or
preferred stock of the Company (other than Disqualified Stock), other than
public offerings with respect to the Company's Common Stock registered on Form
S-8.
"fair market value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors, whose determination shall be conclusive
if evidenced by a Board Resolution.
"Foreign Subsidiary" means any Subsidiary of the Company incorporated or
organized, as the case may be, outside of the United States of America.
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"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Closing Date, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or
in such other statements by such other entity as approved by a significant
segment of the accounting profession. All ratios and computations contained or
referred to in the Indenture shall be computed in conformity with GAAP applied
on a consistent basis, except that calculations made for purposes of
determining compliance with the terms of the covenants and with other
provisions of the Indenture shall be made without giving effect to (i) the
amortization or write off of any expenses incurred in connection with the
Transaction and (ii) except as otherwise provided, the amortization of any
amounts required or permitted by Accounting Principles Board Opinion Nos. 16
and 17.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and,
without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness of
such other Person (whether arising by virtue of partnership arrangements, or
by agreements to keep-well, to purchase assets, goods, securities or services
(unless such purchase arrangements are on arm's-length terms and are entered
into in the ordinary course of business), to take-or-pay, or to maintain
financial statement conditions or otherwise) or (ii) entered into for purposes
of assuring in any other manner the obligee of such Indebtedness of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part); provided that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
"Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including an "Incurrence" of Acquired Indebtedness; provided that neither the
accrual of interest nor the accretion of original issue discount shall be
considered an Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto, but excluding obligations with
respect to letters of credit (including trade letters of credit) securing
obligations (other than obligations described in (i) or (ii) above or (v),
(vi) or (vii) below) entered into in the ordinary course of business of such
Person to the extent such letters of credit are not drawn upon or, if drawn
upon, to the extent such drawing is reimbursed no later than the third
Business Day following receipt by such Person of a demand for reimbursement),
(iv) all obligations of such Person to pay the deferred and unpaid purchase
price of property or services, which purchase price is due more than six
months after the date of placing such property in service or taking delivery
and title thereto or the completion of such services, except Trade Payables,
(v) all Capitalized Lease Obligations, (vi) all Indebtedness of other Persons
secured by a Lien on any asset of such Person, whether or not such
Indebtedness is assumed by such Person; provided that the amount of such
Indebtedness shall be the lesser of (A) the fair market value of such asset at
such date of determination and (B) the amount of such Indebtedness, (vii) all
Indebtedness of other Persons Guaranteed by such Person to the extent such
Indebtedness is Guaranteed by such Person and (viii) to the extent not
otherwise included in this definition, obligations under Currency Agreements
and Interest Rate Agreements. The amount of Indebtedness of any Person at any
date shall be the outstanding balance at such date of all unconditional
obligations as described above and, with respect to contingent obligations,
the maximum liability upon the occurrence of the contingency giving rise to
the obligation, provided (A) that the amount outstanding at any time of any
Indebtedness issued with original issue discount is the original issue price
of such Indebtedness, (B) that money borrowed and set aside at the time of the
Incurrence of any Indebtedness in order to prefund the payment of the interest
on such Indebtedness shall not be deemed to be "Indebtedness" so long as such
money is held to secure the payment of such interest and (C) that Indebtedness
shall not include any liability for federal, state, local or other taxes.
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"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement.
"Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee
or similar arrangement; but excluding advances to customers in the ordinary
course of business that are, in conformity with GAAP, recorded as accounts
receivable on the balance sheet of the Company or its Restricted Subsidiaries)
or capital contribution to (by means of any transfer of cash or other property
to others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, bonds, notes,
debentures or other similar instruments issued by, such Person and shall
include (i) the designation of a Restricted Subsidiary as an Unrestricted
Subsidiary and (ii) the fair market value of the Capital Stock (or any other
Investment), held by the Company or any of its Restricted Subsidiaries, of (or
in) any Person that has ceased to be a Restricted Subsidiary, including
without limitation, by reason of any transaction permitted by clause (iii) of
the "Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries" covenant; provided that the fair market value of the Investment
remaining in any Person that has ceased to be a Restricted Subsidiary shall
not exceed the aggregate amount of Investments previously made in such Person
valued at the time such Investments were made less the net reduction of such
Investments. For purposes of the definition of "Unrestricted Subsidiary" and
the "Limitation on Restricted Payments" covenant described below, (i)
"Investment" shall include the fair market value of the assets (net of
liabilities (other than liabilities to the Company or any of its Restricted
Subsidiaries)) of any Restricted Subsidiary at the time that such Restricted
Subsidiary is designated an Unrestricted Subsidiary, (ii) the fair market
value of the assets (net of liabilities (other than liabilities to the Company
or any of its Restricted Subsidiaries)) of any Unrestricted Subsidiary at the
time that such Unrestricted Subsidiary is designated a Restricted Subsidiary
shall be considered a reduction in outstanding Investments and (iii) any
property transferred to or from an Unrestricted Subsidiary shall be valued at
its fair market value at the time of such transfer.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or
other title retention agreement or lease in the nature thereof or any
agreement to give any security interest).
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the proceeds
of such Asset Sale in the form of cash or cash equivalents, including payments
in respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed
or sold with recourse to the Company or any Restricted Subsidiary) and
proceeds from the conversion of other property received when converted to cash
or cash equivalents, net of (i) brokerage commissions and other fees and
expenses (including fees and expenses of counsel and investment bankers)
related to such Asset Sale, (ii) provisions for all taxes (whether or not such
taxes will actually be paid or are payable) as a result of such Asset Sale
without regard to the consolidated results of operations of the Company and
its Restricted Subsidiaries, taken as a whole, (iii) payments made to repay
Indebtedness or any other obligation outstanding at the time of such Asset
Sale that either (A) is secured by a Lien on the property or assets sold or
(B) is required to be paid as a result of such sale and (iv) appropriate
amounts to be provided by the Company or any Restricted Subsidiary as a
reserve against any liabilities associated with such Asset Sale, including,
without limitation, pension and other post-employment benefit liabilities,
liabilities related to environmental matters and liabilities under any
indemnification obligations associated with such Asset Sale, all as determined
in conformity with GAAP and (b) with respect to any issuance or sale of
Capital Stock, the proceeds of such issuance or sale in the form of cash or
cash equivalents, including payments in respect of deferred payment
obligations (to the extent corresponding to the principal, but not interest,
component thereof) when received in the form of cash or cash equivalents
(except to the extent such obligations are financed or sold with recourse to
the Company or any Restricted Subsidiary) and proceeds from the conversion of
other property received when converted to cash or cash equivalents, net of
attorney's fees,
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accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees incurred in connection
with such issuance or sale and net of taxes paid or payable as a result
thereof.
"Offer to Purchase" means an offer to purchase Notes by the Company from the
Holders commenced by mailing a notice to the Trustee and each Holder stating:
(i) the covenant pursuant to which the offer is being made and that all Notes
validly tendered will be accepted for payment on a pro rata basis; (ii) the
purchase price and the date of purchase (which shall be a Business Day no
earlier than 30 days nor later than 60 days from the date such notice is
mailed) (the "Payment Date"); (iii) that any Note not tendered will continue
to accrue interest (or accrete in value) pursuant to its terms; (iv) that,
unless the Company defaults in the payment of the purchase price, any Note
accepted for payment pursuant to the Offer to Purchase shall cease to accrue
interest (or accrete in value) on and after the Payment Date; (v) that Holders
electing to have a Note purchased pursuant to the Offer to Purchase will be
required to surrender the Note, together with the form entitled "Option of the
Holder to Elect Purchase" on the reverse side of the Note completed, to the
Paying Agent at the address specified in the notice prior to the close of
business on the Business Day immediately preceding the Payment Date; (vi) that
Holders will be entitled to withdraw their election if the Paying Agent
receives, not later than the close of business on the third Business Day
immediately preceding the Payment Date, a telegram, facsimile transmission or
letter setting forth the name of such Holder, the principal amount at maturity
of Notes delivered for purchase and a statement that such Holder is
withdrawing his election to have such Notes purchased; and (vii) that Holders
whose Notes are being purchased only in part will be issued new Notes equal in
principal amount at maturity to the unpurchased portion of the Notes
surrendered; provided that each Note purchased and each new Note issued shall
be in a principal amount at maturity of $1,000 or integral multiples thereof.
On the Payment Date, the Company shall (i) accept for payment on a pro rata
basis Notes or portions thereof tendered pursuant to an Offer to Purchase;
(ii) deposit with the Paying Agent money sufficient to pay the purchase price
of all Notes or portions thereof so accepted; and (iii) deliver, or cause to
be delivered, to the Trustee all Notes or portions thereof so accepted
together with an Officers' Certificate specifying the Notes or portions
thereof accepted for payment by the Company. The Paying Agent shall promptly
mail to the Holders of Notes so accepted payment in an amount equal to the
purchase price, and the Trustee shall promptly authenticate and mail to such
Holders a new Note equal in principal amount at maturity to any unpurchased
portion of the Note surrendered; provided that each Note purchased and each
new Note issued shall be in a principal amount at maturity of $1,000 or
integral multiples thereof. The Company will publicly announce the results of
an Offer to Purchase as soon as practicable after the Payment Date. The
Trustee shall act as the Paying Agent for an Offer to Purchase. The Company
will comply with Rule 14e-1 under the Exchange Act and any other securities
laws and regulations thereunder to the extent such laws and regulations are
applicable, in the event that the Company is required to repurchase Notes
pursuant to an Offer to Purchase.
"Permitted Investment" means (i) an Investment in the Company or a
Restricted Subsidiary or a Person which will, upon the making of such
Investment, become a Restricted Subsidiary or be merged or consolidated with
or into or transfer or convey all or substantially all its assets to, the
Company or a Restricted Subsidiary; provided that such person's primary
business is related, ancillary or complementary to the businesses of the
Company and its Restricted Subsidiaries on the date of such Investment; (ii)
Temporary Cash Investments; (iii) commission, payroll, travel and similar
advances to cover matters that are expected at the time of such advances
ultimately to be treated as expenses in accordance with GAAP; (iv) stock,
obligations or securities received in satisfaction of judgments (v)
Investments in prepaid expenses, negotiable instruments held for collection,
and lease, utility and workers' compensation, performance and other similar
deposits; and (vi) Interest Rate Agreements and Currency Agreements to the
extent permitted under clause (iv) of the "Limitation on Indebtedness"
covenant described below.
"Permitted Liens" means (i) Liens for taxes, assessments, governmental
charges or claims that are being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a
reserve or other appropriate provision, if any, as shall be required in
conformity with GAAP shall have been made; (ii) statutory and common law Liens
of landlords and carriers, warehousemen, mechanics, suppliers,
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materialmen, repairmen or other similar Liens arising in the ordinary course
of business and with respect to amounts not yet delinquent or being contested
in good faith by appropriate legal proceedings promptly instituted and
diligently conducted and for which a reserve or other appropriate provision,
if any, as shall be required in conformity with GAAP shall have been made;
(iii) Liens incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other types
of social security; (iv) Liens incurred or deposits made to secure the
performance of tenders, bids, leases, statutory or regulatory obligations,
bankers' acceptances, surety and appeal bonds, government contracts,
performance and return-of-money bonds and other obligations of a similar
nature incurred in the ordinary course of business (exclusive of obligations
for the payment of borrowed money); (v) easements, rights-of-way, municipal
and zoning ordinances and similar charges, encumbrances, title defects or
other irregularities that do not materially interfere with the ordinary course
of business of the Company or any of its Restricted Subsidiaries; (vi) Liens
(including extensions and renewals thereof) upon real or personal property
acquired after the Closing Date; provided that (a) such Lien is created solely
for the purpose of securing Indebtedness Incurred, in accordance with the
"Limitation on Indebtedness" covenant described below, to finance the cost
(including the cost of acquisition, installation, improvement or construction)
of the item of property or assets subject thereto and such Lien is created
prior to, at the time of or within six months after the later of the
acquisition, the completion of construction or the commencement of full
operation of such property (b) the principal amount of the Indebtedness
secured by such Lien does not exceed 100% of such cost and (c) any such Lien
shall not extend to or cover any property or assets other than such item of
property or assets and any improvements on such item; (vii) leases or
subleases granted to others that do not materially interfere with the ordinary
course of business of the Company and its Restricted Subsidiaries, taken as a
whole; (viii) Liens encumbering property or assets under construction arising
from progress or partial payments by a customer of the Company or its
Restricted Subsidiaries relating to such property or assets; (ix) any interest
or title of a lessor in the property subject to any Capitalized Lease or
operating lease; (x) Liens arising from filing Uniform Commercial Code
financing statements regarding leases; (xi) Liens on property of, or on shares
of Capital Stock or Indebtedness of, any Person existing at the time such
Person becomes, or becomes a part of, any Restricted Subsidiary; provided that
such Liens do not extend to or cover any property or assets of the Company or
any Restricted Subsidiary other than the property or assets acquired; (xii)
Liens in favor of the Company or any Restricted Subsidiary; (xiii) Liens
arising from the rendering of a final judgment or order against the Company or
any Restricted Subsidiary that does not give rise to an Event of Default;
(xiv) Liens securing reimbursement obligations with respect to letters of
credit that encumber documents and other property relating to such letters of
credit and the products and proceeds thereof; (xv) Liens in favor of customs
and revenue authorities arising as a matter of law to secure payment of
customs duties in connection with the importation of goods; (xvi) Liens
encumbering customary initial deposits and margin deposits, and other Liens
that are within the general parameters customary in the industry and incurred
in the ordinary course of business, in each case, securing Indebtedness under
Interest Rate Agreements and Currency Agreements and forward contracts,
options, future contracts, futures options or similar agreements or
arrangements designed solely to protect the Company or any of its Restricted
Subsidiaries from fluctuations in interest rates, currencies or the price of
commodities; (xvii) Liens arising out of conditional sale, title retention,
consignment or similar arrangements for the sale of goods entered into by the
Company or any of its Restricted Subsidiaries in the ordinary course of
business in accordance with the past practices of the Company and its
Restricted Subsidiaries prior to the Closing Date; and (xviii) Liens on or
sales of receivables, including related intangible assets and proceeds
thereof; and (xix) Liens that secure Indebtedness with an aggregate principal
amount not to exceed $5 million at any time outstanding.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Significant Subsidiary" means, at any date of determination, any Restricted
Subsidiary that, together with its Subsidiaries, (i) for the most recent
fiscal year of the Company, accounted for more than 10% of the consolidated
revenues of the Company and its Restricted Subsidiaries or (ii) as of the end
of such fiscal year, was the owner of more than 10% of the consolidated assets
of the Company and its Restricted Subsidiaries, all as set forth on the most
recently available consolidated financial statements of the Company for such
fiscal year.
"S&P" means Standard & Poor's Ratings Group, a division of McGraw-Hill, and
its successors.
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"Stated Maturity" means, (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final
installment of principal of such debt security is due and payable and (ii)
with respect to any scheduled installment of principal of or interest on any
debt security, the date specified in such debt security as the fixed date on
which such installment is due and payable.
"Subsidiary" means, with respect to any Person, any corporation, association
or other business entity of which more than 50% of the voting power of the
outstanding Voting Stock is owned, directly or indirectly, by such Person and
one or more other Subsidiaries of such Person.
"Temporary Cash Investment" means any of the following: (i) direct
obligations of the United States of America or any agency thereof or
obligations fully and unconditionally guaranteed by the United States of
America or any agency thereof, (ii) time deposit accounts, certificates of
deposit and money market deposits maturing within one year of the date of
acquisition thereof issued by a bank or trust company which is organized under
the laws of the United States of America, any state thereof or any foreign
country recognized by the United States of America, and which bank or trust
company has capital, surplus and undivided profits aggregating in excess of
$50 million (or the foreign currency equivalent thereof) and has outstanding
debt which is rated "A" (or such similar equivalent rating) or higher by at
least one nationally recognized statistical rating organization (as defined in
Rule 436 under the Securities Act) or any money-market fund sponsored by a
registered broker dealer or mutual fund distributor, (iii) repurchase
obligations with a term of not more than 30 days for underlying securities of
the types described in clause (i) above entered into with a bank meeting the
qualifications described in clause (ii) above, (iv) commercial paper, maturing
not more than one year after the date of acquisition, issued by a corporation
(other than an Affiliate of the Company) organized and in existence under the
laws of the United States of America, any state thereof or any foreign country
recognized by the United States of America with a rating at the time as of
which any investment therein is made of "P-1" (or higher) according to Moody's
or "A-1" (or higher) according to S&P, and (v) securities with maturities of
six months or less from the date of acquisition issued or fully and
unconditionally guaranteed by any state, commonwealth or territory of the
United States of America, or by any political subdivision or taxing authority
thereof, and rated at least "A" by S&P or Moody's.
"Trade Payables" means, with respect to any Person, any accounts payable or
any other indebtedness or monetary obligation to trade creditors created,
assumed or Guaranteed by such Person or any of its Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods or
services.
"Transaction" means, collectively, the merger of Arizona Acquisition Corp.
with and into the Company; the entry into the Credit Agreement and the equity
investment in Arizona Acquisition Corp. by Cable Systems Holdings, LLC of up
to $72.0 million; and the ancillary and related transactions occurring
substantially contemporaneously therewith or as a direct result thereof.
"Transaction Date" means, with respect to the Incurrence of any Indebtedness
by the Company or any of its Restricted Subsidiaries, the date such
Indebtedness is to be Incurred and, with respect to any Restricted Payment,
the date such Restricted Payment is to be made.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by
the Board of Directors in the manner provided below; and (ii) any Subsidiary
of an Unrestricted Subsidiary. The Board of Directors may designate any
Restricted Subsidiary (including any newly acquired or newly formed Subsidiary
of the Company) to be an Unrestricted Subsidiary unless such Subsidiary owns
any Capital Stock of, or owns or holds any Lien on any property of, the
Company or any Restricted Subsidiary; provided that (A) any Guarantee by the
Company or any Restricted Subsidiary of any Indebtedness of the Subsidiary
being so designated shall be deemed an "Incurrence" of such Indebtedness and
an "Investment" by the Company or such Restricted Subsidiary (or both, if
applicable) at the time of such designation; (B) either (I) the Subsidiary to
be so designated has total assets of $1,000 or less or (II) if such Subsidiary
has assets greater than $1,000, such designation would be permitted under the
"Limitation on Restricted Payments" covenant described below and (C) if
applicable, the Incurrence of Indebtedness and the
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Investment referred to in clause (A) of this proviso would be permitted under
the "Limitation on Indebtedness" and "Limitation on Restricted Payments"
covenants described below. The Board of Directors may designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided that (i) no
Default or Event of Default shall have occurred and be continuing at the time
of or after giving effect to such designation and (ii) all Liens and
Indebtedness of such Unrestricted Subsidiary outstanding immediately after
such designation would, if Incurred at such time, have been permitted to be
Incurred (and shall be deemed to have been Incurred) for all purposes of the
Indenture. Any such designation by the Board of Directors shall be evidenced
to the Trustee by promptly filing with the Trustee a copy of the Board
Resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing provisions.
"Voting Stock" means with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other
than any director's qualifying shares or Investments by foreign nationals
mandated by applicable law) by such Person or one or more Wholly Owned
Subsidiaries of such Person.
COVENANTS
Limitation on Indebtedness
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness (other than the Notes and Indebtedness
existing on the Closing Date); provided that the Company may Incur
Indebtedness if, after giving effect to the Incurrence of such Indebtedness
and the receipt and application of the proceeds therefrom, the Consolidated
Leverage Ratio would be positive and (i) with respect to any Incurrence
occurring from the Closing Date through January 1, 1999, greater than zero and
less than 5.5:1 and (ii) with respect to any Incurrence occurring thereafter,
greater than zero and less than 5.0:1.
Notwithstanding the foregoing, the Company and any Restricted Subsidiary
(except as specified below) may Incur each and all of the following: (i)
Indebtedness of the Company (Guaranteed by Subsidiaries of the Company)
outstanding at any time in an aggregate principal amount not to exceed the
greater of (x) $75 million and (y) 80% of the consolidated net book value of
the accounts receivable and 25% of the net book value of the inventory, in
each case of the Company and its Restricted Subsidiaries as set forth on the
consolidated balance sheet of the Company then most recently filed pursuant to
the "Commission Reports and Reports to Holders" covenant described below, less
any amount of such Indebtedness permanently repaid as provided under the
"Limitation on Asset Sales" covenant described below; (ii) Indebtedness owed
(A) to the Company evidenced by an unsubordinated promissory note or (B) to
any Restricted Subsidiary; provided that any event which results in any such
Restricted Subsidiary ceasing to be a Restricted Subsidiary or any subsequent
transfer of such Indebtedness (other than to the Company or another Restricted
Subsidiary) shall be deemed, in each case, to constitute an Incurrence of such
Indebtedness not permitted by this clause (ii); (iii) Indebtedness issued in
exchange for, or the net proceeds of which are used to refinance or refund,
then outstanding Indebtedness (other than Indebtedness Incurred under clause
(i), (ii), (iv), (vi), (viii), (x) or (xi) of this paragraph) and any
refinancings thereof in an amount not to exceed the amount so refinanced or
refunded (plus premiums, accrued interest, fees and expenses); provided that
Indebtedness the proceeds of which are used to refinance or refund the Notes
or Indebtedness that is pari passu with, or subordinated in right of payment
to, the Notes shall only be permitted under this clause (iii) if (A) in case
the Notes are refinanced in part or the Indebtedness to be refinanced is pari
passu with the Notes, such new Indebtedness, by its terms or by the terms of
any agreement or instrument pursuant to which such new Indebtedness is
outstanding, is expressly made pari passu with, or subordinate in right of
payment to, the remaining Notes, (B) in case the Indebtedness to be refinanced
is subordinated in right of payment to the Notes, such new Indebtedness, by
its terms or by the terms of any agreement or instrument pursuant to which
such new Indebtedness is issued or remains outstanding, is expressly made
subordinate in right
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of payment to the Notes at least to the extent that the Indebtedness to be
refinanced is subordinated to the Notes and (C) such new Indebtedness,
determined as of the date of Incurrence of such new Indebtedness, does not
mature prior to the Stated Maturity of the Indebtedness to be refinanced or
refunded, and the Average Life of such new Indebtedness is at least equal to
the remaining Average Life of the Indebtedness to be refinanced or refunded;
and provided further that in no event may Indebtedness of the Company be
refinanced by means of any Indebtedness of any Restricted Subsidiary pursuant
to this clause (iii); (iv) Indebtedness (A) in respect of performance, surety
or appeal bonds or letters of credit supporting trade payables, in each case
provided in the ordinary course of business, (B) under Currency Agreements and
Interest Rate Agreements; provided that such agreements (1) are designed
solely to protect the Company or its Restricted Subsidiaries against
fluctuations in foreign currency exchange rates or interest rates and (2) do
not increase the Indebtedness of the obligor outstanding at any time other
than as a result of fluctuations in foreign currency exchange rates or
interest rates or by reason of fees, indemnities and compensation payable
thereunder; and (C) arising from agreements providing for indemnification,
adjustment of purchase price or similar obligations, or from Guarantees or
letters of credit, surety bonds or performance bonds securing any obligations
of the Company or any of its Restricted Subsidiaries pursuant to such
agreements, in any case Incurred in connection with the disposition of any
business, assets or Restricted Subsidiary (other than Guarantees of
Indebtedness Incurred by any Person acquiring all or any portion of such
business, assets or Restricted Subsidiary for the purpose of financing such
acquisition), in a principal amount not to exceed the gross proceeds actually
received by the Company or any Restricted Subsidiary in connection with such
disposition; (v) Indebtedness of the Company, to the extent the net proceeds
thereof are promptly (A) used to purchase Notes tendered in an Offer to
Purchase made as a result of a Change in Control or (B) deposited to defease
the Notes as described below under "Defeasance"; (vi) Guarantees of the Notes
and Guarantees of Indebtedness of the Company by any Restricted Subsidiary
provided the Guarantee of such Indebtedness is permitted by and made in
accordance with the "Limitation on Issuance of Guarantees by Restricted
Subsidiaries" covenant described below; (vii) Indebtedness Incurred to finance
the cost (including, without limitation, the cost of design, development,
construction, acquisition, installation or integration) of network assets used
in the telecommunications business (including, without limitation, ownership
interests in minimum investment units or indefeasible rights of use); (viii)
Indebtedness of the Company, not to exceed at any one time outstanding, 2
times the (A) Net Cash Proceeds received by the Company after the Closing Date
as a capital contribution or from the issuance and sale of its Capital Stock
(other than Disqualified Stock) to a Person that is not a Subsidiary of the
Company, to the extent such Net Cash Proceeds have not been used pursuant to
clause (C)(2) of the first paragraph or clause (iii), (iv) or (vi) of the
second paragraph of the "Limitation on Restricted Payments" covenant described
below to make a Restricted Payment and (B) 80% of the fair market value of
property (other than cash and cash equivalents) received by the Company after
the Closing Date from a contribution of capital or the sale of its Capital
Stock (other than Disqualified Stock) to a Person that is not a Subsidiary of
the Company, to the extent such capital contribution or sale of Capital Stock
has not been used pursuant to clause (iii), (iv) or (ix) of the second
paragraph of the "Limitation on Restricted Payments" covenant described below
to make a Restricted Payment; provided that such Indebtedness does not mature
prior to the Stated Maturity of the Notes and has an Average Life longer than
the Notes; (ix) Indebtedness of the Company Incurred to finance capital
expenditures in an amount not to exceed $5 million in any given fiscal year of
the Company; (x) Indebtedness of Foreign Subsidiaries, not to exceed $5
million at any one time outstanding; and (xi) Indebtedness of the Company (in
addition to Indebtedness permitted under clauses (i) through (x) above) in an
aggregate principal amount outstanding at any time not to exceed $100 million,
less any amount of such Indebtedness permanently repaid as provided under the
"Limitation on Asset Sales" covenant described below.
(b) Notwithstanding any other provision of this "Limitation on Indebtedness"
covenant, the maximum amount of Indebtedness that the Company or a Restricted
Subsidiary may Incur pursuant to this "Limitation on Indebtedness" covenant
shall not be deemed to be exceeded, with respect to any outstanding
Indebtedness due solely to the result of fluctuations in the exchange rates of
currencies.
(c) For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant, (1) Indebtedness Incurred under
the Credit Agreement on or prior to the Closing Date
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shall be treated as Incurred pursuant to clause (i) of the second paragraph of
this "Limitation on Indebtedness" covenant, (2) Guarantees, Liens and
obligations with respect to letters of credit supporting Indebtedness
otherwise included in the determination of such particular amount shall not be
included and (3) any Liens granted pursuant to the equal and ratable
provisions referred to in the "Limitation on Liens" covenant described below
shall not be treated as Indebtedness. For purposes of determining compliance
with this "Limitation on Indebtedness" covenant, in the event that an item of
Indebtedness meets the criteria of more than one of the types of Indebtedness
described in the above clauses (other than Indebtedness referred to in clause
(1) of the preceding sentence), the Company, in its sole discretion, shall
classify, and from time to time may reclassify, such item of Indebtedness and
only be required to include the amount and type of such Indebtedness in one of
such clauses.
Limitation on Restricted Payments
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, (i) declare or pay any dividend or make any
distribution on or with respect to its Capital Stock (other than (x) dividends
or distributions payable solely in shares of its Capital Stock (other than
Disqualified Stock) or in options, warrants or other rights to acquire shares
of such Capital Stock and (y) pro rata dividends or distributions on Common
Stock of Restricted Subsidiaries held by minority stockholders) held by
Persons other than the Company or any of its Restricted Subsidiaries, (ii)
purchase, redeem, retire or otherwise acquire for value any shares of Capital
Stock of (A) the Company or an Unrestricted Subsidiary (including options,
warrants or other rights to acquire such shares of Capital Stock) held by any
Person or (B) a Restricted Subsidiary (including options, warrants or other
rights to acquire such shares of Capital Stock) held by any Affiliate of the
Company (other than a Wholly Owned Restricted Subsidiary) or any holder (or
any Affiliate of such holder) of 5% or more of the Capital Stock of the
Company, (iii) make any voluntary or optional principal payment, or voluntary
or optional redemption, repurchase, defeasance, or other acquisition or
retirement for value, of Indebtedness of the Company that is subordinated in
right of payment to the Notes (other than, in each case, the purchase,
repurchase or acquisition of Indebtedness in anticipation of satisfying a
sinking fund obligation, principal installment or final maturity, in any case
due within one year after the date of such purchase, repurchase or
acquisition) or (iv) make any Investment, other than a Permitted Investment,
in any Person (such payments or any other actions described in clauses (i)
through (iv) above being collectively "Restricted Payments") if, at the time
of, and after giving effect to, the proposed Restricted Payment: (A) a Default
or Event of Default shall have occurred and be continuing, (B) the Company
could not Incur at least $1.00 of Indebtedness under the first paragraph of
the "Limitation on Indebtedness" covenant or (C) the aggregate amount of all
Restricted Payments (the amount, if other than in cash, to be determined in
good faith by the Board of Directors, whose determination shall be conclusive
and evidenced by a Board Resolution) made after the Closing Date shall exceed
the sum of (1) 50% of the aggregate amount of the Adjusted Consolidated Net
Income (or, if the Adjusted Consolidated Net Income is a loss, minus 100% of
the amount of such loss) (determined by excluding income resulting from
transfers of assets by the Company or a Restricted Subsidiary to an
Unrestricted Subsidiary) accrued on a cumulative basis during the period
(taken as one accounting period) beginning on the first day of the fiscal
quarter immediately following the Closing Date and ending on the last day of
the last fiscal quarter preceding the Transaction Date for which reports have
been filed with the Commission or provided to the Trustee pursuant to the
"Commission Reports and Reports to Holders" covenant plus (2) the aggregate
Net Cash Proceeds received by the Company after the Closing Date from the
issuance and sale permitted by the Indenture of its Capital Stock (other than
Disqualified Stock) to a Person who is not a Subsidiary of the Company,
including an issuance or sale permitted by the Indenture of Indebtedness of
the Company for cash subsequent to the Closing Date upon the conversion of
such Indebtedness into Capital Stock (other than Disqualified Stock) of the
Company, or from the issuance to a Person who is not a Subsidiary of the
Company of any options, warrants or other rights to acquire Capital Stock of
the Company (in each case, exclusive of any Disqualified Stock or any options,
warrants or other rights that are redeemable at the option of the holder, or
are required to be redeemed, prior to the Stated Maturity of the Notes) plus
(3) an amount equal to the net reduction in Investments (other than reductions
in Permitted Investments and Investments made pursuant to clause (vi), (ix) or
(x) of the following paragraph) in any Person resulting from payments of
interest on Indebtedness, dividends, repayments of loans or advances, or other
transfers of assets, in
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each case to the Company or any Restricted Subsidiary or from the Net Cash
Proceeds from the sale of any such Investment (except, in each case, to the
extent any such payment or proceeds are included in the calculation of
Adjusted Consolidated Net Income), or from redesignations of Unrestricted
Subsidiaries as Restricted Subsidiaries (valued in each case as provided in
the definition of "Investments"), not to exceed, in each case, the amount of
Investments previously made by the Company or any Restricted Subsidiary in
such Person or Unrestricted Subsidiary.
The foregoing provision shall not be violated by reason of: (i) the payment
of any dividend within 60 days after the date of declaration thereof if, at
said date of declaration, such payment would comply with the foregoing
paragraph; (ii) the redemption, repurchase, defeasance or other acquisition or
retirement for value of Indebtedness that is subordinated in right of payment
to the Notes including premium, if any, and accrued and unpaid interest, with
the proceeds of, or in exchange for, Indebtedness Incurred under clause (iii)
of the second paragraph of part (a) of the "Limitation on Indebtedness"
covenant; (iii) the repurchase, redemption or other acquisition of Capital
Stock of the Company or an Unrestricted Subsidiary (or options, warrants or
other rights to acquire such Capital Stock) in exchange for, or out of the
proceeds of a substantially concurrent offering of, shares of Capital Stock
(other than Disqualified Stock) of the Company (or options, warrants or other
rights to acquire such Capital Stock); (iv) the making of any principal
payment or the repurchase, redemption, retirement, defeasance or other
acquisition for value of Indebtedness of the Company which is subordinated in
right of payment to the Notes in exchange for, or out of the proceeds of, a
substantially concurrent offering of, shares of the Capital Stock (other than
Disqualified Stock) of the Company (or options, warrants or other rights to
acquire such Capital Stock); (v) payments or distributions, to dissenting
stockholders pursuant to applicable law, pursuant to or in connection with a
consolidation, merger or transfer of assets that complies with the provisions
of the Indenture applicable to mergers, consolidations and transfers of all or
substantially all of the property and assets of the Company; (vi) Investments
in any Person the primary business of which is related, ancillary or
complementary to the business of the Company and its Restricted Subsidiaries
on the date of such Investments; provided that the aggregate amount of
Investments made pursuant to this clause (vi) does not exceed $20 million at
any one time outstanding; (vii) the purchase, redemption, acquisition,
cancellation or other retirement for value of shares of Capital Stock of the
Company to the extent necessary, in the judgment of the Board of Directors, to
prevent the loss or secure the renewal or reinstatement of any material
license or material franchise held by the Company or any Restricted Subsidiary
from any governmental agency; (viii) the purchase, redemption, retirement or
other acquisition for value of shares of Capital Stock of the Company, or
options to purchase such shares held by directors, employees, or former
directors or employees of the Company or any Restricted Subsidiary (or their
estates or beneficiaries under their estates) upon their death, disability,
retirement, termination of employment or pursuant to the terms of any
agreement under such shares of Capital Stock or options were issued; provided
that the aggregate consideration paid for such purchase, redemption,
retirement or other acquisition for value of such shares of Capital Stock or
options after the Closing Date does not exceed $2 million in any calendar
year, or $5 million in the aggregate; (ix) Investments acquired in exchange
for Capital Stock (other than Disqualified Stock) of the Company or acquired
with Net Cash Proceeds received by the Company after the Closing Date from the
issuance and sale of its Capital Stock (other than Disqualified Stock);
provided that such Net Cash Proceeds are used to make such Investment within
90 days of receipt thereof; or (x) Restricted Payments in any aggregate amount
not to exceed $20 million, increased by the amount of any Investment made
pursuant to this clause (x) that is an Investment and is not outstanding;
provided that, except in the case of clauses (i) and (iii), no Default or
Event of Default shall have occurred and be continuing or occur as a
consequence of the actions or payments set forth therein.
Each Restricted Payment permitted pursuant to the preceding paragraph (other
than the Restricted Payment referred to in clause (ii) thereof, an exchange of
Capital Stock for Capital Stock or Indebtedness referred to in clause (iii) or
(iv) thereof and an Investment referred to in clause (vi) thereof), and the
Net Cash Proceeds from any issuance of Capital Stock referred to in clauses
(iii) and (iv), shall be included in calculating whether the conditions of
clause (C) of the first paragraph of this "Limitation on Restricted Payments"
covenant have been met with respect to any subsequent Restricted Payments. In
the event the proceeds of an issuance of Capital Stock of the Company are used
for the redemption, repurchase or other acquisition of the Notes, or
Indebtedness
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that is pari passu with the Notes, then the Net Cash Proceeds of such issuance
shall be included in clause (C) of the first paragraph of this "Limitation on
Restricted Payments" covenant only to the extent such proceeds are not used
for such redemption, repurchase or other acquisition of Indebtedness.
Any Restricted Payments made other than in cash shall be valued at fair
market value. The amount of any Investment "outstanding" at any time shall be
deemed to be equal to the amount of such Investment on the date made, less the
return of capital to the Company and its Restricted Subsidiaries with respect
to such Investment (up to the amount of such Investment on the date made).
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or suffer to exist or become effective any
consensual encumbrance or restriction of any kind on the ability of any
Restricted Subsidiary to (i) pay dividends or make any other distributions
permitted by applicable law on any Capital Stock of such Restricted Subsidiary
owned by the Company or any other Restricted Subsidiary, (ii) pay any
Indebtedness owed to the Company or any other Restricted Subsidiary, (iii)
make loans or advances to the Company or any other Restricted Subsidiary or
(iv) transfer any of its property or assets to the Company or any other
Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions: (i) existing on the Closing Date in the Credit Agreement, the
Indenture or any other agreements in effect on the Closing Date, and any
extensions, refinancings, renewals or replacements of such agreements;
provided that the encumbrances and restrictions in any such extensions,
refinancings, renewals or replacements are no less favorable in any material
respect to the Holders than those encumbrances or restrictions that are then
in effect and that are being extended, refinanced, renewed or replaced; (ii)
existing under or by reason of applicable law; (iii) existing with respect to
any Person or the property or assets of such Person acquired by the Company or
any Restricted Subsidiary, existing at the time of such acquisition and not
incurred in contemplation thereof, which encumbrances or restrictions are not
applicable to any Person or the property or assets of any Person other than
such Person or the property or assets of such Person so acquired; (iv) in the
case of clause (iv) of the first paragraph of this "Limitation on Dividend and
Other Payment Restrictions Affecting Restricted Subsidiaries" covenant, (A)
that restrict in a customary manner the subletting, assignment or transfer of
any property or asset that is a lease, license, conveyance or contract or
similar property or asset, (B) existing by virtue of any transfer of,
agreement to transfer, option or right with respect to, or Lien on, any
property or assets of the Company or any Restricted Subsidiary not otherwise
prohibited by the Indenture or (C) arising or agreed to in the ordinary course
of business, not relating to any Indebtedness, and that do not, individually
or in the aggregate, detract from the value of property or assets of the
Company or any Restricted Subsidiary in any manner material to the Company or
any Restricted Subsidiary; (v) with respect to a Restricted Subsidiary and
imposed pursuant to an agreement that has been entered into for the sale or
disposition of all or substantially all of the Capital Stock of, or property
and assets of, such Restricted Subsidiary or (vi) relating solely to any
Foreign Subsidiaries and supporting Indebtedness of such Foreign Subsidiaries
Incurred under clause (x) of the second paragraph of the "Limitation on
Indebtedness" covenant. Nothing contained in this "Limitation on Dividend and
Other Payment Restrictions Affecting Restricted Subsidiaries" covenant shall
prevent the Company or any Restricted Subsidiary from (1) creating, incurring,
assuming or suffering to exist any Liens otherwise permitted in the
"Limitation on Liens" covenant or (2) restricting the sale or other
disposition of property or assets of the Company or any of its Restricted
Subsidiaries that secure Indebtedness of the Company or any of its Restricted
Subsidiaries.
Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries
The Company will not sell, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell, any shares of Capital Stock of a
Restricted Subsidiary (including options, warrants or other rights to purchase
shares of such Capital Stock) except (i) to the Company or a Wholly Owned
Restricted Subsidiary; (ii) issuances of director's qualifying shares or sales
to foreign nationals of shares of Capital Stock of foreign Restricted
Subsidiaries, to the extent required by applicable law; or (iii) if,
immediately after giving effect to
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such issuance or sale, such Restricted Subsidiary would no longer constitute a
Restricted Subsidiary and any Investment in such Person remaining after giving
effect to such issuance or sale would have been permitted to be made under the
"Limitation on Restricted Payments" covenant if made on the date of such
issuance or sale or (iv) issuances or sales of Common Stock of a Restricted
Subsidiary, provided that the Company or such Restricted Subsidiary applies
the Net Cash Proceeds, if any, of any such sale in accordance with clause (A)
or (B) of the "Limitation on Asset Sales" covenant described below.
Limitation on Issuances of Guarantees by Restricted Subsidiaries
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Company which is pari passu
with or subordinate in right of payment to the Notes ("Guaranteed
Indebtedness"), unless (i) such Restricted Subsidiary simultaneously executes
and delivers a supplemental indenture to the Indenture providing for a
Guarantee (a "Subsidiary Guarantee") of payment of the Notes by such
Restricted Subsidiary and (ii) such Restricted Subsidiary waives and will not
in any manner whatsoever claim or take the benefit or advantage of, any rights
of reimbursement, indemnity or subrogation or any other rights against the
Company or any other Restricted Subsidiary as a result of any payment by such
Restricted Subsidiary under its Subsidiary Guarantee; provided that this
paragraph shall not be applicable to any Guarantee of any Restricted
Subsidiary (x) that existed at the time such Person became a Restricted
Subsidiary and was not Incurred in connection with, or in contemplation of,
such Person becoming a Restricted Subsidiary or (y) Indebtedness Incurred
under clause (i) or (vii) of the second paragraph of the "Limitation on
Indebtedness" covenant. If the Guaranteed Indebtedness is (A) pari passu with
the Notes, then the Guarantee of such Guaranteed Indebtedness shall be pari
passu with, or subordinated to, the Subsidiary Guarantee or (B) subordinated
to the Notes, then the Guarantee of such Guaranteed Indebtedness shall be
subordinated to the Subsidiary Guarantee at least to the extent that the
Guaranteed Indebtedness is subordinated to the Notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or
transfer, to any Person not an Affiliate of the Company, of all of the
Company's and each Restricted Subsidiary's Capital Stock in, or all or
substantially all the assets of, such Restricted Subsidiary (which sale,
exchange or transfer is not prohibited by the Indenture) or (ii) the release
or discharge of the Guarantee which resulted in the creation of such
Subsidiary Guarantee, except a discharge or release by or as a result of
payment under such Guarantee.
Limitation on Transactions with Shareholders and Affiliates
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into any transaction (including, without
limitation, the purchase, sale, lease or exchange of property or assets, or
the rendering of any service) with any holder (or any Affiliate of such
holder) of 5% or more of any class of Capital Stock of the Company or with any
Affiliate of the Company or any Restricted Subsidiary, except upon fair and
reasonable terms no less favorable to the Company or such Restricted
Subsidiary than could be obtained, at the time of such transaction or, if such
transaction is pursuant to a written agreement, at the time of the execution
of the agreement providing therefor, in a comparable arm's-length transaction
with a Person that is not such a holder or an Affiliate.
The foregoing limitation does not limit, and shall not apply to (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for which the Company or a Restricted Subsidiary
delivers to the Trustee a written opinion of a nationally recognized
investment banking firm stating that the transaction is fair to the Company or
such Restricted Subsidiary from a financial point of view; (ii) any
transaction solely between the Company and any of its Wholly Owned Restricted
Subsidiaries or solely between Wholly Owned Restricted Subsidiaries; (iii) the
payment of reasonable and customary regular fees to directors of the Company
who are not employees of the Company; (iv) any payments or other transactions
pursuant to
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any tax-sharing agreement between the Company and any other Person with which
the Company files a consolidated tax return or with which the Company is part
of a consolidated group for tax purposes; (v) the existence of, or the
performance by the Company or any of its Restricted Subsidiaries of its
obligations under the terms of, any stockholders agreement (including any
registration rights agreement or purchase agreement related thereto) to which
it is a party as of the Closing Date and any similar agreements which it may
enter into thereafter; provided, however, that the existence of, or the
performance by the Company or any of its Restricted Subsidiaries of
obligations under any future amendment to any such existing agreement or under
any similar agreement entered into after the Closing Date shall only be
permitted by this clause (v) to the extent that the terms of any such
amendment or new agreement are not otherwise disadvantageous to the holders of
the Notes in any material respect; (vi) the payment of all fees and expenses
and the performance of obligations related to the Transaction; or (vii) any
Restricted Payments not prohibited by the "Limitation on Restricted Payments"
covenant. Notwithstanding the foregoing, any transaction or series of related
transactions covered by the first paragraph of this "Limitation on
Transactions with Shareholders and Affiliates" covenant and not covered by
clauses (ii) through (vii) of this paragraph, the aggregate amount of which
exceeds $2 million in value, must be approved or determined to be fair in the
manner provided for in clause (i)(A) or (B) above.
Limitation on Liens
The Company will not, and will not permit any Restricted Subsidiary to,
create, incur, assume or suffer to exist any Lien on any of its assets or
properties of any character, or any shares of Capital Stock or Indebtedness of
any Restricted Subsidiary, without making effective provision for all of the
Notes and all other amounts due under the Indenture to be secured equally and
ratably with (or, if the obligation or liability to be secured by such Lien is
subordinated in right of payment to the Notes, prior to) the obligation or
liability secured by such Lien.
The foregoing limitation does not apply to (i) Liens existing on the Closing
Date, including Liens securing obligations under the Credit Agreement; (ii)
Liens granted after the Closing Date on any assets or Capital Stock of the
Company or its Restricted Subsidiaries created in favor of the Holders; (iii)
Liens with respect to the assets of a Restricted Subsidiary granted by such
Restricted Subsidiary to the Company or a Wholly Owned Restricted Subsidiary
to secure Indebtedness owing to the Company or such other Restricted
Subsidiary; (iv) Liens securing Indebtedness which is Incurred to refinance
secured Indebtedness which is permitted to be Incurred under clause (iii) of
the second paragraph of the "Limitation on Indebtedness" covenant; provided
that such Liens do not extend to or cover any property or assets of the
Company or any Restricted Subsidiary other than the property or assets
securing the Indebtedness being refinanced; (v) Liens on any property or
assets of a Restricted Subsidiary securing Indebtedness of such Restricted
Subsidiary permitted under the "Limitation on Indebtedness" covenant; or (vi)
Permitted Liens.
Limitation on Sale-Leaseback Transactions
The Company will not, and will not permit any Restricted Subsidiary to,
enter into any sale-leaseback transaction involving any of its assets or
properties whether now owned or hereafter acquired, whereby the Company or a
Restricted Subsidiary sells or transfers such assets or properties and then or
thereafter leases such assets or properties or any part thereof or any other
assets or properties which the Company or such Restricted Subsidiary, as the
case may be, intends to use for substantially the same purpose or purposes as
the assets or properties sold or transferred.
The foregoing restriction does not apply to any sale-leaseback transaction
if (i) the lease is for a period, including renewal rights, of not in excess
of three years; (ii) the lease secures or relates to industrial revenue or
pollution control bonds; (iii) the transaction is solely between the Company
and any Wholly Owned Restricted Subsidiary or solely between Wholly Owned
Restricted Subsidiaries; or (iv) the Company or such Restricted Subsidiary,
within 12 months after the sale or transfer of any assets or properties is
completed, applies an amount not less than the net proceeds received from such
sale in accordance with clause (A) or (B) of the first paragraph of the
"Limitation on Asset Sales" covenant described below.
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Limitation on Asset Sales
The Company will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale, unless (i) the consideration received by the
Company or such Restricted Subsidiary is at least equal to the fair market
value of the assets sold or disposed of and (ii) at least 75% of the
consideration received consists of cash or Temporary Cash Investments;
provided that the amount of (a) any liabilities (as shown on the Company's or
such Restricted Subsidiary's most recent balance sheet or in the notes
thereto) of the Company or any Restricted Subsidiary (other than liabilities
that are by their terms subordinated to the Notes), that are assumed by the
transferee of any such assets, to the extent the creditors with respect
thereto execute a written release of such liability, in favor of the Company
or the Restricted Subsidiary, as applicable, and (b) any notes or other
obligations received by the Company or such Restricted Subsidiary from such
transferee that are converted by the Company or such Restricted Subsidiary
into cash (to the extent of the cash received) within 180 days following the
closing of such Asset Sale, shall be deemed to be cash for purposes of this
provision. In the event and to the extent that the Net Cash Proceeds received
by the Company or any of its Restricted Subsidiaries from one or more Asset
Sales occurring on or after the Closing Date in any period of 12 consecutive
months exceed 10% of Adjusted Consolidated Net Tangible Assets (determined as
of the date closest to the commencement of such 12-month period for which a
consolidated balance sheet of the Company and its Subsidiaries has been filed
pursuant to the "Commission Reports and Reports to Holders" covenant), then
the Company shall or shall cause the relevant Restricted Subsidiary to (i)
within twelve months after the date Net Cash Proceeds so received exceed 10%
of Adjusted Consolidated Net Tangible Assets (A) apply an amount equal to such
excess Net Cash Proceeds to permanently repay unsubordinated Indebtedness of
the Company, or any Restricted Subsidiary providing a Subsidiary Guarantee
pursuant to the "Limitation on Issuances of Guarantees by Restricted
Subsidiaries" covenant described above or Indebtedness of any other Restricted
Subsidiary, in each case owing to a Person other than the Company or any of
its Restricted Subsidiaries or (B) invest an equal amount, or the amount not
so applied pursuant to clause (A) (or enter into a definitive agreement
committing to so invest within 12 months after the date of such agreement), in
property or assets (other than current assets) of a nature or type or that are
used in a business (or in a company having property and assets of a nature or
type, or engaged in a business) similar or related to the nature or type of
the property and assets of, or the business of, the Company and its Restricted
Subsidiaries existing on the date of such investment and (ii) apply (no later
than the end of the 12-month period referred to in clause (i)) such excess Net
Cash Proceeds (to the extent not applied pursuant to clause (i)) as provided
in the following paragraph of this "Limitation on Asset Sales" covenant. The
amount of such excess Net Cash Proceeds required to be applied (or to be
committed to be applied) during such 12-month period as set forth in clause
(i) of the preceding sentence and not applied as so required by the end of
such period shall constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to
this "Limitation on Asset Sales" covenant totals at least $10 million, the
Company must commence, not later than the fifteenth Business Day of such
month, and consummate an Offer to Purchase from the Holders on a pro rata
basis an aggregate Accreted Value of Notes equal to the Excess Proceeds on
such date, at a purchase price equal to 100% of the Accreted Value of the
Notes, plus, in each case, accrued interest (if any) to the Payment Date.
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
The Company must commence, within 30 days of the occurrence of a Change of
Control, and consummate an Offer to Purchase for all Notes then outstanding,
at a purchase price equal to 101% of the Accreted Value thereof on the
relevant Payment Date, plus accrued interest (if any) to the Payment Date.
There can be no assurance that the Company will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) required by the foregoing covenant (as well
as may be contained in other securities of the Company which might be
outstanding at the time). The above covenant requiring the Company to
repurchase the Notes will, unless consents are obtained, require the Company
to repay all indebtedness then outstanding which by its terms would prohibit
such Note repurchase, either prior to or concurrently with such Note
repurchase.
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COMMISSION REPORTS AND REPORTS TO HOLDERS
Whether or not the Company is then required to file reports with the
Commission, the Company shall file with the Commission (unless the Commission
will not accept such filing) all such reports and other information as it
would be required to file with the Commission by Sections 13(a) or 15(d) under
the Securities Exchange Act of 1934 if it were subject thereto. The Company
shall supply the Trustee and each Holder or shall supply to the Trustee for
forwarding to each such Holder, without cost to such Holder, copies of such
reports and other information; provided, however, that the copies of such
reports and information supplied to Holders may omit exhibits.
EVENTS OF DEFAULT
The following events will be defined as "Events of Default" in the
Indenture: (a) default in the payment of principal of (or premium, if any, on)
any Note when the same becomes due and payable at maturity, upon acceleration,
redemption or otherwise; (b) default in the payment of interest on any Note
when the same becomes due and payable, and such default continues for a period
of 30 days; (c) default in the performance or breach of the provisions of the
Indenture applicable to mergers, consolidations and transfers of all or
substantially all of the assets of the Company or the failure to make or
consummate an Offer to Purchase in accordance with the "Limitation on Asset
Sales" or "Repurchase of Notes upon a Change of Control" covenant; (d) the
Company defaults in the performance of or breaches any other covenant or
agreement of the Company in the Indenture or under the Notes (other than a
default specified in clause (a), (b) or (c) above) and such default or breach
continues for a period of 30 consecutive days after written notice by the
Trustee or the Holders of 25% or more in aggregate principal amount of the
Notes; (e) there occurs with respect to any issue or issues of Indebtedness of
the Company or any Significant Subsidiary having an outstanding principal
amount of $5 million or more in the aggregate for all such issues of all such
Persons, whether such Indebtedness now exists or shall hereafter be created,
(I) an event of default that has caused the holder thereof to declare such
Indebtedness to be due and payable prior to its Stated Maturity and such
Indebtedness has not been discharged in full or such acceleration has not been
rescinded or annulled within 30 days of such acceleration and/or (II) the
failure to make a principal payment at the final (but not any interim) fixed
maturity and such defaulted payment shall not have been made, waived or
extended within 30 days of such payment default; (f) any final judgment or
order (not covered by insurance) for the payment of money in excess of $5
million in the aggregate for all such final judgments or orders against all
such Persons (treating any deductibles, self-insurance or retention as not so
covered) shall be rendered against the Company or any Significant Subsidiary
and shall not be paid or discharged, and there shall be any period of 30
consecutive days following entry of the final judgment or order that causes
the aggregate amount for all such final judgments or orders outstanding and
not paid or discharged against all such Persons to exceed $5 million during
which a stay of enforcement of such final judgment or order, by reason of a
pending appeal or otherwise, shall not be in effect; (g) a court having
jurisdiction in the premises enters a decree or order for (A) relief in
respect of the Company or any Significant Subsidiary in an involuntary case
under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, (B) appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of the Company or any
Significant Subsidiary or for all or substantially all of the property and
assets of the Company or any Significant Subsidiary or (C) the winding up or
liquidation of the affairs of the Company or any Significant Subsidiary and,
in each case, such decree or order shall remain unstayed and in effect for a
period of 60 consecutive days; or (h) the Company or any Significant
Subsidiary (A) commences a voluntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, or consents to the
entry of an order for relief in an involuntary case under any such law, (B)
consents to the appointment of or taking possession by a receiver, liquidator,
assignee, custodian, trustee, sequestrator or similar official of the Company
or any Significant Subsidiary or for all or substantially all of the property
and assets of the Company or any Significant Subsidiary or (C) effects any
general assignment for the benefit of creditors.
If an Event of Default (other than an Event of Default specified in clause
(g) or (h) above that occurs with respect to the Company) occurs and is
continuing under the Indenture, the Trustee or the Holders of at least 25% in
aggregate principal amount of the Notes, then outstanding, by written notice
to the Company (and to the
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Trustee if such notice is given by the Holders), may, and the Trustee at the
request of such Holders shall, declare the Accreted Value of, premium, if any,
and accrued interest on the Notes to be immediately due and payable. Upon a
declaration of acceleration, such Accreted Value of, premium, if any, and
accrued interest shall be immediately due and payable. In the event of a
declaration of acceleration because an Event of Default set forth in clause
(e) above has occurred and is continuing, such declaration of acceleration
shall be automatically rescinded and annulled if the event of default
triggering such Event of Default pursuant to clause (e) shall be remedied or
cured by the Company or the relevant Significant Subsidiary or waived by the
holders of the relevant Indebtedness within 60 days after the declaration of
acceleration with respect thereto. If an Event of Default specified in clause
(g) or (h) above occurs with respect to the Company, the Accreted Value of,
premium, if any, and accrued interest on the Notes then outstanding shall ipso
facto become and be immediately due and payable without any declaration or
other act on the part of the Trustee or any Holder. The Holders of at least a
majority in principal amount of the outstanding Notes by written notice to the
Company and to the Trustee, may waive all past defaults and rescind and annul
a declaration of acceleration and its consequences if (i) all existing Events
of Default, other than the nonpayment of the Accreted Value of, premium, if
any, and interest on the Notes that have become due solely by such declaration
of acceleration, have been cured or waived and (ii) the rescission would not
conflict with any judgment or decree of a court of competent jurisdiction. For
information as to the waiver of defaults, see "--Modification and Waiver."
The Holders of at least a majority in aggregate principal amount of the
outstanding Notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the Indenture, that may involve the
Trustee in personal liability, or that the Trustee determines in good faith
may be unduly prejudicial to the rights of Holders of Notes not joining in the
giving of such direction and may take any other action it deems proper that is
not inconsistent with any such direction received from Holders of Notes. A
Holder may not pursue any remedy with respect to the Indenture or the Notes
unless: (i) the Holder gives the Trustee written notice of a continuing Event
of Default; (ii) the Holders of at least 25% in aggregate principal amount of
outstanding Notes make a written request to the Trustee to pursue the remedy;
(iii) such Holder or Holders offer the Trustee indemnity satisfactory to the
Trustee against any costs, liability or expense; (iv) the Trustee does not
comply with the request within 60 days after receipt of the request and the
offer of indemnity; and (v) during such 60-day period, the Holders of a
majority in aggregate principal amount of the outstanding Notes do not give
the Trustee a direction that is inconsistent with the request. However, such
limitations do not apply to the right of any Holder of a Note to receive
payment of the Accreted Value of, premium, if any, or interest on, such Note
or to bring suit for the enforcement of any such payment, on or after the due
date expressed in the Notes, which right shall not be impaired or affected
without the consent of the Holder.
The Indenture will require certain officers of the Company to certify, on or
before a date not more than 90 days after the end of each fiscal year, that a
review has been conducted of the activities of the Company and its Restricted
Subsidiaries and the Company's and its Restricted Subsidiaries' performance
under the Indenture and that the Company has fulfilled all obligations
thereunder, or, if there has been a default in the fulfillment of any such
obligation, specifying each such default and the nature and status thereof.
The Company will also be obligated to notify the Trustee of any default or
defaults in the performance of any covenants or agreements under the
Indenture.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company will not consolidate with, merge with or into, or sell, convey,
transfer, lease or otherwise dispose of all or substantially all of its
property and assets (as an entirety or substantially an entirety in one
transaction or a series of related transactions) to, any Person or permit any
Person to merge with or into the Company unless: (i) the Company shall be the
continuing Person, or the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or that acquired or leased
such property and assets of the Company shall be a corporation organized and
validly existing under the laws of the United States
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of America, the United Kingdom or, in each case, any jurisdiction thereof and
shall expressly assume, by a supplemental indenture, executed and delivered to
the Trustee, all of the obligations of the Company on all of the Notes and
under the Indenture; (ii) immediately after giving effect to such transaction,
no Default or Event of Default shall have occurred and be continuing; (iii)
immediately after giving effect to such transaction on a pro forma basis, the
Company or any Person becoming the successor obligor of the Notes, as the case
may be, (A) could Incur $1.00 of Indebtedness under the first paragraph of the
"Limitation on Indebtedness" covenant or (B) would have a Consolidated
Leverage Ratio that is positive, but equal to or lower than the Consolidated
Leverage Ratio of the Company immediately prior to such transaction; and (iv)
the Company delivers to the Trustee an Officers' Certificate (attaching the
arithmetic computations to demonstrate compliance with clause (iii)) and
Opinion of Counsel, in each case stating that such consolidation, merger or
transfer and such supplemental indenture complies with this provision and that
all conditions precedent provided for herein relating to such transaction have
been complied with; provided, however, that clause (iii) above does not apply
if, in the good faith determination of the Board of Directors of the Company,
whose determination shall be evidenced by a Board Resolution, the principal
purpose of such transaction is to change the state of incorporation of the
Company; and provided further that any such transaction shall not have as one
of its purposes the evasion of the foregoing limitations.
DEFEASANCE
Defeasance and Discharge. The Indenture will provide that the Company will
be deemed to have paid and will be discharged from any and all obligations in
respect of the Notes on the 123rd day after the deposit referred to below, and
the provisions of the Indenture will no longer be in effect with respect to
the Notes (except for, among other matters, certain obligations to register
the transfer or exchange of the Notes, to replace stolen, lost or mutilated
Notes, to maintain paying agencies and to hold monies for payment in trust)
if, among other things, (A) the Company has deposited with the Trustee, in
trust, money and/or U.S. Government Obligations that through the payment of
interest and principal in respect thereof in accordance with their terms will
provide money in an amount sufficient to pay the principal of, premium, if
any, and accrued interest on the Notes on the Stated Maturity of such payments
in accordance with the terms of the Indenture and the Notes, (B) the Company
has delivered to the Trustee (i) either (x) an Opinion of Counsel to the
effect that Holders will not recognize income, gain or loss for federal income
tax purposes as a result of the Company's exercise of its option under this
"Defeasance" provision and will be subject to federal income tax on the same
amount and in the same manner and at the same times as would have been the
case if such deposit, defeasance and discharge had not occurred, which Opinion
of Counsel must be based upon (and accompanied by a copy of) a ruling of the
Internal Revenue Service to the same effect unless there has been a change in
applicable federal income tax law after the Closing Date such that a ruling is
no longer required or (y) a ruling directed to the Trustee received from the
Internal Revenue Service to the same effect as the aforementioned Opinion of
Counsel and (ii) an Opinion of Counsel to the effect that the creation of the
defeasance trust does not violate the Investment Company Act of 1940 and after
the passage of 123 days following the deposit, the trust fund will not be
subject to the effect of Section 547 of the United States Bankruptcy Code or
Section 15 of the New York Debtor and Creditor Law, (C) immediately after
giving effect to such deposit on a pro forma basis, no Event of Default, or
event that after the giving of notice or lapse of time or both would become an
Event of Default, shall have occurred and be continuing on the date of such
deposit or during the period ending on the 123rd day after the date of such
deposit, and such deposit shall not result in a breach or violation of, or
constitute a default under, any other agreement or instrument to which the
Company or any of its Subsidiaries is a party or by which the Company or any
of its Subsidiaries is bound and (D) if at such time the Notes are listed on a
national securities exchange, the Company has delivered to the Trustee an
Opinion of Counsel to the effect that the Notes will not be delisted as a
result of such deposit, defeasance and discharge.
Defeasance of Certain Covenants and Certain Events of Default. The Indenture
further will provide that the provisions of the Indenture will no longer be in
effect with respect to clauses (iii) and (iv) under "Consolidation, Merger and
Sale of Assets" and all the covenants described herein under "Covenants,"
clause (c) under "Events of Default" with respect to such clauses (iii) and
(iv) under "Consolidation, Merger and Sale of Assets," clause
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(d) under "Events of Default" with respect to such other covenants and clauses
(e) and (f) under "Events of Default" shall be deemed not to be Events of
Default upon, among other things, the deposit with the Trustee, in trust, of
money and/or U.S. Government Obligations that through the payment of interest
and principal in respect thereof in accordance with their terms will provide
money in an amount sufficient to pay the principal of, premium, if any, and
accrued interest on the Notes on the Stated Maturity of such payments in
accordance with the terms of the Indenture and the Notes, the satisfaction of
the provisions described in clauses (B)(ii), (C) and (D) of the preceding
paragraph and the delivery by the Company to the Trustee of an Opinion of
Counsel to the effect that, among other things, the Holders will not recognize
income, gain or loss for federal income tax purposes as a result of such
deposit and defeasance of certain covenants and Events of Default and will be
subject to federal income tax on the same amount and in the same manner and at
the same times as would have been the case if such deposit and defeasance had
not occurred.
Defeasance and Certain Other Events of Default. In the event the Company
exercises its option to omit compliance with certain covenants and provisions
of the Indenture with respect to the Notes as described in the immediately
preceding paragraph and the Notes are declared due and payable because of the
occurrence of an Event of Default that remains applicable, the amount of money
and/or U.S. Government Obligations on deposit with the Trustee will be
sufficient to pay amounts due on the Notes at the time of their Stated
Maturity but may not be sufficient to pay amounts due on the Notes at the time
of the acceleration resulting from such Event of Default. However, the Company
will remain liable for such payments.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company and
the Trustee with the consent of the Holders of not less than a majority in
aggregate principal amount of the outstanding Notes; provided, however, that
no such modification or amendment may, without the consent of each Holder
affected thereby, (i) change the Stated Maturity of the principal of, or any
installment of interest on, any Note, (ii) reduce the principal amount or
Accreted Value of, or premium, if any, or interest on, any Note, (iii) change
the place or currency of payment of principal of, or premium, if any, or
interest on, any Note, (iv) impair the right to institute suit for the
enforcement of any payment on or after the Stated Maturity (or, in the case of
a redemption, on or after the Redemption Date) of any Note, (v) reduce the
above-stated percentage of outstanding Notes the consent of whose Holders is
necessary to modify or amend the Indenture, (vi) waive a default in the
payment of principal of, premium, if any, or interest on the Notes or (vii)
reduce the percentage or aggregate principal amount of outstanding Notes the
consent of whose Holders is necessary for waiver of compliance with certain
provisions of the Indenture or for waiver of certain defaults.
NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS, OR
EMPLOYEES
The Indenture provides that no recourse for the payment of the principal of,
premium, if any, or interest on any of the Notes or for any claim based
thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of the Company in the Indenture, or in any
of the Notes or because of the creation of any Indebtedness represented
thereby, shall be had against any incorporator, stockholder, officer,
director, employee or controlling person of the Company or of any successor
Person thereof. Each Holder, by accepting the Notes, waives and releases all
such liability.
CONCERNING THE TRUSTEE
The Indenture provides that, except during the continuance of a Default, the
Trustee will not be liable, except for the performance of such duties as are
specifically set forth in such Indenture. If an Event of Default has occurred
and is continuing, the Trustee will use the same degree of care and skill in
its exercise of the rights and powers vested in it under the Indenture as a
prudent person would exercise under the circumstances in the conduct of such
person's own affairs.
The Indenture and provisions of the Trust Indenture Act of 1939, as amended,
incorporated by reference therein contain limitations on the rights of the
Trustee, should it become a creditor of the Company, to obtain
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payment of claims in certain cases or to realize on certain property received
by it in respect of any such claims, as security or otherwise. The Trustee is
permitted to engage in other transactions; provided, however, that if it
acquires any conflicting interest, it must eliminate such conflict or resign.
BOOK-ENTRY; DELIVERY AND FORM
The Notes will be initially represented by one or more global notes (the
"Global Notes") issued in the form of fully registered Global Notes, which
will be deposited with, or on behalf of, The Depository Trust Company (the
"Depository") and registered in the name of a nominee of the Depository.
Transfers between participants in the Depository will be effected in the
ordinary way in accordance with the Depository's rules and will be settled in
same-day funds.
The Depository has advised the Company and the Underwriters that the
Depository intends to follow the procedures described below:
The Depository will act as securities depository for the Global Notes.
The Global Notes will be issued as a fully registered security registered
in the name of Cede & Co. (the Depository's nominee).
The Depository is a limited-purpose trust company organized under the New
York Banking Law, a "banking organization" within the meaning of the New
York Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code,
and a "clearing agency" registered pursuant to the provisions of Section
17A of the Exchange Act. The Depository holds securities that its
participants ("Participants") deposit with the Depository. The Depository
also facilitates the settlement among Participants of securities
transactions, such as transfers and pledges, in deposited securities
through electronic computerized book-entry changes in Participants'
accounts, thereby eliminating the need for physical movement of securities
certificates. Direct Participants include securities brokers and dealers,
banks, trust companies, clearing corporations, and certain other
organizations ("Direct Participants"). The Depository is owned by a number
of its Direct Participants and by the New York Stock Exchange, Inc., the
AMEX and the National Association of Securities Dealers, Inc. Access to the
Depository's system is also available to others such as securities brokers
and dealers, banks, and trust companies that clear through or maintain a
custodial relationship with a Direct Participant, either directly or
indirectly ("Indirect Participants"). The Rules applicable to the
Depository and its Participants are on file with the Commission.
Purchases of Notes must be made by or through Direct Participants, which
will receive a credit for the Notes on the Depository's records. The
ownership interest of each actual purchaser of each Note ("Beneficial
Owner") is in turn recorded on the Direct and Indirect Participant's
records. Transfers of ownership interests in the Notes are to be
accomplished by entries made on the books of Participants acting on behalf
of Beneficial Owners. Beneficial Owners will not receive certificates
representing their ownership interests in the Notes, except in the event
that use of the book-entry system for the Notes is discontinued.
Conveyance of Notes and other communications by the Depository to Direct
Participants, by Direct Participants to Indirect Participants, and by
Direct Participants and Indirect Participants to Beneficial Owners are
governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Redemption notices shall be sent to Cede & Co. If less than all of the
Notes are being redeemed, the Depository's practice is to determine by lot
the amount of the interest of each Direct Participant in such issue to be
redeemed.
Neither the Depository nor Cede & Co. will consent or vote with respect
to the Notes. Under its usual procedures, the Depository mails an Omnibus
Proxy to the issuer as soon as possible after the record date. The Omnibus
Proxy assigns Cede & Co.'s consenting or voting rights to those Direct
Participants to whose accounts the Notes are credited on the record date
(identified in a listing attached to the Omnibus Proxy).
Accreted Value of, premium (if any), and interest payments on the Notes
will be made to the Depository. The Depository's practice is to credit
Direct Participants' accounts on the payable date in
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accordance with their respective holdings shown on the Depository's records
unless the Depository has reason to believe that it will not receive
payment on the payable date. Payments by Participants to Beneficial Owners
will be governed by standing instructions and customary practices, as is
the case with securities held for the accounts of customers in bearer form
or registered in "street name," and will be the responsibility of such
Participant and not of the Depository, the Paying Agent, or the Company,
subject to any statutory or regulatory requirements as may be in effect
from time to time. Payment to the Depository of principal, premium (if any)
and interest on the Notes are the responsibility of the Company or the
Paying Agent, disbursement of such payments to Direct Participants shall be
the responsibility of the Depository, and disbursement of such payments to
the Beneficial Owners shall be the responsibility of Direct and Indirect
Participants.
The information in this section concerning the Depository and the
Depository's book-entry system has been obtained from sources that the Company
believes to be reliable, but the Company takes no responsibility for the
accuracy thereof.
So long as the Depository for the Global Notes, or its nominee, is the
registered owner of the Global Notes, the Depository or its nominee, as the
case may be, will be considered the sole owner or Holder of the Notes
represented by the Global Notes for all purposes under the Indenture. Except
as set forth below, owners of beneficial interests in such Global Notes will
not be entitled to have Notes represented by such Global Notes registered in
their names, will not receive or be entitled to receive physical delivery of
Notes in definitive form and will not be considered the owners or Holders
thereof under the Indenture. Accordingly, each person owning a beneficial
interest in Global Notes must rely on the procedures of the Depository and, if
such person is not a Participant, those of the Participant through which such
person owns its interests, in order to exercise any rights of a Holder under
the Indenture or such Note.
The Indenture provides that the Depository, as a Holder, may appoint agents
and otherwise authorize Participants to give or take any request, demand,
authorization, direction, notice, consent, waiver or other action which a
Holder is entitled to give or take under the Indenture, including the right to
sue for payment of principal or interest pursuant to Section 316(b) of the
Trust Indenture Act of 1939, as amended. The Company understands that under
existing industry practices, when the Company requests any action of Holders
or when a Beneficial Owner desires to give or take any action which a Holder
is entitled to give or take under the Indenture, the Depository generally will
give or take such action, or authorize the relevant Participants to give or
take such action, and such Participants would authorize Beneficial Owners
owning through such Participants to give or take such action or would
otherwise act upon the instructions of Beneficial Owners owning through them.
The Company has been informed by the Depository that the Depository will
assist its Participants and their customers (Beneficial Owners) in taking any
action a Holder is entitled to take under the Indenture or exercise any rights
available to Cede & Co., as the holder of record of the Notes and including
the right to demand acceleration of the Notes upon an Event of Default or to
institute suit for the enforcement of payment or interest pursuant to Section
316(b) of the Trust Indenture Act of 1939, as amended. The Depository has
advised the Company that it will act with respect to such matters upon written
instructions from a Participant to whose account with the Depository the
relevant beneficial ownership in the Notes is credited. The Company
understands that a Participant will deliver such written instructions to the
Depository upon itself receiving similar written instructions from either
Indirect Participants or Beneficial Owners, as the case may be. Under Rule 6
of the rules and procedures filed by the Depository with Commission pursuant
to Section 17 of the Exchange Act, Participants are required to indemnify the
Depository against all liability the Depository may sustain, without fault on
the part of the Depository or its nominee, as a result of any action they may
take pursuant to the instructions of the Participant in exercising any such
rights.
The laws of some jurisdictions require that certain purchasers of securities
take physical delivery of such securities in definitive form. Such limits and
such laws may impair the ability to transfer beneficial interests in the
Global Notes.
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Accreted value of, premium, if any, and interest payments on Notes
registered in the name of or held by the Depository or its nominee will be
made to the Depository or its nominee, as the case may be, as the registered
owner or Holder of the Global Notes representing such Notes. Neither the
Company nor the Trustee will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in the Global Notes or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
If the Depository is at any time unwilling, unable or ineligible to continue
as depositary and a successor depositary is not appointed by the Company
within 60 days or, if an Event of Default under the Indenture has occurred and
is continuing, the Company will issue Notes in definitive registered form,
without coupons, in denominations of $1,000 of principal amount at maturity
and any integral multiple thereof, in exchange for the Global Notes
representing such Notes. In addition, the Company may at any time and in its
sole discretion determine not to have any Notes in registered form represented
by the Global Notes and, in such event, will issue Notes or in definitive
registered form in exchange for the Global Notes representing such Notes. In
any such instance, an owner of a beneficial interest in a Global Note will be
entitled to physical delivery in definitive form of Notes registered in its
name. Upon the exchange of the Global Notes for Notes in definitive form, the
Global Notes will be canceled by the Trustee.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a summary of certain United States federal income tax
considerations relevant to the purchase, ownership and disposition of the
Notes by persons acquiring Notes on original issuance for cash at the initial
issue price. This summary is based upon the Internal Revenue Code of 1986, as
amended (the "Code"), Treasury regulations, court decisions, published
positions of the Internal Revenue Service (the "IRS") and other applicable
authorities, all as in effect on the date hereof and all of which are subject
to change or differing interpretation (possibly on a retroactive basis). This
summary does not address all of the tax consequences that may be relevant to
investors that may be subject to special tax treatment (such as financial
institutions, tax-exempt organizations, real estate investment companies,
regulated investment companies, insurance companies, dealers in securities or
currencies or holders who hold the Notes as part of a straddle or a hedging or
conversion transaction). This summary is limited to persons who will hold the
Notes as capital assets within the meaning of Section 1221 of the Code.
Accordingly, each prospective purchaser of Notes should consult its tax
advisor with respect to the particular federal income tax consequences of
purchasing, owning and disposing of Notes, including the application and
effect of any state, local and foreign tax laws.
As used herein, the term "U.S. Holder" means an owner of a Note that is, for
United States federal income tax purposes, (i) a citizen or resident of the
United States, (ii) a corporation, partnership or other entity created or
organized in or under the laws of the United States or any political
subdivision thereof, (iii) an estate the income of which is subject to United
States federal income taxation regardless of its source, or (iv) a trust if a
court within the United States is able to exercise primary supervision over
the administration of the trust and one or more U.S. persons have the
authority to control all substantial decisions of the trust. The term "Non-
U.S. Holder" means an owner of a Note who is not a U.S. Holder.
Original Issue Discount
The Notes will be considered to be issued at an original issue discount
("OID") for federal income tax purposes. In general, the amount of OID with
respect to a Note will be equal to the excess of the "stated redemption price
at maturity" of a Note over its issue price. The stated redemption price at
maturity of a Note will be the sum of all cash payments (whether denominated
as interest or principal) required to be made on such Note other than payments
of qualified stated interest.
Because interest on the Notes is not payable until 2001, the stated interest
on the Notes will not be treated as qualified stated interest but will be
added to the stated redemption price at maturity of the Notes. In addition,
the Notes will be issued at a price that is less than their stated redemption
price at maturity.
For federal income tax purposes, each holder (regardless of its accounting
method) generally must include in gross income an amount equal to the sum of
the daily portions of such OID attributable to each day during the taxable
year on which a U.S. Holder holds the Notes, as it accrues during such period,
determined by using a constant yield to maturity method that reflects
compounding of interest. This means that each U.S. Holder will be required to
include amounts in gross income without a corresponding receipt of cash
attributable to such income.
Payments of stated interest on a Note will not be separably includable in
income, but rather will be treated first as payments of previously accrued OID
and then as payments of principal and consequently will reduce a U.S. Holder's
basis in a Note, as described below under "Sale, Exchange and Redemption of
Notes."
The Company is required to furnish certain information to the IRS, and will
furnish annually to record holders of Notes, information with respect to OID
accruing during the calendar year. Such information will be based on the
amount of OID that would have accrued to a U.S. Holder who acquired the Note
on original issue.
The Company does not intend to treat the possibility of an optional
redemption or repurchase of the Notes as giving rise to any additional accrual
of OID or recognition of ordinary income upon redemption, sale or
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exchange of a Note. In the unlikely event that the interest rate on the Notes
is increased, then such increased interest may be treated as increasing the
amount of OID on the Notes, includable by a U.S. Holder in income as such OID
accrues, in advance of receipt of any cash payment thereof.
Applicable High Yield Discount Obligations
If the yield to maturity with respect to the Notes equals or exceeds the sum
of the "applicable federal rate" (5.89%, compounded semi-annually for April,
1998) plus five percentage points, the Notes would be treated as applicable
high yield discount obligations ("AHYDOs") under the Code. If this were the
case, the OID on the Notes would not be deductible by the Company until
actually paid. In addition, if the Notes are AHYDOs and the yield to maturity
of the Notes exceeds the applicable federal rate plus six percentage points,
the portion of such interest corresponding to the yield in excess of six
percentage points above the applicable federal rate will not be deductible by
the Company at any time. A corporate U.S. Holder may be entitled to treat the
portion of the interest that is not deductible by the Company at any time as a
dividend to the extent that the non-deductible portion of OID would have been
treated as a dividend if it had been distributed with respect to the Company's
stock. Holders are advised to consult their tax advisors regarding the
applicability and operation of the AHYDO rules to their investment in Notes.
Sale, Exchange And Redemption Of Notes
A sale, exchange or redemption of a Note will, except as described below,
result in capital gain or loss equal to the difference between the amount of
cash or other property received for such Note and the holder's adjusted tax
basis in the Note (except to the extent that such cash or other property is
attributable to the payment of accrued and unpaid interest not previously
included in income, which amount will be taxable as ordinary income). A U.S.
Holder's adjusted tax basis generally will equal the cost of such Note to such
holder, increased by income reported by such U.S. Holder with respect to such
Note (including OID and market discount income) and reduced (but not below
zero) by distributions on such Note received by such holder. However, a
portion of any gain that might otherwise be capital gain may be treated as
ordinary income to the extent that a Note is held as part of a "conversion
transaction" within the meaning of section 1258 of the Code. A conversion
transaction generally is one in which the taxpayer has taken two or more
positions in Notes or similar property that reduce or eliminate market risk,
if substantially all of the taxpayers' return is attributable to the time
value of the taxpayer's net investment in such transaction. The amount of gain
realized in a conversion transaction that may be recharacterized as ordinary
income generally will not exceed the amount of interest that would have
accrued on the taxpayer's net investment in such transaction at 120% of the
appropriate "applicable Federal rate" (which rate is computed and published
monthly by the IRS), subject to appropriate reduction (to the extent provided
in regulations to be issued) to reflect prior inclusion of interest or other
ordinary income items from the transaction. In the case of certain
noncorporate taxpayers, capital gains recognized on Notes held (i) one year or
less will be treated as short-term capital gains and taxed at ordinary income
tax rates, (ii) more than one year but 18 months or less will be treated as
mid-term capital gains and taxed at a maximum rate of 28% and (iii) more than
18 months will be treated as long-term capital gains and taxed at a maximum
rate of 20%. In addition, holders should consult their own tax advisers
regarding the availability and effect of a certain tax election to mark-to-
market Notes held on January 1, 2001.
NON-U.S. HOLDERS
A Non-U.S. Holder generally will not be subject to United States federal
withholding tax on interest or OID on a Note, provided that (i) such Non-U.S.
Holder does not actually or constructively own 10% or more of the total
combined voting power of all classes of stock of the Company entitled to vote,
(ii) such Non-U.S. Holder is not a controlled foreign corporation with respect
to which the Company is a "related person" for United States federal income
tax purposes, (iii) such Non-U.S. Holder is not a bank receiving interest
described in section 881(c)(3)(A) of the Code, and (iv) the certification set
forth in section 871(h) or section 881(c) of the Code has been fulfilled with
respect to the beneficial owner. The certification requirement will be
fulfilled if the beneficial owner of a Note certifies on IRS Form W-8, under
penalties of perjury, that it is not a U.S. person and provides
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its name and address, and (i) such beneficial owner files such Form W-8 with
the withholding agent or (ii) in the case of a Note held by securities
clearing organization, bank or other financial institution holding customers'
securities in the ordinary course of its trade or business, holding the Note
on behalf of the beneficial owner, such financial institution files with the
withholding agent a statement that it has received the Form W-8 from the
Holder and furnishes the withholding agent with a copy thereof. With respect
to Notes held by a foreign partnership, under current law, the Form W-8 may be
provided by the foreign partnership. However, for interest (including OID) and
disposition proceeds paid with respect to a Note after December 31, 1999,
unless the foreign partnership has entered into an withholding agreement with
the IRS, a foreign partnership will be required, in addition to providing an
intermediary Form W-8, to attach an appropriate certification by each partner.
If a Non-U.S. Holder does not qualify for the exemption from tax described
above, payments of interest (including payments in respect of any accrued OID)
to such holder may be subject to withholding tax at a tax rate of 30%, subject
to reduction (including exemption) under any applicable tax treaty, provided
the Non-U.S. Holder supplies (at the time of its initial purchase, and at such
subsequent times as are required under the Treasury regulations) a properly
executed IRS Form 1001, or applicable successor form, to report its
eligibility for such reduced rate or exemption. If the Non-U.S. Holder's
income from the Notes is effectively connected with a U.S. trade or business
of the holder and the holder timely furnishes two duly executed copies of IRS
Form 4224 (or, after December 31, 1999, Form W-8) to the withholding agent,
amounts allocable to interest (including any accrued OID) received by such
holder will not be subject to the federal withholding tax, but rather will be
subject to United States federal income tax at the graduated rates applicable
to U.S. persons, and any gain realized on the sale, exchange or other
disposition of a Note by such Non-U.S. Holder would be subject to United
States federal income tax in the same manner as if the Holder were a U.S.
Holder. See "--U.S. Holders--Sale, Exchange and Redemption of Notes" above.
In addition if such Non-U.S. Holder is a foreign corporation, it may be
subject to a 30% branch profits tax (unless reduced or eliminated by an
applicable treaty) on its effectively connected earnings and profits for the
taxable year, subject to certain adjustments. For purposes of the branch
profits tax, interest (including OID) on and any gain recognized on the sale,
exchange or other disposition of a Note will be included in the effectively
connected earnings and profits of such Non-U.S. Holder if such interest or
gain, as the case may be, is effectively connected with the conduct by the
Non-U.S. Holder of a trade or business in the United States.
In addition, gain recognized by a Non-U.S. Holder upon the sale, exchange or
redemption of a Note will not be subject to United States federal income tax
unless (i) the gain is effectively connected with the conduct of a trade or
business within the United States by the Non-U.S. Holder or (ii) the Non-U.S.
Holder is an individual present in the United States for 183 days or more
during the taxable year in which the Note is sold, exchanged or redeemed, and
certain other requirements are met.
A Note held by an individual who at the time of his or her death is not a
citizen or resident of the United States will not be includible in such
individual's gross estate subject to United States federal estate tax as a
result of such individual's death, provided that (i) the individual did not
actually or constructively own 10% or more of the total combined voting power
of all classes of stock of the Company entitled to vote and (ii) payments on
the Note would not have been effectively connected to the conduct by such U.S.
Holder of a United States trade or business income if it had been received by
such individual at the time of his or her death.
BACKUP WITHHOLDING
A holder of a Note may be subject to backup withholding at a 31% rate with
respect to interest, OID and gross proceeds received with respect to the Note.
Backup withholding will not apply, however, to a holder who furnishes a
correct taxpayer identification number or certificate of foreign status and
makes any other required certification, provided in each case that the Company
or its paying agent, as the case may be, does not have actual knowledge that
the payee is a United States person, or who is otherwise exempt from backup
withholding. Generally, a holder of a Note that is a United States person will
provide such certification on IRS Form W-9 (Request for Taxpayer
Identification Number and Certification) and a Non-U.S. Holder will provide
such
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certification on IRS Form W-8 (Certificate of Foreign Status). Under current
Treasury Regulations, payments on the sale, exchange or other disposition of a
Note made to of through a foreign office of a broker generally will not be
subject to backup withholding. However, if such broker is a United States
person, a controlled foreign corporation for United States federal income tax
purposes, a foreign person 50 percent or more of whose gross income is
effectively connected with a United States trade or business for a specified
three-year period or (in the case of payments made after December 31, 1999) a
foreign partnership with certain connections to the United States, then
information reporting will be required unless the broker has in its records
documentary evidence that the beneficial owner is not a United States person
and certain other conditions are met or the beneficial owner otherwise
establishes an exemption. Backup withholding may apply to any payment that
such broker is required to report if the broker has actual knowledge that the
payee is a United States person. Payments to or through the United States
office of a broker will be subject to backup withholding and information
reporting unless the Holder certifies, under penalties of perjury, that it is
not a United States person or otherwise establishes an exemption.
In addition, any amounts deducted and withheld from a distribution to a
recipient under the backup withholding rules would be allowed as a credit
against such recipients federal income tax liability. A holder may obtain a
refund of any excess amounts withheld under the backup withholding rules by
filing the appropriate claim for refund with the IRS (generally, a United
States federal income tax return). Furthermore, certain penalties may be
imposed by the IRS on a recipient of payments that is required to supply
information but that does not do so in the proper manner.
99
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the
Underwriters named herein (the "Underwriters") have severally agreed to
purchase, and the Company has agreed to sell to them, the respective principal
amount of Notes set forth opposite the names of such Underwriters below:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
OF
NAME NOTES AT MATURITY
---- -----------------
<S> <C>
Morgan Stanley & Co. Incorporated.......................... $
Goldman, Sachs & Co........................................
----
Total.................................................... $
====
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Notes offered hereby are
subject to the approval of certain legal matters by their counsel and to
certain other conditions. The Underwriters are obligated to take and pay for
all of the Notes offered hereby if any are taken.
The Underwriters propose to offer part of the Notes directly to the public
at the Price to Public set forth on the cover page hereof and part to certain
dealers at a price which represents a concession not in excess of % of the
principal amount at maturity of the Notes. Each Underwriter may allow, and
such dealers may reallow, a concession to certain other dealers not in excess
of % of the principal amount at maturity of the Notes. After the initial
offering of the Notes the offering price and other selling terms may from time
to time be varied by the Underwriters.
The Company does not intend to apply for listing of the Notes on any
national securities exchange, but has been advised by the Underwriters that
they currently intend to make a market in the Notes, as permitted by
applicable laws and regulations. The Underwriters are not obligated, however,
to make a market in the Notes and any such market making may be discontinued
at any time without notice, at their sole discretion. Accordingly, no
assurance can be given as to the liquidity of, or the existence of trading
markets for, the Notes.
In order to facilitate the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Notes. Specifically, the Underwriters may overallot in connection with the
Offering, creating a short position in the Notes for their own account. In
addition, to cover overallotments or to stabilize the price of the Notes, the
Underwriters may bid for, and purchase, Notes in the open market. Finally, the
underwriting syndicate may reclaim selling concessions allowed to an
underwriter or a dealer for distributing the Notes in the Offering, if the
syndicate repurchases previously distributed Notes in transactions to cover
syndicate short positions, in stabilizing transactions or otherwise. Any of
these activities may stabilize or maintain the market price of the Notes above
independent market levels. The Underwriters are not required to engage in
these activities, and may end any of these activities at any time.
The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
MSSF, an affiliate of Morgan Stanley & Co. Incorporated, will be one of the
lenders under the Revolving Credit Facility and will be paid customary fees.
100
<PAGE>
LEGAL MATTERS
The legality of the issuance of the Notes has been passed on by the law firm
of Thacher Proffitt & Wood, New York, New York, counsel for the Company.
Morgan, Lewis & Bockius LLP, New York, New York, has represented CVC in
connection with the issuance of the Notes. Certain legal matters will be
passed upon for the Underwriters by Shearman & Sterling, New York, New York.
EXPERTS
The consolidated financial statements and financial statement schedule of
IPC as of September 30, 1997 and 1996 and for each of the three years in the
period ended September 30, 1997 included in this Prospectus, have been
included herein in reliance upon the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
101
<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; outstand-
ing 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 $180.0 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 $157.0 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-3. 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 aquisition 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>
INSIDE BACK COVER
[PHOTOGRAPHS OF TURRET SYSTEMS WILL APPEAR HERE]
<PAGE>
LOGO
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses to be borne by IPC in connection
with the offering described in this Registration Statement. All of such
amounts are estimated except for the SEC Registration Fee.
<TABLE>
<S> <C>
SEC Registration Fee............................................ $ 46,315
Printing and Engraving Costs.................................... 125,000
Legal Fees and Expenses......................................... 275,000
Accounting Fees and Expenses.................................... 125,000
Miscellaneous................................................... 40,685
--------
Total....................................................... 612,000
========
</TABLE>
ITEM 15. 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.
II-1
<PAGE>
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.
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 Registrant 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 Registrant 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 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1 Form of Underwriting Agreement.**
2.1 Agreement and Plan of Merger, dated December 18, 1997, by and
between Arizona Acquisition Corp. and IPC Information Systems, Inc.
(Incorporated by reference to Current Report on Form 8-K dated
December 18, 1997 (the "Form 8-K")).
2.2 Stockholders Agreement (Incorporated by reference to the Form 8-K).
4.1 Form of Indenture between IPC Information Systems, Inc. and IBJ
Schroder Bank & Trust Company, as Trustee.**
4.2 Form of Senior Discount Note. (included in Exhibit 4.1).**
5 Opinion of Thacher Proffitt & Wood regarding the legality of the
securities being registered.*
12 Computation of Ratio of Earnings to Fixed Charges.*
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Thacher Proffitt & Wood (included as part of its opinion
filed as Exhibit 5 hereto).*
24 Powers of Attorney (included on page II-4 of original filing).
25 Form T-1 Statement of Eligibility under the Trust Indenture Act of
1939 of , as Trustee.**
</TABLE>
--------
* Previously filed.
** To be filed by amendment.
ITEM 17. UNDERTAKINGS
The undersigned registrant undertakes that, for purposes of determining any
liability under the Securities Act, each filing of the Company's annual report
pursuant to section 13(a) or section 15(d) of the Exchange Act (and, where
applicable, each filing of an employee benefit plan's annual report pursuant
to section 15(d) of the Exchange Act) that is incorporated by reference in the
registration statement 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.
II-2
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions set forth in response to Item 15, 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 the 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.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-3
<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-3 AND HAS DULY CAUSED THIS AMENDMENT NO. 1
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
DAY OF APRIL, 1998.
IPC Information Systems, Inc.
/s/ S. Terry Clontz
By __________________________________
S. TERRY CLONTZ
President, Chief Executive Officer
and Director
POWER OF ATTORNEY
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
NAME TITLE DATE
Chairman and
* Director April , 1998
- -------------------------------------
RICHARD P. KLEINKNECHT
President, Chief
* Executive Officer April , 1998
- ------------------------------------- and Director
S. TERRY CLONTZ (Principal
Executive Officer)
Chief Financial
* Officer (Principal April , 1998
- ------------------------------------- Financial Officer
BRIAN L. REACH and Principal
Accounting Officer)
Vice Chairman and
* Director April , 1998
- -------------------------------------
PETER KLEINKNECHT
* Director April , 1998
- -------------------------------------
ROBERT J. MCINERNEY
* Director April , 1998
- -------------------------------------
THEODORE J. JOHNSON
* Director April , 1998
- -------------------------------------
PETER M. STEIN
/s/ Daniel Utevsky April , 1998
*By ____________________________
DANIEL UTEVSKY
ATTORNEY-IN-FACT
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1 Form of Underwriting Agreement.**
2.1 Agreement and Plan of Merger, dated December 18, 1997, by and between
Arizona Acquisition Corp. and IPC Information Systems, Inc.
(Incorporated by reference to Current Report on Form 8-K dated
December 24, 1997 (the "Form 8-K")).
2.2 Stockholders Agreement (Incorporated by reference to the Form 8-K).
4.1 Form of Indenture between IPC Information Systems, Inc. and IBJ
Schroder Bank and Trust Company, as Trustee.**
4.2 Form of Senior Discount Note (included in Exhibit 4.1).**
5 Opinion of Thacher Proffitt & Wood regarding the legality of the
securities being registered.*
12 Computation of Ratio of Earnings to Fixed Charges.*
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Thacher Proffitt & Wood (included as part of its opinion
filed as Exhibit 5 hereto).*
24 Powers of Attorney (included on page II-4 of original filing).
25 Form T-1 Statement of Eligibility under the Trust Indenture Act of
1939 of IBJ Schroder Bank and Trust Company, as Trustee.**
</TABLE>
- --------
* Previously filed.
** To be filed by amendment.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Pre-Effective Amendment No. 1 to the
Registration Statement on Form S-3 of IPC Information Systems, Inc. (File No.
333-46229) 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
