<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON February 13, 1998
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------
IPC INFORMATION SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------
<TABLE>
<S> <C>
DELAWARE 58-1636502
(STATE OR OTHER (I.R.S. EMPLOYER
JURISDICTION IDENTIFICATION NUMBER)
OF INCORPORATION OR
ORGANIZATION)
</TABLE>
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)
<TABLE>
<S> <C> <C>
COPIES TO:
THOMAS N. TALLEY DAVID P. BLEA JERRY V. ELLIOTT
THACHER PROFFITT & WOOD MORGAN, LEWIS & BOCKIUS LLP JAMES S. SCOTT, SR.
TWO WORLD TRADE CENTER 101 PARK AVENUE SHEARMAN & STERLING
NEW YORK, NEW YORK 10048 NEW YORK, NEW YORK 10178 599 LEXINGTON AVENUE
(212) 912-7400 (212) 309-6000 NEW YORK, NEW YORK 10022
(212) 848-4000
</TABLE>
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
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Title of Securities Proposed Maximum Proposed Maximum Amount of
To Be Registered Amount To Be Registered/(1)/ Aggregate Price Aggregate Offering Price Registration
Per Note Fee
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Senior Discount Notes Due
2008 $157,000,000 N/A $157,000,000 $46,315
==============================================================================================================================
</TABLE>
(1) Represents the original issue price of the Senior Discount Notes.
---------------
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.
<PAGE>
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED _______, 1998
[LOGO]
$157,000,000
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 __% 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 __%
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 $24.7 MILLION OF INDEBTEDNESS OUTSTANDING
(OTHER THAN THE NOTES), ALL OF WHICH WOULD HAVE BEEN SECURED.
________________
SEE "RISK FACTORS" BEGINNING ON PAGE 15 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
________________
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO THE
PUBLIC (1) COMMISSIONS (2) COMPANY (1) (3)
---------- --------------- ----------------
Per Note % % %
Total $ $ $
_______________
(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 $________.
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.
_______________________________
TABLE OF CONTENTS
PAGE
----
Available Information........................ 4
Forward Looking Statements................... 4
Incorporation of Certain Documents By
Reference.................................. 5
Prospectus Summary........................... 6
Risk Factors................................. 15
The Merger and the Financings................ 23
Use of Proceeds.............................. 25
Capitalization............................... 26
Pro Forma Consolidated Financial
Information................................ 27
Selected Historical Consolidated
Financial and Other Information............ 34
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................. 36
PAGE
----
Business..................................... 42
Management................................... 59
Security Ownership of Certain Beneficial
Owners and Management...................... 63
Certain Relationships and Other Related
Transactions............................... 64
Description of Revolving Credit Facility..... 66
Description of the Notes..................... 67
Certain United States Income Tax
Considerations............................. 104
Underwriters................................. 107
Legal Matters................................ 108
Experts...................................... 108
Index to Consolidated Financial
Statements.............................. F-1
_______________________________
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 in its entirety 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 within the
meaning of the Private Securities Litigation Reform Act of 1995 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 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"
4
<PAGE>
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.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by the Company (File No.
0-25492) pursuant to the Exchange Act are incorporated by reference in this
Prospectus:
1. IPC's Annual Report on Form 10-K for the year ended September 30,
1997, as amended;
2. IPC's Current Report on Form 8-K, dated December 24, 1997; and
3. IPC's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1997.
All documents subsequently filed by the Company pursuant to Sections 13(a),
13(c), 14 or 15 of the Exchange Act, prior to the termination of the offering of
the Notes, are deemed to be incorporated by reference in this Prospectus and
shall be deemed to be a part hereof from the date of filing of such documents.
The Company hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus has been delivered, on the written or oral
request of any such person, a copy of any or all of the documents referred to
above which have been or may be incorporated in this Prospectus by reference,
other than exhibits to such documents. Written requests for such copies should
be directed to IPC Information Systems, Inc., Wall Street Plaza, 88 Pine Street,
New York, New York 10005, Attention: Chief Financial Officer. Oral requests
should be directed to such individual (telephone number (212) 825-9060).
_______________________________
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 in its entirety 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.
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
6
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as "Points of Presence" or "POPs") and customer premise nodes (known as
customer access nodes or "CANs") in 15 financial centers including Frankfurt,
Paris, Zurich, Tokyo and Hong Kong and additional CANs in 29 other cities at
December 31, 1997. The IXnet Network employs leased dedicated long-haul
circuits to connect IXnet Network cities and leased dedicated local circuits
to connect customers to the IXnet Network. Because the IXnet Network is, for
the most part, leased, the Company generally can rapidly expand capacity in
response to increased customer traffic, 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.
7
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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.
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.
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 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.
8
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THE MERGER AND THE FINANCINGS
THE MERGER
On December 18, 1997, IPC and Arizona Acquisition Corp. ("AAC") entered into
an Agreement and Plan of Merger (the "Merger Agreement"). The Merger 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, AAC's parent, Cable Systems
Holdings, LLC ("CSH LLC"), a majority of 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 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 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 (i) $8.1 million of bank
borrowings by the Company pursuant to a $75 million senior secured five-year
revolving credit facility (the "Revolving Credit Facility") (subject to
borrowing base and other limitations) provided by a bank syndicate led by Morgan
Stanley Senior Funding, Inc. ("MSSF"), (ii) an equity investment in AAC by CSH
LLC of up to $72.0 million (the "Equity Investment") and (iii) available cash of
the Company. 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 $22.3 million in transaction fees and
expenses, of which $20.1 million will be paid upon the consummation of the
Merger. The Offering is conditioned upon the closing of the Merger, the Equity
Investment and 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>
Sources of Funds
- -----------------------------
<S> <C>
Revolving Credit Facility...................... $ 8,080
Notes.......................................... 157,000
Equity Investment.............................. 72,000
Available cash................................. 3,655
--------
Total Sources............................... $240,735
</TABLE> ========
9
<PAGE>
<TABLE>
<S> <C>
Uses of Funds
- -------------------------------------------
Repayment of certain other obligations......... $ 3,125
Cash merger consideration(1)................... 217,493
Transaction fees and expenses(2)............... 20,117
--------
Total Uses................................... $240,735
</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 "Pro Forma Consolidated Financial Information" and the accompanying
notes included elsewhere in this Prospectus.
10
<PAGE>
THE OFFERING
Issuer............... IPC Information Systems, Inc.
Securities Offered... $________ aggregate principal amount at maturity ($157
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
$24.7 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."
11
<PAGE>
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 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. See "Use
of Proceeds."
RISK FACTORS
See "Risk Factors" beginning on page 15 for a description of certain
factors relating to the Company, its business and an investment in the Notes.
12
<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)
--------- ------- -------- ------- ------ ------ -------
STATEMENT OF OPERATIONS INFORMATION:
<S> <C> <C> <C> <C> <C> <C> <C>
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 60,697 13,847 16,557 16,557
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 9,541 1,355 7,666 7,666
Interest
income/(expense), net 233 (678) (1,844) (21,691) (463) (440) (5,736)
Net income (loss) $ 13,267 $ 12,129 $ 3,834 $ (7,592) $ 566 $ 3,594 $ 628
SELECTED OTHER DATA:
Depreciation and
amortization $ 3,840 $ 6,388 $ 8,743 $ 8,743 $ 1,707 $ 2,787 $ 2,787
EBITDA (2) 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 6.2x 19.3x 1.8x
Ratio of
earnings to
fixed charges (3) 23.9x 12.2x 3.9x 0.5x 2.3x 11.22x 1.5x
ACTUAL PRO FORMA (4)
------------ ------------
BALANCE SHEET INFORMATION:
Cash and cash
equivalents $ 3,655 $ --
Working capital 49,811 49,107
Total assets 169,788 172,036
Revolving Credit
Facility -- -- -- -- 8,080
</TABLE>
13
<PAGE>
<TABLE>
<S> <C> <C>
Capital lease
obligations, net
of current portion 11,085 11,085
Notes offered
hereby -- 157,000
Other long-term
debt, net of
current portion 2,124 2,124
Stockholders'
equity (deficit) $ 81,314 ($73,048)
</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 and 8.15% on the Revolving
Credit Facility. A change of 1/2% on these interest rates would change
interest expense by $887 for the year ended September 30, 1997 and $253 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 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.
(4) 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.
14
<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 $181.7 million of consolidated indebtedness and a stockholders'
deficit of $73.0 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 $7.6 million and 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 $7.6 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 $21.7
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 "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 security 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
15
<PAGE>
of a bankruptcy, liquidation, dissolution, reorganization or similar proceeding
with respect to the Company, 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 significantly increase 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 adverse
16
<PAGE>
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
services to financial institutions have long standing relationships with these
customers' senior management. Accordingly, there
17
<PAGE>
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.
All of the products that the Company currently sells and most of the
Company's products that are currently being used by its customers are year 2000
compliant. However, certain of the Company's older products are not year 2000
compliant. The Company has sought to notify such customers and to sell such
customers more recent products which are year 2000 compliant.
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
state PUCs continue to exercise extensive authority to regulate ownership of
transmission facilities, provision of services and the terms and conditions
under which IXnet's services are provided. The interpretation and enforcement of
laws and regulations by these regulatory authorities vary and could limit
IXnet's ability to provide certain telecommunications services. Thus, there can
be no assurance that changes in current or future laws or regulations or future
judicial intervention in the United States or in any individual state would not
have a material adverse effect on the Company or that FCC or other regulatory
investigation or intervention would not have a material adverse effect on IXnet.
In addition IXnet is required by federal and state law and regulations to
file tariffs listing the rates, terms and conditions of the services it
provides. Any failure to maintain proper federal and state tariffs or
certification or any finding by the federal or state agencies that IXnet is not
operating under permissible terms and conditions may result in an enforcement
action or investigation, either of which could have a material adverse effect on
IXnet.
The existing regulatory environment for international telecommunications
service outside the United States differs from country-to-country.
Internationally, the World Trade Organization ("WTO") Basic Telecommunication
Agreement ("WTO Agreement") may result in the introduction of competitive
services in a number of countries throughout the world. Nevertheless, national
and local laws and regulations continue to differ significantly among the
countries in which Ixnet currently operates and plans to operate. An IXnet
subsidiary, IXnet Ltd., currently holds a license to provide international
simple resale ("ISR") services to all international points from the United
Kingdom and has recently been awarded a license to provide international
facilities-based voice services. In other European Union ("EU") countries and
Switzerland, IXnet currently provides voice services pursuant to special
regulations established for provision of telecommunication services to closed
user groups ("CUGS"). In Asia, IXnet has been issued certain licenses to offer
limited types of services in Japan, Hong Kong and Singapore. The regulatory
structures pursuant to which IXnet operates in all of these countries were all
recently enacted. Consequently, there is very limited guidance on the scope of
the authority provided to IXnet pursuant to existing regulatory structures in
these countries. Thus, there can be no assurance that any examination of
IXnet's operations by a regulatory or governmental authority would conclude that
IXnet is operating in a manner consistent with existing law, regulation or
license issued to IXnet. If a regulatory authority concludes that IXnet is not
operating in a matter consistent with the law, regulation or a license issued to
IXnet, it could limit IXnet's ability to provide certain telecommunications
services and may have a material adverse impact on IXnet's business in the
country in question. There can be no assurance that future changes in the law
or regulation of any particular country or the WTO Agreement will not have a
material adverse effect on IXnet's business, results of operations and financial
condition.
18
<PAGE>
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
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
19
<PAGE>
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 54% nor more than 90% of the outstanding
shares of the common stock of the Surviving Corporation Common Stock will be
held by the stockholders of AAC. As of the date hereof, all of the outstanding
capital stock of AAC is owned, directly or indirectly, in the aggregate by CSH
LLC. 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 and Anthony Servidio
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 and Servidio. 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").
20
<PAGE>
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
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
21
<PAGE>
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
"Underwriting."
22
<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 choose to convert their
shares into cash should 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, 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 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.
23
<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) 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-NJ, "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 (i) $8.1 million of bank borrowings by the
Company pursuant to the $75 million Revolving Credit Facility (subject to
borrowing base and other limitations) provided by a bank syndicate led by MSSF,
(ii) the Equity Investment and (iii) available cash of the Company. 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 $22.3 million in transaction
fees and expenses expected to be incurred in connection with the Merger
Transactions, of which $20.1 million will be paid upon the consummation of the
Merger. The Offering is conditional upon the closing of the Merger, the Equity
Investment and the Revolving Credit Facility.
24
<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 $149.9 million. The proceeds from the Offering,
together with the borrowings under the Revolving Credit Facility, the Equity
Investment and the Company's available cash balance 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 $15.2 million
in transaction fees and expenses expected to be incurred in connection with the
Merger, excluding those related to the Notes offered hereby. See "The Merger and
the Financings," "Capitalization" and "Pro Forma Consolidated Financial
Information."
25
<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 and "Pro Forma
Consolidated Financial Information" and the notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
------------------------
ACTUAL PRO FORMA
------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Short-term debt (including current portion of long-term $ 3,409 $ 3,409
debt) ======= ========
Long-term debt:
Revolving Credit Facility(1) -- 8,080
Notes offered hereby -- 157,000
Capital lease obligations, net of current portion 11,085 11,085
Other, net of current portion 2,124 2,124
------ -------
Total long-term debt 13,209 178,289
------ -------
Stockholder's equity:
Preferred stock - $.01 par value, authorized
10,000,000 shares, none issued and outstanding
Common stock - $.01 par value, authorized 110 41
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
Paid-in capital 48,600 --
Retained earnings (deficit) 33,322 (73,089)
------ -------
Less treasury stock, at cost, December 31, 1997 - (718) --
242,185 shares, pro forma - none ------ -------
Total stockholders' equity (deficit) 81,314 (73,048)
------ -------
Total capitalization $94,523 $105,241
======= ========
</TABLE>
___________
(1) At December 31, 1997 the maximum amount available to borrow under the
Revolving Credit Facility would be $61.9 million based on the Company's
borrowing base.
26
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited consolidated pro forma financial information (the
"Pro Forma Financial Information") of the Company are based on historical
consolidated financial statements of the Company and give effect to the Merger
Transactions. The unaudited consolidated pro forma statement of operations for
the quarter ended December 31, 1997 and year ended September 30, 1997 gives
effect to the Merger Transactions as if they had occurred at October 1, 1996.
The pro forma balance sheet gives effect to the Merger Transactions as if they
had occurred on December 31, 1997. The pro forma adjustments are based upon
available information and upon certain assumptions that management believes are
reasonable under the circumstances. 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 do 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 $22.3 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 charge of approximately $8.3 million in the
quarter in which the Merger is consummated. This one-time charge is included in
the $22.3 million referred to above and 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.
27
<PAGE>
IPC INFORMATION SYSTEMS, INC.
Pro Forma Consolidated Balance Sheet (unaudited)
December 31, 1997
(Dollar amounts 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 $ (3,655) (a) $ -
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 (7,549) 112,209
Property, plant and equipment, net.................................................... 40,420 40,420
Other assets, net..................................................................... 9,610 9,797 (e) 19,407
----------- ------------ -----------
Total assets....................................................... $169,788 $ 2,248 $172,036
=========== ============ ===========
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....................................................... - 8,080 (a) 8,080
Long-term debt, net of current portion................................................ 2,124 2,124
Lease obligations, net of current portion............................................. 11,085 11,085
Senior unsecured notes................................................................ - 157,000 (b) 157,000
Other liabilities..................................................................... 5,318 (1,625) (g) 3,693
----------- ------------ -----------
Total liabilities.................................................. 88,474 156,610 245,084
----------- ------------ -----------
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) -
(120,566) (d)
Retained earnings (deficit) ........................................................ 33,322 (96,824) (d) (73,089)
(4,203) (e)
(4,666) (f)
(715) (h)
(3) (i)
Less treasury stock, at cost, December 31, 1997 - 242,185 shares, pro forma - none . (718) 718 (h) -
----------- ------------ -----------
Total stockholders' equity (deficit)................................ 81,314 (154,362) (73,048)
----------- ------------ -----------
Total liabilities and stockholders' equity (deficit)............... $169,788 $ 2,248 $172,036
=========== ============ ===========
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Financial Information.
28
<PAGE>
IPC INFORMATION SYSTEMS, INC.
Pro Forma Consolidated Statement Of Operations (unaudited)
For the three months ended December 31, 1997
(Amounts 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 16,557
----------- ------------- --------------
Income from operations............................................ 7,666 - 7,666
Interest income/(expense), net................................................. (440) $ (5,006)(k) (5,736)
(290)(j)
Other income/(expense), net (39) (39)
----------- ------------- --------------
Income before provision for income taxes 7,187 (5,296) 1,891
Provision (benefit) for income taxes........................................... 3,593 (2,330)(l) 1,263
----------- ------------- --------------
Net income........................................................ $ 3,594 $ (2,966) $ 628
=========== ============= ==============
Basic earnings per share....................................................... $0.34 $0.15
----------- --------------
Basic weighted average shares outstanding...................................... 10,711 4,063
----------- --------------
Diluted earnings per share..................................................... $0.33 $0.15
----------- --------------
Diluted weighted average shares outstanding.................................... 10,865 4,063
----------- --------------
</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
(Amounts 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 expenses.............................. 60,697 60,697
-------------- -------------- --------------
Income from operations........................ 9,541 - 9,541
Interest income/(expense), net............................................ (1,844) $ (18,687)(n) (21,691)
(1,160)(m)
Other income/(expense), net................... 417 (312)(p) 105
-------------- -------------- --------------
Income (loss) before provision for income taxes 8,114 (20,159) (12,045)
Provision (benefit) for income taxes...................................... 4,280 (8,733)(o) (4,453)
-------------- -------------- --------------
Net income (loss)............................. $ 3,834 $ (11,426) $ (7,592)
============== ============== ==============
Basic earnings (loss) per share........................................... $0.36 ($1.87)
-------------- --------------
Basic weighted average shares outstanding................................. 10,664 4,063
-------------- --------------
Diluted earnings (loss) per share......................................... $0.36 ($1.87)
-------------- --------------
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
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(a) Represents cash required to be borrowed from the Revolving Credit Facility
after application of the Company's cash balances, proceeds from the Note
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>
<S> <C>
Company cash $ 3,655
Proceeds from Note 157,000
Equity Investment 72,000
Repurchase of IPC Common Stock (217,493)
Repayment of certain other obligations (3,125)
Fees and expenses (20,117)
------------
Required from Revolving Credit Facility $ (8,080)
============
</TABLE>
In connection with the repurchase and retirement 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 all such transactions occurred
as of December 31, 1997.
<TABLE>
<S> <C>
Pre-merger shares outstanding 10,737,779
Repurchase and retirement of IPC Common Stock, assuming
the minimum number of shares will be converted into
Surviving Corporation Common Stock (10,356,827)
Issuance of Surviving Corporation Common Stock related
to the Equity Investment 3,428,572
Exchange of 560 shares of IXnet Common Stock for
Surviving Corporation Common Stock 253,968
-------------------
Pro forma issued and outstanding shares of Surviving Corporation
Common Stock 4,063,492
===================
</TABLE>
(b) Represents the gross proceeds to the Company from the issuance of the Note.
(c) Represents the issuance of 3,428,572 shares of Surviving Corporation Common
Stock at $21 per share.
(d) Represents the repurchase and retirement by the Company of 10,356,827
shares of IPC Common Stock at $21 per share.
31
<PAGE>
(e) In connection with the Merger Transactions, the Company will incur
approximately $14,000 of professional fees, printing costs and other
expenses. Of the $14,000 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 $14,000 of fees
are as follows:
<TABLE>
<S> <C> <C>
Fees and other expenses related to the Revolving Credit
Facility, $1,800
to be amortized over five years commencing with the Merger
Fees and other expenses related to the Note,
to be amortized over ten years commencing with the Merger 7,997
------------
Prepaid debt issuance costs $ 9,797
Fees and other expenses related to the Merger Agreement,
to be charged to paid-in-capital upon the Merger 4,203
--------------
Total professional fees, printing costs and other expenses $14,000
==============
</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 Sheet at December 31, 1997
reflects 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 become due at the Merger.
(h) Represents the retirement, upon the Merger, of 242,185 shares of IPC Common
Stock held in treasury.
(i) Represents the Exchange of 560 shares of IXnet Common Stock for 253,968
shares of Surviving Corporation Common Stock.
(j) Represents the amortization of debt issuance cost over the respective terms
of the debt financing, for the three months ended December 31, 1997.
Revolving Credit Facility $ 90
Note 200
-------------
$290
=============
(k) Represents the interest expense on (i) an assumed $12,102 borrowed at
October 1, 1996 under the Revolving Credit Facility, at an assumed rate of
8.15%, (ii) $157,000 par value of the Notes, at an assumed interest rate of
10%, compounded semi-annually, and (iii) accretion of Note discount for
the three months ended December 31, 1997.
Revolving Credit Facility $ 247
Note 4,327
Accretion of Note discount 432
-------------
$5,006
=============
32
<PAGE>
A change of 0.5% in the assumed interest rates would result in a change of $15
and $238 in interest expense for the Revolving Credit Facility and the Note,
respectively, 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 financing, for the year ended September 30, 1997.
Revolving Credit Facility $ 360
Note 800
-------------
$1,160
=============
(n) Represents the interest expense on (i) an assumed $12,102 borrowed at
October 1, 1996 under the Revolving Credit Facility, at an assumed rate of
8.15%, (ii) $157,000 par value of the Notes, at an assumed interest rate of
10%, compounded semi-annually, and (iii) accretion of Note discount, for
the year ended September 30, 1997.
Revolving Credit Facility $ 986
Note 16,092
Accretion of Note discount 1,609
-------------
$18,687
=============
A change of 0.5% in the assumed interest rates would result in a change of $61
and $826 in interest expense for the Revolving Credit Facility and the Note,
respectively, 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 sheet gives
effect to the Merger Transactions, as if they had occurred at December 31, 1997.
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>
FOR THE YEARS ENDED SEPTEMBER 30, THREE MONTHS ENDED DECEMBER 31,
--------------------------------------------------------------------- --------------------------------
PRO PRO
ACTUAL FORMA ACTUAL FORMA
1993 1994 1995 1996 1997 1997(4) 1996 1997 1997(4)
---------- ---------- --------- ---------- ---------- ---------- ---------- ---------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
INFORMATION:
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 60,697 13,847 16,557 16,557
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 9,541 1,355 7,666 7,666
Interest
income/(expense),
net (1,404) (1,568) 233 (678) (1,844) (21,691) (463) (440) (5,736)
Net income (loss) $ 1,753 $ 16,549 (1)$ 13,267 $ 12,129 $ 3,834 $ (7,592) $ 566 $ 3,594 $ 628
Basic earnings per share $ 1.26 $ 1.15 $ 0.36 $ (1.87) $ 0.05 $ 0.34 $ 0.15
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 $ (1.87) $ 0.05 $ 0.33 $ 0.15
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 (2)
Pro forma weighted
average
shares outstanding 8,535 (2)
Supplemental pro forma
earnings per share $ 0.88 (3)
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
SELECTED OTHER DATA:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Depreciation and $ 4,214 $ 4,288 $ 3,840 $ 6,388 $ 8,743 $ 8,743 $ 1,707 $ 2,787 $ 2,787
amortization
EBITDA(5) $ 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 6.2x 19.3x 1.8x
Ratio of earnings to
fixed charges (6) 2.7x 8.4x 23.9x 12.2x 3.9x 0.5x 2.3x 11.22x 1.5x
<CAPTION>
AT SEPTEMBER 30, AT DECEMBER 31, 1997
------------------------------------------------------ -----------------------
PRO
1993 1994 1995 1996 1997 ACTUAL FORMA (7)
-------- ---------- -------- -------- -------- --------- ---------
BALANCE SHEET INFORMATION:
Cash and cash $ 1,574 $ 2,616 $ 15,786 $ 2,306 $ 1,465 $ 3,655 $ --
equivalents
Working capital 16,696 27,661 46,851 50,807 46,933 49,811 49,107
Total assets 70,120 110,702 128,036 141,877 158,362 169,788 172,036
Revolving Credit -- -- -- -- -- -- 8,080
Facility
Capital lease -- -- -- 3,429 10,336 11,085 11,085
obligations, net
of current portion
Other long-term debt,
net of 12,916 10,663 -- -- 2,133 2,124 2,124
current portion
Notes offered hereby -- -- -- -- -- -- 157,000
Stockholders' equity 7,328 21,122 58,504 71,715 76,910 81,314 (73,048)
(deficit)
</TABLE>
(1) 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.
(2) 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.
(3) 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.
(4) 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 and 8.15% on the Revolving
Credit Facility. A change of 1/2% on these interest rates would change
interest expense by $887 for the year ended September 30, 1997 and $253 for
the three months ending December 31, 1997. See the Company's unaudited pro
forma financial information included elsewhere in this Prospectus.
(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 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.
(7) 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.
35
<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 $22.3 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
36
<PAGE>
approximately $8.3 million in the quarter in which the Merger is consummated.
This one-time charge is included in the $22.3 million referred to above and
consists of certain change in control bonuses and severance payments aggregating
$2.5 million and payment to option holders, upon 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 in the 1997 period from $59.4 million in 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 $10.6
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
37
<PAGE>
anticipates that S,G&A will increase. These expenses will be incurred prior to
the realization of anticipated related revenue.
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
38
<PAGE>
and other expenses required to build, manage and grow this global business. The
Company intends to continue to fund the buildup of IXnet's network. As the
Company deploys its network, management anticipates that selling, general and
administrative expenses will increase. These expenses may be incurred prior to
the realization of anticipated related revenue. Additionally, included in
selling, general and administrative expenses for the year ended September 30,
1997 is $0.65 million or $0.04 per share representing the settlement of a
employment agreement with the former Chief Operating Officer.
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.
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Interest Income /(Expense). Interest income/(expense) decreased to $0.7
million in expense for the year ended September 30, 1996 from $0.2 million in
income for the year ended September 30, 1995. This decrease was primarily due
to the Company's utilization of its line of credit during fiscal 1996. Total
interest expense for the fiscal year ended 1996 was $1.1 million compared to
$0.4 million in the fiscal year ended 1995.
Provision for Income Taxes. The Company's effective tax rate for the years
ended September 30, 1996 and 1995 was 39.7% and 41.0 %, respectively.
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.
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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
(i) $8.1 million of bank borrowings by the Company pursuant to the Revolving
Credit Facility (subject to borrowing base and other limitations) provided by a
bank syndicate led by MSSF, (ii) the Equity Investment and (iii) available
cash of the Company. Such amounts will be used to (a) pay up to $217.5 million
to those IPC stockholders who choose to convert their shares of IPC Common Stock
into cash, (b) repay existing indebtedness of the Company under the Existing
Bank Credit Facilities, of which there was no outstanding balance at December
31, 1997, and certain other liabilities of the Company, and (c) pay an estimated
$22.3 million in transaction fees and expenses, of which $20.1 million will be
paid upon the consummation of the Merger. 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.
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.
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.
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LAN/WAN Infrastructure, Design, Installation and Maintenance. Integrated
high speed internal data communications networks have become critical to
financial services companies. Companies are installing increasingly complex
computing environments centered around LANs and WANs that connect networked
desktop personal computers and workstations, printers, telecommunications
equipment, file servers and facsimile machines. As network requirements have
grown and network designs have become more complex, many companies have chosen
to outsource their LAN/WAN design, installation and maintenance needs to
independent specialists.
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
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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.
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 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.
PRODUCTS AND SERVICES
The Company is involved in (i) the design, manufacture, installation and
maintenance of voice telecommunications systems primarily for the financial
trading community (including turret systems and other associated products); (ii)
the design, installation and maintenance of data networks and associated cabling
infrastructures (I.T.S.); and (iii) the provision of voice and data
telecommunications services to the financial trading community (IXnet). 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
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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.
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
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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 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.
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.
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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 extensive
experience in purchasing and implementing telecommunications services for the
financial trading community and began commercial operations in the spring of
1996. IXnet capitalizes on several characteristics of the target customer base:
rapid changes in technology requiring constant reevaluation of previous
technology decisions and new investments to remain competitive; internal
telecommunications departments focused on intra-firm communications via private
networks rather than on communications with trading counterparts; demand for
high performance communications between firms; difficulties in dealing with
multiple vendors, particularly in international markets; significant disparity
between the pricing and underlying costs of international communications
traffic; and no uniform global technology platform for international
communications.
IXnet has implemented a network specifically designed to address the needs
of the financial trading community. The network consists of Company-owned
switches, 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.
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
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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.
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.
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
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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 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 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.
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
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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
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:
FOR THE YEARS ENDED SEPTEMBER 30
-----------------------------------
REGION 1995 1996 1997
- -------------------------- ----------- ---------- ----------
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%
====================================
IPC maintains a high profile in the financial services market by
publicizing contracts won, of advertising in industry
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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.
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 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
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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.
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 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.
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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 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 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 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 state PUCs continue to exercise
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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.
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 state
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
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rates from British Telecom and Mercury. The ISR license allows IXnet to resell
international private lines, as well as interconnect with, and obtain capacity
at wholesale rates from British Telecom 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 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
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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.
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.
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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 Age 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
[ ] __ Director
[ ] __ Director
[ ] __ 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 Walsh __ 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>
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, Lifestyle Furnishings International, 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, Copes-Vulcan,
Inc., Pen-Tab Industries, Inc., Milk Specialities Company and Lifestyle
Furnishings, Ltd.
Robert J. McInerney. Mr. McInerney has been employed as President and Chief
Operating Officer of Merisel, Inc., a leading distributor of computer hardware,
networking, equipment and software since February of 1997 where he is
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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<PAGE>
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 Bell South 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 Bell South's investments in
Europe.
Russell G. Kleinknecht. Mr. Kleinknecht has served as Executive Vice
President, Information Transport Systems since October of 1997 and previously
had been Executive Vice President, Global Sales since August 1996 when the
Company was restructured along functional lines. He is responsible for sales
and operations for the I.T.S. Division. From December 1995 he served as
Executive Vice President of Global Business Development where he built the
Company's organization addressing global customer needs. 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 Kleinknecht
Electric Company, an affiliated company. Mr. Kleinknecht is the cousin of
Richard P. and Peter J. Kleinknecht.
Gerald E. Starr. Mr. Starr has served as Executive Vice President, Trading
Systems since January of 1997 and previously had been Vice President of
Manufacturing and Engineering since February of 1996. He is presently
responsible for the sales, operations, engineering and manufacturing of all IPC
Trading Systems Products. 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 and built
it into a leading provider of digital open line speaker systems to the foreign
exchange trading industry. Previously, Mr. Starr founded Turret Equipment
Corporation ("TEC") in 1980 and sold TEC to Tie Communications in 1984, where he
remained until 1990.
David Walsh. Mr. Walsh ____________.
Brian L. Reach. Mr. Reach joined the Company in May of 1997 as Chief
Financial Officer and in November of 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 of 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.
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.
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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, dated as of December 18, 1997, with IPC 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.
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 payable payments if he is terminated "without cause" or for "good
reason" equal to his base salary, plus his average bonus, multiplied by the
greater of three (3) and his then-remaining term of employment. 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 for the following
distinctions: (i) 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 and (ii) Servidio will receive options to purchase 0.14% of
the fully diluted shares of the Company.
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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 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 [544,112] shares in the aggregate [approximately 12% of the outstanding
Common Stock of the Company on a fully diluted basis.]
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SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of January 26,
1998, with respect to the beneficial ownership of IPC Common Stock by: (i) each
director; (ii) each of the named executive officers; and (iii) 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>
AMOUNT & NATURE OF APPROXIMATE
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP/(1)/ PERCENT OF CLASS/(2)/
- ---------------------------------------- ------------------------- ----------------------
<S> <C> <C>
Richard P. Kleinknecht 3,453,398/(3)/(9)/ 32.16%
Peter J. Kleinknecht 2,852,348/(4)/(9)/ 26.56%
Terry Clontz 68,333/(5) *
Theodore J. Johnson 5,000 *
Robert J. McInerney 4,000 *
Peter M. Stein 1,000 *
Gerald E. Starr 77,617/(6)/ *
Russell G. Kleinknecht 116,907/(7)/(9)/ 1.08
All executive officers and
directors as a group (10 persons) 6,592,480/(8)/ 60.52%
- ------------------------------------------
</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 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 by
members of the group 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 P. 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: (a) 155,637 shares in his
Grantor Retained Annuity Trust; (b) 155,637 shares in his wife's Grantor
Retained Annuity Trust; and (c) 300,075 as custodian for his minor child.
Excludes 600,150 shares owned by Peter J. Kleinknecht's adult son and
daughter for which he disclaims beneficial ownership.
/(5)/ Includes options to purchase 58,333 shares exercisable within 60 days of
January 26,1998.
/(6)/ Includes options to purchase 13,333 shares exercisable within 60 days of
January 26, 1998.
/(7)/ Includes options to purchase 70,333 shares exercisable within 60 days of
January 26, 1998.
/(8)/ Includes options to purchase 152,831 shares exercisable within 60 days of
January 26, 1998.
/(9)/ In accordance with the Stockholders Agreement, Richard P. Kleinknecht, and
certain family members and trusts, Peter J. Kleinknecht and certain family
members and trusts and Russell G. Kleinknecht have agreed, among other
things, to vote their shares of IPC Common Stock in favor of the Merger
and the Merger Agreement. See "The Merger and the Financings."
Except as set forth in the previous section, the Company is not aware of
any beneficial owner of more than 5% of the Company's Common Stock as of January
26, 1998.
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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 Walsh ("Walsh") and Anthony Servidio ("Servidio")
(Richard P. Kleinknecht, Walsh and Servidio collectively, the "Management
Stockholders), dated as of December 18, 1997 (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
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<PAGE>
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 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 lent Russell G. Kleinknecht $98,371, with interest accruing at
6% per annum. As of December 31, 1997, the total amount outstanding under this
loan and under employee advances in the principal amount of $140,000 (inclusive
of accrued interest) was $276,739.
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DESCRIPTION OF REVOLVING CREDIT FACILITY
AAC, which will be merged into the Company as part of the recapitalization,
entered into the Commitment Letter with 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 in part to
finance the cash consideration in connection with the Merger and 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 $[____]
million 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 its inventory, accounts receivable and the proceeds of
the foregoing.
The Commitment Letter contemplates that the Revolving Credit Facility
contains 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 the non-payment of principal or interest when due under the notes issued in
connection with the Revolving Credit Facility or, subject to applicable grace
periods in certain circumstances, upon the non-fulfillment of the covenants
described above, certain changes in control of the ownership of the Company or
various other defaults described in the Revolving Credit Facility. If such a
default occurs, the banks will be entitled to take all actions permitted to be
taken by a secured creditor under the Uniform Commercial Code and to accelerate
the amounts due under the Revolving Credit Facility and may require all such
amounts to be immediately paid in full.
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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 $[___] 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.
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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:
Year Redemption Price
---- ----------------
2003 ___.___%
2004 ___.___%
2005 ___.___
2006 and thereafter 100.000
In addition, at any time prior to ______ __, 2001, the Company may redeem
up to __% 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 principal amount at maturity) 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 at least $___ million aggregate principal amount at maturity of
Notes remains outstanding after each such redemption.
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.
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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 $181.9
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 $24.7 million of
secured indebtedness outstanding, including $8.1 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. 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:
SEMI-ANNUAL ACCRUAL DATE ACCRETED VALUE
------------------------ ----------------
, 1998 ............... $
, 1999 ............... $
, 1999 ............... $
, 2000 ............... $
, 2000 ............... $
, 2001 ............... $
, 2001 ............... $ 1,000.00
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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
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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 Preferred Stock, 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 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.
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"Asset Disposition" means the sale or other disposition by the Company or
any of its Restricted Subsidiaries (other than to the Company or another
Restricted Subsidiary) of (i) all or substantially all of the Capital Stock of
any Restricted Subsidiary or (ii) all or substantially all of the assets that
constitute a division or line of business of the Company or any of its
Restricted Subsidiaries.
"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.
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"Change of Control" means such time as a "person" or "group" (within the
meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) becomes the ultimate
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of more
than __% of the total voting power of the Voting Stock of the Company on a fully
diluted basis and such ownership represents a greater percentage of the total
voting power of the Voting Stock of the Company, on a fully diluted basis, than
is held by the Existing Stockholders on such date.
"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
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Notes, all as determined on a consolidated basis (without taking into account
Unrestricted Subsidiaries) in conformity with GAAP.
"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 contemplated by the
Commitment Letter dated January 12, 1998 among Morgan Stanley & Co.
Incorporated, Goldman, Sachs & Co., Arizona Acquisition Corp. and Citicorp
Venture Capital, Ltd.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
"CVC Group" means CVC and its Permitted Transferees.
"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.
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"Existing Stockholders" means [CSH LLC, CSI, the Kleinknecht Stockholders
and the CVC Group].
"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.
"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 of any expenses incurred in
connection with the offering of the Notes 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
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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 face amount of such Indebtedness less the remaining unamortized portion
of the original issue discount of such Indebtedness at the time of issuance as
determined in conformity with GAAP, (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.
"Interest Coverage Ratio" means, on any Transaction Date, the ratio of (i)
the aggregate amount of Consolidated EBITDA for the then most recent four fiscal
quarters prior to such Transaction Date for which reports have been filed with
the Commission pursuant to the "Commission Reports and Reports to Holders"
covenant (the "Four Quarter Period") to (ii) the aggregate Consolidated Interest
Expense during such Four Quarter Period. In making the foregoing calculation,
(A) pro forma effect shall be given to any Indebtedness Incurred or [repaid]
during the period (the "Reference Period") commencing on the first day of the
Four Quarter Period and ending on the Transaction Date (other than Indebtedness
Incurred or repaid
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11
under a revolving credit or similar arrangement to the extent of the commitment
thereunder (or under any predecessor revolving credit or similar arrangement)
[in effect on the last day of such Four Quarter Period unless any portion of
such Indebtedness is projected, in the reasonable judgment of the senior
management of the Company, to remain outstanding for a period in excess of 12
months from the date of the Incurrence thereof), in each case as if such
Indebtedness had been Incurred or repaid on the first day of such Reference
Period;] (B) Consolidated Interest Expense attributable to interest on any
Indebtedness (whether existing or being Incurred) computed on a pro forma basis
and bearing a floating interest rate shall be computed as if the rate in effect
on the Transaction Date (taking into account any Interest Rate Agreement
applicable to such Indebtedness if such Interest Rate Agreement has a remaining
term in excess of 12 months or, if shorter, at least equal to the remaining term
of such Indebtedness) had been the applicable rate for the entire period; (C)
pro forma effect shall be given to Asset Dispositions and Asset Acquisitions
(including giving pro forma effect to the application of proceeds of any Asset
Disposition) that occur during such Reference Period as if they had occurred and
such proceeds had been applied on the first day of such Reference Period; and
(D) pro forma effect shall be given to asset dispositions and asset acquisitions
(including giving pro forma effect to the application of proceeds of any asset
disposition) that have been made by any Person that has become a Restricted
Subsidiary or has been merged with or into the Company or any Restricted
Subsidiary during such Reference Period and that would have constituted Asset
Dispositions or Asset Acquisitions had such transactions occurred when such
Person was a Restricted Subsidiary as if such asset dispositions or asset
acquisitions were Asset Dispositions or Asset Acquisitions that occurred on the
first day of such Reference Period; provided that to the extent that clause (C)
or (D) of this sentence requires that pro forma effect be given to an Asset
Acquisition or Asset Disposition, such pro forma calculation shall be based upon
the four full fiscal quarters immediately preceding the Transaction Date of the
Person, or division or line of business of the Person, that is acquired or
disposed for which financial information is available.
"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
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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
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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, 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 original issue discount) 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 original issue discount) 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
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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, 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
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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 $___ million at any time outstanding.
"Permitted Transferee" means [(i) Citicorp, any direct or indirect Wholly
Owned Subsidiary of Citicorp and any officer, director or employee of CVC,
Citicorp or any Wholly Owned Subsidiary of Citicorp, (ii) any spouse or lineal
descendent (including by adoption and stepchildren) of the offices, directors
and employees referred to in clause (i) above, (iii) any trust, corporation or
partnership 100% in interest of the beneficiaries, stockholders or partners of
which consists of one or more of the Persons described in clause (i) or (ii)
above.]
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"Receivables Facility" means one or more receivables financing facilities,
as amended from time to time, pursuant to which the Company and/or any of its
Restricted Subsidiaries sells its accounts receivable to a Person that is not a
Restricted Subsidiary.
"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 Service and its successors.
"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
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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 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 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.
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"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 Interest Coverage Ratio would be
for the period beginning on the Closing Date through __________ greater than
[___]:1 and thereafter greater than [___]: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 outstanding at any time in an aggregate principal
amount not to exceed the amount of the commitments under the Credit Agreement on
the Closing Date, 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) or (vii) 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
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instrument pursuant to which such new Indebtedness is issued or remains
outstanding, is expressly made subordinate in right 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 (a) are designed solely to protect the Company or its Restricted
Subsidiaries against fluctuations in foreign currency exchange rates or interest
rates and (b) 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 of the Company (in addition to Indebtedness permitted under clauses
(i) through (vi) above) in an aggregate principal amount outstanding at any time
not to exceed $___ million, less any amount of such Indebtedness permanently
repaid as provided under the "Limitation on Asset Sales" covenant described
below; (viii) Indebtedness Incurred to finance the cost (including, without
limitation, the cost of design, development, construction, acquisition,
installation or integration) of equipment used in the telecommunications
business (including ownership interests in MIUs or IRUs) or inventory purchased
or leased by the Company or any of its Restricted Subsidiaries after the Closing
Date; (ix) Indebtedness under one or more revolving credit or working capital
facilities in an aggregate principal amount outstanding at any time not to
exceed ___% of the consolidated book value of the accounts receivable of the
Company and its Restricted Subsidiaries; and (x) Indebtedness of the Company not
to exceed 1.75x the 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).
(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
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on or prior to the Closing Date 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
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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) in any
Person resulting from payments of interest on Indebtedness, dividends,
repayments of loans or advances, or other transfers of assets, in 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,
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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 the sum of (x) $___ million plus (y) the amount of Net Cash
Proceeds received by the Company after the Closing Date as a capital
contribution or from the sale of its Capital Stock (other than Disqualified
Stock) to a Person who is not a Restricted Subsidiary of the Company, except to
the extent such Net Cash Proceeds are used to Incur Indebtedness pursuant to
clause (viii) under the "Limitation on Indebtedness" covenant or to make
Restricted Payments pursuant to clause (C)(2) of the first paragraph, clauses
(iii) or (iv) of this paragraph, of this "Limitation on Restricted Payments"
covenant, plus (z) the net reduction in Investments made pursuant to this clause
(vi) resulting from distribution on or repayments of such Investments 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 is included in the calculation of
Adjusted Consolidated Net Income) or from such Person becoming a Restricted
Subsidiary (valued in each case as provided in the definition of "Investments"),
provided that the net reduction in any Investment shall not exceed the amount of
such Investment; (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 license or 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 $___ million in any
calendar year, or $___ million in the aggregate; or (ix) Investments acquired in
exchange for Capital Stock (other than Disqualified Stock) of the Company;
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
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Capital Stock of the Company are used for the redemption, repurchase or other
acquisition of the Notes, or Indebtedness 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.
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; or (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.
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,
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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 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) of the Indebtedness Incurred under the Credit Agreement
existing on the Closing Date] {Will Restricted Subsidiaries be providing
guarantees under the Senior Credit Facility?} 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.
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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
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 Issuance 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 Issuance 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 related to the Merger and the Financings; (vii)
transactions with customers, clients, suppliers, or purchasers or sellers of
goods or services,
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in each case in the ordinary course of business and otherwise in compliance with
the terms of the Indenture which are fair to the Company or its Restricted
Subsidiaries, in the reasonable determination of the Board of Directors of the
Company or the senior management thereof, or are on terms at least as favorable
as might reasonably have been obtained at such time from an unaffiliated party;
(viii) sales of accounts receivable, or participations therein, in connection
with any Receivables Facility or (ix) 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 (v) of this
paragraph, (a) the aggregate amount of which exceeds $[ ] million in value, must
be approved or determined to be fair in the manner provided for in clause (i)(A)
or (B) above and (b) the aggregate amount of which exceeds $[__] million in
value, must be determined to be fair in the manner provided for in clause (i)(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.
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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.
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 with the Commission 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
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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 $[__] 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 $[__] 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 $[__] 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 $[__] 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
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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 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
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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.
MERGER AND CONSOLIDATION
The Company will not consolidate with or merge with or into, or convey,
transfer or lease all or substantially all its assets to, any Person, unless:
(i) the resulting, surviving or transferee Person (the "Successor Company") will
be a corporation organized and existing under the laws of the United States of
America, any State thereof or the District of Columbia and the Successor Company
(if not the Company) will expressly assume, by an indenture supplemental hereto,
executed and delivered to the Trustee, in form satisfactory to the Trustee, all
the obligations of the Company under the Notes and the Indenture; (ii)
immediately after giving effect to such transaction (and treating any
Indebtedness which becomes an obligation of the Successor Company or any
Restricted Subsidiary as a result of such transaction as having been Incurred by
the Successor Company or such Restricted Subsidiary at the time of such
transaction), no Default will have occurred and be continuing; (iii) except in
the case of a merger the sole purpose of which is to change the Company's
jurisdiction of incorporation, immediately after giving effect to such
transaction, the Successor Company would be able to Incur an additional $1.00 of
Indebtedness under paragraph (a) of the covenant described under "--Limitation
on Indebtedness"; (iv) immediately after giving effect to such transaction, the
Successor Company will have Consolidated Net Worth in an amount which is not
less than the Consolidated Net Worth of the Company immediately prior to such
transaction and (v) the Company will have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel,
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each stating that such consolidation, merger or transfer and such supplemental
indenture (if any) comply with the Indenture.
Notwithstanding the foregoing clauses (ii), (iii) and (iv), any Restricted
Subsidiary may consolidate with, merge into or transfer all or part of its
properties and assets to the Company.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Indenture, but the
predecessor Company in the case of a conveyance, transfer or lease of all or
substantially all its assets will not be released from the obligation to pay the
principal of and interest on the Notes.
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
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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 (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 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
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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 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 Depositary and registered in the name of
a nominee of the Depositary. Transfers between participants in the Depositary
will be effected in the ordinary way in accordance with the Depositary's rules
and will be settled in same-day funds.
The Depositary has advised the Company and the Underwriters that the
Depositary intends to follow the procedures described below:
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The Depositary 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 Depositary's nominee).
The Depositary 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 Depositary holds securities that its
participants ("Participants") deposit with the Depositary. The Depositary
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 Depositary 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
Depositary'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
Depositary 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 Depositary'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 Depositary 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 Depositary's practice is to determine by
lot the amount of the interest of each Direct Participant in such issue to
be redeemed.
Neither the Depositary nor Cede & Co. will consent or vote with
respect to the Notes. Under its usual procedures, the Depositary mails an
Omnibus Proxy to the issuer
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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 Depositary. The Depositary's practice is to
credit Direct Participants' accounts on the payable date in accordance with
their respective holdings shown on the Depositary's records unless the
Depositary 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 Depositary, 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 Depositary 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 Depositary, 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 Depositary and the
Depositary'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 Depositary for the Global Notes, or its nominee, is the
registered owner of the Global Notes, the Depositary 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 Depositary 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 Depositary, 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 Depositary generally will give or take
such action, or authorize the relevant Participants to give or take such action,
and such Participants would authorize Beneficial
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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 Depositary that the Depositary 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 Depositary has
advised the Company that it will act with respect to such matters upon written
instructions from a Participant to whose account with the Depositary the
relevant beneficial ownership in the Notes is credited. The Company understands
that a Participant will deliver such written instructions to the Depositary 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 Depositary with Commission pursuant to Section 17 of the
Exchange Act, Participants are required to indemnify the Depositary against all
liability the Depositary may sustain, without fault on the part of the
Depositary 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.
Accredited value of, premium, if any, and interest payments on Notes
registered in the name of or held by the Depositary or its nominee will be made
to the Depositary 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 Depositary 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 cancelled by the Trustee.
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CERTAIN UNITED STATES FEDERAL INCOME TAX
CONSIDERATIONS
GENERAL
In the opinion of Thacher Proffitt & Wood, counsel to the Company, the
following discussion is an accurate summary of the material 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 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 non-United States persons).
This summary is limited to persons who will hold the Notes as capital assets
(generally, assets held for investment). 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). 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.
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 payments required to be made on such
Note, including all payments of stated interest. Thus, the stated interest on
the Notes will not be included in the gross income of a holder when received or
accrued, but instead will be included in income under the OID accrual rules
described below.
For federal income tax purposes, each holder (regardless of its accounting
method) generally must include in gross income a portion of the OID in each
taxable year during which a Note is held in an amount equal to the OID that
accrues during such period, determined by using a constant yield to maturity
method that reflects compounding of interest. This means that each holder will
be required to include amounts in gross income without a corresponding receipt
of cash attributable to such income.
A holder's adjusted tax basis in a Note will be equal to the issue price
of such Note, increased by OID included in gross income with respect to such
Note and decreased by payments of stated interest on such Note.
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.
If the yield to maturity with respect to the Notes equals or exceeds the
sum of the "applicable federal rate" (____% for ________, 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. 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 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). In the case of noncorporate taxpayers,
capital gains recognized
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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
The following discussion is a summary of certain United States federal
income tax consequences to a Non-U.S. Holder that holds a Note. A "Non-U.S.
Holder" is a holder that is not (i) a citizen or individual resident of the
United States for federal income tax purposes, (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
includible in gross income for federal income tax purposes 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 United
States fiduciaries have the authority to control all substantial decisions of
the trust.
A Non-U.S. Holder generally will not be subject to United States 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 and (iii) such
Non-U.S. Holder certifies, under penalty of perjury, that it is a Non-U.S.
Holder and provides its name and address.
A Non-U.S. Holder that does not qualify for the exception from tax
described above would generally be subject to United States withholding tax at a
flat rate of 30% (or a lower applicable treaty rate) on payments of interest or
accrual of OID, unless 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 any successor
form) to the withholding agent, in which case such income would be taxed on a
net basis as though the holder were a United States person.
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) the interest or
OID on the Note would not have been 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, 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 certification
on IRS Form W-8 (Certificate of Foreign Status).
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Backup withholding is not an additional tax. Amounts withheld under the
backup withholding rules may be credited against a holder's tax liability, and 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).
The IRS recently issued Treasury regulations, generally effective for
payments made after December 31, 1998, concerning the withholding of tax and
reporting for certain amounts paid to non-resident individuals and foreign
corporations. Among other things, these Treasury regulations may require Non-
U.S. Holders to furnish new certification of their foreign status after December
31, 1998. Prospective purchasers of Notes should consult their tax advisors
concerning the applicability and effect of such Treasury regulations on an
investment in Notes.
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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:
PRINCIPAL AMOUNT
- ----------------------------------- OF
NAME NOTES AT MATURITY
- -----------------------------------
Morgan Stanley & Co. Incorporated $
Goldman, Sachs & Co.
Total $
===================
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.
107
<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.
108
<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 $157.0 million
through the issuance of 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 the
senior subordinated 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 Electronics, 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 1,362,073 shares of
common stock for the exercise 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>
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.
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
========
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
II-1
<PAGE>
that such person is, was or has agreed to serve as a director, officer, employee
or agent of another corporation or organization at the written request of the
Registrant.
Article IX also empowers the Registrant to purchase and maintain insurance
to protect itself and its directors and officers, and those who were or have
agreed to become directors or officers, against any liability, regardless of
whether or not the Registrant would have the power to indemnify those persons
against such liability under the law or the provisions set forth in the Restated
Certificate of Incorporation or Bylaws. The Registrant is also authorized by
its Amended Bylaws to enter into individual indemnification contracts with
directors and officers. The Registrant has obtained insurance policies under
which the Registrant's directors and officers are insured, within the limits and
subject to the limitations of the policies, against certain expenses in
connection with the defense of certain actions, suits or proceedings, and
certain liabilities which might be imposed as a result of certain actions suits
or proceedings, to which they are parties by reason of being or having been such
directors or officers.
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
Exhibit
Number Description
------ -----------
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).*
II-2
<PAGE>
25 Form T-1 Statement of Eligibility under the Trust Indenture Act of
1939 of , as Trustee.*
_____________________
* 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.
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 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 13th day of
February, 1998.
IPC Information Systems, Inc.
By /s/ S. Terry Clontz
------------------------------
S. Terry Clontz
President, Chief Executive Officer and
Director
POWER OF ATTORNEY
Each of the undersigned officers and directors of IPC Information Systems, Inc.
hereby constitutes and appoints S. Terry Clontz and Daniel Utevsky, and each or
any of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities to sign any or all amendments or post-effective
amendments to this Registration Statement and any registration statement for the
same offering filed pursuant to Rule 462 under the Securities Act of 1933, as
amended, and to file the same, and with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents full power and authority to do and
perform each and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as he or she might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them or his substitute and substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
/s/ RICHARD P. KLEINKNECHT Chairman and Director February 13, 1998
- ---------------------------
Richard P. Kleinknecht
/s/ S. TERRY CLONTZ President, Chief Executive February 13, 1998
-------------------------- Officer
S. Terry Clontz and Director (Principal
Executive Officer)
/s/ BRIAN L. REACH Chief Financial Officer February 13, 1998
- ----------------------------
Brian L. Reach (Principal Financial Officer
and Principal Accounting
Officer)
/s/ Peter Kleinknecht Vice Chairman and Director February 13, 1998
- ----------------------------
Peter Kleinknecht
/s/ Robert J. McInerney Director February 13, 1998
- ----------------------------
Robert J. McInerney
II-4
<PAGE>
/s/ Theodore J. Johnson Director February 13, 1998
- ----------------------------
Theodore J. Johnson
/s/ Peter M. Stein Director February 13, 1998
- ----------------------------
Peter M. Stein
II-5
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
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).*
25 Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939 of
IBJ Schroder Bank and Trust Company, as Trustee.*
_______________
/*/ To be filed by amendment.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-3 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
February 13, 1998
