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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
COMMISSION FILE NUMBERS: 0-26171 and 0-25492
IPC COMMUNICATIONS, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 13-4060937
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
IPC INFORMATION SYSTEMS, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 58-1636502
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(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
Wall Street Plaza
88 Pine Street
New York, New York 10005
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(Address of Principal Executive Offices) (Zip Code)
(212) 825-9060
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Registrants' Telephone Number, Including Area Code
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Securities registered pursuant to Section 12(b) of the Act: Common Stock, par value $.01 per share
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(Title of Class)
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrants: (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) have been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the registrants' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of IPC
Communications, Inc. as of November 30, 1999 was approximately $133.3 million
based upon the American Stock Exchange closing sale price of these shares on
that date. All of the voting stock of IPC Information Systems, Inc. is held by
IPC Communications, Inc.
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The number of shares of IPC Communications, Inc. Common Stock outstanding as of
November 30, 1999 was 8,604,380. The number of shares of IPC Information
Systems, Inc. Common Stock outstanding is 100.
DOCUMENTS INCORPORATED BY REFERENCE - Portions of IPC Communications, Inc.'s
Proxy Statement for the Annual Meeting of Stockholders to be held on March 2,
2000 are incorporated by reference into Part III of this Form 10-K Report, which
Proxy Statement is to be filed within 120 days after the end of the Registrants'
fiscal year ended September 30, 1999.
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Disclosure Regarding Forward-Looking Statements
This Report on Form 10-K contains certain forward-looking information,
including statements regarding strategic direction. These comments constitute
forward-looking statements within the meaning of section 21E of the Securities
Exchange Act of 1934, as amended, which involve significant known and unknown
risks, uncertainties and other factors. Given these uncertainties, investors
are cautioned not to place undue reliance on such forward-looking statements.
Actual results may differ materially from the information discussed in these
forward-looking statements. Among the factors that could cause actual results,
performance or achievements to differ materially from any future results,
performance or achievements expressed, described or implied by such forward-
looking statements are general economic conditions, key employee factors,
competition, potential technology changes, changes in or the lack of anticipated
changes in the regulatory environment in various countries, the ability to
secure partnership or joint-venture relationships with other entities, the
ability to raise additional capital to finance expansion, and the risks inherent
in new product and service introductions and the entry into new geographic
markets and other factors discussed in the Company's other filings with the
Securities and Exchange Commission.
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PART I
ITEM 1. BUSINESS
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Background
IPC Communications, Inc. ("IPC") is the leading provider of integrated
telecommunications equipment and services that facilitate the execution of
transactions by the worldwide financial services community. These transactions
involve the trading of equity and debt securities, commodities, currencies and
other financial instruments. The Company designs, manufactures, installs and
services turret systems which provide desktop access to time-sensitive
communications and data. In addition, through its subsidiary, IXnet, Inc.
("IXnet"), the Company operates a global network (the "IXnet Extranet"),
providing a variety of voice, data and content distribution services
specifically designed to meet the specialized communications requirements of the
financial services community. 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 sector.
IPC became the holding company for IPC Information Systems, Inc. ("IPC
Information Systems") effective May 21, 1999 through a merger. Following the
merger, IPC represented the same consolidated financial position as IPC
Information Systems prior to the merger. Accordingly, the consolidated
financial statements included in this Form 10-K reflect the operations of IPC
Information Systems and its subsidiaries through May 20, 1999 and of IPC
thereafter. References to the "Company" in this Form 10-K refer to IPC and its
subsidiaries, including IPC Information Systems.
For the year ended September 30, 1999, the Company's revenues were $339.2
million and earnings before interest, taxes, depreciation and amortization, and
stock compensation charge ("EBITDA") were $40.1 million.
Business of IPC
The Company's three major operating units are:
Trading Systems. The Company's sophisticated turret systems, consisting of
a desktop appliance connected with associated switching equipment, provide
highly reliable, "non-blocking" voice communications primarily for trading
operations. In addition, these systems incorporate a proprietary design,
including many features designed to increase 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 through software modifications as opposed to hardware
changes. The Company believes 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.
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Information Transport Systems ("ITS"). The Company's ITS division provides
cabling infrastructure, design, installation and maintenance services for high
speed voice and data networks, including local area networks ("LAN"s), wide area
networks ("WAN"s) and data connectivity applications. The Company's ITS
engineers design and implement intelligent network infrastructures that provide
connectivity to a wide array of customer applications. The ITS division's
expertise includes network designs which utilize components from suppliers such
as Cisco Systems, Inc. ("Cisco"), 3Com, Bay Networks and Xylan. The ITS division
also installs all of the available physical transport media, including copper,
fiber optic and coaxial cable necessary for network design. ITS services also
include project management for network infrastructure upgrades and on-site, as
well as on-call, technical support. The Company stations ITS personnel on-site
for many of its major customers.
IXnet. IXnet is a leading provider of communications services to the
worldwide financial services community. IXnet has built and operates the IXnet
Extranet, a global seamless communications network connecting financial services
firms and their business partners, as well as multiple offices within the same
firm using a global seamless network. Through the IXnet Extranet, the customer
obtains highly reliable, secure and fully managed voice and data connectivity
without having to access multiple disparate public networks or rely on multiple
customer service organizations.
The services provided are tailored to meet the specialized needs of the
financial services community, including managed voice and data services, virtual
private network services and fully outsourced network solutions. In addition,
IXnet aggregates, hosts and distributes financially oriented content, such as
news, research, analytics and market data, for information service providers.
The IXnet Extranet provides a unique value proposition which enables a firm
to reliably communicate over a common network platform that supports multiple
communications protocols, and efficiently access information from multiple
providers. Customers are connected to the IXnet Extranet by installing
electronic network devices, know as customer access nodes ("CAN"s) on the
customers' premises. The IXnet Extranet currently connects customers in
financial centers in approximately 37 countries around the world, including the
financial centers of New York, Chicago, Toronto, London, Frankfurt, Paris,
Zurich, Hong Kong, Tokyo, Sydney and Singapore. Additionally, IXnet has three
data centers which host services for over 30 content providers and manage
servers and other equipment for customers who have outsourced their network
applications to IXnet. As of September 30, 1999, IXnet had approximately 500
customers and in excess of 1,300 installed CANs.
IXnet was incorporated in Delaware on May 4, 1999 as a wholly owned
subsidiary to hold the Company's interests in International Exchange Networks,
Ltd. ("IENL"). Unless the context otherwise requires, references to "IXnet" in
this Form 10-K refer to IXnet, Inc. and its subsidiaries from May 4, 1999 and to
IENL and its subsidiaries through May 4, 1999. In August 1999, IXnet completed
its initial public offering (the "IPO") through the sale of approximately
7,475,000 shares of common stock at $15 per share. The net proceeds of the IPO
of $102.1 million are being used to finance the continued deployment and
expansion of the IXnet Extranet and for possible acquisitions, strategic
alliances, or investments in property or assets for IXnet's business. As of
November 30, 1999, the total number of shares of common stock held by IPC after
the IPO is 43,100,000 shares, or approximately 84.4% of the shares outstanding.
Merger
On April 30, 1998, Arizona Acquisition Corp. ("AAC") was merged into IPC
Information Systems (the "Merger"). Under the terms of the Merger, each share
of common stock of IPC Information Systems was converted at the election of the
holder thereof into either (i) the right to receive $10.50 (on a post split
basis) in cash or (ii) the right to retain one share of common stock of the
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surviving corporation. Upon the Merger, IPC Information Systems issued $247.4
million aggregate principal amount at maturity ($180.0 million initial proceeds
upon issuance) of its ten year, 10 7/8% Senior Discount Notes due 2008. Prior to
the Merger, AAC was owned by (i) Cable Systems Holdings LLC, whose membership
interests were owned by Citicorp Venture Capital, Ltd. and certain private
investors, (ii) CSH LLC's indirect subsidiary, Cable Systems International,
Inc., and (iii) the investment fund of Lawrence Smith & Horey III, L.P. (now
known as Allegra Capital Partners III, L.P.). The Merger was accounted for as a
leveraged recapitalization. Accordingly, the historical cost basis of the
Company's assets and liabilities has not been impacted by the Merger.
Simultaneous with the Merger, IPC Information Systems acquired the
remaining 20% interest in IENL through the issuance of 457,140 shares (adjusted
for the stock split) of surviving corporation common stock.
Recent Acquisitions and Strategic Alliances
On June 21, 1999, IPC Information Systems acquired V-Band Corporation for
approximately $1.5 million in cash. The purchase was financed through a
combination of cash from operations and borrowings under the General Electric
Capital Corporation revolving credit facility (the "Revolving Credit Facility").
The acquisition was accounted for using the purchase method of accounting and
resulted in approximately $7.5 million of goodwill, of which approximately $7.0
million remains unamortized at September 30, 1999.
On December 31, 1998, IPC Information Systems purchased the assets of
Reuters Voice Systems, a business unit of Reuters Group PLC, for approximately
$5.7 million in cash. The purchase was financed through a combination of cash
from operations and borrowings under the Revolving Credit Facility. The
acquisition was accounted for using the purchase method of accounting and
resulted in approximately $5.3 million in goodwill, of which approximately $4.3
million remains unamortized at September 30, 1999.
On December 18, 1998, IENL acquired all of the issued and outstanding
common shares of Saturn Global Network Services Holdings Limited ("Saturn") from
Marshalls 106 Limited ("Marshalls"). The acquisition was accounted for using the
purchase method of accounting. As a result of the acquisition, IENL recorded
approximately $49.2 million of goodwill, which is being amortized on a straight-
line basis over ten years. The purchase price for Saturn included a cash payment
in the amount of $35.7 million and the issuance of a promissory note in the
amount of $7.5 million. In addition, IXnet assumed indebtedness of Saturn due to
Marshalls in the amount of $5.0 million payable over 24 months. Under this
agreement, the Marshalls Note is subject to a working capital adjustment and
right of offset. The working capital adjustment was settled in June 1999
resulting in a reduction of the obligation by approximately $2.0 million.
On February 13, 1998, IPC Information Systems acquired MXNet for
approximately $6.7 million. Through the acquisition of MXNet, IXnet entered the
business of distributing market data for content providers. IXnet operates a
virtual warehouse where it hosts the data of various content providers and then
distributes such data to end-users on behalf of the content providers. The
IXnet Extranet serves as a content-neutral delivery system to the desktops of
the financial services community. This approach allows the data provider
customers to display content in the formats they desire. Because IXnet often is
willing to expand the IXnet Extranet to reach additional end-users targeted by
our content provider customers, IXnet believes that the IXnet Extranet is more
attractive than existing distribution networks of competing content providers.
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On September 24, 1999, IXnet entered into a strategic alliance agreement
(the "Strategic Agreement"), which included the licensing of certain software
products to enhance the intelligence of its network for a purchase price of
$20.0 million consisting of $10.0 million in cash financed from the proceeds
from IXnet's IPO and 500,000 shares of IXnet common stock valued at an average
closing price prior to the agreement date. The Strategic Agreement is designed
to enhance IXnet's network capabilities with embedded intelligence, delivering
financial enterprise integration, subject-based addressing, trading turret
integration and application management capabilities.
The Industry
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, seamless access to multiple lines. In order to meet these
specific needs, a small number of manufacturers have developed highly-
sophisticated voice communications systems called turret systems. Turret
systems are required to be exceptionally reliable because of the time-sensitive
nature of trading activity and the high opportunity cost of a potential service
outage. The largest trading floors may contain in excess of 1,000 turrets, 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 the 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 customer nor cost effective for
the provider.
To date, financial trading firms have had three 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; (ii) utilizing
the broad based common carriers' public networks, which consist of numerous non-
homogeneous systems and services offered by a multiplicity of local and long
distance providers in different national markets. Presently, a substantial
portion of international communications, including services marketed by some of
the largest telecommunications carriers 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; or (iii) utilizing the public Internet,
which is not well suited for critical financial services applications due to
lack of reliability, limited security and the absence of a single governing
authority and contact point for all matters of accountability.
LAN/WAN Infrastructure, Design, Installation and Maintenance. Integrated
high speed internal data communications networks have become critical to
financial services companies. Companies are installing increasingly complex
computing environments centered around LANs and WANs that connect networked
desktop personal computers and workstations, printers, telecommunications
equipment, file servers and facsimile machines. As network requirements have
grown and network designs have become more complex, many companies have chosen
to outsource their LAN/WAN design, installation and maintenance needs to
independent specialists.
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Business Strategy
The Company's fundamental strategy is to leverage its leading market
position in voice trading systems and established customer relationships to
become the preferred network services provider to the financial services
community. The principal elements of the Company's business strategy include
the following:
Increase Market Share of Turret Systems on Large Trading Floors. The
Company estimates that its turrets represent a majority of the total installed
base of turrets in New York and London, and lower percentages in other financial
centers such as Hong Kong, Tokyo and Frankfurt. Between 1994 and 1999, the
Company estimates that it increased its market share in London from 24% to 57%.
The Company believes that there is substantial opportunity to achieve
significant increases in other financial centers by dedicating additional sales
and marketing resources and by focusing on the large installation opportunities
which the Company expects will continue to be created by the financial services
industry expansion and consolidation trend. The Company expects to continue to
increase its 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
less than 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, 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 the Alliance VS/MX(TM), a turret system
designed to provide a cost effective system for the smallest trading
organizations. 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.
Leverage Existing Customer Relationships to Provide Enhanced
Telecommunications Services. The Company believes it is in a strong position to
provide private network services through IXnet to the financial services
community by virtue of IPC's large installed base of turret systems and
established relationships with many of the largest firms involved in global
financial services. The Company believes its reputation for high quality
service will enable it to capture portions 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 ITS Expertise. The Company intends to leverage ITS's expertise in
the design, integration and installation of data networking equipment (such as
routers and hubs) to provide turnkey managed data services and ongoing support
of data networking equipment located at the Company's client sites. In
addition, the Company intends to narrow its focus on the higher margin
components of design, installation and support of LANs, WANs and data
connectivity and reduce its involvement in the more competitive and lower margin
cabling infrastructure projects.
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Exploit First-Mover Advantage. The Company believes that IXnet is one of
the first to offer the dedicated IXnet Extranet exclusively focused on the
financial services community. IXnet intends to significantly leverage its
position in the marketplace by aggressively expanding its direct sales force and
investing in the IXnet brand.
Rapidly Deploy Customer Access Nodes. Adding key firms and sites to the
IXnet Extranet will greatly increase its value by enabling IXnet to offer
greater inter-firm connectivity. The Company believes that the addition of new
customers to the IXnet Extranet will also attract new content providers to the
IXnet Extranet who seek to deliver content to the expanded customer base.
Similarly, the Company believes that as the number of content providers whose
services are delivered over the IXnet Extranet increases, additional customers
will be attracted to the expanded content of the IXnet Extranet.
Accelerate Network Expansion. IXnet is focused on expanding the
infrastructure of the IXnet Extranet to extend the addressable market, enhance
reliability and increase cost efficiencies.
Aggressively Add Content Providers and Applications to the IXnet Extranet.
IXnet intends to become the best delivery vehicle for content providers who want
to reach the financial services community. It will seek to accomplish this goal
by remaining a content neutral delivery system and by offering content providers
a cost-effective method of reaching their target market through a network
gateway or by having IXnet host their content at one of its data centers.
Accelerate Growth of IXnet by Acquisitions and Strategic Agreements. The
Company's growth strategy for IXnet includes the acquisition of similar or
compatible telecommunications services firms with strong financial trading
community focus. The Company expects IXnet will use such acquisitions to
accelerate IXnet's growth by extending its geographic reach and also to improve
its margins by increasing utilization of the IXnet Extranet backbone over a
broader customer base.
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Products and Services
The Company is involved in (i) the design, manufacture, installation and
maintenance of voice telecommunications systems primarily for the financial
trading community (including turret systems and other associated products); (ii)
the design, installation and maintenance of data networks and associated cabling
infrastructures through its ITS division; and (iii) the provision of voice and
data telecommunications services to the financial services community through its
IXnet division. These products and services represented 65.7%, 27.7% and 6.6%,
respectively, for the fiscal year ended September 30, 1997, 66.5%, 21.4% and
12.1%, respectively, for the fiscal year ended September 30, 1998 and 57.3%,
21.0% and 21.7% for the fiscal year ended September 30, 1999, 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. Turrets provide nearly instantaneous
connection to the call recipient and a high degree of reliability. A turret
system is installed in addition to, and communicates with, a company's public
branch exchange ("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 can result in a lost
transaction, and a outage of the entire telecommunications system can 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 degradation of call setup speed. The Company's flagship Alliance MX
TM system is designed to support up to 23,000 telephone lines in simultaneous
use by up to 2,000 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 his desktop configuration with personal speed
dials, direct connections and associated displays, and to store the settings in
the system's back room switching equipment. Traders are able to access their
customized settings from any turret connected to the system, or through systems
that are networked together or through an internet/intranet connection.
The Company has historically focused on large trading organizations. The
Alliance MX is designed for trading floors from 24 to over 1,000 positions. The
Alliance VS/MX(TM) is designed for trading floors with between four and 24
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.
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The Company's turret systems products and services include the following:
Large Trading Systems. The Company's flagship turret product is the
Alliance MX(TM) system. Alliance MX(TM) 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. Alliance MX(TM) 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.
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 ("MACs") to existing
IPC trading floor installations. For fiscal year 1999, turret service revenue
accounted for 36.9% of the Company's revenue from trading systems. Turret
service revenue has historically been fairly stable. Following a standard one-
year warranty 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
and on-call technical support by IPC personnel for smaller trading operations.
As of September 30, 1999, the Company had over 240 technicians servicing ongoing
contracts, primarily in New York and London. Revenue from MACs is generated
whenever a customer adds additional trading positions to a trading floor or
makes changes to the turret system configuration. MACs produce a steady and
relatively predictable revenue stream for the Company.
TradePhone MX(TM). The Company also manufactures a multi-button telephone
called the TradePhone MX that is designed to operate with the MX family of
turret systems. This product 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 off trading floor use.
The World Turret(TM). The World Turret is a JAVA(TM) based software
application that provides traders remote access to their trading system via the
internet or a corporate intranet. Using a standard PC or laptop traders are able
to access all of their lines and services from any remote location. The World
Turret provides traders full feature functionality and real time performance via
standard voice and data connections.
Exchangefone(TM). Exchangefone is an extremely rugged 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
number. 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.
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TradeSmart CTI(TM) Suite. TradeSmart CTI(TM) solutions are a strategic
extension of IPC's desktop voice systems providing value-added software
applications that converge voice and data applications of the trading
environment. The suite of software products provides a broad range of options
ranging from custom-developed applications to "shrink-wrapped" solutions.
Other Products and Services. In order to offer a broader product line, IPC
remarkets various other products, including PBX systems, and voice logging and
recorder devices.
The IXnet Extranet
IXnet has deployed a global network infrastructure connecting financial
centers worldwide. The IXnet Extranet consists of IXnet-owned switches, network
operations centers ("NOCs"), points of presence ("POPs"), data centers, CANs and
primarily leased fiber optic facilities.
The IXnet Extranet utilizes a uniform equipment platform based on Newbridge
network management technology, and augmented with Nortel Networks switches for
enhanced voice services and Cisco routers for enhanced data services. Newbridge
network access nodes and network management software are located at the POPs,
while CANs are directly installed at the customer's premises. The Newbridge
platform provides advanced global network management which allows for rapid
provisioning and end-to-end network diagnostics from our NOCs to our customers'
premises. IXnet owns two Nortel Networks digital switches located in New York
and London that allow for universal availability of services, rapid provisioning
of services, short call setup times and a single network management and control
system. IXnet has deployed Cisco products for various network functions
including core routing, distribution routing and customer premises routing. The
advanced features and built-in scalability of the Cisco routers enable IXnet to
offer high quality and globally advanced data services such as Liquidity and
IXFrame.
The infrastructure of the IXnet Extranet includes the following components:
Network operations centers. IXnet has deployed NOCs in the financial
districts of New York and London, each of which serves as a control center of
the IXnet Extranet. Each NOC is staffed 24 hours per day, seven days per week
and houses the specialized equipment necessary for managing the IXnet Extranet.
The NOCs contain workstation-based software systems utilizing state of the art
graphical user interfaces to provide a global view the IXnet Extranet, including
all CANs worldwide. This network management system allows for the display of
alarms for all network faults, testing of the network for adverse conditions,
re-routing of traffic to other equipment or facilities, and remote maintenance
for certain network faults. The New York NOC concentrates on the Americas and
Asia, it also acts as the overall NOC for the entire IXnet Extranet. The London
NOC services Europe but also acts as a backup system for the New York NOC and is
capable of supporting the entire IXnet Extranet if required. IXnet plans to
begin construction of a new NOC in the Asia/Pacific region in order to expand
its presence.
Points of Presence. IXnet has POPs in financial centers worldwide. POPs
house the network transmission equipment required to provide all IXnet services
to the financial community. A POP enables IXnet to bring the broad portfolio of
services through the local high speed access facility in a prompt and cost
effective manner. These POPs are built to high standards with highly reliable
power supply systems, backup power capability, separate humidity control and air
conditioning, raised equipment flooring, static electricity control and
security, fire and other control systems. POP's are either located in facilities
owned and operated by the IXnet or are co-located in other facilities through
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arrangements with other carriers. Equipment in the POPs may include Newbridge
products for global transmission bandwidth management as well as asynchronous
transfer mode switching, Nortel Networks and other voice switches and other
equipment such as Stratum 1 clocking, echo cancellers, compression equipment,
digital cross connections systems, test equipment and patch panels.
Backbone facilities. In connecting POP to POP, IXnet has both leased and
purchased various long haul facilities worldwide, including digital lines at
various transmission speeds, such as T-1, E-1, DS-3 and STM-1. Other fiber
optic facilities are leased from major international facilities-based carriers.
In addition, IXnet has purchased or committed to purchase interests in or
indefeasible rights of use ("IRU") on various international projects.
Data Centers. The POPs in New York, London, and Newark, New Jersey also
house Liquidity content centers. These data centers enable IXnet to host and
distribute the content of various content providers. Equipment in the data
centers includes Extreme Networks layer 3 switches, Bay Networks distribution
routers and Cisco systems inter-data center and dial backup routers.
Services
IXnet services fall into three categories: voice, data and content
distribution. Data services include the following:
IXLink(TM). IXLink provides a premium end-to-end managed digital service
for data transmission with bandwidth available from 64Kbps to 768Kbps. IXLink's
features include end-to-end circuits which eliminate the need for multiple
vendors, bandwidth on demand, simplified billing from a single worldwide service
provider and shorter provisioning intervals.
Bandwidth Resale. IXnet provides leased bulk bandwidth at speeds of
768Kbps and above for various customer applications. This is a cost effective
service for customers with large bandwidth requirements.
IXFrame(TM). IXFrame is a managed data network service using frame relay
as its underlying technology and including managed customer-site routers.
Outsourcing. IXnet provides end-to-end management of a customer's network
including network services and hardware. IXnet takes complete responsibility
for building, operating and maintaining the network enabling the customer to
focus on their core business and avoid the cost of maintaining a network.
Content distribution services include the following:
Liquidity(TM). Liquidity is a turnkey managed data network service based
on internet protocol technology. Liquidity provides, over a single network
connection, secure and reliable delivery of time-sensitive financial information
and applications, such as market data, access to institutional electronic
trading systems and routing of messages such as FIX used in the electronic
trading process. Standard Liquidity features include a customer-site router and
network connection which is supplied, owned and managed by IXnet, as well as
network performance guarantees and several levels of optional content data
center hosting including complete outsourcing.
Content Hosting. IXnet provides content hosting services that permit
financial information services providers to deliver data to the desktop of the
financial services community without having to
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invest significantly in technology, infrastructure or operations staff. The
level of hosting services provided scales from simple co-location to fully
outsourced network solutions.
Voice services provided by IPC include the following:
DigiHoot(TM). The DigiHoot hoot & holler networks are specialized open
line voice conference systems utilized by trading firms to allow continuous
voice contact between various trading floors. The DigiHoot service is a desktop
to desktop managed solution delivered over the IXnet Extranet combined with
IPC's Tradenet turret systems, known as MX turret systems, and speaker systems.
MetroLink(TM). MetroLink is a digital private line service that connects
IPC's Tradenet MX customers within a metropolitan area. IXnet serves as a single
source provider of hardware and connectivity from turret to turret. Compared to
the analog connections typically available in the market, MetroLink provides
faster circuit provisioning, end-to-end managed digital connectivity, reduced
installation cost and rapid circuit reconfigurations at a competitive price.
TraderConnect(TM). TraderConnect service is provided in connection with
the turret systems division for a fully integrated solution. As part of this
service, MX turret systems are located in the POP. TraderConnect enables a
customer to utilize the features of the turret system remotely and also access
IXnet's various network services.
IXGlobal(TM). IXGlobal is IXnet's on-net switched voice service. It
provides a seamless international virtual private voice network service to the
financial services 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 and
competitive pricing for on-net calls to IXnet subscribers, fast call completion
and advanced features including caller name and ID, abbreviated dialing plans
and customized billing formats.
IXPrime(TM). IXPrime is the off-network switched voice service. Features
of IXPrime include switched or dedicated originating access and flat rate
pricing for calls.
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ITS
The Company's ITS 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. Most of the Company's fiscal 1999 ITS revenue was from jobs
performed in the New York City metropolitan area. In addition, ITS has a core
group of highly skilled project managers and design engineers who are dispatched
to manage installation projects elsewhere.
Value-Added Services. The Company provides a wide range of value-added
services, including network and trading room design, consulting, engineering
implementation, project management, staging and operational testing of
workstations and technology and operational outsourcing.
Networking Products. The Company markets and services a full line of
third-party manufactured networking products including LAN hubs, adapters,
bridges, routers, network management software and protocol converters. The
Company is a certified reseller of third party networking products, including
products from Cisco, 3Com, Xylan and Bay Networks. The Company sells these
products on a stand-alone basis or fully installed, configured and integrated
with customer systems.
Cabling Infrastructure. Cabling infrastructure provides physical
connectivity among communications devices, including turrets, telephone
switching equipment (turret or PBX), facsimile machines, computer networks and
video conference facilities. Providing a customer with cabling infrastructure
includes several distinct phases: network design, documentation, installation,
certification and ongoing service and maintenance. The Company offers its
cabling infrastructure customers design input on various system elements,
including diversity of cable routing, uninterruptable power systems, security
safeguards and cable management systems. The Company intends to narrow its
focus on the higher margin components of design, installation and support of
LANs, WANs and data connectivity and reduce its involvement in the more
competitive and lower margin cabling infrastructure projects. The Company
places special emphasis on the testing and certification phases of the project
since today's high speed networks demand that products be installed in
accordance with strict manufacturer specifications.
Network Maintenance and Support. The Company offers a broad line of post-
installation maintenance and support services to customers for MACs 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.
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
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organized on an international basis in order to promote relationships with and
provide enhanced service to customers who have significant international
operations. This is a departure from the historical location-by-location and
project-by-project approach taken by turret vendors and service providers and
reflects the consolidation trend in the financial trading community and
customers' preference to utilize common technology and services throughout their
organizations. The Company presently markets its turret and ITS 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 41 direct sales representatives for its turret systems
and ITS products and services as of September 30, 1999, in sales offices and
service locations in:
Domestic: International:
Atlanta Houston Hong Kong
Boston Los Angeles London
Chicago New Jersey Paris
Cincinnati New York City Toronto
Connecticut Philadelphia Zurich
Dallas San Francisco
The Company also has installations through its distributors for its turret
systems in the following countries:
Argentina India Philippines
Australia Indonesia Russia
Austria Ireland Singapore
Belgium Italy Spain
Brazil Japan South Africa
Chile Korea Sweeden
Denmark Kuwait Switzerland
Finland Luxenburg Taiwan
France Malaysia Thailand
Germany Mexico Turkey
Greece New Zealand Venezuela
Holland
These distributors receive extensive training from the Company, are
qualified in turret sales and maintenance, 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 September 30,
1999, IXnet had a total of 42 network sales professionals worldwide, in the
United States, the United Kingdom, Canada, Australia, Japan, Singapore and Hong
Kong. The Company intends to add sales professionals as its expansion
continues. The Company also sells IXnet services through agents in selected
international markets.
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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:
Region
For the Years Ended
-------------------------------
1999 1998 1997
-------------------------------
North America................................ 71% 71% 76%
Europe....................................... 22 24 19
Asia/Pacific and other....................... 7 5 5
-------------------------------
Total................................... 100% 100% 100%
===============================
For risks of foreign operations, see Item 7A - Quantitative and Qualitative
Disclosure About Market Risk. Additionally, for further financial information
regarding the Company's operating units, see the financial statements included
in Item 8 - Financial Statements and Supplemental Data.
IPC maintains a high profile in the financial services market by
publicizing contracts won, advertising in industry publications and
participating in relevant industry trade shows. The Company also actively
participates in industry seminars to communicate IPC's capabilities to
prospective customers and maintains a staff of experienced marketing
professionals who generate promotional brochures and training materials.
Customers
The Company's customers are concentrated primarily in the financial
services 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, most of the Company's
consolidated revenue has been derived from sales to customers in the financial
services community. In fiscal 1999, 1998 and 1997, no single customer accounted
for more than 10% of the Company's consolidated revenues.
Backlog
The Company's trading systems and ITS segments had a backlog of purchase
contracts representing future revenue amounting to approximately $52.4 million,
$61.1 million and $53.4 million as of September 30, 1999, 1998 and 1997,
respectively. 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. The Company's
backlog will be impacted by a recently signed contract with Citigroup to install
the new Alliance MX in over 1,150 positions in their new London office. See,
Item 13 "Certain Relationships and Related Transactions."
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Research and Development
IPC's Alliance MX(TM) product family is recognized within the financial
trading community as providing a high standard of reliability, performance and
functionality. IPC works 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, 1999, 1998 and
1997, the Company recorded expenses of $9.8 million, $8.3 million and $8.5
million, respectively, on research and development. Such amounts are
predominantly related to the continued development of the Alliance MX(TM) family
as well as in developing its next generation of voice-based trading system
products. Additions to the Alliance MX(TM) product line include the Alliance
VS/MX(TM) System and computer telephony integration platforms and applications.
At September 30, 1999, the Company employed 169 persons in the area of research,
development and product engineering.
In addition to developing new MX turret system features and functionality,
IPC intends to strongly emphasize product integration of the MX product line
with the IXnet Extranet. This integration is intended to remove the traditional
boundaries between internal turret systems and external telecommunications
networks.
Interoperability and integration of traders' desktop systems will remain a
strategic focus. IPC intends to utilize its core competencies in call
processing, Computer Telephony Integration ("CTI") and fault tolerant switching
to provide solutions which meet the evolving needs of its customers.
Manufacturing
The Company manufactures its turret system products at an 85,000 square-
foot owned service center facility in Westbrook, Connecticut. The facility
houses assembly lines, repair facilities, inventory, a training center and
various support functions, including production scheduling, purchasing and
quality assurance personnel. The Company's management believes that the
facility and its resources are capable of handling expected demand for the
foreseeable future.
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, and its strong relationships with customers and experienced
management, sales and technical staffs.
In the worldwide market for trading turrets, IPC's main competitor is
British Telecom ("BT"). The Company also competes with Hitachi Ltd., Telaid
Industries Inc., Etrali S.A. (a subsidiary of
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France Telecom), 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 ITS 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.
Competition for IXnet varies geographically and by service offerings.
IXnet competes with and expects continued competition from five major catagories
of business: (1) large interexchange carriers and partnerships (MCI WorldCom
Inc., Cable & Wireless plc, Global One and the AT&T/British Telecommunications
plc venture); (2) specific product competitors and other communications
companies (EQUANT N.V., Infonet Services Corporation and GTE Internetworking);
(3) common carriers (British Telecommunications plc, France Telecom and the
former Bell Operating Companies); (4) content providers (Bloomberg L.P., Bridge
Information Systems, Inc. and Reuters Holdings Plc); and (5) resellers (Business
Networks International, Inc., Sector, Inc., and WESTCom Corp.). Competition is
based on many elements depending on the specific competitor.
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 put price
pressure on some telecommunication services. The Company believes its focus on
the specific needs of the financial trading community with tailored services
will help it mitigate the effect of this price pressure, while the increasing
competition among international carriers will continue to drive down the
wholesale prices of long haul transport capacity.
The third trend is the increasing participation among major international
carriers in global alliances. The major telecommunications alliances are
Concert (BT & AT&T) and Global One (France Telecom, Deutsche Telekom AG and
Sprint Corporation). 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.
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In addition to competing with the alliances, the Company also competes with
many additional carriers which provide service in single or multiple markets,
including Cable & Wireless plc, MCI Worldcom, Inc., Kokusai Denshin Denwa Co.
Ltd. (KDD), France Telecom 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 IXnet Extranet is
designed to meet the specific performance requirements of the financial services
community. This single market focus, the Company's ability to integrate its
products and services and the imbedding of intelligent applications in the IXnet
Extranet allow the Company to provide comprehensive single source solutions for
its customers which translates into a competitive advantage.
Regulatory Environment
The telecommunications services that the Company provides must be
structured to comply with the laws and regulations of national, state and local
government agencies in countries it serves. The primary regulatory policy of the
United States in this area is to promote effective competition in the United
States telecommunications service market, including the market for international
services. The United States government has advocated that competitive
international markets will provide incentives for further market entry both in
the United States and foreign markets. Many other countries are also moving
toward the implementation of competitive market structures.
United States Regulatory Considerations
For domestic telecommunication services in the United States, the FCC and
state public utility commissions have direct jurisdiction, granted by statute,
over all aspects of the Company's telecommunications service offerings. With
international traffic, however, the United States regulatory structure is
limited to the origination or termination of telecommunications services in the
United States. As a result, the United States and each foreign country share
jurisdiction over policies and regulations controlling international
telecommunications services between the two. Thus, the United States cannot
unilaterally implement a regulatory policy for international telecommunications,
thereby limiting the impact a domestic statute, such as the Telecommunications
Act, can have in developing a new structure for international
telecommunications.
In the United States, the Company's telecommunications services are subject
to the Communications Act of 1934, as amended by various statutes, including the
Telecommunications Act and the FCC's regulations promulgated thereunder, as well
as the applicable laws and regulations of the various states as administered by
the relevant public utility commissions. 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 public utility commissions continue to
exercise extensive authority to regulate ownership of transmission facilities,
telecommunications services and the terms and conditions under which the
Company's services are provided. In addition, the Company is required by federal
and state laws and regulations to file tariffs listing the rates, terms and
conditions of the telecommunications services it provides. Any failure to
maintain proper federal and state tariffs or certification or any finding by the
federal or state agencies that the Company 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 the Company's business.
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The Company currently holds several FCC authorizations for
telecommunications services. These authorizations permit it to acquire interests
in submarine cable and international satellite facilities previously authorized
by the FCC. The Company can also 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 offer
switched service by the use of private lines interconnected to the public
switched telephone network for service between the United States and a number of
approved countries.
State public utility commissions exercise jurisdiction over intrastate
services which are communications that originate and terminate in the same
state. The Company holds a certificate of public convenience and necessity to
resell forms of telephone service within New York State and have the appropriate
authority to offer intrastate service in a number of other states.
Regulatory requirements pertinent to operations have recently changed and
will continue to change as a result of the World Trade Organization Basic
Telecommunication Agreement, federal legislation, court decisions, and new and
revised policies of the FCC and public utility commissions. In particular, the
FCC continues to refine its international service rules to promote competition,
reflect and encourage liberalization in foreign countries. To the extent the FCC
is successful in this endeavor, a more competitive environment for international
telecommunications services is likely to develop. This may increase competition
and alter the Company's ability to compete with other service providers. It also
may impact its ability to provide certain services, or introduce new services.
The impact on operations of any changes in applicable regulatory requirements
cannot be predicted. As the regulatory regimes change in the United States and
elsewhere, our authorizations also may need to be adjusted.
International Regulatory Considerations
Significant liberalization of telecommunications regulation in a number of
countries has provided the Company with greater flexibility to obtain
authorizations to provide service. The specific licensing approach or regulation
of services has differed from country-to-country depending on the status of
deregulation and the development of competition in each country.
Canada. The Company was recently granted a Class A license in Canada that
allows it to provide international telecommunications services to the public in
Canada and operate telecommunications facilities used in transporting basic
telecommunications service traffic between Canada and another country.
United Kingdom. The United Kingdom generally permits competition in all
sectors of the telecommunications market, subject to licensing requirements and
license conditions. Individual licenses are required for the provision of
facilities-based services and for the resale of leased lines. The Company's
subsidiary holds both an International Facilities Based Telecommunications
License and International Simple Voice Resale licenses in the United Kingdom.
The International Facilities Based Telecommunication License entitles the
Company to acquire indefeasible rights of use on international satellites and
submarine cable systems, to resell international private lines, as well as
interconnect with, and lease capacity at, wholesale rates from, facility-based
carriers. The International Simple Voice Resale license allows the Company to
resell international private lines, as well as interconnect with, and obtain
capacity at wholesale rates from facility-based carriers.
Other European Union Countries. Prior to January 1, 1998, a majority of the
European Union ("EU"), countries maintained the position that all or most
telecommunications services were under the
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exclusive jurisdiction of state-sanctioned monopolies. Under that regulatory
regime, provision of many competitive telecommunications services was strictly
limited to particular services or banned to preserve the privileged position of
the state-sanctioned monopoly. Effective January 1, 1998, the EU required that
member states liberalize their telecommunications regulations to permit the
introduction of competition in all sectors of the telecommunications market.
Nonetheless, the Company initiated service prior to these reforms. In some
cases, it was able to take advantage of a special status granted to closed user
groups. Closed user groups are communities of interest that are common among a
company and its subsidiaries or group of companies. The EU definition of closed
user groups looks to see if the link between the members of the group is a
common business activity. The Company and its subsidiaries fit the definition of
closed user groups in several countries. In addition, in several EU countries,
the Company structured its service offerings to not require interconnection to
the local public switched telephone network. Based on closed user groups status
and/or lack of interconnection to the public switched network, the Company has
been granted licenses in Belgium, Ireland and Italy to provide voice and data
services to closed user groups. Additionally, its subsidiaries are able to
operate in France, Germany and the Netherlands without the need for licenses in
these countries. In these cases, the Company provides private line and virtual
private network voice services and a full range of data services.
Switzerland. Although Switzerland is not part of the EU, it has followed the
EU's market liberalization approach. Even prior to the January 1, 1998 opening
of the Swiss telecommunications market, the Company, through its subsidiaries,
have been able to provide private line and virtual private network voice
services and a full range of data services in Switzerland due to the Company's
status as a closed user group and our lack of interconnection to the Swiss
public switched telephone network.
Japan. In January 1997, the Japanese Ministry of Post & Telephone granted the
Company's Japanese subsidiary a Special Type II telecommunications carrier
license. This license allows it 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. In
October 1999, the Japanese Ministry of Post and Telephone granted the Company's
new Japanese subsidiary a Type I telecommunications license. This allows it to
own facilities in Japan as well as to land international facilities using
submarine cable systems either as original owner or purchaser of IRU's.
Hong Kong. In June 1997, the Company's subsidiary received from the Hong Kong
Government Office of the Telecommunications Authority a Virtual Private Network
("VPN") license for the provision of virtual private network services. This
license allows it to provide virtual private network services for customers for
the purpose of carrying out telecommunications between companies involved in the
financial services industry. This year that license was converted into a Public
Non-exclusive Telecommunications Services (PNETS) license for external
telecommunications services. Many of the restrictions imposed on the VPN
license were liberalized in the granting of the PNETS license.
Singapore. In October 1997, the Telecommunications Authority of Singapore
granted the Company's Singapore subsidiary a license to operate a network in
Singapore for closed user groups 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. It is
currently operating under that license and have now received permission to apply
for an expansion of that license to include voice services. The Company also
holds a license to provide Intracompany voice and data services in Singapore.
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Brazil. In April 1998, the Brazilian Agencia Nacional de Telecomunicacoes
("Anatel") granted the Company's Brazilian subsidiary a Limited License to offer
specialized limited telecommunications services to and from Brazil. This license
allows it to provide virtual private network and private line voice and data
services to closed user groups.
IXnet intends to expand its operations into other jurisdictions as such
markets deregulate and IXnet is able to offer a full range of services to its
customers. In addition, in countries that enact legislation intended to
deregulate the telecommunications sector or that have made commitments to open
their markets to competition in the WTO Agreement, there may be significant
delays in the adoption of implementing regulations and uncertainties as to the
implementation of the deregulatory programs which could delay or make more
expensive IXnet's entry into such additional markets. The ability of IXnet to
enter a particular market and provide telecommunications services, particularly
in developing countries, is dependent upon the extent to which the regulations
in a particular market permit new entrants. In some countries, regulators may
make subjective judgments in awarding licenses and permits, without any legal
recourse for unsuccessful applicants. In the event IXnet is able to gain entry
to such a market, no assurances can be given that IXnet will be able to provide
a full range of services in such market, that it will not have to significantly
modify its operations to comply with changes in the regulatory environment in
such market, or that any such changes will not have a material adverse effect on
IXnet's business, results of operations or financial condition.
In those countries where IXnet is strictly prohibited from offering
service, IXnet may enter into a relationship with the state-sanctioned
telecommunications monopoly so that its services can be offered in that
jurisdiction. In these situations, the local telecommunications service provider
would provide the facilities and offer local services to IXnet customers. It is
likely that services would be of higher cost in these situations. There are,
however, certain countries which do not require licensing for the provision of
telecommunications network services.
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 18 United States patents, including design patents, for its
technologies whose renewal deadline ranges from April 7, 2002 to February 9,
2016. 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 September 30, 1999, the Company had 925 full-time, non-union
employees worldwide, including 695 in the United States, 195 in the United
Kingdom, 10 in Canada, 2 in France, 17 in Hong Kong, 5 in Japan and 1 in
Switzerland. Of these, 112 were engaged in marketing and sales, 169 in
research, development and product engineering, 367 in branch operations, finance
and corporate administration, 110 in manufacturing and 167 in operations.
An additional 411 United States workers are represented by collective
bargaining units at September 30, 1999 including 361 within the New York
metropolitan area provided under labor pooling agreements between the Company
and two of its former affiliates. Contracts with unions are negotiated every
three years. The next contract negotiation is in June 2001. The Company has
never
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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.
ITEM 2. PROPERTIES
----------
During 1997, the Company purchased its service center 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
Fairfield, Connecticut and its branch offices and sales offices in the United
States, Canada, Hong Kong, Japan, France, Switzerland, Germany, Australia 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.
ITEM 3. LEGAL PROCEEDINGS
-----------------
Except for claims and lawsuits arising in the normal course of business and
the licence and regulatory proceedings described under Business - Regulatory
Environment, IPC and its subsidiaries are not involved in any pending material
legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
-21-
<PAGE>
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
-------------------------------------------------
STOCKHOLDER MATTERS.
--------------------
Effective June 7, 1998 the Company's common stock became listed on the
American Stock Exchange, trading under the symbol IPI. On May 29, 1998 the
Company declared a two-for-one stock split effected in the form of a 100% stock
dividend (the "Stock Dividend"). The Stock Dividend was distributed on June 24,
1998 to holders of record on June 10, 1998. As a result, the number of shares
increased from 4,038,094 shares (the number of shares issued and outstanding
subsequent to the Merger) to 8,076,188 shares. All stock data below is stated
to reflect the Stock Dividend.
<TABLE>
<CAPTION>
For the year ended September 30,
---------------------------------------------------------------
1999 1998
--------------------------- ---------------------------
High Low High Low
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
First Quarter 7 4 3/4 12 3/16 8
Second Quarter 21 1/2 5 7/8 10 7/16 9 7/8
Third Quarter 70 1/16 20 13 1/2 9 9/16
Fourth Quarter 74 38 11 3/4 6 7/8
</TABLE>
On November 30, 1999, the closing sales price per share of the Company's
Common Stock was $59 5/8.
There were 65 holders of record of the Company's Common Stock at the close
of business on November 30, 1999. Such number does not include stockholders who
beneficially own shares held in street name by brokers, but does include such
brokers.
To date, the Company has not paid any cash dividends to its stockholders.
Any future payment of cash dividends will depend upon the Company's earnings and
financial condition, capital requirements and other relevant factors. The
Company is restricted regarding the payment of cash dividends by its Senior Note
Indenture as well as its Revolving Credit Facility and does not intend to pay
cash dividends in the foreseeable future.
-22-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA (unaudited)
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended September 30, (5)
----------------------------------------------------------
1999 1998 (1) 1997 1996 1995
----------------------------------------------------------
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Revenues................................................. $ 339,192 $295,817 $270,058 $ 249,508 $206,254
Gross profit (excluding depreciation and amortization)... 107,951 106,759 74,761 75,269 63,705
Selling, general and administrative expense.............. 58,047 53,345 48,100 38,528 28,326
Research and development expense......................... 9,786 8,276 8,490 10,512 9,512
Depreciation & amortization.............................. 30,110 15,690 8,630 6,021 3,840
Stock compensation charge................................ 9,079 -- -- -- --
Change in control expense................................ -- 10,640 -- -- --
Income from operations................................... 929 18,808 9,541 20,208 22,027
Interest income (expense) net............................ (27,263) (10,337) (1,844) (678) 233
Net (loss) income........................................ ($32,456) $ 2,278 $ 3,834 $ 12,129 $ 13,267
Basic (loss) earnings per share (4)...................... ($3.97) $0.14 $0.18 $0.57 $0.63
Basic weighted average shares outstanding (4)............ 8,172 15,774 21,328 21,180 21,012
Diluted (loss) earnings per share (4).................... ($3.97) $0.14 $0.18 $0.57 $0.63
Diluted weighted average shares outstanding (4).......... 8,172 15,941 21,408 21,230 21,012
Statement of Cash Flows Data:
Net cash provided by (used in) operating activities...... $ 12,313 $ 46,762 $ 24,681 ($14,737) $ 7,343
Net cash used in investing activities.................... (124,272) (25,828) (15,009) (12,737) (8,506)
Net cash provided by (used in) financing activities...... 127,882 6,344 (10,043) 13,785 14,337
Other Data:
EBITDA (2)(3)............................................ 40,118 45,138 18,171 26,229 25,867
<CAPTION>
September 30,
----------------------------------------------------------------
Balance Sheet Data: 1999 1998 1997 1996 1995
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents................................ $ 43,946 $ 28,084 $ 1,465 $ 2,306 $ 15,786
Marketable securities.................................... 54,857 -- -- -- --
Working capital.......................................... 88,807 51,136 46,398 50,807 46,851
Total assets............................................. 413,209 241,642 158,897 141,877 128,036
Long-term debt, net of current portion................... 227,584 188,223 2,133 -- --
Capital lease obligations................................ 21,916 16,952 13,323 4,369 --
Minority Interest........................................ 25,828 -- -- -- --
Stockholders' equity (deficit)........................... (379) (66,541) 77,628 71,715 58,504
Book value (deficit) per share........................... ($0.04) ($8.24) $3.63 $3.38 $2.78
Shares issued and outstanding (4)........................ 8,577 8,076 21,380 21,236 21,044
- ---------------------------------------------------------
</TABLE>
(1) On April 30, 1998 the Company merged with AAC (see `Management Discussion
and Analysis of Financial Condition and Results of Operations'). This
Merger was accounted for as a leveraged recapitalization. Accordingly, the
historical cost basis of the Company's assets and liabilities has not been
impacted by the Merger.
(2) EBITDA consists of income from operations before depreciation and
amortization. For fiscal year 1998, the Company excluded from the
calculation $10.6 million of non recurring change in control expense from
the Merger and for fiscal year 1999, the Company excluded from the
calculation the $9.1 million of stock compensation charge. EBITDA is
provided because it is a
-23-
<PAGE>
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. The Company's
EBITDA will not necessarily all be available to pay its interest expense
due to limitations beginning in fiscal year 1998 on the Company's ability
to utilize foreign tax credits and net operating losses for federal income
tax purposes, 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) and its inability to deduct the losses of IXnet which
have been material to the income of its other operations.
(3) The Company's EBITDA has been reduced by $20.8 million, $13.3 million, $9.6
million, $4.4 million for the fiscal years ended September 30, 1999, 1998,
1997 and 1996, respectively, related to the operations of IXnet.
(4) In fiscal year 1998, the company declared a two-for-one stock split
effected in the form of a 100% stock dividend. All prior period share
information has been restated for the stock split.
(5) Certain prior year amounts have been reclassified to conform to the current
year presentation.
-24-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (unaudited)
The following tables set forth certain statements of operations data and its
percentage to total revenues for the periods indicated:
<TABLE>
<CAPTION>
For the year ended September 30,
----------------------------------------------
(Dollar amounts in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------- -------------- ----------- -------------
Revenue:
<S> <C> <C> <C>
Turret sales and installation .................................................. $ 122,836 $ 133,233 $ 122,493
Turret service ................................................................. 71,734 63,592 55,146
Information Transport Systems sales, installation and service .................. 71,113 63,309 74,746
Network services ............................................................... 73,509 35,683 17,673
---------- ---------- ----------
Total revenue ............................................................. 339,192 295,817 270,058
Cost of revenue (excluding depreciation and amortization) ...................... 231,241 189,058 195,297
---------- ---------- ----------
Gross profit............................................................... 107,951 106,759 74,761
Research and development expenses .............................................. 9,786 8,276 8,490
Selling, general and administrative expenses.................................... 58,047 53,345 48,100
Depreciation & amortization expense............................................. 30,110 15,690 8,630
Stock compensation charge....................................................... 9,079 -- --
Change in control expense....................................................... -- 10,640 --
---------- ---------- ----------
Income from operations .................................................... 929 18,808 9,541
Interest expense, net........................................................... (27,263) (10,337) (1,844)
Other income/(expense), net .................................................... 451 (2) 417
---------- ---------- ----------
(Loss) Income before provision for income taxes and minority interest .......... (25,883) 8,469 8,114
Provision for income taxes ..................................................... 7,968 6,191 4,280
---------- ---------- ----------
(Loss) Income before minority interest.......................................... (33,851) 2,278 3,834
Minority interest............................................................... 1,395 -- --
---------- ---------- ----------
Net (loss) income ......................................................... $ ( 32,456) $ 2,278 $ 3,834
========== ========== ==========
Revenue:
Turret sales and installation .................................................. 36.2% 45.0% 45.4
Turret service ................................................................. 21.1 21.5 20.4
Information Transport Systems sales, installation and service .................. 21.0 21.4 27.7
Network services ............................................................... 21.7 12.1 6.5
---------- ---------- ----------
Total revenue ............................................................. 100.0 100.0 100.0
Cost of revenue (excluding depreciation and amortization) ...................... 68.2 63.9 72.3
---------- ---------- ----------
Gross profit............................................................... 31.8 36.1 27.7
Research and development expenses .............................................. 2.9 2.8 3.2
Selling, general and administrative expenses.................................... 17.1 18.0 17.8
Depreciation & amortization expense............................................. 8.9 5.3 3.2
Stock compensation charge....................................................... 2.6 -- --
Change in control expense....................................................... -- 3.6 --
---------- ---------- ----------
Income from operations .................................................... 0.3 6.4 3.5
Gain on renegotiation of lease obligation on vacant facilities ................. (8.0) (3.5) (0.7)
Other income/(expense), net .................................................... 0.1 (0.0) 0.2
---------- ---------- ----------
(Loss) Income before provision for income taxes and minority interest .......... (7.6) 2.9 3.0
Provision for income taxes ..................................................... 2.4 2.1 1.6
---------- ---------- ----------
(Loss) Income before minority interest.......................................... (10.0) 0.8 1.4
Minority interest............................................................... 0.4 -- --
---------- ---------- ----------
Net (loss) income ......................................................... (9.6)% 0.8% 1.4%
========== ========== ==========
</TABLE>
25
<PAGE>
General
The following discussion and analysis is based upon the consolidated
financial statements of the Company contained in and attached to this Form 10-K
and should be read in conjunction with such consolidated financial statements
contained elsewhere in this Annual Report on Form 10-K.
Overview
IPC is the leading provider of integrated telecommunications equipment and
services that facilitate the execution of transactions by the worldwide
financial services community. These transactions involve the trading of equity
and debt securities, commodities, currencies and other financial instruments.
The Company designs, manufactures, installs and services turret systems which
provide desktop access to time-sensitive communications and data. In addition,
through its subsidiary, IXnet, the Company operates the IXnet Extranet,
providing a variety of voice, data and content distribution services
specifically designed to meet the specialized communications requirements of the
financial services community. 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 sector.
IPC became the holding company for IPC Information Systems effective May
21, 1999 through a merger. Following the merger, IPC represented the same
consolidated financial position as IPC Information Systems prior to the merger.
Accordingly, the consolidated financial statements included in this Form 10-K
reflect the operations of IPC Information Systems and its subsidiaries through
May 20, 1999 and of IPC thereafter.
The Company's operations include trading systems, ITS and network services.
Trading systems reports sales of turret systems to distributors and direct sales
and installations of turret systems as "Product sales and installation." It
reports revenue from turret system maintenance, including annual and multi-year
service contracts, and from MACs to existing turret system installations as
"Service." ITS reports revenue from design, integration and implementation of
cabling infrastructure projects including Local and Wide Area Networks, and from
sales of intelligent network products, such as hubs, bridges and routers, as
"Product sales and installation". It reports revenue from on-site maintenance
of customer cable infrastructure, including annual and multi-year contracts and
from the provision of outsourcing services for the support, expansion and
upgrading of existing customer networks as "Service." IXnet reports revenue
from sales of voice, data and content distribution services. The revenue
derived from the use of the IXnet Extranet is reported as "Service."
Revenue from trading systems and ITS sales and related installation is
recognized upon completion of the installation, except for revenue from sales of
turret products to distributors, which is recognized upon shipment by IPC.
Invoices representing progress payments on direct product sales 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 ITS services are generally
billed in advance, and are recorded as revenue ratably (on a monthly basis) over
the contractual periods. Revenue from MACs to turret systems is recognized upon
completion, which usually occurs in the same month or the month following the
order for services. Revenue from IXnet Extranet services are recognized in the
month the service is provided and related installation revenue is deferred and
recognized ratably over the average contract term Bandwidth and
-26-
<PAGE>
switched voice charges are billed and recognized monthly based on customer
usage. All other revenues are billed and recognized monthly based on flat-rate
monthly charges.
Cost of revenue for turret systems and ITS includes material and labor
associated with the installation of a project or the service performed. Cost of
revenue for IXnet Extranet services includes charges from carriers for bandwidth
associated with such service revenue and network operations expense.
Due to the substantial sales price of the Company's large turret and ITS
installations and the Company's recognition of revenue only upon completion of
installations, revenue and operating results may fluctuate from period to
period. However, the Company's service business generates a more consistent
revenue stream than sales and installation and, consequently, these fluctuations
(as a percentage of total revenue) could be somewhat diminished in the future as
the Company's service business expands.
On April 30, 1998, Arizona Acquisition Corp. was merged into IPC
Information Systems. Under the terms of the Merger, subject to dissenters'
rights, each share of common stock of IPC Information Systems was converted at
the election of the holder thereof into either (i) the right to receive $10.50
in cash (on a post split basis) or (ii) the right to retain one share of common
stock of the surviving corporation. In connection with the Merger, IPC
Information Systems issued $247.4 million aggregate principal amount at maturity
($180.0 million initial proceeds upon issuance) of 10 7/8% Senior Discount Notes
due 2008. Prior to the Merger, AAC was owned by (i) Cable Systems Holdings LLC,
whose membership interests were owned by Citicorp Venture Capital, Ltd. and
certain private investors, (ii) CSH LLC's indirect subsidiary Cable Systems
International, Inc. and (iii) the investment fund of Lawrence Smith & Horey III,
L.P. (now known as Allegra Capital Partners III, L.P.). The Merger was accounted
for as a leveraged recapitalization. Accordingly, the historical basis of the
Company's assets and liabilities has not been impacted by the Merger.
Results of Operations
Comparison of the Year Ended September 30, 1999 ("FY 1999") to the Year Ended
September 30, 1998 ("FY 1998")
Revenue. Total revenue increased by $43.4 million or 14.7% to $339.2
million in the FY 1999 from $295.8 million in the FY 1998.
Turret installation and related service revenue decreased by $2.2 million
or 1.1% to $194.6 million in the FY 1999 from $196.8 million in the FY 1998.
New turret installation projects decreased by $10.4 million or 7.8% to
$122.8 million in the FY 1999 from $133.2 million in FY 1998. Revenues in FY
1998 included the completion of one large installation project for $10.1
million. There were no new installations of comparable size in the current
year.
Turret service revenue increased by $8.1 million or 12.7% in FY 1999 to
$71.7 million from $63.6 million in FY 1998. Higher service revenue for the
current fiscal year is principally due to the Company's expanding customer base
as well as additional service revenue of $5.7 million resulting from the
acquisitions of RVS and V-Band.
-27-
<PAGE>
Revenue from ITS sales and related service increased by $7.8 million or
12.3% to $71.1 million in FY 1999 from $63.3 in FY 1998.
New ITS installation projects increased by $15.3 million or 38.2% to $55.4
million in FY 1999 as compared to $40.1 million in FY 1998. The increase was
primarily due to the higher volume of large installation projects completed
during FY 1999 as compared with FY 1998.
ITS Service-related revenue decreased by $7.5 million or 32.3% to $15.7
million in FY 1999 as compared to $23.2 million in FY 1998. The decrease was
due to one major MAC contract winding down in the first quarter of FY 1999.
Revenue from network services increased by $37.8 million, or 105.9% to
$73.5 million in FY 1999 from $35.7 million in FY 1998. The increase is related
to the growing customer base and increased customer utilization of the IXnet
Extranet. Of this increase, $22.7 million related to revenues from Saturn,
which was acquired in December 1998.
Cost of Revenue (excluding depreciation and amortization shown separately).
Cost of revenue excluding depreciation and amortization (as a percentage of
revenue) of 68.2% in FY 1999 increased by 4.3% as compared to 63.9% in FY 1998.
Product sales and installation cost of revenue (excluding depreciation and
amortization shown separately) for FY 1999 was 58.3%, fairly consistent with
57.7% in FY 1998.
Service cost of revenue (excluding depreciation and amortization shown
separately) for FY 1999 was 79.1% as compared to 72.7% in FY 1998. This
increase is primarily related to expanded network buildout ahead of revenue in
anticipation of future growth.
Research and Development Expenses. Research and development expenses were
$9.8 million for FY 1999, an increase of $1.5 million as compared to $8.3
million for FY 1998. Research and development efforts are focused on the next
generation of trading systems products, the integration of the Tradenet MX and
the Alliance MX turret with the IXnet Extranet as well as enhancements to our
current product lines to sustain the Company's leadership in voice based trading
systems products.
Stock Compensation Charge. During FY 1999, IXnet recorded a non-cash
deferred stock compensation charge of approximately $26.4 million representing
the difference between the exercise price and the deemed fair value of IXnet's
common stock at date of grant. Approximately $9.1 million was amortized in FY
1999. The remaining amount will be amortized over the vesting period of the
stock options, which is approximately four years.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("S,G&A") increased by $4.7 million, or 8.8%, to $58.0
million in FY 1999 from $53.3 million in FY 1998 primarily due to the expansion
of the IXnet Extranet, partially offset by a decrease in S,G&A relating to
trading systems and ITS. The Company intends to continue to invest in the IXnet
Extranet. As the Company deploys this network, the Company anticipates that
S,G&A expenses will continue to increase. These expenses may be incurred prior
to the realization of anticipated related revenue.
Depreciation and Amortization. Depreciation and amortization, including
amortization of goodwill from acquisitions in FY 1999 was $30.1 million as
compared to $15.7 million in FY 1998. The increase of $14.4 million is
primarily due to the increases in property, plant and equipment in connection
with expanding IXnet's network and amortization of goodwill associated with the
-28-
<PAGE>
acquisition of MXNet in the second quarter of the prior year and the
acquisitions of Saturn and RVS in the first quarter and of V-Band in the third
quarter of the current year.
Interest Expense, net. Interest expense, net increased by $17.0 million to
$27.3 million for FY 1999 from $10.3 million for FY 1998. This increase was
primarily due to the accretion of a full year of interest expense associated
with the issuance of the Notes and related amortization of debt issuance costs
aggregating $23.1 million. Total interest expense included in net interest is
$27.4 million in FY 1999 as compared to $11.1 million in FY 1998.
Provision for Income Taxes. The provision for income taxes was $8.0 million
for FY 1999 compared to $6.2 million in FY 1998. The provision is related to a
limitation on the Company's ability to utilize foreign tax credits to offset
taxes paid outside of the United States and IXnet's losses during 1999 for which
the Company is not able to receive certain federal and state statutory tax
benefits.
Minority Interest. Minority interest of $1.4 million represents the
portion of the net loss of IXnet attributable to minority shareholders.
Comparison of the Year Ended September 30, 1998 ("FY 1998") to the Year Ended
September 30, 1997 ("FY 1997")
Revenue. Total revenue increased by $25.8 million or 9.6% to $295.8
million in the FY 1998 from $270.0 million in the FY 1997.
Turret installation and related service revenue increased by $19.2 million
or 10.8% to $196.8 million in the FY 1998 from $177.6 million in the FY 1997.
New turret installation projects increased by $10.7 million to $133.2
million in the FY1998 from $122.5 million in FY 1997. The increase is related
to higher volume of completed projects, principally involving the Company's
digital Tradenet MX(R) product, completed and recognized as revenue in FY 1998
as compared to FY 1997.
Turret service revenue increased by $8.5 million in FY 1998 to $63.6
million from $55.1 million in FY 1997. Higher service revenue for the current
fiscal year is principally due to the Company's expanding customer base.
Revenue from ITS sales and related service decreased by $11.4 million or
15.3% to $63.3 million in FY 1998 from $74.7 in FY 1997.
New ITS installation projects decreased by $17.4 million to $40.1 million
in FY 1998 as compared to $57.5 million in FY 1997. Partially offsetting this
decrease, was an increase in FY 1998 in service related revenue of $5.9 million
to $23.2 million as compared to $17.3 million in FY 1997. The decrease in sales
of new installation projects is related to the Company narrowing its focus to
projects with higher profit margins which typically are a lower revenue value
per project.
Revenue from network services increased by $18.0 million, or 101.7% to
$35.7 million in FY 1998 from $17.7 million in FY 1997. The increase is related
to the growing customer base and increased customer utilization of the IXnet
Extranet. The IXnet revenue run rate (annualized recurring revenue for the
month ended September 30, 1998) was $43.2 million, an increase of 74.2% as
compared with $24.8 million for September 1997.
-29-
<PAGE>
Cost of Revenue (excluding depreciation and amortization shown separately).
Cost of revenue excluding depreciation and amortization shown separately of
63.9% (as a percentage of revenue) in FY 1998 decreased as compared to 72.3% in
FY 1997.
Product sales and installation cost of revenue (excluding depreciation and
amortization shown separately) for FY 1998 was 57.7% (as a percentage of product
sales and installation revenue) which decreased as compared to 70.4% in FY 1997.
The lower cost of product revenue excluding depreciation and amortization shown
separately is primarily related to an increased percentage of turret
installation revenue from products manufactured by the Company (Tradenet MX),
manufacturing efficiencies and improved margins from third party turret product
sales in FY 1998 as compared with revenue for FY 1997. Turret sales and
installation from manufactured products have a lower cost of revenue (excluding
depreciation and amortization shown separately) as compared to third party
products and ITS product sales and installation.
Service cost of revenue (excluding depreciation and amortization shown
separately) for FY 1998 was 72.7% (as a percentage of service revenue) as
compared to 76.2% in FY 1997. The decrease in FY 1998 is primarily related to
higher network service revenue from increased utilization of the IXnet Extranet,
a greater percentage of turret maintenance revenue in revenue in the current
year (turret maintenance revenue typically has a lower cost of revenue as
compared to turret MAC's) and improved efficiencies for ITS service projects as
compared to the prior fiscal year.
Research and Development Expenses. Research and development expenses
decreased by $0.2 million or 2.4% to $8.3 million in FY 1998 as compared to $8.5
million in FY 1997. The decrease was primarily due to cost efficiencies
associated with moving the engineering facility from its former location in
Stamford, Connecticut to its current location in Fairfield, Connecticut.
Research and development efforts are focused on continued integration of the
Tradenet MX turret with the IXnet Extranet as well as enhancement of existing
features of the Tradenet MX family to sustain the Company's leadership position
in voice-based trading system products.
Selling, General and Administrative Expenses. S,G&A increased by $5.2
million, or 10.8%, to $53.3 million in FY 1998 from $48.1 million in FY 1997.
The increase was primarily due to infrastructure costs associated with the
expanding of the IXnet Extranet, people resources and other expenses required to
build, manage and grow the global business. The Company intends to continue to
invest in the IXnet Extranet. As the Company deploys this network, the Company
anticipates that S,G&A expenses will continue to increase. These expenses may
be incurred prior to the realization of anticipated related revenue.
Depreciation and amortization. Depreciation and amortization, including
amortization of goodwill from acquisitions in FY 1998 was $15.7 million as
compared to $8.6 million in FY 1997. The increase of $7.1 million is primarily
due to the increases in property, plant and equipment in connection with
expending IXnet's network, manufacturing equipment replacement and amortization
of goodwill associated with the acquisition of MXNet in the second quarter of FY
1998.
Change in control expense. In connection with the Merger, the Company
recorded in FY 1998 a $10.6 million non-recurring charge for change in control
expenses, comprised of certain change in control bonuses and severance payments
($4.2 million), payments to option holders upon cancellation of their stock
options ($5.9 million) and miscellaneous other expenses ($0.5 million).
-30-
<PAGE>
Interest Expense, net. Interest expense, net increased by $8.5 million to
$10.3 million for FY 1998 from $1.8 million for FY 1997. The accretion of
interest expense associated with the issuance of the Notes and related
amortization of debt issuance costs both of which are non cash items aggregating
$8.7 million. Total interest expense included in net interest is $11.1 million
in FY 1998 as compared to $2.0 million in FY 1997.
Provision for Income Taxes. The Company's effective tax rate was 73.1% for
FY 1998 compared to 52.8% for FY 1997. The increase is related to a limitation
on the Company's ability to utilize foreign tax credits to offset taxes paid
outside of the United States and an increase in IXnet's losses during 1998 for
which the Company is not able to receive certain state statutory tax benefits.
Liquidity and Capital Resources
From IPC Information Systems' initial public offering in fiscal 1995 until
the Merger in April 1998, IPC Information Systems has satisfied its cash
requirements through cash provided by operations, capital lease financing and
certain unsecured bank lines of credit. IPC Information Systems' principal uses
of cash were to fund working capital requirements, operating losses and capital
expenditures of its IXnet subsidiary and acquisitions principally related to the
expansion of the IXnet Extranet.
On April 30, 1998, AAC was merged into IPC Information Systems. Under the
terms of the Merger, subject to dissenters' rights, each share of common stock
of IPC Information Systems was converted at the election of the holder thereof
into either (i) the right to receive $10.50 in cash (on a post split basis) or
(ii) the right to retain one share of common stock of the surviving corporation.
In connection with the Merger, IPC Information Systems issued $247.4 million
aggregate principal amount at maturity ($180.0 million initial proceeds upon
issuance) of 10 7/8% Senior Discount Notes due 2008. Prior to the Merger, AAC
was owned by (i) Cable Systems Holdings LLC, whose membership interests were
owned by Citicorp Venture Capital, Ltd. and certain private investors, (ii) CSH
LLC's indirect subsidiary Cable Systems International, Inc. and (iii) the
investment fund of Lawrence Smith & Horey III, L.P. (now known as Allegra
Capital Partners III, L.P.). The Merger was accounted for as a leveraged
recapitalization. Accordingly, the historical basis of the Company's assets and
liabilities has not been impacted by the Merger.
The Notes were issued under an Indenture between IPC Information Systems,
as issuer, and United States Trust Company of New York, as trustee. The
indenture contains certain restrictive covenants which impose limitations on the
Company and its subsidiaries, including, (i) indebtedness, (ii) restricted
payments, (iii) dividends, (iv) issuance and sale of capital stock of
subsidiaries, (v) issuance of guarantees by subsidiaries, (vi) certain
transactions with shareholders and affiliates, (vii) liens, (viii) sale-
leaseback transactions, and (ix) asset sales.
Although interest on the Notes will not accrue until May 1, 2001 (the
"Interest Accrual Date"), the Notes will accrete in value to the principal
amount by the Interest Accrual Date. The Notes will bear interest at 10 7/8%
from the Interest Accrual Date through redemption and is payable semiannually on
May 1 and November 1. There are no sinking fund payments related to the Notes.
The Notes are unsubordinated, unsecured indebtedness of IPC Information
Systems ranking pari passu in right of payment with all existing and future
unsubordinated, unsecured indebtedness of IPC Information Systems and senior in
right of payment to all of its existing and future subordinated indebtedness.
-31-
<PAGE>
In conjunction with the Merger, IPC Information Systems acquired the
remaining 20% interest in IXnet through the issuance of 457,142 (adjusted for
the stock split) shares of surviving corporation common stock, valued at $4.8
million.
As a result of the Merger, IPC Information Systems' short-term credit
facilities with various banks of up to $35.0 million were terminated on April
30, 1998.
In April 1998, IPC Information Systems entered into a five year $55.0
million senior secured revolving credit agreement with Morgan Stanley Senior
Funding, Inc., syndication agent, and other lenders, to be used for working
capital and other general corporate purposes (the "Revolving Credit Facility").
The Revolving Credit Facility contains various covenants and conditions,
including restrictions on (i) asset dispositions, (ii) mergers and acquisitions,
(iii) capital expenditures, (iv) restricted payments, (v) the incurrence of
indebtedness, (vi) loans and investments, (vii) leins, (viii) certain
transactions with affiliates and (ix) maintaining various financial ratios.
On June 21, 1999, IPC Information Systems, IPC, General Electric
Capital Corporation, as the Administrative Agent and Collateral Agent, First
Union Capital Markets, Inc., as Documentation Agent, and the Lenders and the
Issuing Bank named therein, amended the Revolving Credit Facility to provide for
(1) a working capital facility of $45.0 million, based on eligible accounts
receivable and inventory, and (2) a $20.0 million term loan. In addition,
certain terms relating to the eligibility of accounts receivable used in
determining the amount available under the working capital facility were
relaxed. The amendment also provides for certain additional financial convenants
including a leverage ratio and fixed charge ratio. The Revolving Credit Facility
was further amended to permit the issuance of additional shares of IXnet common
stock, to permit the incurrence of certain deferred payment obligations, and to
modify certain financial ratios applicable through January 15, 2000, at which
time the Company expects that such ratios will be reset in accordance with
updated future projections. The Company has segregated marketable securities to
satisfy such deferred payment obligations.
Under the Revolving Credit Facility, substantially all of the Company's
real and personal property is pledged as collateral, including inventory,
accounts receivable and substantially all of the common stock of its significant
subsidiaries.
The $20.0 million term loan is repayable in quarterly installments of $1.3
million, which commenced on September 30, 1999 and initially bears interest at
LIBOR plus 2.75% or at the base rate plus 1.75% at the Company's option. The
base rate is equal to the higher of (1) the rate of interest announced publicly
by Citibank, N.A. at its head office in New York as the base rate of Citibank
and (2) 1/2 of 1% per annum above the federal funds rate, as defined in the
Revolving Credit Facility. The proceeds of the term loan were used to repay
borrowings outstanding under and for fees incurred in connection with the
Revolving Credit Facility.
Loans made under the working capital facility initially bear interest, at
the Company's option, at the base rate plus 1.5% or LIBOR plus 2.5%. At
September 30, 1999, $14.7 million was outstanding. The Revolving Credit
Facility also provides a $10.0 million sub-limit for the issuance of letters of
credit, of which $8.9 million was outstanding at September 30, 1999.
Availability under the working capital facility at September 30, 1999, after
giving effect to the outstanding borrowings and letters of credit, approximated
$17.9 million. The base rate and LIBOR rate for the Revolving Credit Facility
are subject to step-downs based on the leverage ratio of IPC and its
subsidiaries on a consolidated basis.
-32-
<PAGE>
IPC Information Systems has significant obligations under the Notes
relating to interest payments which begin on November 1, 2001, and under the
Revolving Credit Facility. IPC Information Systems intends to meet these
obligations through cash generated from operations.
Net cash provided by operating activities was $16.6 million in the year
ended September 30, 1999 as compared to $46.8 million in the prior year. This
decrease was primarily due to the increase in the net loss from IXnet from FY
1999 from FY 1998. Additionally, the increase in accounts payable and accrued
liabilities from FY 1999 to FY 1998 and the increase in deferred revenue
contributed to the decrease. The accounts payable, accrued liabilities and
deferred revenue increases are timing differences from FY 1999 to FY 1998
relating to payroll, payments on accounts payable and the completion of
contracts.
Net cash provided by operating activities was $46.8 million in the year
ended September 30, 1998 as compared to net cash provided by operating
activities of $24.7 million in the prior year. The increase was primarily
related to higher non-cash adjustments to net income and lower net working
capital requirements for the year ended September 30, 1998 as compared with
fiscal year 1997. The increase in non-cash adjustments to net income is
primarily related to an increase in depreciation and amortization expense from
capital expenditures, principally related to the IXnet Extranet, goodwill
amortization related to the acquisition of MXNet in the second quarter of FY
1998 and the IXnet Exchange. Additionally, contributing to the increase, was
interest expense related to the Notes for which cash payments do not commence
until November 1, 2001.
Cash used in investing activities was $124.4 million, $25.8 million and
$15.0 million for the years ended September 30, 1999, 1998 and 1997,
respectively. Cash used in investing activities for FY 1999 related to the
acquisitions of RVS, Saturn and V-Band, expenditures for property, plant and
equipment, principally for IXnet Extranet costs and the purchase of marketable
securities relating to the Strategic Agreement. The Strategic Agreement required
the cash portion of the purchase price and monies to be committed to IRUs to be
held in escrow. The Company intends to continue to expand the IXnet Extranet. At
September 30, 1999, certain proceeds from the IXnet IPO proceeds have been
invested in short-term commercial paper.
Cash provided by financing activities was $123.7 million in the year ended
September 30, 1999 as compared to $6.3 million in the year ended September 30,
1998 and a use of cash of $10.0 million in the year ended September 30, 1997.
The main source of cash provided by financing activities during FY 1999 were
proceeds from the IXnet IPO. The net proceeds of IXnet's IPO are being utilized
for continued deployment and expansion of the global IXnet Extranet, including
anticipated capital expenditures, future acquisitions and strategic alliances or
investments in property or assets used in IXnet's business. In accordance with
the IPO and the Indenture, within 12 months after completion of the IPO, the
Company must either: (1) invest the net proceeds from the IPO in property or
assets used in the business, or invest in a company with a business similar to
IXnet or; (2) enter into an agreement to so invest the net proceeds within 12
months after entering into such agreement. In addition to the IXnet IPO, the
Company drew down on its Revolving Credit Facility during FY 1999 to fund
operating losses of IXnet. Cash provided by financing activities in fiscal 1998
are primarily related to the Merger mentioned above. The use of cash in fiscal
1997 is related to the net repayments of note payable.
In connection with the implementation of the IXnet Extranet, IXnet has
entered into capital lease agreements for certain network switching equipment
totaling approximately $10.3 million, $6.4 million and $9.7 million during the
years ended September 30, 1999, 1998 and 1997, respectively.
-33-
<PAGE>
Additionally, in FY 1999 and 1998 IXnet committed $15.7 million and $12.2
million, respectively, to participate in IRUs.
Impact of Year 2000
The Year 2000 issue is the result of computer-controlled systems using two
digits rather than four to define the applicable year. For example, computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, deliver products and
services to customers, send invoices, or engage in similar normal business
activities. Like most service providers, the Year 2000 issue may significantly
and adversely affect the Company and its operations. In addition, software,
hardware, and equipment both within and outside the Company's direct control and
with which the Company electronically or operationally interfaces (e.g.,
including, but not limited to, third party vendors providing data processing,
information system management and maintenance of computer systems) are likely to
be affected. Furthermore, if computer systems are not adequately changed to
identify Year 2000 issues, many computer applications could fail and create
erroneous results. As a result, many calculations which rely on the date field
information, such as interest calculations, payment amounts or due dates and
other operational functions, may generate results which could be significantly
misstated, and the Company could experience an inability for a temporary, but
unknown duration, to process transactions, send invoices or engage in similar
business activities.
State of readiness. The Company has assessed and completed implementing
and validating the Year 2000 compliance for the products that it manufactures
and the services it provides, along with those products manufactured by others
which the Company represents and sells. The Company has obtained Year 2000
compliance status updates from vendors that supply products for resale and
services which the Company either uses internally or resells as part of the
IXnet Extranet. Certain parts of its systems, products and services needed to be
revised to be Year 2000 compliant with upgrades to both the hardware and
software supplied by its vendors. These revisions have been completed. The
Company believes that all of its systems, products and services are currently
Year 2000 compliant. Furthermore, while the Company believes that the internal
components of the IXnet Extranet (including its network management, billing and
accounting systems and the equipment installed at its POPs) are Year 2000
ready, certain suppliers of domestic and international communication bandwidth
may not achieve Year 2000 readiness. IXnet has evaluated the potential risks of
those suppliers that may not be Year 2000 ready and anticipates that such
suppliers will be located outside of the areas where the majority of its
customers are located.
The Company converted to an enterprise-wide management information system
which through software updates to both the application and operating systems is
Year 2000 compliant.
Costs. Most of the Company's expenses in connection with Year 2000
compliance have related to, and are expected to continue to relate to, the
operating costs associated with time spent by employees in the evaluation
process and Year 2000 compliance matters generally. The Company's costs
associated with Year 2000 compliance issues, excluding the conversion to the
enterprise-wide management information system, which was undertaken for
operational reasons, is currently anticipated to be approximately $2.0 million,
all of which has been incurred or committed.
Potential risks. The Company is not aware of any Year 2000 compliance
problems related to its systems that would have a material adverse effect on the
Company's business, results of operations and financial condition. There can be
no assurance that the Company will not discover Year 2000
-34-
<PAGE>
compliance problems in its systems, products or services that will require
substantial revision. In addition, there can be no assurance that third-party
software, hardware or services incorporated into the Company's material systems,
products or services will not need to be revised or replaced, all of which could
be time consuming and expensive. The failure of the Company to fix or replace
its internally developed software, third-party software, hardware or services on
a timely basis could result in lost revenues, increased operating costs, the
loss of customers and other business interruptions, any of which could have a
material adverse effect on the Company's business, results of operations and
financial condition. Moreover, the failure to adequately address Year 2000
compliance issues related to its products and services could result in claims of
mismanagement, misrepresentation or breach of contract and related litigation,
which could be costly and time-consuming to defend.
In addition, there can be no assurance that third party providers of
products and services, including telecommunications and utility companies, and
the Company's customer base, primarily in the financial services industry, will
be Year 2000 compliant. The failure of such entities to be Year 2000 compliant
could result in a systematic failure, beyond the control of the Company, such as
prolonged telecommunications or electrical failure, or the inability of
customers to make payment for services, which could have a material adverse
effect on the Company's business, results of operations and financial condition.
In a SEC release earlier this year regarding Year 2000 disclosure, the SEC
stated that public companies must disclose the most reasonably likely worst case
Year 2000 scenario. Although it is not possible to assess the likelihood of any
of the following events, each must be included in a consideration of worst case
scenarios:
. widespread failure of electrical, gas, and similar suppliers serving
the Company;
. widespread disruption of the services provided by common
communications carriers;
. disruption to the means and modes of transportation for the Company
and its employees, contractors, suppliers and customers;
. significant disruption to the Company's ability to gain access to, and
remain working in, office buildings and other facilities;
. the failure of the Company's mission-critical computer hardware and
software systems, including both internal business systems and systems
controlling operational facilities; and
. the failure of third-party banking and finance systems.
Contingency plans. The Company has completed the development of contingency
plans. The results of the Company's enterprise-wide system conversion and
responses received from vendors and service providers have been taken into
account in determining the nature and extent of its contingency plan.
Effects of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivatives and Hedging Activities, which establishes accounting
and reporting standards for derivative instruments and hedging activities. The
effective date of this standard was deferred to all fiscal quarters of fiscal
years beginning after June 15, 2000 by SFAS 137, Accounting for Derivative
-35-
<PAGE>
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133 which was issued on June 30, 1999. Management does not believe
the adoption of this standard will have a material impact on the Company's
operations.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 is effective for
financial statements for fiscal years beginning after December 15, 1998. The
Company does not anticipate the adoption of this standard to have a material
adverse effect on its financial position, results of operations or cash flows.
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 ITS 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Foreign Exchange Rate Risk
As a global concern, the Company faces exposure to adverse movements in
foreign currency exchange rates. These exposures may change over time as
business practice evolve and could have an adverse impact on the financial
results of the Company. The Company's primary exchange rate risk exposure
relates to nondollar-denominated sales in the European and Asian marketplace, as
well as foreign denominated debt. The Company currently does not hedge against
these currencies and could suffer unanticipated gains or losses as a result.
Interest Rate Risk
The Company is exposed to changes in interest rates primarily from its
outstanding debt and its investments in certain marketable securities. The
interest rate for certain outstanding debt is variable and therefore will
fluctuate with market conditions. As a result, the Company believes that the
effects of changes in interest rates are limited and would not have a material
impact on its financial condition and results of operations. The Company's
marketable securities consist of fixed income investments in the form of short-
term commercial paper. The Company continually monitors its exposure to changes
in interest rates from its marketable securities. Accordingly, the Company
believes that the effects of changes in interest rates are limited, however,
significant increases in interest rates could have a significant impact on the
financial condition or results of operations of the Company. It is possible that
the Company is at risk if interest rates change in an unfavorable direction. The
magnitude of any gain or loss will be a function of the difference between the
fixed rate of the financial instrument and the market rate, which could have a
material affect on financial condition, and results of operations.
-36-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders
of IPC Communications, Inc.:
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 68 present fairly, in all material
respects, the consolidated financial position of IPC Communications, Inc. and
its subsidiaries at September 30, 1999 and 1998, and the results of their
operations and cash flows for each of the three years in the period ended
September 30, 1999, in conformity with accounting principles generally accepted
in the United States. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 14(a)(2) on page 68, presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. 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 auditing standards generally accepted in
the United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
November 30, 1999
-37-
<PAGE>
IPC COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
September 30,
------------------------------
1999 1998
-------------- --------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 43,946 $ 28,084
Marketable securities 28,357 -
Marketable securities, restricted 20,435 -
Trade receivables 80,309 71,521
Inventories 31,903 40,046
Prepaids and other current assets 24,807 15,214
-------------- --------------
Total current assets 229,757 154,865
Property, plant and equipment, net 98,682 57,113
Long term marketable securities, restricted 6,065 -
Debt issuance costs, net 10,675 10,707
Goodwill and intangible assets, net 66,203 15,639
Other assets 1,827 3,318
-------------- --------------
Total assets $ 413,209 $ 241,642
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 23,485 $ 20,094
Accrued liabilities 46,343 40,704
Customer advances and deferred revenue 30,432 38,469
Current portion of notes payable 34,425 -
Current portion of capital leases 6,265 4,462
-------------- --------------
Total current liabilities 140,950 103,729
Senior unsecured notes 209,230 188,223
Notes payable, less current portion 18,354 -
Lease obligations, less current portion 15,651 12,490
Other liabilities 3,575 3,741
-------------- --------------
Total liabilities 387,760 308,183
-------------- --------------
Minority Interest 25,828 -
Commitments and contingencies
Stockholders' deficit:
Common stock - $0.01 par value, authorized 25,000,000 shares; 8,577,480 shares
issued and outstanding at September 30, 1999; 8,076,188
shares issued and outstanding at September 30, 1998 86 81
Paid-in capital 104,913 5,855
Accumulated deficit (105,594) (73,049)
Accumulated other comprehensive income 216 572
-------------- --------------
Total stockholders' deficit (379) (66,541)
-------------- --------------
Total liabilities and stockholders' deficit $ 413,209 $ 241,642
============== ==============
</TABLE>
See Notes to Consolidated Financial Statements.
38
<PAGE>
IPC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the year ended September 30,
------------------------------------------
1999 1998 1997
------------- ------------- -------------
Revenue:
<S> <C> <C> <C>
Product sales and installation $ 178,201 $ 173,350 $ 179,978
Service 160,991 122,467 90,080
--------- --------- ---------
339,192 295,817 270,058
--------- --------- ---------
Cost of revenue (excluding depreciation and amortization
shown separately below)
Product sales and installation 103,837 99,974 126,623
Service 127,404 89,084 68,674
--------- --------- ---------
231,241 189,058 195,297
--------- --------- ---------
Gross profit 107,951 106,759 74,761
Research and development expenses 9,786 8,276 8,490
Selling, general and administrative expenses 58,047 53,345 48,100
Depreciation and amortization 30,110 15,690 8,630
Stock compensation charge 9,079 -- --
Change in control expense -- 10,640 --
--------- --------- ---------
Income from operations 929 18,808 9,541
Interest expense, net (27,263) (10,337) (1,844)
Other income (expense), net 451 (2) 417
--------- --------- ---------
(Loss) income before provision for income taxes
and minority interest (25,883) 8,469 8,114
Provision for income taxes 7,968 6,191 4,280
--------- --------- ---------
(Loss) income before minority interest (33,851) 2,278 3,834
Minority interest 1,395 -- --
========= ========= =========
Net (loss) income $ (32,456) $ 2,278 $ 3,834
========= ========= =========
Basic (loss) earnings per share $ (3.97) $ 0.14 $ 0.18
========= ========= =========
Basic weighted average number of shares outstanding 8,172 15,774 21,328
========= ========= =========
Diluted (loss) earnings per share $ (3.97) $ 0.14 $ 0.18
========= ========= =========
Diluted weighted average number of shares outstanding 8,172 15,941 21,408
========= ========= =========
</TABLE>
See Notes to consolidated Financial Statements
39
<PAGE>
IPC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
For the year ended September 30,
-------------------------------------------
1999 1998 1997
------------- ------------ --------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net (loss) income $ (32,456) $ 2,278 $ 3,834
Adjustments to reconcile net (loss) income to net cash provided by
(used in) operating activities:
Stock compensation charge 9,079 -- --
Minority Interest 1,395 -- --
Depreciation and amortization 30,110 15,158 8,416
Non-cash interest on senior discount notes 21,007 8,212 --
Other interest amortization 1,703 842 327
Provision for doubtful accounts 3,236 2,786 338
Deferred income taxes 3,720 (4,769) 83
Changes in operating assets and liabilities:
Trade receivables (7,061) (11,126) 4,909
Inventories 11,043 (5,978) 3,240
Prepaids and other current assets 841 3,218 (2,926)
Other assets 2,377 (2,077) (45)
Accounts payable (1,708) (2,690) 2,859
Accrued liabilities and other liabilities (15,635) 20,569 5,099
Customer advances and deferred revenue (11,033) 20,339 (1,453)
------- ------ ------
Net cash provided by operating activities 16,618 46,762 24,681
------- ------ ------
Cash flows from investing activities:
Capital expenditures (26,645) (18,293) (13,509)
Purchase of marketable securities (54,857) -- --
Acquisitions, net of cash acquired (42,913) (7,535) (1,500)
------- ------ ------
Net cash (used in) investing activities (124,415) (25,828) (15,009)
------- ------ ------
Cash flows from financing activities:
Net proceeds from IXnet initial public offering 102,775 -- --
Proceeds from revolving credit borrowings 66,817 -- --
Repayments of revolving credit borrowings (52,095) -- --
Proceeds from notes payable -- -- 2,182
Principal payments on notes payable (5,948) (8,807) (12,526)
Proceeds from issuance of senior discount notes -- 180,011 --
Proceeds from equity investment -- 54,721 --
Purchase of IPC common stock at Merger -- (200,271) --
Costs, Obligations and equity charges at Merger (1,380) (19,778) --
Proceeds from the exercise of stock options 13,551 468 301
------- ------ ------
Net cash provided by (used in) financing activities 123,720 6,344 (10,043)
------- ------ ------
Effect of exchange rate changes on cash (61) (659) (470)
------- ------ ------
Net increase (decrease) in cash 15,862 26,619 (841)
Cash and cash equivalents, beginning of period 28,084 1,465 2,306
------- ------ ------
Cash and cash equivalents, end of period $ 43,946 $ 28,084 $ 1,465
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for-
Income taxes $ 4,282 $ 4,822 $ 4,100
Interest $ 4,323 $ 2,138 $ 1,040
Non-cash investing and financing activities-
Issuance of stock to acquire remaining 20% interest in subsidiary $ -- $ 4,799 $ --
Installment purchase for property, plant and equipment $ -- $ 3,600 $ --
Retirement of treasury stock $ -- $ 718 $ --
Capital lease obligations entered into during the year $ 10,284 $ 7,092 $ 10,776
Purchase of software in connection with Strategic Agreement $ 20,000 $ -- $ --
Working capital adjustment in connection with Saturn $ 1,952 $ -- $ --
Additional amount payable in connection with the aquisition of
Bridge Electronics, Inc. $ -- $ -- $ 3,500
</TABLE>
See Notes to Consolidated Financial Statements.
40
<PAGE>
IPC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Dollar and share amounts in thousands)
<TABLE>
<CAPTION>
Paid- Accumulated
Common Stock in (deficit)
Shares Amount capital earnings
------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Consolidated balance, September 30, 1996 10,618 $ 109 $ 47,889 $ 24,341
Net income - - - 3,834
Translation adjustment - - - -
Total comprehensive income - - - -
Issuance of common stock under employment contracts 32 - 478 -
Issuance of common stock under stock purchase plan 21 - 312 -
Issuance of common stock under stock option plan 20 - 301 -
------- -------- --------- ---------
Consolidated balance, September 30, 1997 10,691 109 48,980 28,175
Net income - - - 2,278
Translation adjustment - - - -
Total comprehensive income
Issuance of common stock under stock purchase plan 18 - 262 -
Issuance of common stock under stock option plan 32 1 467 -
Repurchase and retirement of IPC common stock from - - - -
Merger dated April 30, 1998 (9,537) (95) (103,346) (96,830)
Retirement of treasury stock - (2) - (716)
Issuance of Common Stock from Merger 2,606 26 54,695 -
Equity charges related to the Merger - - - (5,916)
Issuance of common stock to acquire remaining 20% interest
in subsidiary 228 2 4,797 -
Two-for-one stock split effected in the form of a 100% stock
dividend, issued on June 10, 1998 4,038 40 - (40)
------- -------- --------- ---------
Consolidated balance, September 30, 1998 8,076 81 5,855 (73,049)
Net loss - - - (32,456)
Translation adjustment - - - -
Total comprehensive income - - - -
IXnet initial public offering - - 93,799 -
Equity charges related to the Merger - - - (89)
Issuance of common stock under stock option plan 491 5 5,259 -
------- -------- --------- ---------
Consolidated balance, September 30, 1999 8,567 $ 86 $ 104,913 $ (105,594)
======= ======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other Total
Comprehensive Treasury stockholders' Comprehensive
Income stock (deficit) equity Income (loss)
-------------- ------- ---------------------------------
<S> <C> <C> <C>
Consolidated balance, September 30, 1996 $ 94 $ (718) $71,715
Net income - - 3,834 $ 3,834
Translation adjustment 270 - 270 270
-------
Total comprehensive income - - - $ 4,104
=======
Issuance of common stock under employment contracts - - 478
Issuance of common stock under stock purchase plan - - 312
Issuance of common stock under stock option plan - - 301
-------------- ------- ---------
Consolidated balance, September 30, 1997 364 (718) 76,910
Net income - - 2,278 $ 2,278
Translation adjustment 208 - 208 208
-------
Total comprehensive income $ 2,486
=======
Issuance of common stock under stock purchase plan - - 262
Issuance of common stock under stock option plan - - 468
Repurchase and retirement of IPC common stock from - - -
Merger dated April 30, 1998 - - (200,271)
Retirement of treasury stock - 718 -
Issuance of Common Stock from Merger - - 54,721
Equity charges related to the Merger - - (5,916)
Issuance of common stock to acquire remaining 20% interest
in subsidiary - - 4,799
Two-for-one stock split effected in the form of a 100% stock
dividend, issued on June 10, 1998 - - -
-------------- ------- ---------
Consolidated balance, September 30, 1998 572 - (66,541)
Net loss - - (32,456) $(32,456)
Translation adjustment (356) - (356) (356)
--------
Total comprehensive income - - - $(32,812)
========
IXnet initial public offering - - 93,799
Equity charges related to the Merger - - (89)
Issuance of common stock under stock option plan - - 5,264
-------------- ------- ---------
Consolidated balance, September 30, 1999 $ 216 $ - $ (379)
============== ======= =========
</TABLE>
See Notes to Consolidated Financial Statements.
41
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation:
IPC Communications, Inc. ("IPC") is the leading provider of integrated
telecommunications equipment and services that facilitate the execution of
transactions by the worldwide financial services community. These
transactions involve the trading of equity and debt securities,
commodities, currencies and other financial instruments. The Company
designs, manufactures, installs and services turret systems which provide
desktop access to time-sensitive communications and data. In addition,
through its subsidiary, IXnet, Inc. ("IXnet"), the Company operates a
global network (the "IXnet Extranet"), providing a variety of voice, data
and content distribution services specifically designed to meet the
specialized communications requirements of the financial services
community. 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 sector.
IPC became the holding company for IPC Information Systems, Inc. ("IPC
Information Systems") effective May 21, 1999 through a merger. Following
the merger, IPC represented the same consolidated financial position as IPC
Information Systems prior to the merger. Accordingly, the consolidated
financial statements included in this Form 10-K reflect the operations of
IPC Information Systems and its subsidiaries through May 20, 1999 and of
IPC thereafter.
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 related installation is recognized upon
completion of the installation except for revenue from sales to
distributors, which is recognized upon shipment. Under contract provisions,
customers may be 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 and related
installation revenue is deferred and recognized ratably over the average
contract term. Bandwidth and switched voice charges are billed and
recognized monthly based on customer usage. All other revenues are billed
and recognized monthly based on flat-rate monthly charges.
Cash and Cash Equivalents
--------------------------
The Company places cash with high credit quality financial institutions.
Temporary cash investments with original maturities of three months or less
are considered cash equivalents. Temporary cash investments are stated at
cost, which approximates fair value. These investments are not subject to
significant market risk.
-42-
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
Marketable Securities
---------------------
Marketable securities consist of investments in short-term government grade
commercial paper with maturities of less than one year. Such securities are
classified as available for sale and, accordingly, are carried at fair
value, which approximates cost at September 30, 1999. The amortized cost of
debt securities is adjusted for amortization of premium and accretion of
discounts to maturity. Amortization of purchase premiums or accretion of
discounts and realized gains and losses are included in interest income.
On September 24, 1999, IXnet entered into a strategic agreement (the
"Strategic Agreement"), including the license of certain software products
to enhance the intelligence of its network. The purchase price included
$10.0 million of cash to be paid in installments over six months beginning
on October 30, 1999. Separately, IXnet also entered into agreements to
purchase indefeasible rights of use ("IRU's") over the next three years in
an aggregate amount of $16.5 million. In accordance with an amendment to
the Revolving Credit Facility revised in connection with the Strategic
Agreement, these amounts are invested in marketable securities dedicated to
satisfy these commitments.
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 may
be progress-billed prior to the completion of the contract. Trade
receivables are recorded net of allowance for doubtful accounts of $3.6
million and $2.4 million for the years ended September 30, 1999 and 1998,
respectively.
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 or
amortized on a straight-line basis over their estimated useful lives or
related contract terms beginning in the year the asset was placed into
service. Network switching equipment includes direct costs of installation.
Amortization of network switching equipment under capital leases and IRUs is
calculated using the straight-line method over the terms of the lease or
IRU's and is included in depreciation and amortization expense.
-43-
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
Debt Issuance Costs
-------------------
Debt issuance costs represent costs associated with the issuance of the
Senior Discount Notes and in connection with the Revolving Credit Facility.
These costs are amortized to interest expense utilizing the effective
interest method over the life of the Senior Discount Notes and on a
straight-line basis over the term of the Revolving Credit Facility.
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 are amortized on a straight-line basis over the
periods benefited, principally 2.75 to 10 years.
Research and Development
------------------------
Research and development expenditures are charged to expense as incurred.
Stock Options
-------------
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation ("SFAS No. 123") requires the Company to choose
between two different methods of accounting for stock options. The
Statement defines a fair-value-based method of accounting for stock options
but allows an entity to continue to measure compensation cost for stock
options using the accounting prescribed by Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees ("APB No.
25"). The Company has elected to continue using the accounting methods
prescribed by APB No. 25 and to disclose the amount of the proforma
compensation expense required to be disclosed under SFAS No. 123.
Income Taxes
------------
In accordance with SFAS 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 bases 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. The provision for income
taxes is the tax payable for the period and the change during the period in
deferred tax assets and liabilities.
IXnet IPO and Minority Interest
-------------------------------
The Company recorded an increase to paid-in-capital representing the
increase in its share of IXnet's net assets as a result of the proceeds from
the offering. The Company continues to consolidate the financial statements
of IXnet, with an allocation of the net loss of IXnet to its minority
shareholders.
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 accumulated other comprehensive income account in
stockholders' (deficit) equity.
-44-
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
Earnings Per Share
------------------
Basic earnings per share is computed based upon the weighted average number
of common shares outstanding during the periods. Diluted earnings per share
is computed based upon the weighted average number of common shares
outstanding plus the assumed issuance of common stock equivalents computed
in accordance with the treasury stock method.
Comprehensive Income
--------------------
Effective October 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. This statement requires the Company to include within
its financial statements information on comprehensive income/loss, which is
defined as all activity impacting equity from non-owner sources.
Comprehensive income/loss includes the Company's net income/loss and foreign
currency translation adjustments.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, and liabilities, and
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.
Reclassifications
-----------------
Certain reclassifications have been made to the 1998 and 1997 financial
statements in order to conform to the current year's presentation.
Effects of Recently Issued Accounting Standards
------------------------------------------------
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivatives and Hedging Activities, which establishes
accounting and reporting standards for derivative instruments and hedging
activities. The effective date of this standard was deferred to all fiscal
quarters of fiscal years beginning after June 15, 2000 by SFAS 137,
Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133 which was issued on June 30,
1999. Management does not believe the adoption of this standard will have a
material impact on the Company's operations.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 ("SOP 98-1"), Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use. SOP 98-1 is effective for
financial statements for fiscal years beginning after December 15, 1998.
The Company does not anticipate the adoption of this standard to have a
material effect on its financial position, results of operations or cash
flows.
3. Acquisitions and Strategic Agreement:
Strategic Agreement
-------------------
On September 24, 1999, IXnet entered into a strategic agreement (the
"Strategic Agreement"), including the licensing of certain software products
to enhance the intelligence of its netowork for a purchase price of $20.0
million consisting of $10.0 million in cash financed from the proceeds from
IXnet's IPO and 500,000 shares of IXnet restricted common stock valued at an
average closing price prior to the agreement date. The Strategic Agreement
is designed to enhance IXnet's
-45-
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
network capabilities with embedded intelligence, delivering financial
enterprise integration, subject-based addressing, trading turret integration
and application management.
V-Band Corporation ("V-Band")
-----------------------------
On June 21, 1999, IPC acquired V-Band Corporation for approximately $1.5
million in cash. The purchase was financed through a combination of cash
from operations and borrowings under the Revolving Credit Facility. The
acquisition was accounted for using the purchase method of accounting and
resulted in approximately $7.5 million of goodwill, of which approximately
$7.0 million remains unamortized at September 30, 1999.
Reuters Voice Systems ("RVS")
-----------------------------
On December 31, 1998, IPC purchased the assets of Reuters Voice Systems, a
business unit of Reuters Group PLC, for approximately $5.7 million in cash.
The purchase was financed through a combination of cash from operations and
borrowings under the Revolving Credit Facility. The acquisition was
accounted for using the purchase method of accounting and resulted in
approximately $5.3 million in goodwill, of which approximately $3.8 million
remains unamortized at September 30, 1999.
Saturn Global Network Service Holdings Ltd. ("Saturn")
------------------------------------------------------
On December 18, 1998, IENL acquired all of the issued and outstanding common
shares of Saturn from Marshalls. The acquisition was accounted for using
the purchase method of accounting. As a result of the acquisition, IENL
recorded approximately $49.2 million of goodwill, which is being amortized
on a straight-line basis over ten years.
The purchase price for Saturn included a cash payment in the amount of
$35.7 million and the issuance of a promissory note in the amount of $7.5
million bearing interest at the UK Sterling Base Rate, as defined, plus
three percent and payable over three years. In addition, IXnet assumed
indebtedness of Saturn due to Marshalls in the amount of $5.0 million
payable over 24 months with interest at 9.25%. Under this agreement, the
Marshalls Note is subject to a working capital adjustment and right of
offset. The working capital adjustment was settled in June 1999 resulting
in a reduction of the obligation by approximately $2.0 million.
The following unaudited pro forma statement of operations data for the years
ended September 30, 1999 and 1998 gives effect to the Saturn acquisition as
if it had occurred on October 1, 1999 and 1998 respectively (In thousands):
<TABLE>
<CAPTION>
September 30,
1999 1998
-------- --------
<S> <C> <C>
Revenue $ 343,991 $321,135
Loss before provision for income taxes and minority interest ($35,065) ($5,700)
</TABLE>
Pro forma adjustments include (i) amortization of goodwill over 10 years and
(ii) interest expense on the Saturn Note and the Marshalls Note. The pro
forma financial information presented above does not purport to be
indicative of the operating results which would have been achieved had the
acquisition occurred at October 1, 1998 or 1997, or the results to be
achieved thereafter.
-46-
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
MXNet Inc. ("MXNet")
--------------------
In February 1998, the Company acquired, by the issuance of a promissory note
in the amount of $6.7 million, all of the issued and outstanding common
stock of MXNet, a wholly owned subsidiary of National Discount Brokers
Group, Inc. The promissory note plus accrued interest was paid on April 8,
1998. In addition, MXNet entered into employment agreements with four MXNet
executives which included signing and retention bonuses in the aggregate
amount of approximately $1.1 million payable over two years. This
acquisition was accounted for using the purchase method of accounting and
resulted in $5.5 million of goodwill of which $1.5 million remains in
intangible assets at September 30, 1999.
IXnet
-----
During June 1995, the Company acquired an 80% interest in IXnet for $5.5
million in cash. The acquisition was accounted for using the purchase
method of accounting. Included in intangible assets is $0.7 million and
$0.9 million at September 30, 1998 and 1997, respectively, representing
acquired technology.
In conjunction with the April 1998 Merger, the Company acquired the
remaining 20% interest in IXnet (the "IXnet Exchange") through the issuance
of 457,142 shares of Surviving Corporation Common Stock, valued at $4.8
million. Included in intangible assets is $3.7 million at September 30,
1999, representing acquired technology.
4. Merger and Recapitalization:
On April 30, 1998, Arizona Acquisition Corp. ("AAC") was merged into IPC
Information Systems (the "Merger"). Under the terms of the Merger, each
share of common stock of IPC Information Systems was converted at the
election of the holder thereof into either (i) the right to receive $10.50
in cash (on a post split basis) or (ii) the right to retain one share of
common stock of the surviving corporation. In connection with the Merger,
the Company issued $247.4 million aggregate principal amount at maturity
($180.0 million initial proceeds upon issuance) of 10 7/8% Senior Discount
Notes due 2008 (the "Notes"). A portion of the proceeds from the Notes
($145.6 million), together with $54.7 million of capital provided by AAC
were used to repurchase 19,073,330 shares (on a post split basis) of IPC
Common Stock, at a price of $10.50 per share, from IPC shareholders who did
not elect to retain stock of the surviving corporation upon the Merger.
Prior to the Merger, AAC was owned by (i) Cable Systems Holdings LLC ("CSH
LLC"), whose membership interests were owned by Citicorp Venture Capital,
Ltd. and David Kirby and John O'Mara, private investors, (ii) CSH LLC's
indirect subsidiary Cable Systems International, Inc. and (iii) the
investment fund of Lawrence Smith & Horey III, L.P. (now known as Allegra
Capital Partners III, L.P.). The Merger was accounted for as a leveraged
recapitalization. Accordingly, the historical basis of the Company's assets
and liabilities has not been impacted by the Merger.
In connection with the Merger, the Company incurred various non-recurring
costs totaling approximately $27.8 million. These costs consist primarily of
professional fees, printing costs, change of control costs and other
expenses. Of this amount, $10.6 million was recorded in fiscal 1998 as a
non-recurring charge for change in control expenses, comprised of certain
change in control bonuses and severance payments ($4.3 million), payments to
option holders upon cancellation of their stock options ($5.9 million) and
miscellaneous other expenses ($0.5 million).
-47-
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
Unaudited pro forma statement of operations information for the years ended
September 30, 1998 and 1997, as if the Merger occurred on October 1, 1996 is
as follows (In thousands, except per share amounts):
<TABLE>
<CAPTION>
For the year ended
September 30,
-----------------------------
1998 1997
------ ------
<S> <C> <C>
Revenue $295,817 $270,058
Operating Income (loss) $ 18,129 $ (2,263)
Net loss $ (6,447) $(14,943)
Basic loss per share $ (0.80) $ (1.85)
Basic and diluted weighted average number of
common shares outstanding (in thousands) 8,076 8,076
</TABLE>
Pro forma adjustments include: (i) elimination of non-recurring charge for
change in control expense; (ii) full year of interest expense on the Notes
and related amortization of debt issuance costs and discount; and (iii)
amortization of the acquired technology related to the IXnet Exchange. All
pro forma adjustments were tax effected at the Company's 44% incremental tax
rate. The pro forma financial information presented above is not
necessarily indicative of the operating results which would have been
achieved had the Merger occurred at October 1, 1996 or of the results to be
achieved in the future.
5. Stock Split:
On May 29, 1998 the Company declared a two-for-one stock split effected in
the form of a 100% stock dividend (the "Stock Dividend"). The Stock
Dividend was distributed on June 24, 1998 to holders of record on June 10,
1998. As a result, the number of shares increased from 4,038,094 shares
(the number of shares issued and outstanding subsequent to the Merger and
IXnet Exchange) to 8,076,188 shares. Unless otherwise indicated, all share
and per share data, including stock option information, is stated to reflect
the Stock Dividend.
6. Inventories (In thousands):
<TABLE>
<CAPTION>
September 30,
-----------------------------
1999 1998
------------ -------------
<S> <C> <C>
Components and work in process $16,519 $13,639
Inventory on customer sites awaiting installation 11,554 21,516
Parts and maintenance supplies 3,830 4,891
------------ -------------
$31,903 $40,046
============ =============
</TABLE>
-48-
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
7. Property, Plant and Equipment (In thousands):
<TABLE>
<CAPTION>
September 30,
----------------------------------------
1999 1998
------------------- -----------------
<S> <C> <C>
Building $ 2,463 $ 2,462
Machinery and Equipment 36,300 36,230
Furniture and Fixtures 2,812 2,758
Leasehold Improvements 9,092 8,503
Network Equipment 39,865 13,638
Network Equipment under capital leases 28,649 20,717
Network Software 21,561 -
IRU's 6,692 4,000
------------------- -----------------
Total depreciable property, plant and equipment 147,434 88,308
Less accumulated depreciation and amortization (49,761) (32,502)
------------------- -----------------
97,673 55,806
Land and other 1,009 1,307
------------------- -----------------
$ 98,682 $ 57,113
=================== =================
</TABLE>
8. Supplemental Financial Data:
Prepaids and other current assets include the following (In thousands):
September 30,
1999 1998
------- -------
Deferred taxes $ 5,634 $ 9,354
Prepaid expenses 3,318 3,808
ACT recoverable 9,257 -
Other current assets 6,598 2,052
------- -------
Total $24,807 $15,214
======= =======
Accrued liabilities includes the following (In thousands):
September 30,
1999 1998
------- -------
Compensation $14,051 $12,351
Income taxes 2,263 1,859
Carrier costs 12,351 3,815
Other expenses 17,678 22,679
------- -------
Total $46,343 $40,704
======= =======
9. Short-Term Credit Facilities:
As a result of the Merger, the Company's short-term credit facilities with
various banks of up to $35.0 million were terminated on April 30, 1998.
-49-
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
In April 1998, IPC Information Systems entered into a five year $55.0
million senior secured revolving credit agreement (the "Revolving Credit
Facility"), with Morgan Stanley Senior Funding, Inc., as syndication agent,
and other lenders , to be used for working capital and other general
corporate purposes. The Revolving Credit Facility was subject to borrowing
base limitations, which at September 30, 1998 approximated $33.6 million.
Borrowings under the Revolving Credit Facility bore interest at a rate equal
to, at the Company's option, the base rate plus 1.5% or the LIBOR rate plus
a margin of 1.5% to 2.5% depending upon the Company's leverage ratio. The
base rate was a fluctuating interest rate equal to the higher of (i) the
rate of interest announced publicly by Citibank, N.A. as its base 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 as published by the Federal Reserve Bank of New York.
The Revolving Credit Facility contained various covenants and conditions,
including restrictions on (i) asset dispositions, (ii) mergers and
acquisitions, (iii) capital expenditures, (iv) restricted payments, (v) the
incurrence of indebtedness, (vi) loans and investments, (vii) liens, (viii)
certain transactions with affiliates and (ix) maintaining various financial
ratios.
On June 21, 1999, IPC Information Systems, IPC, General Electric Capital
Corporation, as the Administrative Agent and Collateral Agent, First Union
Capital Markets, Inc., as Documentation Agent, and the Lenders and the
Issuing Bank named therein, amended the Revolving Credit Facility to provide
for (1) a working capital facility of $45.0 million, based on eligible
accounts receivable and inventory, and (2) a $20.0 million term loan. In
addition, certain terms relating to the eligibility of accounts receivable
used in determining the amount available under the working capital facility
were relaxed. The amendment also provides for certain additional financial
covenants including a leverage ratio and fixed charge ratio. The Revolving
Credit Facility was further amended to permit the issuance of additional
shares of IXnet common stock, to permit the incurrence of certain deferred
payment obligations, and to modify certain financial ratios applicable
through January 15, 2000, at which time the Company expects that such ratios
will be reset in accordance with updated future projections. The Company
has segregated marketable securities to satisfy such deferred payment
obligations.
Under the Revolving Credit Facility, substantially all of the Company's real
and personal property is pledged as collateral, including inventory,
accounts receivable and substantially all of the common stock of its
significant subsidiaries.
The $20.0 million term loan is repayable in quarterly installments of $1.3
million, which commenced on September 30, 1999 and initially bears interest
at LIBOR plus 2.75% or at the base rate plus 1.75%, at the Company's option.
The base rate is equal to the higher of (1) the rate of interest announced
publicly by Citibank, N.A. at its head office in New York as the base rate
of Citibank and (2) 1/2 of 1% per annum above the federal funds rate, as
defined in the Revolving Credit Facility. The proceeds of the term loan
were used to repay borrowings outstanding under and for fees incurred in
connection with the Revolving Credit Facility.
Loans made under the working capital facility initially bear interest, at
the Borrower's option, at the base rate plus 1.5% or LIBOR plus 2.5%. At
September 30, 1999, $14.7 million was outstanding. The Revolving Credit
Facility also provides a $10.0 million sub-limit for the issuance of letters
of credit, of which $8.9 million was outstanding at September 30, 1999.
Availability
-50-
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
under the working capital facility at September 30, 1999, after giving
effect to the outstanding borrowings and letters of credit, approximated
$17.9 million.
The base rate and LIBOR rate for the Revolving Credit Facility are subject
to step-downs based on the Company's leverage ratio.
The Revolving Credit Facility requires the Company to pay a commitment fee
equal to 0.5% per annum on the unused commitment amount. The Company
incurred $0.1 million and $0.3 million in commitment fees and $0.4 million
and $0.1 million of interest amortization, for the years ended September 30,
1999 and 1998, respectively, associated with the Revolving Credit Facility.
10. Long-Term Debt:
Senior Discount Notes
----------------------
On April 30, 1998, the Company issued $247.4 million aggregate principal
amount at maturity ($180.0 million proceeds at issuance) of 10 7/8% Senior
Discount Notes due 2008. The Notes were issued under an indenture between
the Company, as issuer, and United States Trust Company of New York, as
trustee. The indenture contains certain restrictive covenants which impose
limitations on the Company and its subsidiaries, including, (i)
indebtedness, (ii) restricted payments, (iii) dividends, (iv) issuance and
sale of capital stock of subsidiaries, (v) issuance of guarantees by
subsidiaries, (vi) certain transactions with shareholders and affiliates,
(vii) liens, (viii) sale-leaseback transactions, and (ix) asset sales.
The Notes were issued at a discount to their aggregate principal amount
resulting in gross proceeds to the Company of $180.0 million. Although
interest on the Notes will not accrue until May 1, 2001 (the "Interest
Accrual Date"), the Notes will accrete in value to the principal amount by
the Interest Accrual Date. The Notes will bear interest at 10 7/8% from the
Interest Accrual Date through redemption and is payable semiannually on May
1 and November 1. There are no sinking fund payments related to the Notes.
Up to 35% of the Notes may be redeemed by the Company at 110.875% of the
accreted value plus accrued and unpaid interest with the proceeds of one or
more equity offerings, as defined, prior to May 1, 2001. In addition, the
Company may redeem the Notes in whole or in part, at any time after May 1,
2003 and prior to maturity at a premium of 105.428% decreasing to the
principal amount on May 1, 2006. The indenture also provides for a
mandatory offer by the Company to repurchase the Notes in the event of a
change of control at 101% of the accreted value plus accrued interest.
The Notes are unsubordinated, unsecured indebtedness of IPC Information
Systems, ranking pari passu in right of payment with all existing and future
unsubordinated, unsecured indebtedness of IPC Information Systems and senior
in right of payment to all existing and future subordinated indebtedness of
IPC Information Systems.
Interest expense, net includes $21.0 million and $8.2 million related to the
amortization of the discount of the Notes and $0.3 million and $0.4 million
related to issuance costs of the Notes, for the years ended September 30,
1999 and 1998, respectively.
The estimated fair value of the Notes, calculated using the quoted closing
price of the bonds was $192.7 million and $178.1 million at September 30,
1999 and 1998, respectively.
-51-
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
Saturn Note
-----------
In conjunction with the acquisition of Saturn, two notes were issued and
assumed by the Company in the aggregate amount of $12.5 million. The first
is a 3 year $7.5 million note issued to Marshalls Finance Ltd. bearing
interest at a rate of the UK Sterling plus 3%. The second note assigned to
IXnet in accordance with the acquisition of Saturn amounting to $5.0
million. Under the agreement, the assumed Marshalls note is subject to a
working capital adjustment and right of offset. This working capital
adjustment was settled in June 1999 resulting in a reduction of the
obligation by approximately $2.0 million.
Strategic Agreement
-------------------
In connection with the Strategic Agreement, IXnet agreed to pay $10.0
million over a six-month period ending on April 1, 2000.
Future debt payments required by the Saturn Note, the Marshalls Note, the
Strategic Agreement and the Revolving Credit Facility (included as a $14.7
million payment in fiscal 2000) at September 30, 1999 are as follows (In
thousands):
Fiscal
------
2000 $29,402
2001 3,189
2002 2,445
-------
$35,036
=======
The future payments noted above exclude any payments in relation to the
Senior Note Indenture. The interest payments relating to the indenture
begin paying semi-annually on November 1, 2001.
11. Deferred Compensation and Other Benefit Plans:
Deferred Compensation
---------------------
The Company has deferred compensation agreements with certain past key
officers and employees. 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 $6.6 million and $3.6 million at September 30, 1999 and $6.9
million and $3.9 million at September 30, 1998, respectively.
-52-
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
Approximate payments for subsequent annual periods related to the deferred
compensation agreements, at September 30, 1999, are as follows (In
thousands):
2000 $ 320
2001 390
2002 471
2003 490
2004 434
Thereafter 4,503
------
$6,608
======
Pension Plans
-------------
IPC maintains a 401(k) savings 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 $0.7 million, $0.6 million
and $0.4 million to the plan for the years ended September 30, 1999, 1998
and 1997, 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, were $0.2 million per
year for the years ended September 30, 1999, 1998 and 1997.
The Company paid to Kleinknecht Electric Company ("KEC") and Kleinknecht
Electric Company - New Jersey ("KEC-NJ"), both affiliated companies, in
accordance with labor pooling agreements, approximately $8.1 million, $7.6
million, and $7.6 million for the years ended September 30, 1999, 1998 and
1997, respectively, representing pass-through contributions to various union
sponsored pension plans.
IPC Employee Stock Option and Purchase Plan
-------------------------------------------
In connection with the Merger, the employee stock purchase plan was
terminated April 30, 1998. On April 30, 1998 the Company terminated its
existing plan and replaced it with a new stock option plan. Under the new
plan, employees generally vest in stock options over a five-year period.
In connection with the Reorganization, IPC Information Systems assigned, and
IPC assumed, the obligations for the performance of the IPC Information
Systems, Inc. 1998 Stock Incentive Plan, which, effective as of December 3,
1998 had been amended to increase its share reserve from 1,108,224 to
1,538,322 shares of the Company's Common Stock and which was renamed the
"IPC Communications, Inc. 1999 Stock Incentive Plan." The Stock Incentive
Plan provides for the grant of options to purchase Common Stock of the
Company to certain officers, employees, consultants and directors of the
Company and its subsidiaries.
IXnet Stock Option Plan
-----------------------
During May 1999, IXnet's Board of Directors and the Company approved the
IXnet, Inc. 1999 Stock Option Plan authorizing the grant of options to
purchase up to 7,053,409 shares of IXnet's common stock. At that time,
options to purchase 6,530,184 shares were granted to employees, directors
and others at an exercise price of $13.96 per share. Except for 1,763,352
options granted
-53-
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
to IXnet's chief executive officer which vested immediately, such options
vest over four years. Such options become exercisable, to the extent then
vested, 30 months from the date of grant.
Stock Compensation Data
-----------------------
A summary of the Company's stock option plan as of September 30, 1999, 1998
and 1997 and changes during the years then ended is presented below (In
thousands).
<TABLE>
<CAPTION>
IPC Stock Option Plan
---------------------
Consolidated IXnet Employee Options IXnet 1999 Stock Option Plan
-------------- ------------------------ ----------------------------
Weighted Weighted Weighted
Number of Average Number of Average Number of Average
Options Exercise Price Options Exercise Price Options Exercise Price
--------- --------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at September 30, 1996 1,652,402 $ 8.05 231,000 $ 7.93 - -
Granted 791,000 $ 7.42 186,000 $ 7.25 - -
Exercised (39,730) $ 7.00 (26,666) $ 6.83 - -
Forfeited (356,472) $ 8.18 (53,334) $ 7.53 - -
---------- --------
Outstanding at September 30, 1997 2,047,200 $ 7.81 337,000 $ 7.71 - -
Granted 200,000 $12.50 401,734 $10.50 - -
Granted 1,071,284 $10.50 - - - -
Exercised (63,722) $ 7.47 (4,998) $ 8.00 - -
Exercised and retired at merger (1,814,266) $ 7.37 (328,000) $ 7.70 - -
Forfeited (369,212) $12.58 (4,002) $ 7.63 - -
---------- --------
Outstanding at September 30, 1998 1,071,284 $10.50 401,734 $10.50 - -
May 4, 1999 initial grant - - - - 6,530,184 $13.96
Granted 647,443 $20.13 195,146 $10.50 489,764 $16.04
Exercised (490,576) $10.50 (160,300) $10.50 - -
Forfeited (120,220) $10.50 (22,868) $10.50 193,919 $13.98
---------- -------- ---------
Outstanding at September 30, 1999 1,107,931 $16.13 413,712 $10.50 6,826,029 $14.11
========== ======== =========
Options exercisable
At September 30, 1997 544,990 $ 7.44 - - - -
At September 30, 1998 - - - - - -
At September 30, 1999 1,107,931 $10.50 413,712 $10.50 - -
</TABLE>
The weighted average contractual life of stock options outstanding at
September 30, 1999 was 9.1 years.
In connection with the IPO of IXnet, the Company recognized $9.1 million of
compensation expense during the year ended September 30, 1999.
Additionally, in connection with the April 30, 1998 Merger, included in the
$10.6 million non-recurring change in control expense, the Company
recognized compensation expense in the amount of $5.9 million, representing
payments to option holders upon cancellation of their stock options. As a
result of the charges mentioned above, under the provisions of SFAS No. 123,
the Company's net income and earnings per share on a pro forma basis is the
same as actual for the years ended September 30, 1999 and 1998. 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, consistent with the provisions of
-54-
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
SFAS No. 123, the Company's net income and earnings per share would have
been reduced to the pro forma amounts indicated below (In thousands, except
per share amounts).
<TABLE>
<CAPTION>
For the year ended
September 30,
-----------------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Net (loss) income - as reported $(32,456) $2,278 $3,834
Net (loss) income - pro forma $(37,039) $2,278 $2,934
Basic (loss) earnings per share - as reported $ (3.97) $ 0.14 $ 0.18
Basic (loss) earnings per share - pro forma $ (4.53) $ 0.14 $ 0.14
Diluted (loss) earnings per share - as reported $ (3.97) $ 0.14 $ 0.18
Diluted (loss) earnings per share - pro forma $ (4.53) $ 0.14 $ 0.14
</TABLE>
The fair value of each option grant is estimated on the date of the grant
using the "Black-Scholes option-pricing model" with the following weighted
average assumptions used for grants for the years ended September 30, 1999,
1998 and 1997; zero dividend yield; expected volatility of 55%; weighted
average risk-free interest rate of 6.5% in fiscal 1999, 6.19% in fiscal 1998
and 6.03% in fiscal 1997; and expected lives of 5 years in fiscal 1999, 4.78
years in 1998 and 4 years for fiscal 1997.
12. Earnings Per Share:
The following is a reconciliation of the computations of basic and diluted
earnings per share (In thousands, except per share amounts).
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------
1999 1998 1997
------------ ----------- -----------
Basic earnings (loss) per share computation
<S> <C> <C> <C>
Net Income (loss) $(32,456) $ 2,278 $ 3,834
------------- ----------- -----------
Weighted average common shares outstanding 8,172 15,774 21,328
Total shares 8,172 15,774 21,328
============= =========== ===========
Basic earnings (loss) per share $ (3.97) $ 0.14 $ 0.18
============= =========== ===========
Year Ended September 30,
--------------------------------------------
1999 1998 1997
------------- ----------- -----------
Diluted earnings (loss) per share computation
Net income (loss) $(32,456) $ 2,278 $ 3,834
------------- ----------- -----------
Weighted average common shares outstanding 8,172 15,774 21,328
Common stock equivalent of stock options - 167 80
------------- ----------- -----------
Total shares 8,172 15,941 21,408
============= =========== ===========
Diluted earnings (loss) per share $ (3.97) $ 0.14 $ 0.18
============= =========== ===========
</TABLE>
Approximately 1,071,284 and 318,000 stock options were outstanding for the
years ended September 30, 1998 and 1997, respectively, which were not
included in the computation of diluted earnings per share because the
exercise prices exceeded the average market price of the Company's common
stock for each period. For the year ended September 30, 1999, Common
-55-
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
Stock equivalents of stock options were excluded from the diluted earnings
per share calculation as their effect would have been anti-dilutive.
13. Commitments and Contingencies:
Operating Leases
----------------
The Company has entered into various operating leases primarily for real
estate and related lines and equipment.
Rental expenses under operating leases were $20.8 million, $17.4 million and
$13.7 million for the years ended September 30, 1999, 1998 and 1997,
respectively.
Future minimum annual rental payments required under noncancellable
operating leases at September 30, 1999 are as follows (In thousands):
2000 $28,530
2001 9,665
2002 8,353
2003 7,436
2004 6,789
Thereafter 4,379
-------
$65,151
=======
Capital Leases
--------------
The Company has entered into capital lease agreements for certain network
switching equipment and for certain computer equipment and software. Total
assets acquired under capital leases was approximately $31.1 million at
September 30, 1999 and $22.4 million at September 30, 1998. The accumulated
depreciation and amortization at September 30, 1999 and 1998 was
approximately $12.1 million and $6.1 million, respectively.
Future minimum lease payments required under noncancellable capital leases
at September 30, 1999 are as follows (In thousands):
2000 $13,189
2001 12,249
2002 7,854
2003 4,540
2004 1,525
-------
39,357
Less, amount representing interest 17,441
------
Net present value of minimum lease payments under
capital leases $21,916
=======
14. 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.
-56-
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
The Company has a written arrangement with KEC and KEC-NJ with respect to a
pool of field technicians utilized by the Company. KEC and KEC-NJ are
responsible for administering the payroll and related benefits 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 thousand per month in lieu of the fee payment of 2.5%.
Approximately $53.0 million, $51.7 million and $52.7 million of technical
labor, and $2.1 million, $2.0 million and $2.2 million of administrative
labor was provided through agreements with KEC and KEC-NJ during the years
ended September 30, 1999, 1998 and 1997, respectively.
For the years ended September 30, 1999, 1998 and 1997, KEC and KEC-NJ billed
the Company payroll administrative services of $0.6 million annually.
Included in prepaid expenses and other current assets is a net related party
receivable of $0.6 million at September 30, 1999. $0.3 million of net
related party payable is included in accrued expenses at September 30, 1998.
A portion of the Company's New York branch operation was co-located with KEC
through 1997 in a building owned by Knight Ventures, Inc., a company owned
by Richard P. Kleinknecht and Peter J. Kleinknecht (the "Former Principal
Stockholders"). For the year ended September 30, 1997 the Company was
charged rent of approximately $0.2 million.
Subcontracts and Other
----------------------
The Company and other companies controlled by the Former Principal
Stockholders periodically subcontract certain work to one another. Amounts
charged to companies controlled by the Former Principal Stockholders under
subcontracts with IPC for the years ended September 30, 1999, 1998 and 1997
were approximately $3.1 million, $2.9 million and $0.1 million,
respectively, while amounts charged to IPC under subcontracts with companies
controlled by the Former Principal Stockholders were approximately $0.1
million, $0.2 million and $0.3 million, 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 the Company 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.
The Company and companies controlled by the Former Principal Stockholders
also charge each other certain miscellaneous expenses, including, but not
limited to, office equipment rentals and certain other administrative
expenses. Such amounts are not significant.
-57-
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
15. Income Taxes:
Pretax (loss) earnings consisted of the following (In thousands):
<TABLE>
<CAPTION>
For the year ended September 30,
---------------------------------------------------------
1999 1998 1997
-------------- ------------------ ---------------
<S> <C> <C> <C>
United States $(31,955) $(18,275) $1,689
Foreign 6,072 26,744 6,425
-------------- ------------------ ---------------
Total pretax (loss) earnings (25,883) $ 8,469 $8,114
============== ================== ===============
</TABLE>
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
For the year ended September 30,
---------------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Current:
Federal - $ 295 $ (182)
State and local 687 1,545 2,037
Foreign 3,561 9,120 2,342
---------------- ---------------- ----------------
$4,248 $10,960 $4,197
---------------- ---------------- ----------------
Deferred:
Federal $2,549 $(3,737) $ 323
State and local 750 (885) 9
Foreign 421 (147) (249)
---------------- ---------------- ----------------
3,720 (4,769) 83
---------------- ---------------- ----------------
Income tax provision $7,968 $ 6,191 $4,280
================ ================ ================
</TABLE>
The components of net deferred tax assets are as follows (In thousands):
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------------------------------------------------
1999 1998
--------------------------------------------- ------------------------------------------
US Foreign Total US Foreign Total
--------- ---------- --------- --------- --------- ---------
Deferred tax assets:
<S> <C> <C> <C> <C> <C> <C>
Excess of book over tax
depreciation $ 189 - $ 189 $ 745 $ 91 $ 836
Amortization of intangibles 4,701 - 4,701 621 - 621
Inventory and receivables 1,388 - 1,388 2,685 569 3,254
Accrued expenses 2,658 369 3,027 4,510 20 4,530
Net operating loss carryforward 13,649 291 13,940 - - -
AMT tax credit carryforward 334 - 334 128 - 128
Foreign tax credit carryforward 4,657 - 4,657 3,999 - 3,999
-------- ------- ---------- --------- ------- ---------
Total 27,576 660 28,236 12,688 680 13,368
Less valuation allowance (20,133) (291) (20,424) (3,999) - (3,999)
-------- ------- ---------- --------- ------- ---------
Total deferred tax assets $ 7,443 $ 369 $ 7,812 $ 8,689 $680 $ 9,369
</TABLE>
-58-
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Deferred tax liabilities:
Excess of book over tax (2,068) (110) (2,178) (15) - (15)
depreciation
------------ ------- ---------- --------- ------- ---------
Net deferred tax assets $ 5,375 $ 259 $ 5,634 $ 8,674 $680 $ 9,354
============ ======= ========== ========= ======= =========
</TABLE>
A valuation allowance is provided for foreign tax credit carryforwards, net
operating loss carryforwards related to IXnet and certain foreign net
operating loss carryforwards which expire at various times. The U.S. net
operating loss of $40.1 million as of September 30, 1999 expires in the year
2019.
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,
--------------------------------------------------------
1999 1998 1997
-------------- ----------------- --------------
<S> <C> <C> <C>
Statutory US federal tax rate (35.0%) 35.0% 35.0%
State and local income taxes,
net of federal benefit 3.6 7.8 16.4
Incremental foreign tax effect 7.2 22.3 -
Losses with no benefit 62.3 - -
Other, net (7.3) 8.0 1.4
-------------- ----------------- --------------
(30.8%) 73.1% 52.8%
============== ================= ==============
</TABLE>
16. Business Segment and Geographic Information:
Business Segments
-----------------
The Company has adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, for reporting information about
operating segments and related disclosures about products and services,
geographic areas and major customers.
The Company's operations include trading systems, ITS and IXnet. Trading
systems reports sales of turret systems to distributors and direct sales and
installations of turret systems as "Product sales and installation". It
reports revenue from turret system maintenance, including annual and multi-
year service contracts, and from moves, additions and changes to existing
turret system installations as "Service". ITS reports revenue from the
design, integration and implementation of cabling infrastructure projects
including LAN's and WAN's, and from the sales of intelligent network
products, such as hubs, bridges and routers as "Product sales and
installation". It reports revenue from on-site maintenance of customer
cable infrastructure, including annual and multi-year contracts, and from
the provision of outsourcing services for the support, expansion and
upgrading of existing customer networks as "Service." IXnet reports revenue
from sales of premium voice, managed bandwidth and outsourcing services, and
to a lesser extent, switched voice, shared internet protocol and other
services (In thousands).
-59-
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
<TABLE>
<CAPTION>
Trading
Systems ITS IXnet Eliminations Consolidated
------------- ------------ -------------- ---------------- -----------------
Fiscal Year 1999:
Revenue:
<S> <C> <C> <C> <C> <C>
Product sales and installation $122,836 $55,365 - - $178,201
Service 71,734 15,748 $ 73,509 - 160,991
Intersegment - - 106 $(106) -
------------- ------------ -------------- ---------------- -----------------
Total Revenue 194,570 71,113 73,615 (106) 339,192
Gross profit (excluding
depreciation and amortization) 98,189 9,090 778 (106) 107,951
Research & development 9,786 - - - 9,786
Selling, general & administrative (a) 22,975 4,458 21,627 (106) 58,047
Depreciation & amortization 8,177 357 21,576 - 30,110
Stock compensation charge - - 9,079 - 9,079
------------- ------------ -------------- ---------------- -----------------
Income from operations $ 57,251 $ 4,275 $(51,504) - $ 929
============= ============ ============== ================ =================
EBITDA (b) $ 65,428 $ 4,632 $(20,849) - $ 40,118
============= ============ ============== ================ =================
Total assets (c) $193,548 $23,806 $195,855 - $413,209
============= ============ ============== ================ =================
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year 1998:
Revenue:
<S> <C> <C> <C> <C> <C>
Product sales and installation $133,233 $40,117 - - $173,350
Service 63,592 23,192 $ 35,683 - 122,467
Intersegment - - 170 $(170) -
------------- ------------ -------------- ---------------- -----------------
Total Revenue 196,825 63,309 35,853 (170) 295,817
Gross profit (excluding
depreciation and amortization) 98,610 7,948 371 (170) 106,759
Research & development 8,276 - - - 8,276
Selling, general & administrative (a) 22,018 5,146 13,626 (170) 53,345
Depreciation & amortization 6,209 421 9,060 - 15,690
Change in control expense 8,837 453 1,350 - 10,640
------------- ------------ -------------- ---------------- -----------------
Income from operations $ 53,270 $ 1,928 $(23,665) - $ 18,808
============= ============ ============== ================ =================
EBITDA (b) $ 68,316 $ 2,802 $(13,255) - $ 45,138
============= ============ ============== ================ =================
Total assets (c) $202,859 $24,280 $ 14,503 - $241,642
============= ============ ============== ================ =================
</TABLE>
-60-
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
<TABLE>
<CAPTION>
Fiscal Year 1997:
Revenue:
<S> <C> <C> <C> <C> <C>
Product sales and installation $122,493 $57,485 - - $179,978
Service 55,146 17,261 $ 17,673 - 90,080
Intersegment - - 165 $(165) -
------------- ------------ -------------- ---------------- -----------------
Total Revenue 177,639 74,746 17,838 (165) 270,058
Gross profit (excluding
depreciation and amortization) 71,602 5,344 (2,020) (165) 74,761
Research & development 8,490 - - - 8,490
Selling, general & administrative (a) 24,632 4,904 7,576 (165) 48,100
Depreciation & amortization 4,776 394 3,460 - 8,630
------------- ------------ -------------- ---------------- -----------------
Income from operations $ 33,704 $ 46 $(13,056) - $ 9,541
============= ============ ============== ================ =================
EBITDA (b) $ 38,480 $ 440 $ (9,596) - $ 18,171
============= ============ ============== ================ =================
Total assets (c) $135,779 $13,035 $ 10,083 - $158,897
============= ============ ============== ================ =================
</TABLE>
(a) Consolidated selling, general & administrative includes corporate general &
administrative expenses of $9,093, $12,725 and $11,153 for the years ended
September 30, 1999, 1998 and 1997 respectively.
(b) Earnings before interest, taxes, depreciation and amortization ("EBITDA")
represents operating income plus depreciation and amortization. EBITDA for
the year ended September 30, 1999 excludes $9.1 million of deferred
compensation expense and for the year ended September 30, 1998 excludes a
$10.6 million non-recurring change in control expense.
(c) The Company's management reviews corporate assets combined with trading
system's assets.
Geographic sales information is based on the currency in which the customer
is billed. Information about the Company's operations by geographic area is as
follows (In thousands):
<TABLE>
<CAPTION>
For the year ended September 30,
--------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
Revenues:
<S> <C> <C> <C>
North America $242,479 $211,237 $205,745
Europe 73,306 70,708 50,682
Asia/Pacific and other 23,407 13,872 13,631
-------------- -------------- --------------
$339,192 $295,817 $270,058
============== ============== ==============
Long Lived Assets:
United States $ 97,252 $ 72,104 $ 36,232
United Kingdom 1,813 12,636 11,042
Rest of World 92 101 -
-------------- -------------- --------------
$ 99,157 $ 84,841 $ 47,274
============== ============== ==============
</TABLE>
No single customer accounted for 10% or more of total revenues for the years
ended September 30, 1999, 1998 and 1997.
-61-
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
17. Quarterly Financial Information (unaudited):
The following tables set forth unaudited quarterly financial information
for the years ended September 30, 1999 and 1998 (In thousands, except
per share amounts):
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------
December 31, March 31, June 30, September 30,
----------- -------- -------- --------------
Year ended
September 30, 1999:
-------------------
<S> <C> <C> <C> <C>
Revenue $67,750 $80,933 $ 91,206 $ 99,303
Gross profit (excluding 27,769 31,424 19,847 28,911
depreciation and amortization)
Net income (loss) (3,659) (3,291) (11,610) (13,896)
Basic and diluted (loss) per share ($0.45) ($0.41) ($1.44) ($1.70)
Year ended
September 30, 1998:
-------------------
Revenue $67,052 $61,145 $ 77,954 $ 89,666
Gross profit (excluding 26,627 23,713 31,536 24,883
Depreciation and amortization)
Net income 3,594 2,154 (3,839) 369
Basic and diluted earnings (loss)
per share $ 0.17 $ 0.10 ($0.31) $ 0.05
</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.
In connection with the Merger, the Company incurred a pre-tax non-recurring
charge for change in control expenses of $10.6 million in the quarter ended
June 30, 1998. As a result of this charge, the Company incurred a net loss
in the quarter and diluted earnings per share was not calculated as the
common stock equivalents would have had an anti-dilutive effect. For the
year ended September 30, 1999, Common Stock equivalents of stock options
were excluded from the diluted earnings per share calculation as their
effect would have been anti-dilutive.
-62-
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
This information required by this Item 10 is incorporated by reference from the
"Directors and Executive Officers of the Registrant" section of the Company's
Proxy Statement to be furnished to shareholders in connection with the 2000
Annual Meeting.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
This information required by Item 11 is incorporated by reference from the
"Executive Compensation" section of the Company's Proxy Statement to be
furnished to shareholders in connection with the 2000 Annual Meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
This information required by this Item 12 is incorporated by reference from the
"Security Ownership of Certain Beneficial Owners and Management" section of the
Company's Proxy Statement to be furnished to shareholders in connection with the
2000 Annual Meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
-----------------------------------------------
Richard P. Kleinknecht, the Company's Vice Chairman and his brother,
Peter J. Kleinknecht, the Company's former 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 Kleinknecht Electric Company, Inc., a New York company ("KEC-NY"),
Kleinknecht Electric Company, Inc., a New Jersey company ("KEC-NJ"), both
electrical services companies, and Humaco Leasing & Holding Corporation
("Humaco"), a tool and vehicle leasing company.
As of October 1, 1993, the Company and KEC-NY entered into a 20-year
contract with respect to a pool of field technicians and administrative
employees, who are members of the International Brotherhood of Electrical
Workers ("IBEW"), Local 3 and are utilized by either the Company or KEC-NY on an
ongoing or per project basis. The Company and KEC-NJ also entered into a
comparable 20-year agreement with respect to a similar pool of employees who are
members of IBEW, Local 164T. Effective April 30, 1998, the Company and KEC-NY
and KEC-NJ entered into amended and restated
-63-
<PAGE>
agreements with respect to these labor pools. The Company, KEC-NY and KEC-NJ
have benefited from these arrangements by allowing each company to draw from a
larger pool of field technicians and retaining the more highly trained and
skilled technicians for a broader range of projects. KEC-NY and KEC-NJ are
responsible for administering the payroll and related services for Company
employees in these pools. The Company pays all such compensation and benefits by
reimbursement to KEC-NY or KEC-NJ, as appropriate, plus an administration fee
equal to 2.5% of such costs. Effective October 3, 1996, the parties agreed to
amend this agreement to provide for a flat administrative fee of $50,000 per
month (apportioned between KEC-NY and KEC-NJ). The total amounts paid by the
Company for compensation and benefits under these arrangements in the fiscal
years ended September 30, 1999, 1998 and 1997 were $55.1 million, $53.7 million
and $54.9 million, respectively. In addition, the Company paid $0.6 million in
the fiscal years ended September 30, 1999, 1998 and 1997 in related
administrative fees.
The Company periodically subcontracts certain work to KEC-NY or KEC-NJ.
Amounts charged to these companies under subcontracts with the Company for the
years ended September 30, 1999, 1998 and 1997 were approximately $3.1 million,
$2.9 million and $0.1 million, respectively, while amounts charged to the
Company under subcontracts with these companies were approximately $0.1 million,
$0.2 million and $0.3 million, respectively.
The Company, KEC-NY and KEC-NJ entered into a 20-year agreement dated
as of May 9, 1994, and amended and restated as of April 30, 1998, with respect
to corporate opportunities regarding electrical and communications cable
infrastructures. KEC-NY and KEC-NJ have agreed not to bid for or accept any
communications cabling jobs in competition with the Company, if the Company
intends to bid or accept such work. The Company, which is not a licensed
electrical contractor, has agreed to refrain from bidding for or accepting,
without the consent of KEC-NY or KEC-NJ, opportunities that combine both
electrical and communications cabling work. IPC has also agreed to continue to
refer to KEC-NY and KEC-NJ certain electrical contracting bid opportunities
which may arise.
Effective as of June 1, 1998, the Company entered into a Consulting
Agreement with Little Knight Music, Inc., a corporation controlled by Russell G.
Kleinknecht (a former executive officer of the Company), for a term of eighteen
(18) months under which Mr. Kleinknecht may be required to perform certain
consulting services. In consideration of such consulting services, the Company
has and will make monthly payments equaling $37,324 and totaling $707,832. As
of the effective date of the Consulting Agreement, Mr. Kleinknecht owed the
Company a total of $267,893 (consisting of employee loans, advances and accrued
interest thereon). Payments under the Consulting Agreement were offset by the
Company against such outstanding loans, which loans were paid in full prior to
December 31, 1998. In addition to the foregoing, the Company agreed to
reimburse Mr. Kleinknecht for a portion of the costs incurred by him for
continuation of medical, dental and hospitalization benefits during the term of
such agreement.
As of July 1, 1999, IXnet and IPC entered into an inter-company agreement
which provides, among other matters, for IPC to furnish up to $50.0 million of
credit, including the provision of letters of credit, guarantees and other forms
of credit enhancements limited to $6.25 million per fiscal quarter, commencing
on July 1, 1999 and continuing through the quarter ending June 30, 2001.
Outstanding notes payable on July 1, 1999 and additional amounts borrowed under
the agreement bore interest at the Base Rate plus 2%. Any and all amounts
advanced by IPC to IXnet and/or its subsidiaries which are outstanding on June
30, 2001 shall be immediately due and payable. The amount due IPC at September
30, 1999 and 1998, respectively, was $52.1 million and $20.1 million. For the
quarter ended September 30, 1999, the $6.25 million limitation had been exceeded
representing a delay in reimbursement of a fourth quarter funding by IPC, the
transfer of a UK VAT receivable from IPC's records to IXnet's and interest
expense on the outstanding amounts. The amounts were subsequently
-64-
<PAGE>
reimbursed and the intercompany balances are now consistent with the
intercompany agreement. All intercompany transactions are eliminated upon
consolidation.
On December 8, 1999, the Company announced that it had signed a contract
with Citigroup to install the new Alliance MX in over 1,150 positions at their
new trading room in Canary Wharf, London. The installation will be implemented
in two phases, with the first phase scheduled to be completed by July 2000.
IPC's largest shareholder Cable Systems Holdings LLC which is controlled by
Citigroup Venture Capital. Through Cable Systems Holdings LLC, Citigroup
Venture Capital holds an approximate 60% stake in the Company.
-65-
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
-----------------------------------------------------------------
(a)(1) Financial Statements
Report of Independent Accountants 37
Consolidated Balance Sheets as of September 30, 1999 and 1998 38
Consolidated Statements of Operations For the Years Ended
September 30, 1999, 1998 and 1997 39
Consolidated Statements of Cash Flows For the Years Ended
September 30, 1999, 1998 and 1997 40
Consolidated Statements of Stockholders (Deficit) Equity
For the Years Ended September 30, 1999, 1998 and 1997 41
Notes to the Consolidated Financial Statements 42 - 62
(a)(2) Financial Statement Schedule
Schedule II: Valuation and Qualifying Accounts 71
Schedules not listed have been omitted because they are not applicable
or are not required or the information required to be set forth therein is
included in the Consolidated Financial Statements or notes thereto.
(b) Reports on Form 8-K
Current report on Form 8-K, dated July 1, 1999, relating to the
adoption of the Amended and Restated Credit Agreement, dated as of
June 21, 1999 among IPC Information, Inc., IPC Funding Corp., IPC
Communications, Inc., General Electric Capital Corporation, as
collateral agent and administrative agent, Morgan Stanley Senior
Funding, Inc., as syndication agent, and the lenders and the
issuing bank named therein.
Current report on Form 8-K, dated July 2, 1999, relating to the
adoption of Amendment No. 1 to the Amended and Restated Credit
Agreement, dated as of June 21, 1999 among IPC Information
Systems, Inc., IPC Funding Corp., IPC Communications, Inc.,
General Electric Capital Corporation, as collateral agent and
administrative agent, Morgan Stanley Senior Funding, Inc., as
syndication agent, and the lenders and the issuing bank named
therein.
(c) Exhibits: The following exhibits are filed as part of this Annual
Report on Form 10-K.
Exhibit No. Description
- ----------- -----------
2.1* Agreement and Plan of Merger, dated as of December 18, 1997,
between IPC Information Systems, Inc. and Arizona Acquisition Corp.
2.2* Stockholders' Agreement, dated as of December 18, 1997, among
Arizona Acquisition Corp., Richard P. Kleinknecht, Peter J.
Kleinknecht, Russell G. Kleinknecht and other signatories thereto.
2.3* Agreement for Sale/Purchase of the Issued Share Capital of Saturn
Global Network Services Holdings Limited dated August 7, 1998 (as
amended on December 18, 1998) among Marshalls 106 Limited,
Marshalls Finance Limited, International Exchange Networks, Ltd.
and IPC Information Systems, Inc.
-66-
<PAGE>
2.4* Agreement and Plan of Merger dated as of May 20, 1999 among IPC
Information Systems, Inc., IPC Communications, Inc. and IPC Merger
Sub Two, Inc.
3.1 Certificate of Incorporation of IPC Communications, Inc. (filed
herewith).
3.2 Bylaws of IPC Communications, Inc. (filed herewith).
3.3* Restated Certificate of Incorporation of IPC Information Systems,
Inc.
3.4* Amended and Restated Bylaws of IPC Information Systems, Inc.
4.1 Specimen of IPC Communications, Inc. Stock Certificate (filed
herewith).
4.2* Indenture dated as of April 30, 1998 between IPC Information
Systems, Inc. and United States Trust Company of New York, as
indenture trustee.
10.1* Form of Intercompany Agreement among IXnet, Inc., International
Exchange Networks, Ltd. and IPC Information Systems, Inc.
10.2* Form of Tax Sharing Agreement between IPC Communications, Inc. and
IXnet, Inc.
10.3* Form of Registration Rights Agreement between IPC Information
Systems, Inc. and IXnet, Inc.
10.4* Form of Maintenance Agreement between International Exchange
Networks, Ltd. and IPC Information Systems, Inc.
10.5* Employment Agreement dated May 9, 1994, between IPC Information
Systems, Inc. and Richard P. Kleinknecht.
10.6* Letter Agreement, dated October 17, 1995, amending the Employment
Agreement between IPC Information Systems, Inc. and Richard P.
Kleinknecht.
10.7* Amended and Restated Employment Agreement, dated as of December 18,
1997, between IPC Information Systems, Inc. and Richard P.
Kleinknecht.
10.8* Labor Pool Agreement between IPC Information Systems, Inc. and
KEC-NY.
10.9* Amended and Restated Labor Pool Agreement, dated as of December 18,
1997, between IPC Information Systems, Inc. and KEC-NY.
10.10* Labor Pool Agreement between IPC Information Systems, Inc. and
KEC-NJ.
10.11* Amended and Restated Labor Pool Agreement, dated as of December 18,
1997, between IPC Information Systems, Inc. and KEC-NJ.
10.12* Corporate Opportunity Agreement among IPC Information Systems,
Inc., KEC-NY and KEC-NJ.
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<PAGE>
10.13* Amended and Restated Corporate Opportunity Agreement, dated as of
December 18, 1997, among IPC Information Systems, Inc., KEC-NY and
KEC-NJ.
10.14* Registration Rights Agreement, between IPC Information Systems,
Inc. and Richard P. Kleinknecht and Peter J. Kleinknecht.
10.15* Amended and Restated Investors Agreement, dated as of April 9,
1998, among IPC Information Systems, Inc., Cable Systems Holding
LLC, Cable Systems International, Inc., Richard P. Kleinknecht,
David Walsh, Anthony Servidio, and Lawrence Smith & Horey III, L.P.
10.16* Share Exchange and Termination Agreement, dated as of December 18,
1997, among IPC Information Systems, Inc., International Exchange
Networks, Ltd., David Walsh and Anthony Servidio.
10.17* Amended and Restated Employment Agreement, dated as of December 18,
1997, between International Exchange Networks, Ltd. and David
Walsh.
10.18* Amendment No. 1, dated as of June 1, 1999, to the Amended and
Restated Employment Agreement between David A. Walsh and
International Exchange Networks, Ltd.
10.19* Amended and Restated Employment Agreement, dated as of December 18,
1997, between International Exchange Networks, Ltd. and Anthony
Servidio.
10.20* Employment Agreement, dated as of July 1, 1999, by and between
International Exchange Networks, Ltd. and Gerald E. Starr.
10.21 Form of Employment Agreement for Senior Executives (filed
herewith).
10.22* Amended and Restated Credit Agreement, dated as of June 21, 1999,
among IPC Information Systems, Inc., IPC Funding Corp., IPC
Communications, Inc., General Electric Capital Corporation, as
collateral agent and administrative agent, Morgan Stanley Senior
Funding, Inc., as syndication agent, and the lenders and the
issuing bank named therein.
21.1 Subsidiaries of IPC Communications, Inc., including IPC Information
Systems, Inc. and its wholly owned subsidiaries (filed herewith).
23.1 Consent of PricewaterhouseCoopers LLP (filed herewith).
27 Financial Data Schedule
__________________________
* Previously filed
-68-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized.
IPC COMMUNICATIONS, INC.
/s/ Gerald E. Starr
Date: December 28, 1999 By:____________________
Gerald E. Starr
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
amendment to the Report on Form 10-K has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
---------- ---------
<S> <C> <C>
/s/ Peter A. Woog Chairman December 28, 1999
- ------------------------------------------------------------- -------------------
Peter A. Woog
/s/ Richard P. Kleinknecht Director December 28, 1999
- ------------------------------------------------------------- -------------------
Richard P. Kleinknecht
/s/ Richard M. Cashin, Jr. Director December 28, 1999
- ------------------------------------------------------------- -------------------
Richard M. Cashin, Jr.
/s/ David Y. Howe Director December 28, 1999
- ------------------------------------------------------------- -------------------
David Y. Howe
/s/ Gerald E. Starr Chief Executive Officer, December 28, 1999
- ------------------------------------------------------------- -------------------
Gerald E. Starr President and Director
(Principal Executive Officer)
/s/ James M. Demitrieus Chief Financial Officer and December 28, 1999
- ------------------------------------------------------------- -------------------
James M. Demitrieus Director
(Principal Accounting Officer)
/s/ David A. Walsh Director December 28, 1999
- ------------------------------------------------------------- -------------------
David A. Walsh
Director
/s/ Richard W. Smith December 28, 1999
- ------------------------------------------------------------- -------------------
Richard W. Smith
Director
December 28, 1999
- ------------------------------------------------------------- -------------------
Robert J. McInerney
</TABLE>
-69-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized.
IPC INFORMATION SYSTEMS, INC.
/s/ Gerald E. Starr
Date: December 28, 1999 By:_____________________
Gerald E. Starr
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
amendment to the Report on Form 10-K has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
------------ -------
<S> <C> <C>
/s/ Peter A. Woog Chairman December 28, 1999
- ------------------------------------------------------------- -------------------
Peter A. Woog
/s/ Richard P. Kleinknecht Director December 28, 1999
------------------------------------------------------------ -------------------
Richard P. Kleinknecht
/s/ Richard M. Cashin, Jr. Director December 28, 1999
- ------------------------------------------------------------- -------------------
Richard M. Cashin, Jr.
/s/ David Y. Howe Director December 28, 1999
- ------------------------------------------------------------- -------------------
David Y. Howe
/s/ Gerald E. Starr Chief Executive Officer, December 28, 1999
- ------------------------------------------------------------- -------------------
Gerald E. Starr President and Director
(Principal Executive Officer)
/s/ James M. Demitrieus Chief Financial Officer and December 28, 1999
- ------------------------------------------------------------- -------------------
James M. Demitrieus Director
(Principal Accounting Officer)
/s/ David A. Walsh Director December 28, 1999
- ------------------------------------------------------------- -------------------
David A. Walsh
Director
/s/ Richard W. Smith December 28, 1999
- ------------------------------------------------------------- -------------------
Richard W. Smith
Director
December 28, 1999
- ------------------------------------------------------------- -------------------
Robert J. McInerney
</TABLE>
-70-
<PAGE>
IPC COMMUNICATIONS, INC.
Schedule II
VALUATION AND QUALIFYING ACCOUNTS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Balance
at Additions
---------------------------------
Beginning Charged to Costs Charged to Balance at End
Description of Period and Expenses Other Accounts Deductions of Period
- ----------- ---------- --------------------------------- ----------- --------------
For the Year Ended September 30, 1997:
<S> <C> <C> <C> <C> <C>
Provision for Doubtful Accounts ........................ $ 1,521 $ 338 - $ 344 (1) $ 1,515
======= ======= ======= ===== =======
Provision for Inventory
Obsolescence ........................................ $ 6,365 $ 2,106 - $1,965 (2) $ 6,506
======= ======= ======= ===== =======
For the Year Ended September 30, 1998:
Provision for Doubtful Accounts ........................ $ 1,515 $ 2,786 - $1,859 (1) $ 2,442
======= ======= ======= ===== =======
Provision for Inventory
Obsolescence ........................................ $ 6,506 $ 3,454 - $2,906 (2) $ 7,054
======= ======= ======= ===== =======
Deferred Tax Valuation Allowance ....................... $ -- $ 3,999 - $ -- $ 3,999
======= ======= ======= ===== =======
For the Year Ended September 30, 1999:
Provision for Doubtful Accounts ........................ $ 2,442 $ 3,236 - $2,072 (1) $ 3,606
======= ======= ======= ===== =======
Provision for Inventory
Obsolescence ........................................ $ 7,054 $ 4,407 - $6,202 (2) $ 5,259
======= ======= ======= ===== =======
Deferred Tax Valuation Allowance ....................... $ 3,999 $16,425 - $ -- $20,424
======= ======= ======= ===== =======
</TABLE>
(1) Doubtful Accounts Written Off, Net of Cash Recovered
(2) Inventory Written Off
71
<PAGE>
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
IPC COMMUNICATIONS, INC.
1. Name. The name of the corporation is IPC Communications, Inc. (the
----
"Corporation").
2. Registered Office and Agent. The address of the Corporation's
---------------------------
registered office in the State of Delaware is Corporation Trust Center, 1209
Orange Street, in the City of Wilmington, County of New Castle. The name of the
Corporation's registered agent at such address is The Corporation Trust Company.
3. Purpose. The nature of the business and purpose or purposes to be
-------
conducted or promoted by the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
4. Capital Stock.
-------------
4.1 Shares, Classes, and Series Authorized. The total number of
--------------------------------------
shares of all classes of capital stock which the Corporation shall have
authority to issue is thirty-five million (35,000,000) shares, of which ten
million (10,000,000) shares shall be preferred stock, par value one cent ($.01)
per share (the "Preferred Stock"), and twenty five million (25,000,000) shares
shall be common stock, par value one cent ($.01) per share (the "Common Stock").
The Preferred Stock and Common Stock are sometimes hereinafter collectively
referred to as the "Capital Stock."
4.2 Designations, Powers, Preferences, Rights, Qualification,
---------------------------------------------------------
Limitations and Restrictions Relating to the Capital Stock. The following is a
- ----------------------------------------------------------
statement of the designations, powers, preferences and rights in respect of the
classes of the Capital Stock, and the qualifications, limitations or
restrictions thereof, and of the authority with respect thereto expressly vested
in the Board of the Corporation.
(a) Preferred Stock. The Preferred Stock may be issued from time to
---------------
time in one or more series, the number of shares and any designation of each
series and the powers, preferences and rights of the shares of each series, and
the qualifications, limitations or restrictions thereof, to be as stated and
expressed in a resolution or resolutions providing for the issue of such series
adopted by the Board of Directors, subject to the limitations prescribed by law.
The Board of Directors in any such resolution or resolutions is expressly
authorized to state for each such series:
(i) the voting powers, if any, of the holders of stock of such series
in addition to any voting rights affirmatively required by law;
(ii) the rights of stockholders in respect of dividends, including,
without limitation, the rate or rates per annum and the time or times at which
(or the formula or other method
<PAGE>
pursuant to which such rate or rates and such time or times may be determined)
and conditions upon which the holders of stock of such series shall be entitled
to receive dividends and other distributions, and whether any such dividends
shall be cumulative or noncumulative and, if cumulative, the terms upon which
such dividends shall be cumulative;
(iii) whether the stock of each such series shall be redeemable by
the Corporation at the option of the Corporation or the holder thereof or upon
the occurrence of a specified event or events, and, if redeemable, the terms and
conditions upon which the stock of such series may be redeemed;
(iv) the amount payable and the rights or preferences to which the
holders of the stock of such series shall be entitled upon any voluntary or
involuntary liquidation, dissolution or winding up of the Corporation;
(v) the terms, if any, upon which shares of stock of such series shall
be convertible into, or exchangeable for, shares of stock of any other class or
classes or of any other series of the same or any other class or classes,
including the price or prices or the rate or rates of conversion or exchange and
the terms of adjustment, if any; and
(vi) any other designations, preferences, and relative, participating,
optional or other special rights, and qualifications, limitations or
restrictions thereof, so far as they are not inconsistent with the provisions of
this Certificate of Incorporation and to the full extent now or hereafter
permitted by the laws of the State of Delaware.
All shares of the Preferred Stock of any one series shall be identical
to each other in all respects, except that shares of any one series issued at
different times may differ as to the dates from which dividends thereon, if
cumulative, shall be cumulative.
Subject to any limitations or restrictions stated in the resolution or
resolutions of the Board of Directors originally fixing the number of shares
constituting a series, the Board of Directors may by resolution or resolutions
likewise adopted increase (but not above the total number of authorized shares
of that class) or decrease (but not below the number of shares of the series
then outstanding) the number of shares of the series subsequent to the issue of
shares of that series; and if the number of shares of any series shall be so
decreased, the shares constituting the decrease shall resume that status that
they had prior to the adoption of the resolution originally fixing the number of
shares constituting such series.
(b) Common Stock. All shares of Common Stock shall be identical to
------------
each other in every respect. The shares of Common Stock shall entitle the
holders thereof to one vote for each share on all matters on which stockholders
have the right to vote. The holders of Common Stock shall not be permitted to
cumulate their votes for the election of directors.
Subject to the preferences, privileges and powers with respect to each
class or series of Capital Stock having any priority over the Common Stock, and
the qualifications, limitations or restrictions thereof, the holders of the
Common Stock shall have and possess all rights pertaining to the Common Stock.
No holder of shares of Common Stock shall be entitled as such, as a matter
<PAGE>
of preemptive right, to subscribe for, purchase or otherwise acquire any part of
any new or additional issue of stock of any class or series whatsoever of the
Corporation, or of securities convertible into stock of any class or series
whatsoever of the Corporation, or of any warrants or other instruments
evidencing rights or options to subscribe for, purchase or otherwise acquire
such stock or securities, whether now or hereafter authorized or whether issued
for cash or other consideration or by way of dividend.
5. Board of Directors.
------------------
5.1 Number of Directors. The total number of directors which shall
-------------------
constitute the whole board of directors shall be determined in accordance with
the By-laws of the Corporation, but shall not be less than two (2) nor more than
nine (9).
5.2 Written Ballot. Unless and to the extent that the By-Laws so
--------------
provide, elections of directors need not be by written ballot.
6. Limitation of Director Liability.
--------------------------------
6.1 Limitation. A director of the Corporation shall not be personally
----------
liable to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except to the extent such exemption from liability
or limitation thereof is expressly prohibited by the General Corporation Law of
the State of Delaware as the same exists or may hereafter be amended.
6.2 No Retroactive Changes. Any amendment, termination or repeal of
----------------------
this Paragraph 6 or any provisions hereof shall not adversely affect or diminish
in any way any right or protection of a director of the Corporation existing
with respect to any act or omission occurring prior to the time of the final
adoption of such amendment, termination or repeal.
6.3 Amendment of this Paragraph. In addition to any requirements of
---------------------------
law or of any other provisions of this Certificate of Incorporation, the
affirmative vote of the holders of not less than seventy percent (70%) of the
total number of votes eligible to be cast by the holders of all outstanding
shares of Capital Stock entitled to vote thereon shall be required to amend,
alter, rescind or repeal any provision of this Paragraph 6.
7. Amendments.
----------
7.1 Amendments of Certificate of Incorporation. In addition to any
------------------------------------------
affirmative vote required by applicable law and any voting rights granted to or
held by holders of Preferred Stock, any alteration, amendment, repeal or
rescission (collectively, any "Change") of any provision of this Certificate of
Incorporation must be approved by a majority of the directors of the Corporation
then in office and by the affirmative vote of the holders of a majority (or such
greater proportion as may otherwise be required pursuant to any specific
provision of this Certificate of Incorporation) of the total votes eligible to
be cast by the holders of all outstanding shares of Capital Stock entitled to
vote thereon.
<PAGE>
Except as may otherwise be provided in this Certificate of
Incorporation, the Corporation reserves the right at any time, and from time to
time, to amend, alter, change or repeal any provision contained in this
Certificate of Incorporation, and to add or insert herein any other provisions
authorized by the laws of the State of Delaware at the time in force, in the
manner now or hereafter prescribed by law, and all rights, preferences and
privileges of any nature conferred upon stockholders, directors or any other
persons whomsoever by and pursuant to this Certificate of Incorporation in its
present form or as hereafter amended are granted subject to the provisions
contained in this Paragraph 7.1.
7.2 Amendments of By-laws. In furtherance and not in limitation of
---------------------
the powers conferred by statute, the Board of Directors of the Corporation is
expressly authorized to make, alter, amend, rescind or repeal from time to time
any of the By-laws of the Corporation in accordance with the terms thereof;
provided, however, that any By-law made by the Board may be altered, amended,
rescinded, or repealed by the holders of a majority of the shares of Capital
Stock entitled to vote thereon at any annual meeting or at any special meeting
called for that purpose. Notwithstanding the foregoing, any provision of the By-
laws that contains a supermajority voting requirement shall only be altered,
amended, rescinded, or repealed by a vote of the Board or holders of shares of
Capital Stock entitled to vote thereon that is not less than the supermajority
specified in such provision.
8. Incorporator. The name and mailing address of the sole
------------
incorporator is as follows:
Susan A.T. Tice
Thacher Proffitt & Wood
Two World Trade Center
New York, New York 10048
<PAGE>
THE UNDERSIGNED, being the incorporator, for the purpose of forming a
corporation pursuant to the provisions of the Delaware General Corporation Law,
does make this certificate, hereby declaring and further certifying that this is
the undersigned's act and deed and that the facts herein stated are true, and,
accordingly, has hereunto set the undersigned's hand this 4th day of May, 1999.
/s/ Susan A.T. Tice
---------------------------------
Susan A.T. Tice
<PAGE>
EXHIBIT 3.2
BY-LAWS
OF
IPC COMMUNICATIONS, INC.
ARTICLE I
Stockholders
------------
SECTION 1. Annual Meeting. The annual meeting of the stockholders of
--------------
the Corporation shall be held on such date, at such time and at such place
within or without the State of Delaware as may be designated by the Board of
Directors, for the purpose of electing Directors and for the transaction of such
other business as may be properly brought before the meeting.
SECTION 2. Special Meetings. Except as otherwise provided in the
----------------
Certificate of Incorporation, a special meeting of the stockholders of the
Corporation may be called at any time by the Board of Directors or the Chairman
of the Board. Any special meeting of the stockholders shall be held on such
date, at such time and at such place within or without the State of Delaware as
the Board of Directors or the officer calling the meeting may designate. At a
special meeting of the stockholders, no business shall be transacted and no
corporate action shall be taken other than that stated in the notice of the
meeting unless all of the stockholders are present in person or by
<PAGE>
proxy, in which case any and all business may be transacted at the meeting even
though the meeting is held without notice.
SECTION 3. Notice of Meetings. Except as otherwise provided in these
------------------
By-Laws or by law, a written notice of each meeting of the stockholders shall be
given not less than ten (10) nor more than sixty (60) days before the date of
the meeting to each stockholder of the Corporation entitled to vote at such
meeting at his or her address as it appears on the records of the Corporation.
The notice shall state the place, date and hour of the meeting and, in the case
of a special meeting, the purpose or purposes for which the meeting is called.
SECTION 4. Quorum. At any meeting of the stockholders, the holders of
------
a majority in number of the total outstanding shares of stock of the Corporation
entitled to vote at such meeting, present in person or represented by proxy,
shall constitute a quorum of the stockholders for all purposes, unless the
representation of a larger number of shares shall be required by law, by the
Certificate of Incorporation or by these By-Laws, in which case the
representation of the number of shares so required shall constitute a quorum;
provided that at any meeting of the stockholders at which the holders of any
class of stock of the Corporation shall be entitled to vote separately as a
class, the holders of a majority in number of the total outstanding shares of
such class, present in person or represented by proxy, shall constitute a quorum
for purposes of such class vote unless the representation of a larger number of
shares of such class shall be required by law, by the Certificate of
Incorporation or by these By-Laws.
2
<PAGE>
SECTION 5. Adjourned Meetings. Whether or not a quorum shall be
------------------
present in person or represented at any meeting of the stockholders, the holders
of a majority in number of the shares of stock of the Corporation present in
person or represented by proxy and entitled to vote at such meeting may adjourn
from time to time; provided, however, that if the holders of any class of stock
of the Corporation are entitled to vote separately as a class upon any matter at
such meeting, any adjournment of the meeting in respect of action by such class
upon such matter shall be determined by the holders of a majority of the shares
of such class present in person or represented by proxy and entitled to vote at
such meeting. When a meeting is adjourned to another time or place, notice need
not be given of the adjourned meeting if the time and place thereof are
announced at the meeting at which the adjournment is taken. At the adjourned
meeting, the stockholders, or the holders of any class of stock entitled to vote
separately as a class, as the case may be, may transact any business which might
have been transacted by them at the original meeting. If the adjournment is for
more than thirty days, or if after the adjournment a new record date is fixed
for the adjourned meeting, a notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote at the adjourned meeting.
SECTION 6. Organization. The Chairman of the Board, or, in his
------------
absence, the Vice-Chairman of the Board, or, in their absence, the Chief
Executive Officer, or, in the absence of the Chairman of the Board, the Vice-
Chairman of the Board and the Chief Executive Officer, the President, or, in the
absence of the Chairman of the Board, the Vice-Chairman of the Board, the Chief
Executive Officer and the President, a Vice President shall call all meetings of
the stockholders to order, and shall act as Chairman of such meetings. In the
absence of the Chairman of the Board, the Vice-Chairman of the Board, the Chief
Executive Officer, the President and all of
3
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the Vice Presidents, the holders of a majority in number of the shares of stock
of the Corporation present in person or represented by proxy and entitled to
vote at such meeting shall elect a Chairman.
The Secretary of the Corporation shall act as Secretary of all
meetings of the stockholders; but in the absence of the Secretary, the Chairman
may appoint any person to act as Secretary of the meeting. It shall be the duty
of the Secretary to prepare and make, at least ten days before every meeting of
stockholders, a complete list of stockholders entitled to vote at such meeting,
arranged in alphabetical order and showing the address of each stockholder and
the number of shares registered in the name of each stockholder. Such list shall
be open, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting or, if not so
specified, at the place where the meeting is to be held, for the ten days next
preceding the meeting, to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, and shall be produced
and kept at the time and place of the meeting during the whole time thereof and
subject to the inspection of any stockholder who may be present.
SECTION 7. Voting. Except as otherwise provided in the Certificate of
------
Incorporation or by law, each stockholder shall be entitled to one vote for each
share of the capital stock of the Corporation registered in the name of such
stockholder upon the books of the Corporation. Each stockholder entitled to vote
at a meeting of stockholders or to express consent or dissent to corporate
action in writing without a meeting may authorize another person or persons to
act for him or her by proxy, but no such proxy shall be voted or acted upon
after three years from its date, unless the proxy provides for a longer period.
When directed by the presiding officer or upon the demand of any stockholder,
the vote upon any matter before a meeting of stockholders shall be by ballot.
Except as otherwise provided by law or by the Certificate of Incorporation,
Directors
4
<PAGE>
shall be elected by a plurality of the votes cast at a meeting of stockholders
by the stockholders entitled to vote in the election and, whenever any corporate
action, other than the election of Directors is to be taken, it shall be
authorized by a majority of the votes cast at a meeting of stockholders by the
stockholders entitled to vote thereon.
Shares of the capital stock of the Corporation belonging to the
Corporation or to another corporation, if a majority of the shares entitled to
vote in the election of directors of such other corporation is held, directly or
indirectly, by the Corporation, shall neither be entitled to vote nor be counted
for quorum purposes.
SECTION 8. Inspectors. When required by law or directed by the
----------
presiding officer or upon the demand of any stockholder entitled to vote, but
not otherwise, the polls shall be opened and closed, the proxies and ballots
shall be received and taken in charge, and all questions touching the
qualification of voters, the validity of proxies and the acceptance or rejection
of votes shall be decided at any meeting of the stockholders by one or more
Inspectors who may be appointed by the Board of Directors before the meeting, or
if not so appointed, shall be appointed by the presiding officer at the meeting.
If any person so appointed fails to appear or act, the vacancy may be filled by
appointment in like manner. Each inspector, before entering upon the discharge
of his duties, shall take and sign an oath faithfully to execute the duties of
inspector with strict impartiality and according to the best of his ability.
SECTION 9. Consent of Stockholders in Lieu of Meeting. Any action
------------------------------------------
required to be taken at any annual or special meeting of stockholders of the
Corporation, or any action which may be taken at any annual or special meeting
of the stockholders, may be taken without a meeting,
5
<PAGE>
without prior notice and without a vote, if a consent or consents in writing,
setting forth the action so taken, shall be signed by the holders of outstanding
stock having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted and shall be delivered to the Corporation by
delivery to its registered office in Delaware, its principal place of business,
or an officer or agent of the Corporation having custody of the book in which
proceedings of meetings of stockholders are recorded. Delivery made to the
Corporation's registered office shall be made by hand or by certified or
registered mail, return receipt requested.
Every written consent shall bear the date of signature of each stockholder
who signs the consent and no written consent shall be effective to take the
corporate action referred to therein unless, within sixty (60) days of the date
the earliest dated consent is delivered to the Corporation, a written consent or
consents signed by a sufficient number of holders to take action are delivered
to the Corporation in the manner prescribed in the first paragraph of this
Section.
ARTICLE II
Board of Directors
------------------
SECTION 1. Number and Term of Office. The business and affairs of the
-------------------------
Corporation shall be managed by or under the direction of a Board of Directors,
none of whom need be stockholders of the Corporation. The number of Directors
constituting the Board of Directors shall be fixed from time to time by
resolution passed by a majority of the Board of Directors. The Directors shall,
except as hereinafter otherwise provided for filling vacancies, be elected at
the annual meeting of stockholders, and shall hold office until their respective
successors are elected and
6
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qualified or until their earlier resignation or removal.
SECTION 2. Removal, Vacancies and Additional Directors. The
-------------------------------------------
stockholders may, at any special meeting the notice of which shall state that it
is called for that purpose, remove, with or without cause, any Director and fill
the vacancy; provided that whenever any Director shall have been elected by the
holders of any class of stock of the Corporation voting separately as a class
under the provisions of the Certificate of Incorporation, such Director may be
removed and the vacancy filled only by the holders of that class of stock voting
separately as a class. Vacancies caused by any such removal and not filled by
the stockholders at the meeting at which such removal shall have been made, or
any vacancy caused by the death or resignation of any Director or for any other
reason, and any newly created directorship resulting from any increase in the
authorized number of Directors, may be filled by the affirmative vote of a
majority of the Directors then in office, although less than a quorum, and any
Director so elected to fill any such vacancy or newly created directorship shall
hold office until his or her successor is elected and qualified or until his or
her earlier resignation or removal.
When one or more Directors shall resign effective at a future date, a
majority of the Directors then in office, including those who have so resigned,
shall have power to fill such vacancy or vacancies, the vote thereon to take
effect when such resignation or resignations shall become effective, and each
Director so chosen shall hold office as herein provided in connection with the
filling of other vacancies.
SECTION 3. Place of Meeting. The Board of Directors may hold its
----------------
meetings in such place or places in the State of Delaware or outside the State
of Delaware as the Board from time
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to time shall determine.
SECTION 4. Regular Meetings. Regular meetings of the Board of
----------------
Directors shall be held at such times and places as the Board from time to time
by resolution shall determine. No further notice shall be required for any
regular meeting of the Board of Directors; but a copy of every resolution fixing
or changing the time or place of regular meetings shall be mailed to every
Director at least five days before the first meeting held in pursuance thereof.
SECTION 5. Special Meetings. Special meetings of the Board of
----------------
Directors shall be held whenever called by direction of the Chairman of the
Board or by any two of the Directors then in office.
Notice of the day, hour and place of holding of each special meeting
shall be given by mailing the same at least two days before the meeting or by
causing the same to be transmitted by facsimile, telegram or telephone at least
one day before the meeting to each Director. Unless otherwise indicated in the
notice thereof, any and all business other than an amendment of these By-Laws
may be transacted at any special meeting, and an amendment of these By-Laws may
be acted upon if the notice of the meeting shall have stated that the amendment
of these By-Laws is one of the purposes of the meeting. At any meeting at which
every Director shall be present, even though without any notice, any business
may be transacted, including the amendment of these By-Laws.
SECTION 6. Quorum. Subject to the provisions of Section 2 of this
------
Article II, a majority of the members of the Board of Directors in office (but
in no case less than one-third of the total number of Directors nor less than
two Directors) shall constitute a quorum for the transaction
8
<PAGE>
of business and the vote of the majority of the Directors present at any meeting
of the Board of Directors at which a quorum is present shall be the act of the
Board of Directors. If at any meeting of the Board there is less than a quorum
present, a majority of those present may adjourn the meeting from time to time.
SECTION 7. Organization. The Chairman of the Board shall preside at
------------
all meetings of the Board of Directors. In the absence of the Chairman of the
Board, a Chairman shall be elected from the Directors present. The Secretary of
the Corporation shall act as Secretary of all meetings of the Directors; but in
the absence of the Secretary, the Chairman may appoint any person to act as
Secretary of the meeting.
SECTION 8. Committees. The Board of Directors may designate one or
----------
more committees including, without limitation, compensation and audit
committees, each committee to consist of one or more of the Directors of the
Corporation. The Board may designate one or more Directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of a member of a
committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not such member or members constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
at the meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board, shall have and
may exercise all the powers and authority of the Board of Directors in the
management of the business and the affairs of the Corporation, and may authorize
the seal of the Corporation to be affixed to all papers which may require it;
but no such committee shall have the power or authority in reference to
approving or adopting, or recommending to the stockholders, any action or matter
9
<PAGE>
expressly required by law to be submitted to stockholders for approval, or
adopting, amending or repealing these By-laws.
SECTION 9. Conference Telephone Meetings. Unless otherwise restricted
-----------------------------
by the Certificate of Incorporation or by these By-Laws, the members of the
Board of Directors or any committee designated by the Board, may participate in
a meeting of the Board or such committee, as the case may be, by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and such participation
shall constitute presence in person at such meeting.
SECTION 10. Consent of Directors or Committee in Lieu of Meeting.
----------------------------------------------------
Unless otherwise restricted by the Certificate of Incorporation or by these By-
Laws, any action required or permitted to be taken at any meeting of the Board
Directors, or of any committee thereof, may be taken without a meeting if all
members of the Board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the Board or committee, as the case may be.
ARTICLE III
Officers
--------
SECTION 1. Officers. The officers of the Corporation shall be a
--------
Chairman of the Board, Vice-Chairman of the Board, Chief Executive Officer, a
President, one or more Vice Presidents, a Secretary and a Treasurer, and such
additional officers, if any, as shall be elected by the Board of Directors
pursuant to the provisions of Section 7 of this Article III. The Chairman of
10
<PAGE>
the Board, the Vice-Chairman of the Board, the President, the Chief Executive
Officer, one or more Vice Presidents, the Secretary and the Treasurer shall be
elected by the Board of Directors at its first meeting after each annual meeting
of the stockholders. The failure to hold such election shall not of itself
terminate the term of office of any officer. All officers shall hold office at
the pleasure of the Board of Directors. Any officer may resign at any time upon
written notice to the Corporation. Officers may, but need not, be Directors. Any
number of offices may be held by the same person.
All officers, agents and employees shall be subject to removal, with
or without cause, at any time by the Board of Directors. The removal of an
officer without cause shall be without prejudice to his or her contract rights,
if any. The election or appointment of an officer shall not of itself create
contract rights. All agents and employees other than officers elected by the
Board of Directors shall also be subject to removal, with or without cause, at
any time by the officers appointing them.
Any vacancy caused by the death, resignation or removal of any
officer, or otherwise, may be filled by the Board of Directors, and any officer
so elected shall hold office at the pleasure of the Board of Directors.
In addition to the powers and duties of the officers of the
Corporation as set forth in these By-Laws, the officers shall have such
authority and shall perform such duties as from time to time may be determined
by the Board of Directors.
SECTION 2. Powers and Duties of the Chairman of the Board. The
----------------------------------------------
Chairman of the Board shall preside at all meetings of the stockholders and at
all meetings of the Board of
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Directors and shall have such other powers and perform such other duties as may
from time to time be assigned by these By-Laws or by the Board of Directors.
SECTION 3. Powers and Duties of the Vice-Chairman of the Board. The
---------------------------------------------------
Vice-Chairman of the Board shall have all powers and shall perform all duties
incident to the office of Vice-Chairman of the Board and shall have such other
powers and perform such other duties as may from time to time be assigned by
these By-Laws or by the Board of Directors or the Chairman of the Board.
SECTION 4. Powers and Duties of the Chief Executive Officer. The
------------------------------------------------
Chief Executive Officer shall be the chief executive officer of the Corporation,
have general charge and control of all the Corporation's business and affairs
and, subject to the control of the Board of Directors, shall have all powers and
shall perform all duties incident to the office of Chief Executive Officer. In
the absence of the Chairman of the Board, the Chief Executive Officer shall
preside at all meetings of the stockholders and at all meetings of the Board of
Directors. In addition, the Chief Executive Officer shall have such other powers
and perform such other duties as may from time to time be assigned by these By-
Laws or by the Board of Directors.
SECTION 5. Powers and Duties of the President. The President shall,
----------------------------------
subject to the control of the Board of Directors, have all powers and shall
perform all duties incident to the office of President. In the absence of the
Chairman of the Board and the Chief Executive Officer, the President shall
preside at all meetings of the stockholders and at all meetings of the Board of
Directors. In the absence of the Chief Executive Officer, the President shall be
the chief executive officer of the Corporation, have general charge and control
of all the Corporation's business and
12
<PAGE>
affairs and shall have such other powers and perform such other duties as may
from time to time be assigned by these By-Laws or by the Board of Directors.
SECTION 6. Powers and Duties of the Vice Presidents. Each Vice
----------------------------------------
President shall have all powers and shall perform all duties incident to the
office of Vice President and shall have such other powers and perform such other
duties as may from time to time be assigned by these By-Laws or by the Board of
Directors, the Chairman of the Board, the Chief Executive Officer or the
President.
SECTION 7. Powers and Duties of the Secretary. The Secretary shall
----------------------------------
keep the minutes of all meetings of the Board of Directors and the minutes of
all meetings of the stockholders in books provided for that purpose. The
Secretary shall attend to the giving or serving of all notices of the
Corporation; shall have custody of the corporate seal of the Corporation and
shall affix the same to such documents and other papers as the Board of
Directors, the Chairman of the Board, the Vice-Chairman of the Board, the Chief
Executive Officer or the President shall authorize and direct; shall have charge
of the stock certificate books, transfer books and stock ledgers and such other
books and papers as the Board of Directors, the Chairman of the Board, the Vice-
Chairman of the Board, the Chief Executive Officer or the President shall
direct, all of which shall at all reasonable times be open to the examination of
any Director, upon application, at the office of the Corporation during business
hours. The Secretary shall have all powers and shall perform all duties incident
to the office of Secretary and shall also have such other powers and shall
perform such other duties as may from time to time be assigned by these By-Laws
or by the Board of Directors, the Chairman of the Board, the Vice-Chairman of
the Board, the Chief Executive Officer or the President.
13
<PAGE>
SECTION 8. Powers and Duties of the Treasurer. The Treasurer shall
----------------------------------
have custody of, and when proper shall pay out, disburse or otherwise dispose
of, all funds and securities of the Corporation. The Treasurer may endorse on
behalf of the Corporation for collection checks, notes and other obligations and
shall deposit the same to the credit of the Corporation in such bank or banks or
depository or depositories as the Board of Directors may designate; shall sign
all receipts and vouchers for payments made to the Corporation; shall enter or
cause to be entered regularly in the books of the Corporation kept for the
purpose full and accurate accounts of all moneys received or paid or otherwise
disposed of and whenever required by the Board of Directors, the Chairman of the
Board, the Vice-Chairman of the Board, the Chief Executive Officer or the
President shall render statements of such accounts. The Treasurer shall, at all
reasonable times, exhibit the books and accounts to any Director of the
Corporation upon application at the office of the Corporation during business
hours; and shall have all powers and shall perform all duties incident of the
office of Treasurer and shall also have such other powers and shall perform such
other duties as may from time to time be assigned by these By-Laws or by the
Board of Directors, the Chairman of the Board, the Vice-Chairman of the Board,
the Chief Executive Officer or the President.
SECTION 9. Additional Officers. The Board of Directors may from time
-------------------
to time elect such other officers (who may but need not be Directors), including
a Controller, Assistant Treasurers, Assistant Secretaries and Assistant
Controllers, as the Board may deem advisable and such officers shall have such
authority and shall perform such duties as may from time to time be assigned by
the Board of Directors, the Chairman of the Board, the Vice-Chairman of the
Board, the Chief Executive Officer or the President.
The Board of Directors may from time to time by resolution delegate to
any Assistant
14
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Treasurer or Assistant Treasurers any of the powers or duties herein assigned to
the Treasurer; and may similarly delegate to any Assistant Secretary or
Assistant Secretaries any of the powers or duties herein assigned to the
Secretary.
SECTION 10. Giving of Bond by Officers. All officers of the
--------------------------
Corporation, if required to do so by the Board of Directors, shall furnish bonds
to the Corporation for the faithful performance of their duties, in such
penalties and with such conditions and security as the Board shall require.
SECTION 11. Voting Upon Stocks. Unless otherwise ordered by the Board
-------------------
of Directors, the Chairman of the Board, the Vice-Chairman of the Board, the
Chief Executive Officer, the President or any Vice President shall have full
power and authority on behalf of the Corporation to attend and to act and to
vote, or in the name of the Corporation to execute proxies to vote, at any
meeting of stockholders of any corporation in which the Corporation may hold
stock, and at any such meeting shall possess and may exercise, in person or by
proxy, any and all rights, powers and privileges incident to the ownership of
such stock. The Board of Directors may from time to time, by resolution, confer
like powers upon any other person or persons.
SECTION 12. Compensation of Officers. The officers of the Corporation
------------------------
shall be entitled to receive such compensation for their services as shall from
time to time be determined by the Board of Directors.
ARTICLE IV
Indemnification of Directors and Officers
-----------------------------------------
15
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SECTION 1. Right to Indemnification. Each person who was or is made a
------------------------
party or is threatened to be made a party to or is otherwise involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (hereinafter, a "Proceeding"), by reason of the fact that he or
she is or was a director or officer 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 of a partnership, joint venture, trust or other
enterprise, including service with respect to an employee benefit plan
(hereinafter, an "Indemnitee"), whether the basis of such Proceeding is alleged
action in an official capacity as a director, officer, employee or agent or in
any other capacity while serving as a director, officer, employee or agent shall
be indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than permitted prior thereto), against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid in settlement) reasonably incurred or suffered by such
Indemnitee in connection therewith and such indemnification shall continue as to
an Indemnitee who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of the Indemnitee's heirs, executors and
administrators; provided, however, that, except as provided in Section 3 of this
Article IV with respect to Proceedings to enforce rights to indemnification, the
Corporation shall indemnify any such Indemnitee in connection with a Proceeding
(or part thereof) initiated by such Indemnitee only if such Proceeding (or part
thereof) was authorized by the Board of Directors of the Corporation.
SECTION 2. Right to Advancement of Expenses. The right to
--------------------------------
indemnification
16
<PAGE>
conferred in Section 1 of this Article IV shall include the right to be paid by
the Corporation the expenses incurred in defending any Proceeding for which such
right to indemnification is applicable in advance of its final disposition
(hereinafter, an "Advancement of Expenses"); provided, however, that, if the
Delaware General Corporation Law requires, an Advancement of Expenses incurred
by an Indemnitee in his or her capacity as a director or officer (and not in any
other capacity in which service was or is rendered by such Indemnitee,
including, without limitation, service to an employee benefit plan) shall be
made only upon delivery to the Corporation of an undertaking (hereinafter, an
"Undertaking"), by or on behalf of such Indemnitee, to repay all amounts so
advanced if it shall ultimately be determined by final judicial decision from
which there is no further right to appeal (hereinafter, a "Final Adjudication")
that such Indemnitee is not entitled to be indemnified for such expenses under
this Section or otherwise.
SECTION 3. Right of Indemnitee to Bring Suit. The rights to
---------------------------------
indemnification and to the advancement of expenses conferred in Section 1 or 2
of this Article IV shall be contract rights. If a claim under Section 1 or 2 of
this Article IV is not paid in full by the Corporation within sixty days after a
written claim has been received by the Corporation, except in the case of a
claim for an Advancement of Expenses) in which case the applicable period shall
be twenty days, the Indemnitee may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim. If successful in whole or
in part in any such suit, or in a suit brought by the Corporation to recover an
Advancement of Expenses pursuant to the terms of an Undertaking, the Indemnitee
shall be entitled to be paid also the expense of prosecuting or defending such
suit. In (i) any suit brought by the Indemnitee to enforce a right to
indemnification hereunder (but not in a suit brought by the Indemnitee to
enforce a right to an Advancement of Expenses) it shall be a defense that, and
(ii) in any suit by the Corporation to recover an Advancement of Expenses
pursuant to the terms of an
17
<PAGE>
Undertaking the Corporation shall be entitled to recover such expenses upon a
Final Adjudication that, the Indemnitee has not met any applicable standard for
indemnification set forth in the Delaware General Corporation Law. Neither the
failure of the Corporation (including its Board of Directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the Indemnitee is proper in
the circumstances because the Indemnitee has met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an actual
determination by the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) that the Indemnitee has not met such
applicable standard of conduct, shall create a presumption that the Indemnitee
has not met the applicable standard of conduct or, in the case of such a suit
brought by the Indemnitee, be a defense to such suit. In any suit brought by the
Indemnitee to enforce a right to indemnification or to an Advancement of
Expenses hereunder, or by the Corporation to recover an Advancement of Expenses
pursuant to the terms of an Undertaking, the burden of proving that the
Indemnitee is not entitled to be indemnified, or to such Advancement of
Expenses, under this Section or otherwise shall be on the Corporation.
SECTION 4. Non-Exclusivity of Rights. The rights to indemnification
-------------------------
and to the Advancement of Expenses conferred in this Article IV shall not be
exclusive of any other right which any person may have or hereafter acquire
under any statute, the Corporation's certificate of incorporation, bylaw,
agreement, vote of stockholders or disinterested directors or otherwise.
SECTION 5. Insurance. The Corporation may maintain insurance, at its
---------
expense, to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or
18
<PAGE>
not the Corporation would have the power to indemnify such person against such
expense, liability or loss under the Delaware General Corporation Law.
SECTION 6. Indemnification of Employees and Agents of the Corporation.
----------------------------------------------------------
The Corporation may, to the extent authorized from time to time by the Board of
Directors, grant rights to indemnification, and to the Advancement of Expenses
to any employee or agent of the Corporation to the fullest extent of the
provisions of this Article IV with respect to the indemnification and
Advancement of Expenses of directors and officers of the Corporation.
ARTICLE V
Stock-Seal-Fiscal Year
----------------------
SECTION 1. Certificates For Shares of Stock. The certificates for
--------------------------------
shares of stock of the Corporation shall be in such form, not inconsistent with
the Certificate of Incorporation, as shall be approved by the Board of
Directors. All certificates shall be signed by the Chairman of the Board, the
Vice-Chairman of the Board, the Chief Executive Officer, the President or a Vice
President and by the Secretary or an Assistant Secretary or the Treasurer or an
Assistant Treasurer, and shall not be valid unless so signed.
In case any officer or officers who shall have signed any such
certificate or certificates shall cease to be such officer or officers of the
Corporation, whether because of death, resignation or otherwise, before such
certificate or certificates shall have been delivered by the Corporation, such
certificate or certificates may nevertheless be issued and delivered as though
the person or persons who signed such certificate or certificates had not ceased
to be such officer or
19
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officers of the Corporation.
All certificates for shares of stock shall be consecutively numbered
as the same are issued. The name of the person owning the shares represented
thereby with the number of such shares and the date of issue thereof shall be
entered on the books of the Corporation.
Except as hereinafter, provided, all certificates surrendered to the
Corporation for transfer shall be canceled, and no new certificates shall be
issued until former certificates for the same number of shares have been
surrendered and canceled.
SECTION 2. Lost, Stolen or Destroyed Certificates. Whenever a person
--------------------------------------
owning a certificate for shares of stock of the Corporation alleges that it has
been lost, stolen or destroyed, he or she shall file in the office of the
Corporation an affidavit setting forth, to the best of his or her knowledge and
belief, the time, place and circumstances of the loss, theft or destruction,
and, if required by the Board of Directors, a bond of indemnity or other
indemnification sufficient in the opinion of the Board of Directors to indemnify
the Corporation and its agents against any claim that may be made against it or
them on account of the alleged loss, theft or destruction of any such
certificate or the issuance of a new certificate in replacement therefor.
Thereupon the Corporation may cause to be issued to such person a new
certificate in replacement for the certificate alleged to have been lost, stolen
or destroyed. Upon the stub of every new certificate so issued shall be noted
the fact of such issue and the number, date and the name of the registered owner
of the lost, stolen or destroyed certificate in lieu of which the new
certificate is issued.
SECTION 3. Transfer of Shares. Shares of stock of the Corporation
------------------
shall be
20
<PAGE>
transferred on the books of the Corporation by the holder thereof, in person or
by his or her attorney duly authorized in writing, upon surrender and
cancellation of certificates for the number of shares of stock to be
transferred, except as provided in Section 2 of this Article IV.
SECTION 4. Regulations. The Board of Directors shall have power and
-----------
authority to make such rules and regulations as it may deem expedient concerning
the issue, transfer and registration of certificates for shares of stock of the
Corporation.
SECTION 5. Record Date. In order that the Corporation may determine
-----------
the stockholders entitled to notice of or to vote at any meeting of stockholders
, or to receive payment of any dividend or other distribution or allotment of
any rights or to exercise any rights in respect of any change, conversion or
exchange of stock or for the purpose of any other lawful action, the Board of
Directors may fix a record date, which record date shall not precede the date on
which the resolution fixing the record date is adopted and which record date
shall not be more than sixty (60) nor less than ten (10) days before the date of
any meeting of stockholders, nor more than sixty (60) days prior to the time for
such other action as hereinbefore described; provided, however, that if no
record date is fixed by the Board of Directors, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day next preceding the day on which notice is
given or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held, and, for determining
stockholders entitled to receive payment of any dividend or other distribution
or allotment of rights or to exercise any rights of change, conversion or
exchange of stock or for any other purpose, the record date shall be at the
close of business on the day on which the Board of Directors adopts a resolution
relating thereto.
21
<PAGE>
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
In order that the Corporation may determine the stockholders entitled
to consent to corporate action in writing without a meeting, the Board of
Directors may fix a record date, which shall not precede the date upon which the
resolution fixing the record date is adopted by the Board of Directors, and
which record date shall be not more than ten (10) days after the date upon which
the resolution fixing the record date is adopted. If no record date has been
fixed by the Board of Directors and no prior action by the Board of Directors is
required by the Delaware General Corporation Law, the record date shall be the
first date on which a signed written consent setting forth the action taken or
proposed to be taken is delivered to the Corporation in the manner prescribed by
Article I, Section 9 hereof. If no record date has been fixed by the Board of
Directors and prior action by the Board of Directors is required by the Delaware
General Corporation Law with respect to the proposed action by written consent
of the stockholders, the record date for determining stockholders entitled to
consent to corporate action in writing shall be at the close of business on the
day on which the Board of Directors adopts the resolution taking such prior
action.
SECTION 6. Dividends. Subject to the provisions of the Certificate of
---------
Incorporation, the Board of Directors shall have power to declare and pay
dividends upon shares of stock of the Corporation, but only out of funds
available for the payment of dividends as provided by law.
Subject to the provisions of the Certificate of Incorporation, any
dividends declared upon the stock of the Corporation shall be payable on such
date or dates as the Board of Directors
22
<PAGE>
shall determine. If the date fixed for the payment of any dividend shall in any
year fall upon a legal holiday, then the dividend payable on such date shall be
paid on the next day not a legal holiday.
SECTION 7. Corporate Seal. The Board of Directors shall provide a
--------------
suitable seal, containing the name of the Corporation, which seal shall be kept
in the custody of the Secretary. A duplicate of the seal may be kept and be used
by any officer of the Corporation designated by the Board of Directors, the
Chairman of the Board, the Vice-Chairman of the Board, the Chief Executive
Officer or the President.
SECTION 8. Fiscal Year. The fiscal year of the Corporation shall be
-----------
such fiscal year as the Board of Directors from time to time by resolution shall
determine.
ARTICLE VI
----------
Miscellaneous Provisions
------------------------
SECTION 1. Checks, Notes, Etc. All checks, drafts, bills of exchange,
------------------
acceptances, notes or other obligations or orders for the payment of money shall
be signed and, if so required by the Board of Directors, countersigned by such
officers of the Corporation and/or other persons as the Board of Directors from
time to time shall designate.
Checks, drafts, bills of exchange, acceptances, notes, obligations and
orders for the payment of money made payable to the Corporation may be endorsed
for deposit to the credit of the Corporation with a duly authorized depository
by the Treasurer and/or such other officers or persons as the Board of Directors
from time to time may designate.
23
<PAGE>
SECTION 2. Loans. No loans and no renewals of any loans shall be
-----
contracted on behalf of the Corporation except as authorized by the Board of
Directors. When authorized to do so, any officer or agent of the Corporation may
effect loans and advances for the Corporation from any bank, trust company or
other institution or from any firm, corporation or individual, and for such
loans and advances may make, execute and deliver promissory notes, bonds or
other evidences of indebtedness of the Corporation. When authorized so to do,
any officer or agent of the Corporation may pledge, hypothecate or transfer, as
security for the payment of any and all loans, advances, indebtedness and
liabilities of the Corporation, any and all stocks, securities and other
personal property at any time held by the Corporation, and to that end may
endorse, assign and deliver the same. Such authority may be general or confined
to specific instances.
SECTION 3. Contracts. Except as otherwise provided in these By-Laws or
---------
by law or as otherwise directed by the Board of Directors, the Chairman of the
Board, the Vice-Chairman of the Board, the Chief Executive Officer, the
President or any Vice President shall be authorized to execute and deliver, in
the name and on behalf of the Corporation, all agreements, bonds, contracts,
deeds, mortgages, and other instruments, either for the Corporation's own
account or in a fiduciary or other capacity, and the seal of the Corporation, if
appropriate, shall be affixed thereto by any of such officers or the Secretary
or an Assistant Secretary. The Board of Directors, the Chairman of the Board,
the Vice-Chairman of the Board, the Chief Executive Officer, the President or
any Vice President designated by the Board of Directors may authorize any other
officer, employee or agent to execute and deliver, in the name and on behalf of
the Corporation, agreements, bonds, contracts, deeds, mortgages, and other
instruments, either for the Corporation's own account or in a fiduciary or other
capacity, and, if appropriate, to affix the seal of the Corporation thereto.
24
<PAGE>
The grant of such authority by the Board or any such officer may be general or
confined to specific instances.
SECTION 4. Waivers of Notice. Whenever any notice whatever is required
-----------------
to be given by law, by the Certificate of Incorporation or by these By-Laws to
any person or persons, a waiver thereof in writing, signed by the person or
persons entitled to the notice, whether before or after the time stated therein,
shall be deemed equivalent thereto.
SECTION 5. Offices Outside of Delaware. Except as otherwise required
---------------------------
by the laws of the State of Delaware, the Corporation may have an office or
offices and keep its books, documents and papers outside of the State of
Delaware at such place or places as from time to time may be determined by the
Board of Directors, the Chairman of the Board, the Vice-Chairman of the Board,
the Chief Executive Officer or the President.
ARTICLE VII
Amendments
----------
These By-Laws and any amendment thereof may be altered, amended or
repealed, or new By-Laws may be adopted, by the Board of Directors at any
regular or special meeting by the affirmative vote of a majority of all of the
members of the Board, provided in the case of any special meeting at which all
of the members of the Board are not present, that the notice of such meeting
shall have stated that the amendment of these By-Laws was one of the purposes of
the meeting; but these By-Laws and any amendment thereof may be altered, amended
or repealed or new By-Laws may be adopted by the holders of a majority of the
total outstanding stock of the Corporation entitled
25
<PAGE>
to vote at any annual meeting or at any special meeting, provided, in the case
of any special meeting, that notice of such proposed alteration, amendment,
repeal or adoption is included in the notice of the meeting.
ARTICLE VIII
Waiver of Section 203
---------------------
The Corporation expressly elects not to be governed by Section 203 of
the Delaware General Corporation Law, which election shall, in accordance with
such Section, not be effective until 12 months after the adoption of these By-
Laws and not apply to any business combination between the Corporation and any
person who became an interested stockholder of the Corporation on or prior to
such adoption.
26
<PAGE>
EXHIBIT 4.1
Incorporated under the laws of the State of Delaware
IPC Communications, Inc.
Total Authorized Issue
25,000,000 Shares $0.01 Par Value
Common Stock
This Certifies that
is the registered holder of
fully paid and non-assessable shares of the Common Stock, $.01 par value, of IPC
Communications, Inc. transferable on the books of the Corporation by the holder
hereof in person or by duly authorized Attorney upon surrender of this
Certificate properly endorsed. The Corporation will furnish without charge to
each stockholder who so requests a statement of the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. This Certificate is not valid
unless countersigned and registered by the Transfer Agent and Registrar.
Witness, the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
Gerald E. Starr Brian L. Reach
President and Chief Executive Officer Chief Financial Officer and Assistant
Secretary
<PAGE>
The following abbreviations when used in the inscription on the face of this
Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT . . . . . .Custodian . . . . .
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with under Uniform Gifts to Minors Act. . . . . . .
right of survivorship (State)
and not as tenants in common
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received, ______________________ hereby sell(s), assign(s) and
transfer(s) unto_____________________________________________________________
_________________________________ shares represented by the within Certificate,
and do hereby irrevocably constitute and appoint ______________________________
Attorney to transfer the said stock on the books of the within-named Corporation
with full power of substitution in the premises.
Dated,
---------------------------------
-----------------------------------------------------
NOTICE: The signature to this assignment must
correspond with the name as written upon the face of
the Certificate in every particular, without alteration
or enlargement or any change whatever.
<PAGE>
EXHIBIT 10.21
FORM OF EMPLOYMENT AGREEMENT FOR SENIOR EXECUTIVES
THIS FORM OF EMPLOYMENT AGREEMENT FOR SENIOR EXECUTIVES ("Agreement")
is made and entered into this 1st __day of July, 1999, (the "Effective Date")
by and between [ ]
(the "Executive") and International Exchange Networks, Ltd., a
Delaware corporation (the "Company").
BACKGROUND
WHEREAS the Executive has and is expected to continue to make a major
contribution to the growth, profitability and financial strength of the Company;
and
WHEREAS the Company desires to retain the services of the Executive,
and the Executive desires to be retained by the Company, on the terms and
conditions set forth below.
NOW, THEREFORE, intending to be legally bound, and in consideration of
the premises and the mutual promises set forth in this Agreement and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Company and Executive agree as follows:
ARTICLE I -- DEFINITIONS
1.1 Definitions. The following terms, when used in this Agreement, shall
have the following meanings, unless the context clearly requires otherwise
(such definitions to be equally applicable to both the singular and plural
of the defined terms):
1.1.1 "Affiliate" means, (a) with respect to the Executive, any other
---------
Person directly or indirectly Controlling, Controlled by, or under common
Control with the Executive and (b) with respect to the Company, (i) any Person
which directly or indirectly beneficially owns (within the meaning of Rule 13d-3
promulgated under the Securities Exchange Act of 1934, as amended) securities or
other equity interests possessing more than 50% of the aggregate voting power in
the election of directors (or similar governing body) represented by all
outstanding securities of the Company or (ii) any Person with respect to which
the Company beneficially owns (within the meaning of Rule 13d promulgated under
the Securities Exchange Act of 1934, as amended) securities or other equity
interests possessing more than 50% of the aggregate voting power in the election
of directors (or similar governing body) represented by, or more than 50% of the
aggregate value of, all outstanding securities or other equity interests of such
Person.
1.1.2 "Base Salary" shall have the meaning set forth in section 3.1.
-----------
1.1.3 "Board" means the Board of Directors of the Company.
-----
<PAGE>
1.1.4 "Cause" means an omission, act or action or series of omissions,
-----
acts or actions of the Executive which, in the determination of the Board,
constitute(s), cause(s) or result(s) in:
1.1.4.1 the Executive's material dishonesty including, without
limitation, theft, fraud, embezzlement, financial
misrepresentation or other similar behavior or action in his
dealings with or with respect to the Company or any Affiliate
thereof or entity with which the Company or any Affiliate
thereof, shall be engaged in or be attempting to engage in
commerce;
1.1.4.2 the conviction of the Executive for, or the Executive's
entry of a plea of guilty or nolo contendere to, the commission
of a felony;
1.1.4.3 the willful refusal of the Executive to follow the
lawful directives of the Board or the President of the Company
with respect to his duties hereunder, which directives shall be
consistent with his duties and position as an officer of the
Company, as set forth in this Agreement, and which refusal is not
cured by the Executive within thirty (30) calendar days after
written notice from the Board of the Company to the Executive
setting forth with reasonable specificity the nature thereof; or
1.1.4.4 the material breach of any provision of this Agreement
which is not cured by the Executive within thirty (30) calendar
days after written notice from the Board or the President of the
Company to the Executive setting forth with reasonable
specificity the nature of such breach.
1.1.5 "Confidential Information" means:
------------------------
1.1.5.1..proprietary information, trade secrets and know-how of
the Company and its Affiliates;
1.1.5.2 confidential information relating to the business,
operations, systems, networks, services, data bases, customer
lists, pricing policies, business plans, marketing plans, product
development plans, strategies, inventions and research of the
Company or its Affiliates; and
1.1.5.3 confidential information relating to the financial
affairs and results of operations and forecasts or projections of
the Company or its Affiliates;
provided that information shall not constitute Confidential Information if such
information: (i) is generally known by Persons other than the Company or its
Affiliates or Persons employed by, in control of or otherwise affiliated with
the Company or its Affiliates, (ii) is known by Persons other than the Company
or its Affiliates or Persons employed by, in control of or otherwise affiliated
with the Company or its Affiliates by reason of the action of such Person or
Persons other than the Executive or any Person acting at the Executive's
direction or with the Executive's consent, (iii) was known by the Executive, by
lawful means, prior to the date of the Executive's
<PAGE>
employment with the Company or (iv) is compelled to be disclosed by law,
regulation or legal process.
1.1.6 "Control" (including the terms "Controlled by" and "under common
-------
Control with") means the possession, directly or indirectly or as a trustee
or executor, of the power to direct or cause the direction of the
management of a Person, whether through the ownership of stock, as a
trustee or executor, by contract or credit agreement or otherwise.
1.1.7 "Disability" means any physical or mental condition which renders
----------
Executive incapable of performing his essential functions and duties
hereunder as determined in good faith by the Board.
1.1.8 "Effective Date" shall have the meaning set forth in the preamble.
--------------
1.1.9 "Employment Term" shall have the meaning set forth in section 2.2.
---------------
1.1.10 "Good Reason" means:
-----------
1.1.10.1 the assignment to Executive, without Executive's
expressed written approval, of duties or responsibilities
materially inconsistent with the Executive's position of ,
or any material reduction in Executive's duties, responsibilities
or authority from those in effect on the date hereof;
1.1.10.2 the Company's failure to continue in effect any
material benefit plan, program or policy in which Executive is
participating (other than any plan, program or policy which is
available to the salaried employees of the Company generally), or
the taking of any action by the Company that would adversely
affect Executive's participation in or materially reduce
Executive's benefits under any such benefit plan, program or
policy or that would deprive Executive of any material fringe
benefit enjoyed by Executive; provided, however, that no Good
Reason shall occur if the aggregate value of the benefit plans,
programs and policies in which the Executive is participating
remains substantially equivalent;
1.1.10.3 a relocation of the Executive's primary place of
employment to any location that is both (a) greater than 50 miles
away from the location at which Executive is currently working,
and (b) greater than 50 miles away from the Executor's primary
residence, except for required travel by Executive on the
Company's business to an extent substantially consistent with
Executive's past business travel obligations;
which, in any case, is not cured by the Company within thirty (30) calendar days
after written notice from the Executive to the Board setting forth with
reasonable specificity the nature of such breach. For purposes of this
Agreement, any action or inaction shall constitute Good Reason only
<PAGE>
if written notice thereof as contemplated by the preceding sentence is given
within 60 days after the date on which such action or inaction first occurs (or,
if later, the earliest date on which the Executor knows or reasonably should
know of such action or inaction).
1.1.11 "Initial Term" means the first period that this Agreement
------------
is in effect, as set forth in section 2.2.
1.1.12 "Person" means an individual, corporation, partnership,
------
association, limited liability company or partnership, trust, government,
governmental agency or body, or any other group or entity, no matter how
organized and whether or not for profit.
1.1.13 "Renewal Term" shall have the meaning set forth in
------------
Section 2.2.
ARTICLE II -- EMPLOYMENT AND TERM
2.1 Employment. The Company employs Executive and the Executive hereby
agrees to such employment by the Company during the Employment Term to serve as
____ of the Company, with the customary duties, authorities and responsibilities
of a _________ ___ of a telecommunications corporation and such other duties,
authorities and responsibilities relative to the Company or its Affiliates that:
(i) have been agreed upon by the Company and Executive or (ii) may from time to
time be delegated to Executive by the Board [or the President of the Company].
2.2 Employment Term.
2.2.1 Initial Term. The "Initial Term" of this Agreement shall
------------
commence on the Effective Date, and unless sooner terminated as provided in
Article IV, shall continue until the fourth anniversary of such date.
2.2.2 Renewal Term. On the day after the Effective Date and on each
------------
day thereafter, the Employment Term shall be extended by one day, such that
on any date the Employment Term will expire on the fourth (4th) anniversary
of such date. These extensions shall continue in perpetuity until
discontinued by: (a) notice to the Executive given by the Company that it
has elected to discontinue the extensions; (b) notice by the Executive to
the Company that he has elected to discontinue the extensions; or (c)
termination of the Executive's employment with the Company, whether by
resignation, discharge or otherwise. On the date on which such a notice is
deemed given, or on the effective date of a termination of the Executive's
employment with the Company, the Employment Term shall be converted to a
fixed period of four (4) years ending on the fourth (4th) anniversary of
such date.
2.2.3. Employment Term. For all purposes of this Agreement, the term
---------------
"Employment Term" shall mean the Initial Term and all Renewal Terms.
Except as otherwise expressly provided in this Agreement, any reference in
this Agreement to the term "Remaining Unexpired Employment Term" as of any
date shall mean the period beginning on such date and ending on the fourth
(4th) anniversary of the earliest of (a) the
<PAGE>
date in question, (b) any earlier date on which the Executive or the
Company is deemed to have given a notice to discontinue extensions of the
Employment Term, and (c) any earlier date on which the Executive's
employment with the Company was terminated.
2.3 Full Working Time. During the Employment Term, the Executive shall
devote his ability and attention, all of his skill and experience and efforts
during normal business hours and at such other times as the performance of his
duties hereunder may reasonably require to the proper performance of his duties
hereunder and to the business and affairs of the Company. During the Employment
Term, the Executive, without the prior written approval of the Board, shall not,
either directly or indirectly, actively participate in any other business or
accept any employment or business office whatsoever, including, without
limitation, serving as a director, from any other Person; provided, however,
that the foregoing shall not preclude the Executive, subject to Article V, from:
(i) serving as a director of any non-profit or charitable organization or (ii)
making an investment in any other business, so long as in any such case, the
Executive does not actively participate in such other business or organization
and such activity does not interfere with the Executive's ability to perform his
duties hereunder and does not constitute a conflict of interest with the Company
in the reasonable opinion of the Board.
ARTICLE III -- COMPENSATION AND BENEFITS
3.1 Base Salary. During the Employment Term, as compensation for services
hereunder and in consideration for the protective covenants set forth in Article
V of this Agreement, Executive shall be paid an annual base salary of [$ ] or
such greater amount as may from time to time be approved by the Compensation
Committee of the Board (the "Base Salary"); provided, however, that the Base
Salary may be decreased if there are decreases in salary imposed on all of the
Company's executive employees because the Company's financial performance
dictates such decreases. Base Salary shall be paid to Executive in accordance
with the Company's normal payroll practices.
3.2 Bonus. During the Employment Term, Executive shall be eligible to
receive an annual bonus that will be determined in accordance with the bonus
program established by the Board from time to time.
3.3 Stock Option. The Executive shall be granted an option to purchase
shares of the common stock of the Company pursuant to the IXnet, Inc. 1999
Stock Option Plan (the "Stock Plan").
3.4 Benefits. To the maximum extent that he is eligible under the terms of
the applicable plan or program, the Executive shall participate in any and all
plans or programs maintained by the Company for its employees and/or senior
executives generally that provide insurance, medical benefits, retirement
benefits, or similar fringe benefits. In addition, the Executive shall be
entitled to [ ] weeks of paid vacation each calendar year of the Employment
Term, which must be taken in accordance with the Company's vacation policy then
in effect.
<PAGE>
3.5 Indemnification and Insurance.
3.5.1 D&O Insurance. The Company shall cause the Executive to be
-------------
covered by and named as an insured under any policy or contract of
insurance obtained by it to insure its directors and officers against
personal liability for acts or omissions in connection with service as an
officer or director of the Company or service in other capacities at its
request. The coverage provided to the Executive pursuant to this section
3.5.1 shall be of the same scope and on the same terms and conditions as
the coverage (if any) provided to other officers or directors of the
Company and shall continue for so long as the Executive shall be subject to
personal liability relating to such service.
3.5.2 Indemnification. To the maximum extent permitted under applicable
---------------
law, the Company shall indemnify the Executive against and hold him
harmless from any costs, liabilities, losses and exposures to the fullest
extent and on the most favorable terms and conditions that similar
indemnification is offered to any director or officer of the Company or any
subsidiary or Affiliate thereof and shall continue for so long as the
Executive shall be subject to personal liability relating to such service.
3.6 Expenses. The Company shall pay or reimburse the Executive for
reasonable business expenses actually incurred or paid by the Executive during
the Employment Term, in the performance of his services hereunder; provided,
however, that such expenses are consistent with the Company policy. Such payment
or reimbursement is expressly conditioned upon presentation of expense
statements or vouchers or other supporting documentation by the Executive in a
manner that is acceptable to the Company and otherwise in accordance with the
Company policy then in effect.
3.7 Deductions. The Company shall deduct from all compensation or
benefits payable pursuant to this Agreement such payroll, withholding and other
taxes as may in the reasonable opinion of the Company be required by law and any
such additional amounts requested in writing by the Executive.
ARTICLE IV - TERMINATION
4.1 General. The Company shall have the right to terminate the employment
of the Executive at any time with or without Cause.
4.2 Termination Under Certain Circumstances.
4.2.1 Termination Without Severance Benefits. In the event the
--------------------------------------
Executive's employment with the Company is terminated prior to the
expiration of the Employment Term by reason of (i) the Executive's
resignation without Good Reason, (ii) the Executive's death or (iii) the
Executive's discharge by the Company for Cause, this Agreement shall
terminate including, without limitation, the Company's obligations to
provide any compensation, benefits or severance to the Executive under
Article IV of this
<PAGE>
Agreement or otherwise, other than the Standard Termination Entitlements
(as defined in section 4.4.1).
4.2.2 Disability. The Company may terminate the Executive's
----------
employment upon the Executive's Disability. In such event, in addition to
the Standard Termination Entitlements (as defined in section 4.4.1), the
Company shall continue to pay the Executive his Base Salary in accordance
with the Company's normal payroll practices, at the annual rate in effect
for him immediately prior to the termination of his employment, during a
period ending on the earliest of: (a) the date on which long-term
disability insurance benefits are first payable to him under any long-term
disability insurance plan covering employees of the Company; and (b) the
date of his death; and (c) the expiration of the Remaining Unexpired
Employment Term. A termination of employment due to Disability under this
Section 4.2.2 shall be effected by notice of termination given to the
Executive by the Company and shall take effect on the later of the
effective date of termination specified in such notice or the date on which
the notice of termination is deemed given to the Executive.
4.2.3 Termination with Severance Benefits. In the event that the
-----------------------------------
Executive's employment with the Company is terminated by the Executive
prior to the expiration of the Employment Term for Good Reason or by the
Company prior to the expiration of the Employment Term other than for Cause
or Disability, the Company shall pay the Standard Termination Entitlements
(as defined in section 4.4.1) and the Severance Benefits (as defined in
section 4.4.2); provided, however, that any payment required by this
section 4.2.2 is expressly conditioned upon:
4.2.3.1 The Executive's compliance with the terms of this
Agreement, including, without limitation, Article V;
4.2.3.2 The Executive's execution of a release and waiver of
all claims and potential claims against the Company, its
Affiliates and other related parties in a form satisfactory to
the Company and that is substantially similar to the attached
form; and
4.2.3.3 The Executive's resignation from any and all positions
which he holds as an officer, director or committee member with
respect to the Company or any Affiliate thereof.
4.3 Liquidated Damages. The Company and Executive hereby stipulate that
the damages which may be incurred by the Executive as a consequence of any such
termination of employment are not capable of accurate measurement as of the date
first above written and that the liquidated damages payments provided for in
this Agreement constitute a reasonable estimate under the circumstances of, and
are in full satisfaction of, all damages sustained as a consequence of any such
termination of employment.
<PAGE>
4.4 Standard Termination Entitlements; Severance Benefits.
4.4.1 Standard Termination Entitlements. For all purposes of this
---------------------------------
Agreement, the Executive's "Standard Termination Entitlements" shall mean
and include:
(a) the Executive's earned but unpaid compensation (including,
without limitation, salary and all other items which constitute wages
under applicable law) as of the date of his termination of employment.
This payment shall be made at the time and in the manner prescribed by
law applicable to the payment of wages but in no event later than 30
days after the date of the Executive's termination of employment.
(b) the benefits, if any, due to the Executive, and the
Executive's estate, surviving dependents or his designated
beneficiaries under the employee benefit plans and programs and
compensation plans and programs (including stock option plans)
maintained for the benefit of the officers and employees of the
Company). The time and manner of payment or other delivery of these
benefits and the recipients of such benefits shall be determined
according to the terms and conditions of the applicable plans and
programs.
4.4.2 Severance Benefits. For all purposes of this Agreement, the
------------------
Executive's "Severance Benefits" shall mean and include:
(a) the payment of (i) the Executive's Base Salary at the annual
rate of Base Salary in effect immediately prior to his termination of
employment (without giving effect to any reduction in Base Salary not
expressly authorized by this Agreement) for a period of twelve (12)
months from the date of the Executive's termination of employment
payable in accordance with the Company's normal payroll practices,
plus (ii) the annual bonus (if any) earned by the Executive for the
fiscal year (computed as though the Executive had remained employed
through the end of such fiscal year) multiplied by a fraction, the
number of which is the number of calendar months in the current fiscal
year to begin before the Executive's termination of employment and the
denominator of which is twelve (12), payable at the time and in the
manner specified in the applicable bonus plan. The payments described
in this section 4.4.2 (a) shall not commence until the release
referred to in section 4.3.2.2. becomes irrevocable.
(b) a lump sum payment equal to any unpaid bonuses or other
compensation earned for periods completed prior to the
<PAGE>
Executive's termination of employment, the payment of which is
contingent on the Executive's continued employment through a date that
is after the date of his termination of employment. This payment shall
be made at the time and in the manner prescribed by law, but in any
event within five (5) business days after the Executive's termination
of employment.
(c) for a period of one year after termination of employment,
direct payment by the Company to the carrier of the premiums due for
any health insurance continuation coverage elected by the Executive
under the Company group health plans pursuant to the Consolidated
Budget Reconciliation of 1985.
ARTICLE V -- RESTRICTIVE COVENANTS
5.1 Proprietary Information.
5.1.1 Disclosure during the Term. The Executive shall promptly
--------------------------
disclose to the Company in such form and manner as the Company may
reasonably require (a) all operations, systems, services, methods,
developments, inventions, improvements and other information or data
pertaining to the business or activities of the Company and its Affiliates
as are conceived, originated, discovered or developed by Executive (whether
or not copyrighted or patented or capable of being copyrighted or patented)
during the Employment Term (whether before or after the date hereof), and
(b) such information and data pertaining to the business, operations,
personnel, activities, financial affairs, and other information relating to
the Company and its Affiliates and their respective customers, suppliers,
employees and other persons having business dealings with the Company and
its Affiliates as may be reasonably required for the Company to operate its
business. It is understood that such information is proprietary in nature
and shall (as between the Company and Executive) be for the exclusive use
and benefit of the Company and shall be and remain the property of the
Company both during the Employment Term and thereafter. If so requested by
the Company, the Executive shall execute and deliver to the Company any
instrument as the Company may reasonably request to effectuate the
assignment of any such proprietary information to the Company. Without
limiting the generality of the foregoing, the Executive hereby releases and
waives and assigns to the Company any and all claims and rights which he
has against the Company or any Affiliate thereof or any of the technology,
"know-how," licenses or other proprietary rights or processes of the
Company or any Affiliate thereof.
5.1.2 Disclosure after the Term. In the event that the Executive
-------------------------
leaves the employ of the Company for any reason, including, without
limitation, the expiration of the Employment Term, the Executive shall
deliver to the Company (and shall not keep in his possession, recreate or
deliver to anyone other than the Company or its designee) any and all
devices, records, data, notes, reports, proposals, lists, correspondence,
specifications, drawings, blueprints, sketches, materials, equipment, other
documents or property,
<PAGE>
together with all copies thereof (in whatever medium recorded) belonging to
the Company or any Affiliate thereof or any of their respective successors
or assigns.
5.2 Non-Competition. During the Employment Term and any extensions thereof,
and, only if the Executive's employment hereunder is terminated due to the
Company's discharge of the Executive for Cause, or the Executive's voluntary
resignation from his employment hereunder without Good Reason, for two years
thereafter, the Executive agrees, and shall cause each Person Controlled by him
to agree, that any such Person shall not, directly or indirectly, through any
Person Controlled by the Executive, in any form or manner on a worldwide basis:
(a) engage in any activities competitive with the business of the Company and
its Affiliates for his or their own account or for the account of any other
Person, or (b) become interested in any Person engaged in activities competitive
with the business of the Company and its Affiliates as a partner, shareholder,
member, principal, agent, employee, trustee, consultant or in any other
relationship or capacity; provided, however, that Executive may own, directly or
indirectly, solely as a passive investment, securities of any Person if the
Executive (x) is not a Person in Control of, or a member of a group that
Controls, such Person and (y) does not, directly or indirectly, own 5% or more
of any voting class of securities of such Person.
5.3 Non-Solicitation. During the Employment Term, any extensions thereof
and for a period of two years thereafter, the Executive will not, directly or
indirectly, use proprietary knowledge or information relating to the Company or
its Affiliates obtained during the course of Executive's employment with the
Company with the intention to, or which a reasonable person would construe to
(a) interfere with or disrupt any present or prospective relationship,
contractual or otherwise, between the Company or its Affiliates and any
customer, supplier, employee, consultant or other person having business
dealings with the Company or its Affiliates, or (b) employ or solicit the
employment or engagement by others of any employee or consultant of the Company
or its Affiliates who was such an employee or consultant at the time of
termination of the Executive's employment hereunder or within one year prior
thereto.
5.4 Non-Disclosure. Except with the prior written consent of the Company in
each instance or as may be reasonably necessary to perform the Executive's
services hereunder, the Executive shall not disclose, use, publish, or in any
other manner reveal, directly or indirectly, at any time during or after the
Employment Term, any Confidential Information relating to the Company or any
Affiliate thereof acquired by him prior to, during the course of, or incident
to, his employment hereunder. In the event Executive is required (by oral
questions, interrogatories, requests for information or documents in legal
proceedings, subpoenas, civil investigative demand or similar process) to
disclose any such Confidential Information, the Executive shall provide the
Company with prompt written notice of such requirement so that the Company may
seek a protective order or other appropriate remedy and/or waive compliance with
the provisions of this Section. If, in the absence of such a protective order or
other remedy or receipt of a waiver by the Company, the Executive is nonetheless
advised by his legal counsel that he is legally compelled to disclose such
Confidential Information, the Executive may, without liability hereunder,
disclose only that portion of such Confidential Information which such counsel
advises in writing is legally required to be disclosed.
<PAGE>
5.5 Reasonable Limitations. Executive acknowledges that given the nature
of the Company's business the covenants contained in this Article V contain
reasonable limitations as to time, geographical area and scope of activity to be
restrained, and do not impose a greater restraint than is necessary to protect
and preserve the Company's business and to protect the Company's legitimate
business interests. If, however, this Article V is determined by any court of
competent jurisdiction or any arbitrator to be unenforceable by reason of its
extending for too long a period of time or over too large a geographic area or
by reason of its being too extensive in any other respect, or for any other
reason, it will be interpreted to extend only over the longest period of time
for which it may be enforceable and/or over the largest geographical area as to
which it may be enforceable and/or to the maximum extent in all other aspects as
to which it may be enforceable, all as determined by such court or arbitrator in
such action.
5.6 Remedies for Breach. Executive acknowledges that the legal remedies
for breach of the protective covenants hereunder are inadequate and therefore
agrees that, in addition to all of the remedies available to the Company in the
event of a breach or a threatened breach of any covenant contained in this
Article V, the Company may: (i) obtain temporary, preliminary, and permanent
injunctions and any other appropriate equitable relief against any and all such
actions, (ii) cease as of the date of such breach or threatened breach any and
all further payments to Executive pursuant to this Agreement and (iii) recover
from Executive monetary damages to the Company or any Affiliate arising from
such breach or threatened breach and all costs and expenses (including
reasonable attorneys' fees) incurred by the Company or any Affiliate in the
enforcement of such protective covenants.
5.7 Extension of Limitation Period. The parties acknowledge that if
Executive violates any of the protective covenants in this Article V and the
Company brings legal action for injunctive, damages or other relief hereunder,
the Company shall, as a result of the time involved in obtaining the relief, be
deprived of the full benefit of these protective covenants. Accordingly, the
applicable limitation period shall be deemed to have the full duration of the
period stated therein, computed from the date relief is granted, but reduced by
the time between the period when the restriction began to run and the date of
the first violation of the covenant by Executive.
5.8 Affiliates of the Company. The provisions of this Article V shall
benefit the business and proprietary rights of the Company's Affiliates and
shall be enforceable against Executive by each of such Affiliates as third party
beneficiaries.
5.9 Survival of Protective Covenants. Each covenant on the part of
Executive contained in this Article V shall be construed as an agreement
independent of any other provision of this Agreement, unless otherwise indicated
herein, and shall survive the termination of Executive's Employment under this
Agreement, and the existence of any claim or cause of action of Executive
against the Company, whether predicated on this Agreement or otherwise, shall
not constitute a defense to the enforcement by the Company of such covenant.
ARTICLE VI -- DISPUTE RESOLUTION
6.1 Arbitration. Any dispute, controversy or claim, at any time arising
from or relating to this Agreement, or the breach, termination or invalidity
thereof (other than any
<PAGE>
dispute, controversy or claim made by the Company pursuant to Article V, which
may, at the option of the Company, be submitted to any court of competent
jurisdiction) shall be referred to final and binding arbitration by a panel of
three arbitrators selected according to the National Rules for the Resolution of
Employment Disputes of the American Arbitration Association (but not held under
its auspices). In the event the arbitrator selected by the Executive and the
arbitrator selected by the Company cannot, within thirty (30) days after the
appointment of both, agree on a third arbitrator, he or she shall be selected by
a United States District Court Judge sitting in the United States District Court
for the Southern District of New York. The place of arbitration shall be New
York, NY. Any arbitral award may be entered as a judgment in any court of
competent jurisdiction.
ARTICLE VII -- GENERAL PROVISIONS
7.1 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly received if so given) by hand delivery, telegram, telex
or telecopy, or by mail (registered or certified mail, postage prepaid, return
receipt requested) or by any courier service, providing proof of delivery. All
communications hereunder shall be delivered to the respective parties at the
following addresses:
If to the Executive: [ ]
[address]
with copy to: [ ]
If to the Company: IPC Information Systems, Inc.
Wall Street Plaza
88 Pine Street - 15th Floor
New York, NY 10005
Attn: Chairman of the Board
Fax No.: (212) 858-7959
with copy to: [ ]
or to such other address as the party to whom notice is given may have
previously furnished to the other parties hereto in writing in the manner set
forth above.
7.2 Entire Agreement. This Agreement shall constitute the entire agreement
between the Executive and the Company with respect to the Company's employment
of the Executive and supersedes any and all prior agreements and understandings,
written or oral, with respect thereto.
<PAGE>
7.3 Amendments and Waivers. Any term of this Agreement may be amended and
the observance of any term of this Agreement may be waived (either generally or
in a particular instance and either retroactively or prospectively), only by (a)
an instrument in writing and signed by the party against whom such amendment or
waiver is sought to be enforced, and (b) in the case of the Company, such
amendment or waiver also must be duly authorized by an appropriate resolution of
the Board.
7.4 Successors and Assigns. The Company shall have the right to assign
this Agreement. The personal services of the Executive are the subject of this
Agreement and no part of his rights or obligations hereunder may be assigned,
transferred, pledged or encumbered by the Executive. This Agreement shall inure
to the benefit of, and be binding upon (a) the parties hereto, (b) the heirs,
administrators, executors and personal representatives of the Executive and (c)
the successors and assigns of the Company as provided herein.
7.5 Governing Law. This Agreement, including the validity hereof and the
rights and obligations of the parties hereunder, and all amendments and
supplements hereof and all waivers and consents hereunder, shall be construed in
accordance with and governed by the laws of the State of New York without giving
effect to any conflicts of law provisions or rule, that would cause the
application of the laws of any other jurisdiction.
7.6 Severability. If any provisions of this Agreement as applied to any
part or to any circumstance shall be adjudged by a court to be invalid or
unenforceable, the same shall in no way affect any other provision of this
Agreement, the application of such provision in any other circumstances or the
validity or enforceability of this Agreement.
7.7 No Conflicts. The Executive represents to the Company that the
execution, delivery and performance by the Executive of this Agreement does not
and will not conflict with or result in a violation or breach of, or constitute
(with or without notice or lapse of time or both) a default under any contract,
agreement or understanding, whether oral or written, to which the Executive is
or was a party or of which the Executive is or should be aware.
7.8 Survival. The rights and obligations of the Company and Executive
pursuant to Articles IV, V and VI shall survive the termination of the
Executive's employment with the Company and the expiration of the Employment
Term.
7.9 Captions. The headings and captions used in this Agreement are used
for convenience only and are not to be considered in construing or interpreting
this Agreement.
7.10 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
7.11 Non-duplication. In the event that the Executive shall perform
services for any Affiliate of the Company or any other direct or indirect
subsidiary or affiliate of the Company or any Affiliate, any compensation or
benefits provided to the Executive by such other employer shall be applied to
offset the obligations of the Company hereunder, it being intended that this
<PAGE>
Agreement set forth the aggregate compensation and benefits payable to the
Executive for all services to the Company, its Affiliates and all of their
respective direct or indirect subsidiaries and affiliates.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
[EXECUTIVE]
IXnet, Inc.
By:
Name:
Title:
<PAGE>
Exhibit 21.1
Subsidiaries of IPC Communications, Inc.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------- ----------------------
Name Place of Incorporation
<S> <C>
IPC Information Systems, Inc. (operating corp.) Delaware
IPC Information Systems Canada, Inc. (operating corp.) Canada
IPC Information Systems Far East, Inc. (holding corp.) Delaware
IPC Information Systems Asia Pacific, Limited (operating corp.) Hong Kong
IPC U.K. Holdings Limited (holding corp.) United Kingdom
IPC Information Systems (operating Corp.) United Kingdom
IPC UK SPC Limited (holding corp.) United Kingdom
IPC Funding Corp. (holding corp.) Delaware
IXnet, Inc. (holding corp.) Delaware
International Exchange Networks, Ltd. (operating corp.) Delaware
Saturn Global Network Services Holdings Limited (holding corp.) United Kingdom
IXnet Brasil Comercio & Participacoes LTDA. (operating corp.) Brazil
International Exchange Networks (Mexico), S.A. de C.V. (operating Mexico
corp.)
International Exchange Network Corp. (holding corp.) Delaware
MXNet Inc. (operating corp.) Delaware
IXnet Australia PTY Limited (f/k/a Saturn Global Network Services PTY Australia
Limited) (operating corp.)
International Exchange Network SAS (operating corp.) France
International Exchange Network GmbH (operating corp.) Germany
Saturn Global Network Services (Hong Kong) Ltd. (operating corp.) Hong Kong
IXnet Japan Co., Ltd. (operating corp.) Japan
Saturn Global Network Services (Japan) Ltd. (operating corp.) Japan
Saturn Global Network Services (Singapore) PTE Ltd. (operating corp.) Singapore
IXnet UK Limited (operating corp.) United Kingdom
Saturn Global Networks, Inc. (operating corp.) New York
IXnet PTE Ltd. (operating corp.) Singapore
Saturn Global Network Services (U.K.) Ltd. United Kingdom
Saturn Systems PTE Ltd Singapore
International Exchange Networks (Hong Kong) Limited Hong Kong
Saturn Employee Trustee (Jersey) Limited Jersey, Channel Islands
</TABLE>
<PAGE>
EXHIBIT 23.1
Consent of Independent Accountants
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-81241) of IPC Communications, Inc. of our report
dated November 30, 1999 relating to the financial statements and financial
statement schedule of IPC Communications, Inc., which appears in this Annual
report on Form 10-K.
PricewaterhouseCoopers LLP
New York, New York
December 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 43,946
<SECURITIES> 54,857
<RECEIVABLES> 80,309
<ALLOWANCES> 3,606
<INVENTORY> 31,903
<CURRENT-ASSETS> 229,757
<PP&E> 98,682
<DEPRECIATION> 49,761
<TOTAL-ASSETS> 413,209
<CURRENT-LIABILITIES> 140,950
<BONDS> 262,009
0
0
<COMMON> 86
<OTHER-SE> (465)
<TOTAL-LIABILITY-AND-EQUITY> 413,209
<SALES> 339,192
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<CGS> 231,241
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<OTHER-EXPENSES> 451
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</TABLE>
