Proposed Acquisition of Telco Systems

BATM Advanced Communications Ld 3 February 2000 A presentation to analysts will be held at 10.00am today in the Trust Boardroom, Dresdner Kleinwort Benson, 20 Fenchurch Street BATM ADVANCED COMMUNICATIONS LIMITED PROPOSED ACQUISITION OF TELCO SYSTEMS - BATM announces that it has conditionally agreed to acquire Telco Systems, a major US manufacturer of network transport and access systems for leading telecommunication companies, from World Access Inc. for a total consideration of US$326.6 million (£203.5 million). - US$200 million (£125 million) of this consideration will be paid in cash from existing resources, US$65.8 million (£41.0 million) will be satisfied by the issue of 960,000 New Ordinary Shares to World Access Inc. and the balance of US$60.8 million (£37.9 million) will be satisfied by a placing of New Ordinary Shares for cash. Dresdner Kleinwort Benson has acted as adviser to BATM. - Strong strategic fit - BATM has a pipeline of new IP products aimed at telcos - explosive internet growth is moving telcos from circuit to packet (IP) equipment - Telco Systems is strong in sales, distribution and technical support to US telcos - Telco Systems has a broad high quality customer base - the transaction expands and strengthens BATM's product range - the technology is complementary - the Acquisition brings experienced US management who will be retained by BATM - World Access Inc. will enter into a letter of intent to purchase a range of BATM's products following completion of the proposed acquisition - Due to its size, the Acquisition is conditional on the approval of BATM shareholders. It is also conditional on US anti-trust clearances. Dr Zvi Marom, BATM's Chief Executive today said 'BATM's acquisition of Telco Systems represents a significant opportunity for us to establish a stronger presence in the US telecommunications equipment markets. Telco Systems innovative EdgeLink multiplexer series naturally complements BATM's switching and access solutions that cater to the network edge. On a combined basis, we anticipate that our bundled service offerings will become a compelling sales tool. Furthermore, Telco Systems' direct salesforce and well developed direct and indirect sales channels establish a broad sales and marketing presence for BATM, especially in US telecommunications equipment market. We intend to utilize Telco Systems' customer development and retention programs as a basis for further retail account growth.' This summary should be read in conjunction with the full text of the following announcement issued on behalf of BATM by Dresdner Kleinwort Benson. Enquiries: www.batm.com BATM 00972 3 938 6888 Dr Zvi Marom (Chief Executive) Ofer Bar-Ner (Finance Director) Dresdner Kleinwort Benson 0207 623 8000 Mark Smith Shore Capital and Corporate Limited 0207 408 4090 Graham Shore Ludgate Communications 0207 253 2252 Edward Macquisten Kleinwort Benson Limited ('Dresdner Kleinwort Benson'), which is regulated in the UK by The Securities and Futures Authority Limited, is acting exclusively for BATM in connection with the acquisition and no-one else and will not be responsible to anyone other than BATM for providing the protections afforded to customers of Dresdner Kleinwort Benson, or for giving advice in relation to the acquisition. Shore Capital and Corporate Limited ('Shore Capital') which is regulated in the UK by The Securities and Futures Authority Limited, is acting exclusively for BATM in connection with the acquisition and no-one else and will not be responsible to anyone other than BATM for providing the protections afforded to customers of Shore Capital, or for giving advice in relation to the acquisition. BATM ADVANCED COMMUNICATIONS LIMITED PROPOSED ACQUISITION OF TELCO SYSTEMS Introduction BATM announces that it has conditionally agreed to acquire Telco Systems, a leading US manufacturer of network transport and access systems for leading telecommunication companies from World Access Inc. The total consideration amounts to US$326.6 million (£203.5 million). US$200 million (£125 million) of this consideration will be paid in cash from existing resources, US$65.8 million (£41.0 million) will be satisfied by the issue of 960,000 New Ordinary Shares to be retained by World Access Inc. and the balance of US$60.8 million (£37.9 million) will be satisfied from a placing of New Ordinary Shares for cash described below. Dresdner Kleinwort Benson has fully underwritten this placing. In view of its size, the Acquisition is conditional on Shareholder approval. It is also conditional, inter alia, on US regulatory clearance. Background to and reasons for the Acquisition Over the last two years BATM has developed internet protocol (IP) based products aimed at the telecommunications and datacommunications markets. These products have advanced rapidly in their technological capabilities. The Titan T4 and T5 switches have reached the market and the non-blocking Titan T6 switch remains on course for Beta trials to commence in April 2000. Additionally, the Company has recently announced the launch of the Titan T5 QS switch, incorporating some of the quality of service features which will be present in the Titan T6 as well as plans to demonstrate a working prototype of the system containing the crossbar from the Titan T8 photonic switch at Cebit in February 2000. BATM has a stated strategy not only to attain technological excellence but also to increase penetration of its products in the packet-based networking, telecommunications and data communications markets. The major customers for BATM's products are telecommunications and datacommunications equipment manufacturers many of whom are based in the US. BATM has also stated its aim of acquiring a US based business to further this strategy. Telco Systems is a leading US manufacturer of fibre optic, digital transmission equipment and network access products. Telco Systems is currently owned by World Access Inc, a US quoted provider of bundled voice, data and internet services. Telco Systems has been involved in delivering voice and data solutions for service providers for over 20 years, manufacturing network access servers, bandwidth optimisation products, broadband transmission equipment and frame relay access devices enabling LAN and WAN networking across frame relay networks. Telco Systems' product range is aimed at the point at which networks interconnect and its core technology focuses on multiplexing of circuit, packet and cell-based networks. As such its products are highly complementary to BATM's switches and switch routers which connect to such access devices. The EdgeLink family from Telco Systems delivers service providers a wide range of solutions, including SONET/SDH access, T3 multiplexing and seamless migration from circuit-switched to emerging packet and cell technologies. Products are manufactured for IXC, ILEC, CLEC, RBOCs, PTT and Utility service providers around the globe including, in North America, Europe and Asia. World Access Inc. will enter into a letter of intent to purchase a range of BATM's products following completion of the proposed Acquisition. Key attractions of Telco Systems to BATM include: - Existing and new products aimed at growth markets Growth in internet usage has led to greater demands for infrastructure. In addition, convergence of internet, data, voice and video technologies will drive the requirement for bandwidth and greater demands on the capabilities of customer access devices. The directors of BATM believe that the markets for Telco Systems' equipment are growing rapidly. Independent estimates show these markets growing from US$3.0bn in 1998 to US$6.0bn in 2001. The EdgeLink family provides a range of solutions offering cost effective integration of voice, data and internet access over a single, high speed link and other IP-based functionality over fibre and other networks. The range also offers associated multiplexing solutions for high bandwidth applications. Existing users of the EdgeLink family of products include Cisco and Nortel with potential OEM relationships with Lucent. The integrated access market is served by the Access range of products being high capacity multiplexers providing digital access to public and private networks. Customers using Access products include BT and Concert. Telco Systems' products supply three principal markets being multi service access, the multi service broadband transport and access concentration, and the integrated access markets. - Broad customer base and distribution Telco Systems' ultimate customers are network service providers, including CLECs, RBOCs, LECs, IXCs, wireless service providers, international PTTs, ISPs and utilities offering competitive telephone services over their rights of way. Large service provider customers include Bell Atlantic, AT&T, Sprint, MCI WorldCom, British Telecom, Ameritech, BellSouth, Nextlink and Concert. Telco Systems also sells its products to leading equipment manufacturers such as Cisco, Lucent/Ascend, Nortel and PairGain. Telco Systems services its customers through its own direct sales force as well as through leading third-party distributors. BATM intends to achieve greater penetration of its product range through the utilisation of Telco System's existing client base in order to provide broader distribution channels. - Experienced management team to be retained by BATM Telco Systems has a strong and experienced management team which has the depth of knowledge and experience to build upon the established development programmes in North America. David LeBeau, President of Telco Systems, will report directly to BATM's Chief Executive, Dr Zvi Marom. Name Position Age Industry Years at Experience Telco Systems David A. President 39 18 5 LeBeau Telco Systems Systems Division Clinton W. Vice 39 16 5 Clements President Global Sales Daniel A. Vice 44 14 2 Bettencourt President Operations Charles S. Vice 40 19 2 Macdonough President Customer Support and Quality Assurance John Vice President 40 18 * Rokosz Engineering David J. Controller 46 11 11 Garrity *Recent recruit All of the above have entered into new service agreements with BATM, subject to the Acquisition becoming unconditional. - Complementary technology Telco Systems' multi-service EdgeLink100 and EdgeLink300 are market leading technological developments, which complement BATM's opto-electronic and photonic switch product lines. Such complementary product ranges will provide significant opportunities for cross selling to existing customers and technology transfers which are expected to advance the market position of the enlarged group. Telco Systems EdgeLink products have shown strong sales growth, fuelled by rising requirements for bandwidth which is being fulfilled through deployment of Telco Systems equipment by service providers including CLECs, utilities and incumbent service providers. The new EdgeLink family offers service providers an economic, scalable architecture to migrate from circuit to IP- based packet architectures. BATM's expertise in high performance opto-electronic and photonic switches for LAN to WAN (edge) applications and its joint venture with 3M in respect of commercialising desktop fibre optic cabling will be of significant value to Telco Systems. Telco Systems has a reputation for setting new industry standards for integrated access devices in terms of cost, size, port density, scalability and services supported. Further information on Telco Systems In the year ended 31 August 1998, Telco Systems reported turnover of US$113.2 million (£70.5 million) and profit before interest, tax and exceptional charges of US$1.46 million (£0.91 million). Net assets as at 31 August 1998 were US$55.5 million (£34.6 million). Following its acquisition by World Access Inc, which completed in November 1998, Telco Systems changed its accounting period to 31 December. In the nine months to 30 September 1999, Telco Systems (excluding contributions from the wireless business not being acquired by BATM) reported unaudited turnover of US$91.8 million (£57.2 million) and profit before interest and tax of US$20.5 million (£12.8 million). In addition, according to unaudited management accounts, Telco Systems recorded strong sales in the fourth quarter of 1999. The above figures are stated under US GAAP and Telco System's accounting policies. Application of UK GAAP and BATM's own accounting policies will result in a different treatment of items including revenue recognition, research and development expenditure, one-off profit and loss credits and other treatment of reserves resulting in lower turnover and materially lower profit before interest and tax. The audited figures for the year ended 31 December 1999 for Telco Systems will be included in the circular to be sent to BATM's shareholders as described below. Terms of the Acquisition Under the terms of the Acquisition Agreement, BATM will acquire Telco Systems for a total consideration of US$326.6 million (£203.5 million), of which US$200 million (£125 million) will be paid in cash from existing resources, which include the net proceeds of the share placement concluded in November 1999. US$65.8 million (£41.0 million) of the consideration will be satisfied by the issue of up to 960,000 New Ordinary Shares to World Access and the balance of US$60.8 million (£37.9 million) from a placing of New Ordinary Shares for cash. The 960,000 New Ordinary Shares to be retained by World Access will comprise approximately 2.7 per cent. of the issued share capital of the Enlarged Group. World Access has agreed that they will not dispose of any of the New Ordinary Shares to which they become entitled for a period of 12 months following Completion. BATM will raise approximately US$80m by way of an issue of New Ordinary Shares for cash to satisfy the balance of the consideration for the Acquisition and provide flexibility for future bolt-on acquisitions. Dresdner Kleinwort Benson will act as sole bookrunner to the equity issue and both the issue price and number of shares to be issued will be determined upon completion of such issue. Dresdner Kleinwort Benson reserves the right to open the book at any time. However, it is unlikely that the equity issue will take place prior to the despatch of the circular to shareholders seeking approval for the Acquisition. Dresdner Kleinwort Benson has also underwritten the proceeds of the equity issue. Application will be made for admission of the new ordinary shares to the Official List of the London Stock Exchange. The Acquisition is conditional upon obtaining the approval of BATM shareholders, which approval will be sought at an extraordinary general meeting. It is also conditional on US anti-trust clearances. The placing is conditional upon completion of the Acquisition. Current trading and prospects Since 30 June 1999 BATM has continued to build sales and has substantial orders in hand for the year 2000. Trading is in line with the directors' expectations. BATM expects to announce its results for the year ended 31 December 1999 in early March 2000. As stated above Telco Systems, according to unaudited management accounts, has recorded strong sales, particularly to the main distributors of its products in the last quarter of 1999. These distributors are expected by the directors of BATM to maintain strong demand for Telco Systems' products in 2000. Accordingly the directors of BATM view Telco System's prospects with confidence. The strategic fit of Telco Systems with BATM encourages the BATM directors to believe that there are significant opportunities for revenue growth, not only from BATM's and Telco System's strong respective market positions, but also from synergies to be obtained from combining BATM's core proprietary technologies with Telco System's current and future products through enhanced distribution channels. On a combined basis therefore, the directors of BATM believe BATM and Telco Systems have a positive future. General A circular to Shareholders, containing further details of the transaction and convening an extraordinary general meeting, will be posted as soon as is practicable. Sterling equivalents of amounts stated in US Dollars (US$) have been provided throughout this press release using an exchange rate of £1 to US$1.605, the spot rate ruling at the close of business in London on 2nd February, 2000 (the latest practicable date prior to the publication of this press release). Enquiries: www.batm.com BATM 00972 3 938 6888 Dr Zvi Marom (Chief Executive) Ofer Bar-Ner (Finance Director) Dresdner Kleinwort Benson 0207 623 8000 Mark Smith Shore Capital and Corporate Limited 0207 408 4090 Graham Shore Ludgate Communications 0207 253 2252 Edward Macquisten Kleinwort Benson Limited ('Dresdner Kleinwort Benson'), which is regulated in the UK by The Securities and Futures Authority Limited, is acting exclusively for BATM in connection with the acquisition and no-one else and will not be responsible to anyone other than BATM for providing the protections afforded to customers of Dresdner Kleinwort Benson, or for giving advice in relation to the acquisition. Shore Capital and Corporate Limited ('Shore Capital') which is regulated in the UK by The Securities and Futures Authority Limited, is acting exclusively for BATM in connection with the acquisition and no-one else and will not be responsible to anyone other than BATM for providing the protections afforded to customers of Shore Capital, or for giving advice in relation to the acquisition.
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