United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1999
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Commission file number 000-26171
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IPC Communications, Inc.
------------------------
(Exact Name of registrant as specified in its charter)
Delaware 13-4060937
-------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Wall Street Plaza, 88 Pine Street, New York, NY 10005
-----------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 825-9060
Indicate by check mark whether the registrant: (1) has 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) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 1999
----- ----------------------------
Common Stock par value $0.01 8,354,642 shares
<PAGE>
IPC COMMUNICATIONS, INC.
INDEX TO FORM 10-Q
PAGE
----
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at June 30, 1999
and September 30, 1998 2
Condensed Consolidated Statements of Operations for the Three
and Nine Months Ended June 30, 1999 and 1998 3
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended June 30,1999 and 1998 4
Notes to Condensed Consolidated Financial Statements 5 - 11
ITEM 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 19
ITEM 3
Market Risk 19
PART II. OTHER INFORMATION 20 - 21
SIGNATURES 22
<PAGE>
IPC COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(Dollar amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,143 $ 28,084
Trade receivables, less allowance of $3,081 and $2,442, respectively 70,545 71,521
Inventories 40,375 40,046
Prepaid expenses and other current assets 30,346 15,214
--------- ---------
Total current assets 152,409 154,865
Property, plant and equipment, net 72,443 57,113
Debt issuance costs, net 10,843 10,707
Goodwill, net 67,766 15,639
Other assets 3,362 3,318
--------- ---------
Total assets $ 306,823 $ 241,642
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Revolving credit borrowings $ 1,552 $ --
Current portion of long-term debt 17,760 4,462
Accounts payable 28,886 20,094
Accrued liabilities 60,977 40,704
Customer advances and deferred revenue 33,486 38,469
--------- ---------
Total current liabilities 142,661 103,729
Long-term debt, net of current portion 238,089 200,713
Minority interest 7,881 --
Other liabilities 3,783 3,741
--------- ---------
Total liabilities 392,414 308,183
--------- ---------
Commitments and contingencies
Stockholders' deficit:
Preferred stock - $0.01 per share par value, authorized 10,000,000 shares,
none issued and outstanding
Common stock - $0.01 per share par value, authorized 25,000,000 shares; shares
issued and outstanding (June 30, 1999- 8,132,815,
September 30, 1998 - 8,076,188) 81 81
Paid-in capital 6,449 5,855
Retained deficit (92,121) (72,477)
--------- ---------
Total stockholders' deficit (85,591) (66,541)
--------- ---------
Total liabilities and stockholders' deficit $ 306,823 $ 241,642
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
IPC COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
-------------------------- --------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Product sales and installation $ 50,940 $ 45,428 $ 124,099 $ 115,711
Service 40,266 32,563 115,790 90,369
--------- --------- --------- ---------
91,206 77,991 239,889 206,080
--------- --------- --------- ---------
Cost of revenue (excluding depreciation and amortization
shown separately below):
Product sales and installation 30,423 26,161 71,615 66,626
Service 32,413 22,821 89,234 64,126
--------- --------- --------- ---------
62,836 48,982 160,849 130,752
--------- --------- --------- ---------
Gross profit 28,370 29,009 79,040 75,328
Research and development expenses 1,736 1,885 6,330 6,049
Selling, general and administrative expenses 14,769 14,363 40,112 38,679
Depreciation and amortization expense 7,414 4,384 20,688 10,507
Stock compensation charge 7,881 -- 7,881 --
Change in control expense -- 10,640 -- 10,640
--------- --------- --------- ---------
(Loss) income from operations (3,430) (2,263) 4,029 9,453
Interest expense, net (6,748) (3,781) (19,892) (4,669)
Other income/(expense), net 289 20 343 (61)
--------- --------- --------- ---------
(Loss) income before provision for income taxes (9,889) (6,024) (15,520) 4,723
Provision (benefit) for income taxes 1,721 (2,185) 3,040 2,814
--------- --------- --------- ---------
Net (loss) income $ (11,610) $ (3,839) $ (18,560) $ 1,909
========= ========= ========= =========
Basic (loss) earnings per share $ (1.44) $ (0.31) $ (2.30) $ 0.10
========= ========= ========= =========
Basic weighted average shares outstanding 8,076 12,495 8,076 18,445
========= ========= ========= =========
Diluted earnings per share $ 0.10
=========
Diluted weighted average shares outstanding 18,691
=========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
IPC COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Nine months ended
June 30,
--------------------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (18,560) $ 1,909
Adjustments to reconcile net income to net cash provided by
operating activities:
Stock compensation charge 7,881 --
Depreciation and amortization 13,605 8,509
Amortization of goodwill 7,083 1,998
Non-cash interest on senior discount notes 15,565 3,264
Other interest amortization 1,247 439
Provision for doubtful accounts 1,823 1,529
Changes in operating assets and liabilities:
Trade receivables 3,462 (6,733)
Inventories 2,252 (11,029)
Prepaid expenses and other current assets (5,160) 1,991
Other assets 664 (431)
Accounts payable 3,785 (2,159)
Accrued liabilities and other liabilities (602) 5,858
Customer advances and deferred revenue (7,506) 20,401
--------- ---------
Net cash provided by operating activities 25,539 25,546
--------- ---------
Cash flows from investing activities:
Capital expenditures (15,579) (12,917)
Acquisitions, net of cash acquired (42,913) (6,660)
Contingent acquisition payments to Bridge Electronics, Inc -- (875)
--------- ---------
Net cash used in investing activities (58,492) (20,452)
--------- ---------
Cash flows from financing activities:
Net repayment of notes payable -- (3,200)
Proceeds from revolving credit borrowings 34,532 --
Repayments of revolving credit borrowings (32,980) --
Proceeds from long-term debt 20,000 180,011
Repayment of long-term debt (4,800) (4,655)
Proceeds from equity investment -- 54,721
Purchase of IPC common stock at Merger -- (200,271)
Debt issuance costs (1,157) (11,146)
Other obligations due at Merger -- (2,625)
Equity charges at Merger -- (5,884)
Subsidiary IPO costs (1,222) --
Proceeds from the exercise of stock options 595 467
Other (41) --
--------- ---------
Net cash provided by financing activities 14,927 7,418
--------- ---------
Effect of exchange rate changes on cash and cash equivalents 1,085 (968)
--------- ---------
Net (decrease) increase in cash and cash equivalents (16,941) 11,544
Cash and cash equivalents, beginning of period 28,084 1,465
--------- ---------
Cash and cash equivalents, end of period $ 11,143 $ 13,009
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
IPC COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements include all necessary adjustments (consisting
of normal recurring accruals and appropriate intercompany elimination
adjustments) for a fair presentation of the financial position of IPC
Communications, Inc. (the "Company" or "IPC Communications") as of June 30,
1999, and the results of its operations for the three and nine months ended June
30, 1999 and 1998, and its cash flows for the nine months ended June 30, 1999
and 1998, in conformity with generally accepted accounting principles for
interim financial information applied on a consistent basis. The results of
operations for the three and nine months ended June 30, 1999 are not necessarily
indicative of the results to be expected for the full year. These financial
statements should be read in conjunction with the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1998.
2. Reorganizations:
IPC Communications, Inc.
Effective on May 21, 1999, IPC Information Systems, Inc. ("IPC"),
reorganized into a holding company form of organizational structure, whereby IPC
Communications, a Delaware corporation, became the holding company.
The holding company organizational structure was effected by a merger
conducted pursuant to Section 251(g) of the General Corporation Law of the State
of Delaware (the "Merger"), which provides for the formation of a holding
company structure without a vote of the stockholders of IPC. In the Merger, IPC
Merger Sub Two, Inc., a Delaware corporation ("Merger Sub"), merged with and
into IPC, with IPC as the surviving corporation (the "Surviving Corporation").
Prior to the Merger, IPC Communications was a direct, wholly owned subsidiary of
IPC, and Merger Sub was a direct, wholly owned subsidiary of IPC Communications
and was organized for the purpose of implementing the holding company
organizational structure. Pursuant to the Merger, (i) each outstanding share of
common stock, $0.01 par value per share, of IPC was converted into one share of
the common stock, $0.01 par value per share, of IPC Communications, (ii) all of
the issued and outstanding shares of Merger Sub were automatically converted
into shares of the Surviving Corporation's common stock, and Merger Sub's
corporate existence ceased and (iii) all of the issued and outstanding shares of
IPC Communications owned by IPC were canceled. As a result of the Merger, IPC
became a direct, wholly owned subsidiary of IPC Communications. IPC
Communications' common stock trades on the American Stock Exchange under the
ticker symbol "IPI." Unless the context otherwise requires, references to the
"Company" or "IPC" in this Form 10-Q refer to IPC Communications, as successor
to IPC Information Systems, as of May 21, 1999 and to IPC Information Systems
through May 20, 1999.
The conversion of shares of IPC's common stock in the Merger occurred
without an exchange of certificates. Accordingly, certificates formerly
representing shares of outstanding common stock of IPC are deemed to represent
the same number of shares of common stock of IPC Communications until such
certificates are submitted to IPC Communications' transfer agent for transfer.
The change to the holding company structure was tax free for federal income tax
purposes for stockholders.
5
<PAGE>
IXnet, Inc.
On May 4, 1999, IXnet, Inc., a Delaware corporation ("IXnet"), was
incorporated as a holding company owned by IPC with the intent to offer up to
20% of its common stock in an initial public offering ("IPO") (see Note 13). In
addition, IPC contributed (1) MXNet Inc. ("MXNet") to International Exchange
Networks, Ltd. ("IENL") and (2) IENL to IXnet. Unless the context otherwise
requires, references to "IXnet" in this Form 10-Q refer to IXnet, Inc. as of May
4, 1999 and to International Exchange Networks, Ltd. through May 4, 1999.
3. Certain reclassifications have been made to the fiscal 1998 financial
statements in order to conform to the current period's condensed consolidated
presentation.
4. Components of inventories (in thousands):
June 30, September 30,
1999 1998
------- -------
Components and manufacturing work in process $12,322 $13,639
Inventory on customer sites awaiting installation 24,303 21,516
Parts and maintenance supplies 3,750 4,891
------- -------
$40,375 $40,046
======= =======
5. Revolving credit borrowings:
On June 21, 1999, IPC Communications, IPC, IPC Funding Corp. (together
with IPC, the "Borrowers"), 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, entered
into an Amended and Restated Credit Agreement (originally dated April 30, 1998)
(the "Credit Agreement"), pursuant to which the Borrowers amended their $55
million revolving credit facility to provide for (1) a working capital facility
of $45 million, based on eligible accounts receivable and inventory, and (2) a
$20 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 and restatement also provides for a
pledge by the Company of IPC's common stock and a pledge by IPC of the common
stock of IXnet, and certain additional financial convenants including a leverage
ratio and fixed charge ratio.
The $20 million term loan is repayable in quarterly installments of $1.3
million, commencing September 30, 1999 and initially bears interest at LIBOR
plus 2.75% or at the base rate plus 1.75%, at the Borrower'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 Credit
Agreement. The proceeds of the term loan were used to repay borrowings
outstanding under the original revolving credit facility and for fees incurred
with amending the Credit Agreement.
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 June
30, 1999, approximately $1.6 million was outstanding. The Credit Agreement also
provides a $10.0 million sub-limit for the issuance of letters of credit, of
which $8.8 million was outstanding at June 30, 1999. Availability under the
working
6
<PAGE>
capital facility at June 30, 1999, after giving effect to outstanding borrowings
and letters of credit, approximated $27.0 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. The weighted average interest rate for borrowings under the
revolving credit facility during the three and nine months ended June 30, 1999
was 8.15% and 8.50%, respectively.
6. Long-term debt:
Long term debt consists of the following (in thousands):
June 30, September 30,
1999 1998
--------- -------------
10 7/8% Senior Discount Notes due 2008 $ 203,788 $ 188,223
Term note payable with maturities through 2003
(range of interest rates 7.67% - 9.25%) 20,000 --
Capital leases (range of interest rates
8.19% - 10.65%) 22,464 16,952
Other notes payable 9,597 --
--------- ---------
Total 255,849 205,175
Less current portion (17,760) (4,462)
--------- ---------
Total long-term debt $ 238,089 $ 200,713
========= =========
The estimated fair value of the Senior Discount Notes at June 30, 1999 and
September 30, 1998, calculated using the quoted closing price of the bonds on
each date was $188.0 million and $178.1 million, respectively.
7. Acquisitions:
On June 21, 1999, IPC acquired V Band Corporation ("V Band") 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.
On December 31, 1998, IPC purchased the assets of Reuters Voice Systems
("RVS"), a business unit of Reuters Group PLC, for approximately $5.7 million
(the "RVS Acquisition"). The purchase was financed through a combination of cash
from operations and borrowings under the revolving credit facility. The RVS
Acquisition was accounted for using the purchase method of accounting and
resulted in approximately $5.3 million in goodwill, of which approximately $4.1
million remains unamortized at June 30, 1999.
Other than the amortization of goodwill, the effect on the Company's
operating results from the V Band and RVS acquisitions is not material.
On December 18, 1998, IPC, through IENL, acquired all of the outstanding
shares of Saturn Global Network Services Holdings Limited ("Saturn") from
Marshalls 106 Limited ("Marshalls") (the "Saturn Acquisition"). The purchase
price included the payment of cash in the amount of $35.7 million (paid by IPC
through a combination of cash from operations and borrowings under the revolving
credit facility) and the issuance by IENL of a promissory note, guaranteed by
IPC, in the amount of $7.5 million, bearing interest at the UK Sterling Base
Rate, as defined, plus three percent and payable in three annual installments
("Marshalls Note"). The Marshalls Note, which is subject to
7
<PAGE>
certain set off rights, was reduced in June 1999 by $1.9 million to a principal
amount of $5.6 million, representing an adjustment to Saturn's working capital.
In addition, Saturn remains indebted to Marshalls in the amount of $5.0 million
payable over 24 months with interest at 9.25% (the "Saturn Note").
Saturn, a UK Holding Company, owns telecommunication network operating
subsidiaries in the United Kingdom, USA, Hong Kong, Australia, Japan and
Singapore. It has established a business selling managed premium grade voice and
data communication services to the financial community, similar to IXnet but
focused on Europe, Australia and the Pacific Rim; therefore, its customer base
and network facilities are geographically complementary to IXnet.
The Saturn Acquisition was accounted for using the purchase method of
accounting and resulted in approximately $46.7 million of goodwill, of which
approximately $44.2 million remains unamortized at June 30, 1999.
The following unaudited pro forma statement of operations for the nine
months ended June 30, 1999 and 1998, gives effect to the Saturn Acquisition as
if it had occurred at the beginning of the fiscal year for each of the periods
presented (amounts in thousands, except per share amounts).
For the nine months ended
June 30,
----------------------
1999 1998
--------- ---------
Revenue $ 244,648 $ 225,704
Loss before provision for income taxes $ (17,910) $ (2,824)
Net loss $ (8,939) $ (2,360)
Basic loss per share $ (1.11) $ (0.13)
Basic weighted average shares outstanding (a) 8,076 18,445
(a) Since the nine months ended June 30, 1999 and 1998 resulted in a pro forma
net loss, common stock equivalents would have had an anti-dilutive effect.
Therefore, diluted earnings per share have not been calculated.
Pro forma adjustments include: (i) amortization of goodwill over 10 years;
(ii) interest expense on the Saturn Note and the Marshalls Note; and (iii)
interest expense from revolving credit borrowings for the Saturn Acquisition.
All pro forma adjustments were tax effected using the effective tax rate for
each period. The pro forma financial information presented above is not
necessarily indicative of the operating results which would have been achieved
had the Saturn Acquisition occurred at the beginning of the fiscal year for each
of the periods presented or of the results to be achieved in the future.
8. Stock Compensation Charge:
In May 1999, IXnet recorded $26.4 million in non-cash deferred stock
compensation reflecting the issuance by IXnet of options to purchase 6,530,184
shares of common stock of IXnet at $13.96 per share. Such deferred stock
compensation is based upon the deemed fair market value for accounting purposes
of IXnet's common stock and the exercise price of such options issued on the
date of grant. Approximately $7.9 million of deferred stock compensation is
included as expense and as minority interest as of and for the three and nine
months ended June 30, 1999. The remaining deferred compensation will be
amortized over 4 years, the vesting period of the options.
8
<PAGE>
In addition, certain non-employee options are treated as variable options,
which may result in recording additional deferred stock compensation expense in
future periods as the value of the shares of IXnet's common stock changes during
the vesting period.
9. Earnings Per Share:
The following is a reconciliation of the numerators and denominators for
the computations of basic and diluted earnings per share (amounts in thousands,
except per share amounts).
<TABLE>
<CAPTION>
For the three months For the nine months
ended June 30, ended June 30,
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Basic earnings (loss) per share computation
Numerator - Net (loss) income $(11,610) $ (3,839) $(18,560) $ 1,909
Denominator -
Weighted average common shares outstanding 8,076 12,495 8,076 18,445
-------- -------- -------- --------
Basic (loss) earnings per share $ (1.44) $ (0.31) $ (2.30) $ 0.10
======== ======== ======== ========
Diluted earnings per share computation
Numerator - Net (loss) income $ 1,909
Denominator:
Weighted average common shares outstanding 18,445
Dilutive stock options 246
--------
Total shares 18,691
--------
Diluted earnings per share (a) $ 0.10
========
</TABLE>
(a) Since the three and nine months ended June 30, 1999 and the three months
ended June 30, 1998 resulted in a net loss, common stock equivalents would have
had an anti-dilutive effect. Therefore, diluted earnings per share has not been
calculated.
10. Comprehensive Income:
Effective October 1, 1998, the Company adopted Statement of Financial
Accounting Standards No.130, "Reporting Comprehensive Income." This statement
requires the Company to include within its financial statements information on
comprehensive income, which is defined as all activity impacting equity from
non-owner sources. For the Company, comprehensive income includes net income and
foreign currency translation adjustments. Total comprehensive income, net of
taxes, was a net loss of $19.6 million and a net income of $1.8 million for the
nine months ended June 30, 1999 and 1998, respectively.
11. Business Segments:
The Company's operations include Trading Systems, Information Transport
Systems ("I.T.S.") and network services (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." I.T.S. reports revenue from
9
<PAGE>
the design, integration and implementation of cabling infrastructure projects,
including Local and Wide Area Networks, 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." Additionally, IXnet reports revenue
derived from the IXnet network as "Service."
<TABLE>
<CAPTION>
Trading
Systems I.T.S IXnet Corporate Eliminations Consolidated
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Nine Months ended June 30, 1999
Revenue:
Product sales and installation $ 89,898 $ 34,201 $ -- $ -- $ -- $124,099
Service 51,589 11,705 52,496 -- 115,790
Intersegment 153 (153) --
-------- -------- -------- -------- -------- --------
Total revenue $141,487 $ 45,906 $ 52,649 $ -- $ (153) $239,889
======== ======== ======== ======== ======== ========
Gross profit 71,514 6,057 1,622 -- (153) 79,040
Research & development 6,330 -- -- -- -- 6,330
Selling, general &
administrative 18,108 3,341 13,148 5,668 (153) 40,112
Depreciation & amortization 3,996 259 14,805 1,628 -- 20,688
Stock compensation charge -- -- 7,881 -- -- 7,881
-------- -------- -------- -------- -------- --------
Income (loss) from operations $ 43,080 $ 2,457 $(34,212) $ (7,296) $ -- $ 4,029
======== ======== ======== ======== ======== ========
EBITDA (a), before stock
compensation charge $ 47,076 $ 2,716 $(11,526) $ (5,668) $ -- $ 32,598
======== ======== ======== ======== ======== ========
Total assets (b) $146,270 $ 32,815 $127,738 $ -- $ -- $306,823
======== ======== ======== ======== ======== ========
Nine Months ended June 30, 1998
Revenue:
Product sales and installation $ 93,030 $ 22,681 $ -- $ -- $ -- $115,711
Service 46,876 18,383 25,110 -- -- 90,369
Intersegment 125 (125) --
-------- -------- -------- -------- -------- --------
Total revenue $139,906 $ 41,064 $ 25,235 $ -- $ (125) $206,080
======== ======== ======== ======== ======== ========
Gross profit 69,560 5,385 383 -- -- 75,328
Research & development 6,049 -- -- -- -- 6,049
Selling, general & administrative 16,741 3,773 9,451 8,714 -- 38,679
Depreciation & amortization 3,630 340 5,616 921 -- 10,507
Change in control expense 8,837 453 1,350 -- -- 10,640
-------- -------- -------- -------- -------- --------
Income (loss) from operations $ 34,303 $ 819 $(16,034) $ (9,635) $ -- $ 9,453
======== ======== ======== ======== ======== ========
EBITDA (a), before change
in control expense $ 46,770 $ 1,612 $ (9,068) $ (8,714) $ -- $ 30,600
======== ======== ======== ======== ======== ========
Total assets at September 30,
1998 (b) $139,713 $ 41,597 $ 60,332 $ -- $ -- $241,642
======== ======== ======== ======== ======== ========
</TABLE>
(a) Earnings before interest, taxes, depreciation and amortization ("EBITDA")
represents income (loss) from operations before depreciation and amortization.
10
<PAGE>
(b) The Company's management reviews corporate assets combined with Trading
System's assets. In addition, Trading System's total assets are net of $45.2
million at June 30, 1999 and $62.2 million at September 30, 1998 relating to
amounts due from affiliates eliminated in consolidation.
12. Effects of Recently Issued Accounting Standards:
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives
and Hedging Activities," which establishes accounting and reporting standards
for derivative instruments and hedging activities. This standard is effective
for all fiscal quarters of fiscal years beginning after June 15, 2000. The
Company does not currently use derivative financial instruments.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("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 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.
13. Subsequent Events:
Initial Public Offering
On August 12, 1999, IXnet completed its IPO through the sale of
approximately 6,500,000 shares of common stock at $15 per share (excluding
approximately 975,000 shares in connection with the exercise of underwriters'
over-allotment option). The total number of shares of common stock held by IPC
after this offering is 43,100,000 shares or 86.9% of the shares outstanding. The
proceeds of the IPO are to be used to finance the continued deployment and
expansion of IXnet's telecommunications network and for possible acquisitions,
strategic alliances, or investments in property or assets for IXnet's business.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (unaudited)
Overview
IPC Communications is a leader in providing integrated telecommunications
equipment and services that facilitate the execution of transactions by the
financial trading community. Such transactions involve the trading of equity and
debt securities, commodities, currencies and other financial instruments.
Through IPC and its subsidiaries, we design, manufacture, install and services
turret systems and install and service the cabling infrastructure and networks
which provide financial traders with desktop access to time-sensitive
communications and data. Our 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. We use
an integrated approach to market our products and services, leveraging IPC's
established customer base throughout the financial trading community. In
addition, through IXnet, we operate a telecommunication network which provides a
variety of dedicated private line, managed data and switched network services
which has been specifically designed to meet the specialized telecommunications
requirements of the financial trading community.
Our operations include Trading Systems, Information Transport Systems
("I.T.S.") and network services (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."
I.T.S. 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." Additionally, IXnet reports revenue
derived from the use of its international network as "Service."
Revenue from trading systems and I.T.S. sales and installation is
recognized upon completion of the installation, except for revenue from sales of
turret products to distributors, which is recognized upon shipment. Invoices
representing progress payments on direct product sales are submitted during
various stages of the installation. The revenue attributable to such advance
billings is deferred until system installation is completed. In addition,
contracts for annual recurring turret and I.T.S. services are generally billed
in advance, and are recorded as revenue ratably (on a monthly basis) over the
contractual periods. Revenue from moves, additions and changes to turret systems
is recognized upon completion, which usually occurs in the same month or the
month following the order for services. Revenue from IXnet network services are
recognized in the month that the service is provided, except for installation
revenue which is amortized over the average customer contract life.
Cost of revenue for trading systems and I.T.S. includes material and labor
associated with the installation of a project or the service performed. Cost of
revenue for IXnet network services includes leased local and long distance
circuit costs and personnel and related operating expenses associated with
network operation, customer support and field service support.
12
<PAGE>
Due to the substantial sales price of IPC's large turret and I.T.S.
installations and their recognition of revenue only upon completion of
installations, revenue and operating results could fluctuate significantly from
period to period. However, our service business from all three divisions
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 our service business expands.
On April 30, 1998, Arizona Acquisition Corp. was merged into IPC (the
"1998 Merger"). In connection with the 1998 Merger, IPC issued $247.4 million
aggregate principal amount at maturity of 10 7/8% Senior Discount Notes due 2008
(the "Notes"). The Notes were issued under an indenture between IPC, as issuer,
and United States Trust Company of New York, as trustee. The indenture contains
certain restrictive covenants which impose limitations on IPC 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, (ix) asset sales,
and (x) maintaining various financial ratios.
Results of Operations
Comparison of the Three Months ("Q3 1999") and Nine Months ("YTD 1999") ended
June 30, 1999 to the Three Months ("Q3 1998") and Nine Months ("YTD 1998") ended
June 30, 1998
Revenue. Total revenue increased $13.2 million, or 16.9%, to $91.2 million
in Q3 1999 from $78.0 million in Q3 1998. Total revenue increased $33.8 million
or 16.4% to $239.9 million in YTD 1999 from $206.1 million in YTD 1998.
Turret installation and related service revenue decreased $1.4 million, or
2.7%, to $50.2 million in Q3 1999 from $51.6 million in Q3 1998. YTD 1999 turret
installation and related service revenue increased $1.6 million, or 1.1%, to
$141.5 million from $139.9 million in YTD 1998.
Turret sales and installation revenue decreased $2.1 million in Q3 1999 to
$33.0 million and decreased $3.1 million to $89.9 million in YTD 1999 as
compared to the similar periods of the prior year. The decrease in Q3 1999 is
primarily related to the timing of large installation projects recognized as
revenue when compared to the prior year periods. The YTD 1999 decrease is
attributable to one large installation project for $8.4 million recognized as
revenue in the first quarter of the prior year in which there were no jobs of a
comparable size in the current year. Due to this occurrence we anticipate
installation revenue to be less in fiscal 1999 as compared to fiscal 1998,
however this decrease will be offset by an increase in service revenue.
Turret service revenue increased $759,000 to $17.3 million in Q3 1999 from
$16.5 million in Q3 1998. Turret service revenue increased $4.7 million to $51.6
million in YTD 1999 from $46.9 million in YTD 1998. Approximately $2.5 million
of the increase in the current year is related to the acquisition of RVS. Higher
service revenue also resulted from the Company's expanding customer base.
Revenue from I.T.S. sales and related service increased by $4.5 million or
27.3%, to $21.0 million in Q3 1999 from $16.5 million Q3 1998. YTD 1999 I.T.S.
sales and related service revenue increased by $4.8 million to $45.9 million
from $41.1 million in YTD 1998.
13
<PAGE>
Revenue from new I.T.S. installation projects in Q3 1999 and YTD 1999 was
$18.0 million and $34.2 million, respectively, as compared to $10.3 million and
$22.7 million, respectively, in Q3 1998 and YTD 1998. The increase in Q3 1999
and YTD 1999 is attributable to one large project installation recognized as
revenue for $8.8 million. There were no projects of a comparable size in Q3
1998.
I.T.S. service revenue was $3.0 million and $11.7 million, respectively,
in Q3 1999 and YTD 1999 as compared to $6.2 million and $18.4 million,
respectively, in Q3 1998 and YTD 1998. The decrease in Q3 1999 and YTD 1999 is
primarily related to a large customer service contract which expired at the end
of fiscal year 1998 and was not renewed. Due to this singular occurrence, the
Company anticipates that I.T.S. service revenue for the current fiscal year will
be less than the prior year.
Revenue from network services increased $10.1 million, or 102.0%, to $20.0
million in Q3 1999 from $9.9 million in Q3 1998. YTD 1999 network services
revenue increased $27.4 million, or 108.6%, to $52.6 million from $25.2 million
in YTD 1998. Approximately $7.2 million of the increase in Q3 1999 is revenue
related to the Saturn acquisition in December 1998 and $18.0 million of the
increase in YTD 1999 is revenue related to the acquisition of MXNet Inc.
("MXNet") in the second quarter of fiscal 1998 and Saturn. In addition, higher
network services revenue resulted from increased customer utilization of IXnet's
international telecommunication network. The revenue run rate at the end of Q3
1999 (annualized recurring revenue for the last month of the period) was $78.6
million, an increase of $39.0 million, or 98.5% as compared with the similar
period of the prior year.
Cost of Revenue (excluding depreciation and amortization). Cost of revenue
(as a percentage of product sales and installation revenue and service revenue)
for Q3 1999 and YTD 1999 was 68.9% and 67.1%, respectively, which increased as
compared to 62.8% and 63.4%, respectively, in Q3 1998 and YTD 1998.
Product sales and installation cost of revenue (as a percentage of product
sales and installation revenue) for Q3 1999 and YTD 1999 was 59.7% and 57.7%,
respectively, as compared to 57.7% and 57.6%, respectively, in Q3 1998 and YTD
1998. The increase in Q3 1999 is largely related to a higher percentage of
I.T.S. product sales and installation revenue in total product sales and
installation revenue. I.T.S. product sales and installation revenue typically
has a higher cost of revenue as compared with Trading System's product sales and
installation revenue.
Service cost of revenue (as a percentage of service revenue) for Q3 1999
and YTD 1999 was 80.5% and 77.1%, respectively, as compared to 70.1% and 71.0%
in Q3 1998 and YTD 1998, respectively. The increases in Q3 1999 and YTD 1999 are
primarily related to the expansion of IXnet's network and resulting increases in
leased circuit maintenance, personnel, facilities and customer support costs. We
anticipate that IXnet's cost of revenue will continue to increase as its
customer base increases, however, such expenses, as a percentage of their
revenue will decrease over time. These expenses may be incurred prior to the
realization of anticipated revenue. The increase in IXnet's cost of revenue was
offset in part by a decrease in Trading Systems service cost of revenue largely
attributed to their expanding customer base. Trading Systems service revenue
typically has a lower percentage of cost of revenue as compared to IXnet's and
I.T.S.'s cost of revenue.
Research and Development Expenses. Research and development expenses were
$1.7 million and $6.3 million in Q3 1999 and YTD 1999, respectively, as compared
to $1.9 million and $6.0 million, respectively, in Q3 1998 and YTD 1998,
respectively. Research and development efforts
14
<PAGE>
continue to be focused on the development of the next generation of trading
systems products, including integration of the Tradenet MX turret with the IXnet
Network 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. Selling, general and
administrative expenses ("SG&A") increased by $406,000, or 2.8%, to $14.8
million in Q3 1999 from $14.4 million in Q3 1998. SG&A expenses increased $1.4
million, or 3.7%, to $40.1 million in YTD 1999 from $38.7 million in YTD 1998.
The increase in YTD 1999 is attributable to expanding IXnet's business through
both internal growth and acquisitions. Through IXnet, we intend to continue to
grow the network. This growth requires significant expansion of its personnel,
primarily related to their sales force within the U.S., Europe and the
Asia/Pacific region over the next 12 to 18 months. General and administrative
expenses will increase in the future as IXnet expands; however, such expenses
will decrease over time as a percentage of their revenue.
Also contributing to the SG&A increase in YTD 1999, is a non-recurring
charge of $800,000 relating to a separation agreement and release between IPC
and Terry Clontz, our former President and Chief Executive officer.
Depreciation and Amortization. Depreciation and amortization, including
amortization of goodwill from acquisitions, in Q3 1999 and YTD 1999 was $7.4
million and $20.7 million, respectively, as compared to $4.4 million and $10.5
million, respectively, in Q3 1998 and YTD 1998. These increases are primarily
due to increases in property, plant and equipment in connection with expanding
IXnet's network and amortization of goodwill associated with the acquisition of
MXNet in the second quarter of the prior year and the acquisitions of Saturn and
RVS in the first quarter of the current year.
Stock Compensation Charge. During Q3 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 $7.9 million was amortized in Q3
1999. The remaining amount will be amortized over the vesting period of the
stock options, which is typically 4 years.
Certain of these stock options will be treated as variable options, which
may result in recording additional deferred compensation expense in future
periods as the value of IXnet's common stock changes over the vesting period.
Interest Expense, net. Interest expense, net increased $3.0 million to
$6.7 million in Q3 1999 and increased $15.2 million to $19.9 million in YTD
1999. The increase is primarily related to non-cash interest associated with the
issuance of the Notes in April 1998. Non-cash interest for Q3 1999 and YTD 1999
was $5.6 million and $16.8 million, respectively, as compared to $3.6 million
and $3.7 million in Q3 1998 and YTD 1998, respectively. Also contributing to the
increase in the current year is interest expense from borrowings under our
revolving credit facility, capital leases and notes issued in conjunction with
the Saturn Acquisition.
Provision for Income Taxes. The Company's effective tax rate for Q3 1999
and YTD 1999 was a negative 17.4% and 19.6%, respectively, compared to 36.3% and
59.6% in the similar periods of the prior year. Although we incurred a net loss
for Q3 1999 and YTD 1999, income taxes were provided due to a limitation on our
ability to utilize foreign tax credits to offset taxes paid outside of the
15
<PAGE>
United States, a valuation allowance for our net operating loss carry forwards
and an increase in IXnet's pre-tax losses for which we are not able to receive
certain state statutory tax benefits.
Liquidity and Capital Resources
Since our initial public offering in fiscal 1995 until the 1998 Merger, we
have satisfied our cash requirements through cash provided by operations,
capital lease financing and certain unsecured bank lines of credit. Our
principal uses of cash are to fund working capital requirements, operating
losses and capital expenditures of IXnet and acquisitions, principally related
to the expansion of IXnet's international telecommunications network.
On August 12, 1999, IXnet completed its IPO through the sale of
approximately 6,500,000 shares of common stock at $15 per share (excluding
approximately 975,000 shares in connection with the exercise of underwriters'
over-allotment option). The total number of shares of common stock held by IPC
after this offering is 43,100,000 shares or 86.9% of the shares outstanding. The
proceeds of the IPO are to be used to finance the continued deployment and
expansion of IXnet's telecommunications network and for possible acquisitions,
strategic alliances, or investments in property or assets for IXnet's business.
Net cash provided by operating activities was $25.5 million in YTD 1999
and YTD 1998.
Cash used in investing activities was $58.5 million and $20.5 million for
YTD 1999 and YTD 1998, respectively. Cash used in investing activities was
related to the acquisitions of Saturn, RVS and V Band in YTD 1999, as well as
expenditures for property, plant and equipment, principally consisting of
network equipment and machinery and equipment primarily for IXnet.
Cash provided by financing activities was $14.9 million in YTD 1999 as
compared to $7.4 million in YTD 1998. The increase is principally related to
$16.8 million in net borrowings under our revolving credit facility used
primarily to finance the acquisitions of Saturn and RVS.
On June 21, 1999, IPC Communications, the Borrowers, 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, entered into the Credit Agreement, pursuant to which
the Borrowers amended their $55 million revolving credit facility to provide for
(1) a working capital facility of $45 million, based on eligible accounts
receivable and inventory, and (2) a $20 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
and restatement also provides for a pledge by the Company of IPC's common stock
and a pledge by IPC of the common stock of IXnet, and certain additional
financial convenants including a leverage ratio and fixed charge ratio.
The $20 million term loan is repayable in quarterly installments of $1.3
million, commencing September 30, 1999 and initially bears interest at LIBOR
plus 2.75% or at the base rate plus 1.75%, at the Borrower'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 Credit
Agreement. The proceeds of the term loan were used to repay borrowings
outstanding under the revolving credit facility and for fees incurred with
amending the Credit Agreement.
16
<PAGE>
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 June
30, 1999, $1.6 million was outstanding. The Credit Agreement also provides a
$10.0 million sub-limit for the issuance of letters of credit, of which $8.8
million was outstanding at June 30, 1999. Availability under the working capital
facility at June 30, 1999, after giving effect to outstanding borrowings and
letters of credit, approximated $27.0 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. The weighted average interest rate for borrowings under the
revolving credit facility during the three and nine months ended June 30, 1999
was 8.15% and 8.50%, respectively.
On June 21, 1999, IPC acquired V Band 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.
On December 31, 1998, IPC purchased the assets of RVS, a business unit of
Reuters Group PLC, for approximately $5.7 million. The purchase was financed
through a combination of cash from operations and borrowings under the revolving
credit facility.
On December 18, 1998 IPC, through IENL, acquired all of the outstanding
shares of Saturn from Marshalls. The purchase price included the payment of cash
in the amount of $35.7 million (paid by IPC through a combination of cash from
operations and borrowings from the revolving credit facility) and the issuance
by IENL of the Marshalls Note. The Marshalls Note, which is subject to certain
set off rights, was reduced in June 1999 by $1.9 million to a principal amount
of $5.6 million, representing an adjustment to Saturn's working capital. In
addition, Saturn remains indebted to Marshalls in the amount of $5.0 million
payable over 24 months with interest at 9.25%.
Saturn owns telecommunication network operating subsidiaries in the United
Kingdom, USA, Hong Kong, Australia, Japan and Singapore. It has established a
business selling managed premium grade voice and data communication services to
the financial community, similar to IXnet but focused on Europe, Australia and
the Pacific Rim; therefore, its customer base and network facilities are
geographically complementary to IXnet.
In connection with the implementation of the IXnet's network, IENL has
entered into capital lease agreements for certain network switching equipment
totaling approximately $9.2 million and $8.9 million in YTD 1999 and YTD 1998,
respectively.
The Company believes that cash flows from operations, existing credit
facilities and the sale of common stock by IXnet are sufficient to meet its
working capital and capital expenditure needs at least through September 2000.
The Company does not rule out seeking additional debt or equity financing for
other corporate purposes.
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,
17
<PAGE>
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.
The Company has assessed and is in the process of implementing and
validating its 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 is also taking steps to
obtain 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 Network and is the process of developing contingency plans. At this
point in time, the Company believes that its current products and the products
it resells are Year 2000 compliant or can be made Year 2000 compliant or Year
2000 ready, as the case may be, with upgrades to both the hardware and software
made available by the Company and its vendors. Furthermore, while the Company
believes that the internal components of the IXnet Network (including its
network management, billing and accounting systems and the equipment installed
at various points of presence) will be Year 2000 ready, certain suppliers of
network bandwidth may not achieve Year 2000 readiness. Contingency planning with
respect to the IXnet Network is continuing.
In addition, the Company has made available to trading systems customers
its trading system laboratory located in Westbrook, Connecticut, to
independently verify and test such compliance with respect to current trading
systems products.
The Company is in the process of converting to an enterprise-wide
management information system which, through software updates to both the
application and operating systems with an anticipated completion date by August
31, 1999, is expected to be Year 2000 compliant. Such date also represents a
Year 2000 covenant in the company's credit agreement.
The Company estimated it will spend approximately $2.0 million in
connection with identifying, evaluating or addressing Year 2000 readiness and
compliance issues, excluding the costs associated with the conversion to an
enterprise-wide management information system, which was undertaken for
operational reasons. As of June 30, 1999 the Company has incurred approximately
$1.6 million related to Year 2000 compliance. 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.
Despite its best efforts to ensure Year 2000 compliance, there can be no
assurance that the Company will not discover Year 2000 or readiness compliance
problems. Although the Company's products and products it resells are Year 2000
compliant, the potential that circumstances beyond its control which cannot be
determined with complete certainty may result in its systems, products or
services requiring substantial revision and may result in an interruption of
normal business operations. In addition, there can be no assurance that
third-party software, hardware or services
18
<PAGE>
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.
As discussed above, the Company is engaged in an ongoing Year 2000
compliance assessment and has not yet developed any contingency plans. The
results of the Company's enterprise-wide system conversion and responses
received from vendors and service providers will be taken into account in
determining the nature and extent of any contingency plan. Upon completion of
the foregoing, the company anticipates developing an appropriate contingency
plan on a timely basis.
ITEM 3. Market Risk
Foreign Exchange Rate Risk
We conduct our business in more than 35 countries. With the exception of
countries where we sell to foreign distributors, which are generally invoiced in
U.S. Dollars, transactions from foreign operations are denominated in local
currencies. With respect to these operations, we are exposed to foreign currency
fluctuations for our net working capital positions. Foreign currency
fluctuations have not had a significant impact on our revenues or operating
results. We currently do not have a foreign exchange risk program; however, we
may implement a program to mitigate foreign currency transaction risk in the
future. Although our foreign operations are subject to economic, fiscal and
monetary policy of foreign governments, to date these factors have not had a
material effect on our results of operations or liquidity.
On January 1, 1999, several members of the European Union established
fixed conversion rates between their existing sovereign currencies, and adopted
the Euro as their new legal currency. Since its adoption, the Euro has not had a
material adverse effect on the Company's business or financial condition.
- --------------------------------------------------------------------------------
With respect to any forward-looking comments contained herein, the Company
refers readers to the cautionary statement under the Private Securities
Litigation Reform Act of 1995, contained in the Company's Report on Form 10-K
for the fiscal year ended September 30, 1998.
- --------------------------------------------------------------------------------
19
<PAGE>
Part II - Other Information
ITEM 1. Legal Proceedings - None
ITEM 2. Changes in Securities - None
ITEM 3. Defaults Upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders
Our Annual Meeting of the Stockholders (the "Annual Meeting") was held on
June 15, 1999.
There were 8,076,188 shares of Common Stock issued and outstanding at the
close of business on May 21, 1999, the record date, entitled to vote at the
meeting, of which, the holders of 5,477,080 shares were present in person or
represented by proxy.
Our stockholders voted at this meeting on the following matters, which
were set forth in full in our proxy statement, dated June 3, 1999.
1. To elect nine directors, each to hold office for a one year term:
Nominee For Withhold
- ------- --- --------
Peter A. Woog 5,477,080 0
Richard M. Cashin, Jr. 5,477,080 0
Richard P. Kleinknecht 5,477,080 0
David Y. Howe 5,477,080 0
Richard W. Smith 5,477,080 0
Robert J. McInerney 5,477,080 0
David A. Walsh 5,477,080 0
Gerald E. Starr 5,477,080 0
Brian L. Reach 5,477,080 0
A majority of the outstanding shares of the Company were voted for the
election of the nine nominees for election to the Board.
2. A proposal to amend the Amended and Restated Certificate of Incorporation
of IPC Information Systems, Inc. to eliminate the provision relating to
Section 251(g) of the General Corporation Law of the State of Delaware was
approved by a vote of 5,477,080 in favor and none against.
3. A proposal to approve an amendment to the IPC Communications, Inc. 1999
Stock Incentive Plan to increase its share reserve was approved by a vote
of 5,466,780 in favor and 10,300 against.
20
<PAGE>
4. Ratification of the firm of PricewaterhouseCoopers LLP as the independent
auditors for the 1999 fiscal year was approved by a vote of 5,477,080 in
favor and none against.
ITEM 5. Other Information - None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibit Number 27 Financial Data Schedule
(b) Form 8-K
IPC filed with the Securities and Exchange Commission ("SEC") a current
report on Form 8-K, dated January 4, 1999, reporting information under items 2
and 7 thereof and providing the following exhibits:
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.
99 Press Release issued on December 21, 1998
Amendments to this current report on Form 8-K, were filed with the SEC on
February 11, 1999 and May 20, 1999, reporting information under Item 7.
IPC filed with the SEC a current report on Form 8-K, dated April 23 1999,
reporting information under items 2 and 7 thereof and providing the following
exhibits:
99.1 Press release issued on April 8, 1999
IPC filed with the SEC a current report on Form 8-K, dated May 21, 1999,
reporting information under items 5 and 7 thereof and providing the following
exhibits:
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.
3.3 Certificate of Merger of IPC Information Systems, Inc.
99.1 Press release issued on May 21, 1999
IPC Communications filed with the SEC a current report on Form 8-K, dated
May 24, 1999, reporting information under items 5 and 7 thereof and providing
the following exhibits:
2.1 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.
99.1 Press release issued on May 21, 1999
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IPC COMMUNICATIONS, INC.
Dated: August 16, 1999 By: /s/ GERALD E. STARR
----------------------
Gerald E. Starr
President and
Chief Executive Officer
Dated: August 16, 1999 By: /s/ BRIAN L. REACH
---------------------
Brian L. Reach
Vice President, Chief Financial Officer
22
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<TOTAL-LIABILITY-AND-EQUITY> 306,823
<SALES> 239,889
<TOTAL-REVENUES> 239,889
<CGS> 160,849
<TOTAL-COSTS> 235,860
<OTHER-EXPENSES> (343)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,892
<INCOME-PRETAX> (15,520)
<INCOME-TAX> 3,040
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,560)
<EPS-BASIC> (2.30)
<EPS-DILUTED> 0
</TABLE>
