<PAGE>
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 March 31, 2000
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Commission file numbers 000-26171 and 000-25492
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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)
IPC Information Systems, Inc.
-----------------------------
(Exact Name of registrant as specified in its charter)
Delaware 58-1636502
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
Wall Street Plaza, 88 Pine Street, New York, NY 10005
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(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 April 30, 2000
- ----------------------------- -----------------------------
Common Stock par value $0.01 8,838,855 shares
<PAGE>
IPC COMMUNICATIONS, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PAGE
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PART I FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at March 31, 2000 and September 30, 1999 1
Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2000 and 1999 2
Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2000 and 1999 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
<PAGE>
Disclosure regarding forward-looking statements
Statements contained in this Interim Report on Form 10-Q that are not historical
facts are forward-looking statements within the meaning of section 21E of the
Securities Exchange Act of 1934, as amended. Section 21E provides a "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information about themselves so long as they identify these
statements as forward-looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to differ from the
projected results. Investors are cautioned that forward-looking statements are
inherently uncertain and that undue reliance should not be placed on such
forward-looking statements. Actual performance and results may differ materially
from that projected or suggested herein due to certain risks and uncertainties.
You can identify these statements by forward-looking words such as "may,"
"will," "expect," "anticipate," "believe," "estimate" and "continue" or similar
words. Among the factors that could cause actual results, performance, or
achievement 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, 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.
<PAGE>
IPC COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
March 31, September 30,
---------- --------------
2000 1999
---------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 31,621 $ 43,946
Marketable securities - 28,357
Marketable securities, restricted 3,000 20,435
Trade receivables 83,600 80,309
Inventories 39,022 31,903
Prepaids and other current assets 25,308 24,807
--------- ---------
Total current assets 182,551 229,757
Property, plant and equipment, net 117,382 98,682
Long term marketable securities, restricted - 6,065
Debt issuance costs, net 10,264 10,675
Goodwill and intangible assets, net 88,097 66,203
Other assets 1,725 1,827
--------- ---------
Total assets $ 400,019 $ 413,209
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 40,625 $ 23,485
Accrued liabilities 48,320 46,343
Customer advances and deferred revenue 41,368 30,432
Current portion of notes payable 50,316 34,425
Current portion of capital leases 7,205 6,265
--------- ---------
Total current liabilities 187,834 140,950
Senior unsecured notes 220,647 209,230
Notes payable, less current portion 5,503 18,354
Lease obligations, less current portion 18,648 15,651
Other liabilities 3,558 3,575
--------- ---------
Total liabilities 436,190 387,760
--------- ---------
Minority interest 14,627 25,828
Commitments and contingencies
Stockholders' deficit:
Common stock - $0.01 par value, authorized 25,000,000 shares;
8,838,855 shares issued and outstanding at March 31, 2000; 8,577,480
shares issued and outstanding at September 30, 1999 88 86
Paid-in capital 115,900 104,913
Accumulated deficit (165,580) (105,594)
Accumulated other comprehensive income (1,206) 216
--------- ---------
Total stockholders' deficit (50,798) (379)
--------- ---------
Total liabilities and stockholders' deficit $ 400,019 $ 413,209
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
1
<PAGE>
IPC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
March 31 March 31
-------------------------- -------------------------
2000 1999 2000 1999
------- -------- ------- --------
<S> <C> <C> <C> <C>
Revenue:
Product sales and installation $ 35,013 $ 38,803 $ 73,766 $ 73,159
Service 52,727 42,130 97,454 75,524
-------- -------- -------- --------
87,740 80,933 171,220 148,683
-------- -------- -------- --------
Cost of revenue (exclusive of depreciation and amortization
shown separately below)
Product sales and installation 20,335 22,409 44,103 41,192
Service 45,968 31,807 83,928 56,821
-------- -------- -------- --------
66,303 54,216 128,031 98,013
-------- -------- -------- --------
Gross profit 21,437 26,717 43,189 50,670
Research and development expenses 3,201 2,193 6,113 4,594
Selling, general and administrative expenses 22,777 12,749 41,689 25,343
Depreciation and amortization 12,632 7,613 23,415 13,274
Stock compensation charge 1,236 - 2,599 -
Merger related costs 23,288 - 23,288 -
-------- -------- -------- --------
(Loss) income from operations (41,697) 4,162 (53,915) 7,459
Interest expense, net (7,447) (6,953) (14,240) (13,144)
Other (expense) income, net (768) (22) (572) 54
-------- -------- -------- --------
Loss before provision for income taxes
and minority interest (49,912) (2,813) (68,727) (5,631)
Provision for income taxes 1,219 478 2,460 1,319
-------- -------- -------- --------
Loss before minority interest (51,131) (3,291) (71,187) (6,950)
Minority interest 7,634 - 11,201 -
-------- -------- -------- --------
Net loss $(43,497) $ (3,291) $(59,986) $ (6,950)
======== ======== ======== ========
Basic and diluted loss per share $ (4.97) $ (0.41) $ (6.91) $ (0.86)
======== ======== ======== ========
Basic and diluted weighted average number of shares
outstanding 8,748 8,076 8,681 8,076
======== ======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
2
<PAGE>
IPC COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six months ended
March 31,
--------------------------
2000 1999
--------- -------
Cash flows from operating activities:
Net loss $ (59,986) $ (6,950)
Adjustments to reconcile net loss to net cash
(used in) provided by (used in)
operating activities
Stock compensation charge 2,599 -
Minority interest (11,201) -
Depreciation and amortization 23,415 13,349
Other interest amortization 12,241 11,217
Bad debt and sales credit provision 1,632 672
Changes in operating assets and liabilities:
Trade receivables (4,409) 11,267
Inventories (7,119) (2,194)
Prepaids and other current assets (49) (2,010)
Other assets (1,654) 239
Accounts payable 16,153 (1,094)
Accrued liabilities and other liabilities 2,122 938
Customer advances and deferred revenue 10,936 (4,783)
--------- -------
Net cash (used in) provided by operating
activities (15,320) 20,651
--------- -------
Cash flows from investing activities:
Capital expenditures (27,666) (9,410)
Net change in marketable securities 52,453 -
Acquisitions, net of cash acquired (23,863) (40,418)
--------- -------
Net cash provided by (used in) investing
activities 924 (49,828)
--------- -------
Cash flows from financing activities:
Proceeds from revolving credit borrowings 15,150 22,082
Repayments of revolving credit borrowings - (5,276)
Principal payments on capital leases (3,269) (2,376)
Principal payments on notes payable (12,303) (555)
Debt issuance costs (413) (384)
Proceeds from the exercise of stock options 4,328 -
Other - (42)
--------- -------
Net cash provided by financing activities 3,493 13,449
--------- -------
Effect of exchange rate changes on cash (1,422) (317)
--------- -------
Net decrease in cash (12,325) (16,045)
Cash and cash equivalents, beginning of period 43,946 28,084
--------- -------
Cash and cash equivalents, end of period 31,621 $12,039
========= =======
Non-cash investing and financing activities:
the period
Capital lease obligations entered
into during the period $ 7,207 $ 5,318
Deferred compensation in
connection with grants of stock options 2,599 -
See Notes to Consolidated Financial Statements
3
<PAGE>
1. Background and basis for presentation
IPC Communications, Inc. ("IPC" or the "Company") is the world's leading
supplier of voice trading systems to the financial services community with a
sophisticated suite of globally integrated voice and data telecommunications
products. IPC focuses on serving the financial trading environment by designing,
manufacturing, installing, and servicing products that allow traders around the
world to communicate with each other instantly and reliably. In addition,
through its subsidiary, IXnet, Inc. ("IXnet"), the Company provides a high
performance intelligent global extranet (the "IXnet Extranet") designed
exclusively for the financial community. Through a single connection, IXnet
delivers end-to-end managed data and voice communications solutions to the
financial services community around the world. 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-Q reflect the operations of IPC Information
Systems and its subsidiaries through May 20, 1999 and of IPC thereafter.
On February 22, 2000, the Company, IPC Information Systems and IXnet
entered into a merger agreement with Global Crossing, Ltd. (the "Merger"). The
Merger was approved by a majority of the Company's and IXnet's stockholders.
Under the terms of the Merger agreement, at the closing, Company stockholders
will be entitled to receive 5.417 shares of Global Crossing common stock for
each share of Company common stock and IXnet stockholders will be entitled to
receive 1.184 shares of Global Crossing common stock for each share of IXnet
common stock. The Merger is expected to close by the end of the Company's third
fiscal quarter. For the three and six months ended March 31, 2000, the Company
recorded costs of $23.3 million related to the Merger. These costs primarily
included investment banker fees, legal fees, other professional fees, and other
direct costs.
In the opinion of management, the accompanying unaudited 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 as of March 31, 2000, and the
results of its operations for the three and six months ended March 31, 2000 and
1999 and cash flows for the six months ended March 31, 2000 and 1999, in
conformity with generally accepted accounting principles, commonly referred to
as "GAAP", for interim financial information applied on a consistent basis. The
results of operations for the three and six months ended March 31, 2000 are not
necessarily indicative of the results to be expected for the full year. Certain
information and note disclosures normally included in financial statements
prepared in accordance with GAAP have been omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. These financial
statements should be read in conjunction with IPC's Annual Report on Form 10-K
for the fiscal year ended September 30, 1999.
2. Summary of Significant Accounting Policies
Trade Receivables
Trade accounts receivable relate to Trading Systems and ITS sales and
installations which are progress billed until the installation is complete.
Turret sales to distributors are billed after the product is shipped and service
contract invoices are billed in advance. Trade receivables are recorded net of
allowance for doubtful accounts of $4.6 million and $2.3 million for the period
ended March 31, 2000 and 1999, respectively.
Reclassifications
Certain reclassifications have been made to the 1999 financial statements in
order to conform to the current period's presentation.
Earnings Per Share:
Basic loss per share is computed using the weighted average number of common
shares outstanding during the year. Diluted loss per share is computed using
the weighted average number of shares of common stock adjusted for the dilutive
effect of common stock equivalent shares of common stock options. Common stock
equivalent shares are calculated using the treasury stock method. All stock
options outstanding have been excluded from the computation of diluted loss per
share as their effect would be antidilutive. Accordingly, there is no
difference between basic and diluted EPS.
3. Comprehensive loss
Effective October 1, 1998, IPC 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 IPC's net income/loss and foreign currency translation adjustments.
IPC's total comprehensive loss for the six months ended March 31, 2000 and
1999 was as follows (in thousands):
Six Months Ended
March 31,
2000 1999
-------- -------
Net loss $(59,986) $(6,950)
Translation adjustment (1,422) (1,045)
-------- -------
Total comprehensive loss $(61,408) $(7,995)
======== =======
4
<PAGE>
4. Acquisitions and Strategic Agreement:
Systems Programming & Network Computing, Inc. ("SPNC")
- ------------------------------------------------------
On January 25, 2000, IXnet acquired all of the issued and outstanding common
shares of SPNC which is a leader in providing and integrating sophisticated
multi-system, multi-platform applications for the financial services community.
The purchase price was approximately $1.5 million and consisted of $300,000 in
cash, a $100,000 promissory note issued by the Company and 6,080 shares of IXnet
common stock. The acquisition was accounted for using the purchase method of
accounting and resulted in $111,000 of goodwill, which will be amortized over a
5 year period from the date of the acquisition.
Business Networks of New York, Inc. ("BNNY")
- --------------------------------------------
Effective January 1, 2000, IXnet acquired all of the issued and outstanding
common shares of BNNY which is a leader in providing voice and data services to
the financial community, primarily in the New York Metropolitan Area. The $26.5
million purchase price consisted of $24.5 million in cash and 45,707 shares of
IXnet common stock. The acquisition was accounted for using the purchase method
of accounting and resulted in $27.3 million of goodwill, which will be amortized
over a 10 year period from the date of the acquisition.
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 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 restricted 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.
V-Band Corporation ("V-Band")
- -----------------------------
On June 21, 1999, the Company 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.
Reuters Voice Systems ("RVS")
- -----------------------------
On December 31, 1998, the Company purchased the assets of RVS, 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.
Saturn Global Network Service Holdings Ltd. ("Saturn")
- ------------------------------------------------------
On December 18, 1998, International Exchange Networks, Ltd. ("IENL") acquired
all of the issued and outstanding common shares of Saturn from Marshalls 106
Limited ("Marshalls"). The acquisition was accounted for using the purchase
method of accounting.
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, IENL 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.
5
<PAGE>
5. Property, Plant and Equipment (In thousands):
March 31, September 30,
---------- -------------
2000 1999
---------- -------------
Building $ 2,463 $ 2,463
Machinery and equipment 39,247 36,300
Furniture and fixtures 3,004 2,812
Leasehold improvements 10,576 9,092
Network equipment 49,586 39,865
Network equipment under capital leases 43,444 28,649
Network software 24,547 21,561
IRU's 10,759 6,692
-------- --------
Total depreciable property, plant and equipment 183,626 147,434
Less accumulated depreciation and amortization (66,595) (49,761)
-------- --------
117,031 97,673
Land and other 351 1,009
-------- --------
$117,382 $ 98,682
======== ========
<PAGE>
6. Business Segments:
The Company's operations include Trading Systems, Information Transport
Systems ("ITS") and IXnet. Trading Systems reports sales 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 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." IXnet reports revenue from
sales of premium voice, managed bandwidth and outsourcing services, switched
voice, shared internet protocol and other services (In thousands):
<TABLE>
<CAPTION>
Trading
Systems I T S IXnet Consolidated
------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
For the Six Months ended March 31, 2000
Revenue:
Product sales and installation $ 54,433 $ 19,333 $ - $ 73,766
Service 38,250 7,097 52,107 97,454
-------- -------- -------- --------
Total revenue $ 92,683 $ 26,430 $ 52,107 $ 171,220
======== ======== ======== =========
Gross profit (loss) 43,824 2,953 (3,588) 43,189
Research & development 6,113 - - 6,113
Selling, general & administrative (a) 12,146 2,014 24,060 41,689
Depreciation & amortization 4,884 195 18,336 23,415
Merger related costs 4,750 18,538 23,288
Stock compensation charge - - 2,599 2,599
-------- --------- --------- -------
Income (loss) from operations $ 15,931 $ 744 $ (67,121) $ (53,915)
======== ======== ========= =========
EBITDA (b) $ 17,346 $ 939 $ (46,186) $ (27,901)
======== ======== ========= =========
Total assets $222,093 $ 26,206 $ 151,720 $ 400,019
======== ======== ========= =========
</TABLE>
(a) Consolidated selling, general & administrative includes corporate general &
administrative of $3,469 for the six months ended March 31, 2000
(b) EBITDA represents operating income before net interest, other expenses,
income taxes, depreciation and amortization and non-cash stock compensation
charges. EBITDA is not a measurement of financial performance under generally
accepted accounting principles. It is not intended to represent cash flow from
operations and should not be considered as an alternative to net loss as an
indicator of our operating performance or to cash flows as a measure of
liquidity. We believe that EBITDA is widely used by analysts, investors and
others in the telecommunications industry. EBITDA is not necessarily comparable
with similarly titled measures used by other companies.
7
<PAGE>
<TABLE>
<CAPTION>
Trading
Systems I T S IXnet Consolidated
-------- -------- --------- ------------
<S> <C> <C> <C> <C>
For the Six Months ended March 31, 1999
Revenue:
Product sales and installation $ 56,933 $ 16,226 $ - $ 73,159
Service 34,332 8,680 32,512 75,524
-------- -------- --------- --------
Total revenue 91,265 24,906 32,512 148,683
======== ======== ========= ========
Gross profit (loss) 45,762 3,330 1,578 50,670
Research & development 4,594 - 4,594
Selling, general & administrative (a) 11,373 2,095 7,693 25,343
Depreciation & amortization 3,598 168 9,508 13,274
-------- -------- --------- --------
Income (loss) from operations $ 26,197 $ 1,067 $ (15,623) $ 7,459
======== ======== ========= ========
EBITDA (b) $ 29,795 $ 1,235 $ (6,115) $ 20,733
======== ======== ========= ========
Total assets $125,578 $ 31,465 $ 125,440 $282,483
======== ======== ========= ========
</TABLE>
(a) Consolidated selling, general & administrative includes corporate general &
administrative of $4,182 for the six months ended March 31, 1999
(b) EBITDA represents operating income before net interest, other expenses,
income taxes, depreciation and amortization and non-cash stock compensation
charges. EBITDA is not a measurement of financial performance under generally
accepted accounting principles. It is not intended to represent cash flow from
operations and should not be considered as an alternative to net loss as an
indicator of our operating performance or to cash flows as a measure of
liquidity. We believe that EBITDA is widely used by analysts, investors and
others in the telecommunications industry. EBITDA is not necessarily comparable
with similarly titled measures used by other companies.
7. Stock Compensation Charge:
In May 1999, IXnet recorded $26.4 million in non-cash deferred stock
compensation reflecting the issuance by the Company of options to purchase
6,530,184 shares of common stock of IXnet at $13.96 per share. The deferred
stock compensation is based upon the deemed fair market value of IXnet's common
stock and the exercise price of such options issued on the date of grant. The
Company recorded an additional $2.1 million of non-cash deferred stock
compensation during the quarter and $4.4 during the six months ended March 31,
2000, which represents the charge for the issuance of options in May 1999 that
are treated as variable options for accounting purposes. Stock compensation
expense for the three and six months ended March 31, 2000 is $1.2 million and
$2.6 million respectively. The remaining deferred compensation will be amortized
over the remaining vesting period of the options.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (unaudited)
Overview
- --------
IPC is the world's leading supplier of voice trading systems to the financial
services community with a sophisticated suite of globally integrated voice and
data telecommunications products. IPC focuses on serving the financial trading
environment by designing, manufacturing, installing, and servicing products that
allow traders around the world to communicate with each other instantly and
reliably. In addition, through its subsidiary, IXnet, the Company provides a
high performance intelligent global extranet designed exclusively for the
financial community. Through a single connection, IXnet delivers end-to-end
managed data and voice communications solutions to the financial services
community around the world. 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.
Our operations include Trading Systems, ITS and network services (IXnet).
Trading Systems reports sales 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
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 premium
voice, managed bandwidth and outsourcing services, switched voice, shared
internet protocol and other services.
Revenue from trading systems and ITS sales and installation is recognized upon
completion of the installation. Revenue from sales of turret products to
distributors, is recognized upon shipment. Invoices representing progress
payments on 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 ITS 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 the IXnet Extranet is 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 ITS includes material and labor
associated with the installation of a project or the service performed. Cost of
revenue for IXnet includes leased local and long distance circuit costs and
personnel and related operating expenses associated with network operation,
customer support and field service support.
Due to the substantial sales price of IPC's large turret and ITS 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.
9
<PAGE>
Results of Operations
Comparison of the Three Months ("Q2 2000") and Six Months ended March 31, 2000
("YTD 2000") to the Three Months ("Q2 1999) and Six Months ("YTD 1999") ended
March 31, 1999
Revenue. Total revenue increased $6.8 million, or 8.4%, to $87.7 million in Q2
2000 from $80.9 million in Q2 1999. Total revenue increased $22.5 million, or
15.1%, to $171.2 million in YTD 2000 from $148.7 million in YTD 1999.
Trading system sales and installation and related service revenue decreased
$1.2 million, or 2.5%, to $46.1 million in Q2 2000 from $47.3 million in Q2
1999. YTD 2000 Trading system installation and related service revenue
increased $1.4 million, or 1.5%, to $92.7 million from $91.3 million in YTD
1999.
Trading system sales and installation revenue decreased $3.5 million or 11.8%
in Q2 2000 to $26.1 million and decreased $2.5 million or 4.4% to $54.4
million in YTD 2000 as compared to the similar periods of the prior year. The
decrease in Q2 2000 is primarily related to the timing of large installation
projects recognized as revenue when compared to the same period of the prior
year.
Trading system service revenue increased $2.3 million or 13.0% in Q2 2000 to
$20.0 million and increased $4.0 million or 11.7% to $38.3 million in YTD 2000
as compared to the similar periods of the prior year. The increase is
primarily related to the expanded service base attained through the
acquisitions of RVS and V-Band in December 1998 and June 1999, respectively,
as well as the Company's expanding customer base.
Revenue from ITS sales and related service decreased by $1.4 million or 10.1%,
to $12.5 million in Q2 2000 from $13.9 million Q2 1999. YTD 2000 revenue from
ITS sales and related service increased by $1.5 million or 6.0%, to $26.4
million from $24.9 million in YTD 1999.
Revenue from new ITS installation projects in Q2 2000 decreased by $0.3
million or 3.2% to $8.9 million in Q2 2000 and increased $3.1 million or 19.2%
to $19.3 million in YTD 2000 as compared to the similar periods of the prior
year. The changes in Q2 2000 and YTD 2000 are primarily related to the timing
of large installation projects recognized as revenue when compared to the same
period of the prior year.
ITS service revenue decreased $1.1 million or 23.0% to $3.6 million in Q2 2000
and decreased $1.6 million or 18.2% to $7.1 million in YTD 2000 as compared to
similar periods of the prior year. The decrease in Q2 2000 and YTD 2000 is
primarily related to a large customer service contract which expired at the
end of December 1998 and a lower volume of move, add and change orders
recognized as revenue when compared to the same period of the prior year.
IXnet revenue increased $9.3 million, or 47.0%, to $29.1 million in Q2 2000
from $19.8 million in Q2 1999. For YTD 2000 IXnet revenue increased $19.6
million, or 60.3%, to $52.1 million from $32.5 million in YTD 1999.
Approximately $8.4 million of the increase in revenue related to the
acquisition of Saturn in December 1998 which is included for a full six months
in YTD 2000.
Cost of Revenue (excluding depreciation and amortization). Cost of revenue (as
a percentage of revenue) for Q2 2000 and YTD 2000 were 75.6% and 74.8%,
respectively, as compared with 67.0% and 65.9% for the same periods of the
prior year.
Product sales and installation cost of revenue (as a percentage of product
sales and installation revenue) for Q2 2000 and YTD 2000 was 58.1% and 59.8%
respectively as compared with 58.4% and 58.0% for the same periods of the
prior year. The increase in Q2 2000 and YTD 2000 is largely related to a
higher percentage of ITS product sales and installation revenue included in
total product sales and installation revenue. ITS product sales and
installation revenue typically has a higher cost of revenue as compared with
Trading System's turret product sales and installation revenue.
Service cost of revenue (as a percentage of service revenue) for Q2 2000 and
YTD 2000 was 87.2% and 86.1%, respectively, as compared with 75.5% and 75.2%
for the same periods of the prior year. The increase in Q2 2000 and YTD 2000
is 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.
10
<PAGE>
Research and Development Expenses. Research and development expenses were $3.2
million in Q2 2000 and $6.1 million in YTD 2000 as compared to $2.2 million in
Q2 1999 and $4.6 million in YTD 1999. Research and development efforts continue
to be focused on the development of the next generation of trading systems
products, including integration of the Alliance MX turret with the IXnet Network
as well as enhancement of existing features of the Alliance 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 $10.1 million, or 79.5%, to $22.8
million in Q2 2000 from $12.7 million in Q2 1999. SG&A increased by $16.4
million, or 64.8%, to $41.7 million in YTD 2000 from $25.3 million in YTD 1999.
The increase is attributable to expanding IXnet's business through both internal
growth and acquisitions.
Depreciation and Amortization. Depreciation and amortization, including
amortization of goodwill from acquisitions, in Q2 2000 increased $5.0 million to
$12.6 million as compared to $7.6 million in Q2 1999. For YTD 2000 depreciation
and amortization increased by $10.1 million to $23.4 million from $13.3 million
in YTD 1999. The increase in Q2 2000 and YTD 2000 is primarily due to increases
in property and equipment in connection with expanding the IXnet Extranet and
amortization of goodwill associated with acquisitions.
Stock Compensation Charge. IXnet recorded a non-cash deferred compensation
charge of approximately $1.4 million in Q1 2000 and $1.2 million in Q2 2000
representing the difference between the exercise price and the deemed fair value
of IXnet's common stock at the date of grant.
Merger related costs. Merger related costs were $23.3 million for the three
months ended March 31, 2000, a 100% increase over the prior period. These costs,
incurred in connection with the merger with Global Crossing primarily include
investment banker fees, legal fees, other professional fees, and other direct
costs.
Interest Expense, net. Interest expense, net increased $0.4 million or 5.7%
to $7.4 million in Q2 2000 and increased $1.1 million or 8.4% to $14.2 million
in YTD 2000 compared with $7.0 million in Q2 1999 and $13.1 million in YTD 1999.
The increase is primarily related to increased borrowings outstanding under the
Revolving Credit Facility, capital leases and notes issued in conjunction with
acquisitions.
Provision for Income Taxes. The Company's tax provision was $2.5 million and
$1.3 million on pretax losses of $68.7 million and $5.6 million for YTD 2000 and
YTD 1999 respectively. These provisions were primarily the result of foreign
taxes and valuation allowances on the net operating loss tax assets.
Liquidity and Capital Resources
- -------------------------------
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 the IXnet Extranet.
On August 12, 1999, IXnet completed its initial public offering ("IPO") of
6,500,000 shares at price of $15 per share. On August 30, 1999, the underwriters
exercised their over-allotment option and purchased an additional 975,000 shares
at $15 per share.
Total proceeds received by IXnet net of commissions and expenses were
approximately $102.1 million. The proceeds of the IPO have been used to finance
the continued expansion of its network and for acquisitions, strategic
alliances, and investments in IXnet's business.
Net cash used in operating activities was $15.3 million in YTD 2000 as
compared to cash provided by operating activities of $20.7 million in YTD 1999.
The decrease was primarily due to the increase in the net loss from IXnet in YTD
2000 from YTD 1999.
Cash provided by investing activities was $.9 million in YTD 2000 as compared
to cash used of $49.8 million for YTD 1999. Cash provided by or used in
investing activities in YTD 2000 related to capital expenditures for property,
plant and equipment, principally consisting of network equipment and machinery
for the continued buildout of the IXnet Extranet as well as the SPNC and BNNY
acquisitions. Cash used in investing activities for YTD 1999 related primarily
to the acquisitions of Saturn and RVS.
Cash provided by financing activities was $3.5 million in YTD 2000 as compared
to $13.4 million in YTD 1999. Cash provided by financing activities for YTD 2000
was primarily derived from proceeds from borrowings on our Revolving Credit
Facility and the exercise of employee stock options. This increase was partially
offset by principal payments on notes payable resulting from the acquisitions by
IXnet.
11
<PAGE>
Cash provided by financing activities for YTD 1999 related to $22.1 million in
net borrowings under our revolving credit facility used primarily to finance the
acquisitions of Saturn and RVS.
The Company believes that cash flows from operations, existing credit
facilities and the remaining proceeds from the sale of common stock by IXnet are
sufficient to meet its working capital and capital expenditure needs at least
through the close of the Merger with Global Crossing. The Company does not rule
out seeking additional debt or equity financing for other corporate purposes.
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. The effective date of this
standard was deferred to all fiscal quarters of fiscal years beginning after
June 15, 2000 by SFAS No. 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. The Company does not currently use
derivative financial instruments.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
SAB 101 is not a rule or interpretation of the SEC, however, it represents
interpretations and practices followed by the Division of Corporation Finance
and the Office of the Chief Accountant in administering the disclosure
requirements of the Federal securities laws. The Company does not believe that
the interpretations outlined in SAB 101 will have an impact on the Company's
revenue recognition policies.
Year 2000 Update
- ----------------
Even though the date is now past January 1, 2000, and we have not experienced
any immediate adverse impact on our operations from the transition to the Year
2000, we cannot provide complete assurance that our operations have not been
affected in a manner that is not yet apparent or that will arise in the future.
In addition, certain computer programs that were date sensitive to the Year 2000
may not have been programmed to process the Year 2000 as a leap year, and any
negative consequential effects remain unknown. As a result, we will continue to
monitor our Year 2000 compliance and the Year 2000 compliance of our suppliers.
However, we anticipate no Year 2000 problems that are reasonably likely to have
a material effect on our operations.
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk
---------------------------------------------------------
Foreign Exchange Rate Risk
- ---------------------------
As a global concern, we conduct business in many foreign countries and
transactions from these foreign operations are denominated in local currencies.
With respect to these foreign operations, we are exposed to foreign currency
fluctuations for our net working capital positions. Foreign currency
fluctuations historically have not had a significant impact on our revenues or
operating results. We currently do not have a foreign currency exchange hedging
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. A significant and growing portion of our business is from our
international operations, and changes in the global economy, foreign tax laws,
international business practices and currency exchange rates could adversely
affect our business.
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 effect on the Company's business or financial condition.
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 is exposed to
interest rate fluctuations, which could have a negative impact on our results of
operations. We currently do not have an interest rate hedging program; however,
we may implement a program to mitigate future fluctuations in interest rates.
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, it is possible that the Company would be 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.
12
<PAGE>
Part II - Other Information
ITEM 1. Legal Proceedings
From February 20, 2000 to March 8, 2000, three lawsuits purporting to be class
actions were filed in the Delaware Chancery Court against the Company, IXnet and
the individual directors of the Company and IXnet. The complaints, captioned
Weinbtraub v. Smith, et al., Blisko v. Smith, et al., and Koening v. Smith, et
al., allege that the defendants breached their fiduciary duties to IXnet's
minority shareholders in connection with the Merger. The plaintiffs allege,
among other things, that when measured in percentage terms, IXnet's minority
shareholders will receive a lower premium for their shares than the Company's
shareholders. The plaintiffs seek an injunction, money damages, costs and
attorneys' fees. The Company believes that these actions are entirely without
merit and intends to contest them vigorously.
ITEM 2. Changes in Securities - None
ITEM 3. Defaults Upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders
At the Company's Annual Meeting of Stockholders on March 2, 2000, the
following proposals were adopted: 1) the election of nine directors to hold
office until the next Annual Meeting; 2) the approval of an amendment to
increase by 300,000 the shares reserved for the IPC Communications, Inc. 1999
Stock Incentive Plan; and 3) the ratification of the appointment of
PricewaterhouseCoopers LLP as independent auditor of the Company for the fiscal
year ending September 30, 2000.
ITEM 5. Other Information - None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits: The following exhibits are filed as part of this Quarterly Report
on Form 10-Q
Exhibit
Number Description
- ------- -----------------------------------------------------------------
10.26 Amendment No. 4 to Amended and Restated Credit Agreement, dated
December 1, 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 (Incorporated by
reference to exhibit 10.26 to form 10Q at December 31, 1999).
10.27 Amendment No. 5 to Amended and Restated Credit Agreement, dated
December 15, 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 (Incorporated by
reference to exhibit 10.27 to form 10Q at December 31, 1999).
10.28 Amendment No. 6 to Amended and Restated Credit Agreement, dated
January 21, 2000, 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 (Incorporated by
reference to exhibit 10.28 to form 10Q at December 31, 1999).
10.29 Amendment No. 7 to Amended and Restated Credit Agreement, dated
January 31, 2000, 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 (Incorporated by
reference to exhibit 10.29 to form 10Q at December 31, 1999).
10.30 Amendment No. 8 to Amended and Restated Credit Agreement, dated
February 10, 2000, 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 (Incorporated by
reference to exhibit 10.30 to form 10Q at December 31, 1999).
27 Financial Data Schedule
(b) Form 8-K - On March 6, 2000, the Company filed Form 8-K in connection with
the Merger with Global Crossing. The filing included the merger agreement as
well as a joint press release.
13
<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: May 15, 2000 By: /s/ TIMOTHY WHELAN
-------------------------
Timothy Whelan
Vice President, Finance
14
<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 INFORMATION SYSTEMS, INC.
Dated: May 15, 2000 By: /s/ TIMOTHY WHELAN
-------------------------
Timothy Whelan
Vice President, Finance
15
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