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, 1995
Commission file number 0-25492
IPC Information Systems, Inc.
(Exact Name of registrant as specified in its charter)
Delaware 58-1636502
(State or other jurisdiction of (I.R.S. 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 close of the period covered by this report.
Class Outstanding at June 30, 1995
Common Stock par value $0.01 10,521,554 shares
<PAGE>
IPC INFORMATION SYSTEMS, INC.
CONDENSED CONSOLIDATED AND COMBINED BALANCE SHEET (unaudited)
(Dollars in Thousands, Except per Share Amounts)
<TABLE>
<CAPTION>
June 30, September 30,
1995 1994
Consolidated Combined
<S> <C> <C>
ASSETS:
CURRENT ASSETS
Cash and temporary investments............... . $18,636 $2,616
Trade receivables, less allowance of $1,555 and $1,331,
respectively 34,512 39,450
Inventories............................... . 40,147 50,426
Prepaid expenses and other current assets... 7,658 8,117
Total current assets...................... 100,953 100,609
Property, plant and equipment, net.......... 7,400 4,797
Other assets, net........................... 8,106 5,296
Total assets.................................$116,459 $110,702
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable.............................. $10,044 $15,542
Accrued liabilities........................... 17,051 16,164
Customer advances and deferred revenue........ 28,369 39,831
Notes payable to stockholders................. 1,411
Total current liabilities........ 55,464 72,948
Long-term debt................................ 10,663
Other liabilities............................. 6,019 5,969
Total liabilities............ 61,483 89,580
Commitments and contingencies
STOCKHOLDERS EQUITY
Preferred stock - $0.01 par value, authorized 10,000,000 shares,
none issued and outstanding
Common stock - IPC-US: $0.01 par value, authorized
25,000,000 shares; issued 10,763,740 and 10,451,883 shares at
June 30, 1995 and September 30, 1994, respectively. IPC-UK:
BP1 par value, authorized, issued and outstanding 100 ordinary shares
at September 30, 1994.........................107 75
Paid in Capital............................... 45,854 8,986
Retained earnings............................. 9,822 12,354
Cumulative translation adjustment............. (89) 29
Less treasury stock, at cost, 242,186 and 195,611 shares, respectively (718) (322)
Total stockholders equity........ 54,976 21,122
Total liabilities and stockholders' equity. $116,459 $110,702
<FN>
See Notes to Condensed Consolidated and Combined Financial Statements
</TABLE>
<PAGE>
IPC INFORMATION SYSTEMS, INC.
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF OPERATION (unaudited)
(Dollars in Thousands, Except per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
1995 1994 1995 1994
Consolidated Combined Consolidated Combined
<S> <C> <C> <C> <C>
Revenues:
Product sales and installation.. $ 34,134 $ 25,058 $ 102,471 $ 73,080
Service.................................. 18,324 15,038 48,231 45,048
52,458 40,096 150,702 118,128
Cost of Revenues:
Product sales and installation.. 22,753 17,365 69,711 52,044
Service................................. . 13,567 10,935 34,927 31,618
36,320 28,300 104,638 83,662
Gross Profit................. 16,138 11,796 46,064 34,466
Research and development expenses. 2,568 2,348 7,313 5,687
Selling, general and administrative
expenses................................... 7,721 5,523 22,222 16,700
Income from operations...... 5,849 3,925 16,529 12,079
Interest income/ (expenses), net..... 60 (387) 119 (1,171)
Gain on renegotiation of lease obligation
on vacant facilities............................ 517
Income before provision for
income taxes................. 5,909 3,538 16,648 11,425
Provision for income taxes............. 2,423 859 6,826 1,765
Net income....................... $3,486 $2,679 $9,822 $9,660
Earnings per share.................... .. $ 0.33 $ 0.94
Weighted average shares outstanding. 10,506 10,500
<FN>
See Notes to Condensed Consolidated and Combined Financial Statements
</TABLE>
<PAGE>
IPC INFORMATION SYSTEMS, INC.
CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine months ended
June 30 June 30
1995 1994
Consolidated Combined
<S> <C> <C>
Cash flows from operating activities:
Net Income $9,822 $9,660
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization expense 1,299 1,715
Deferred taxes (509)
Amortization of discount on long-term liabilities 304 335
Amortization of product development costs 469 469
Amortization of acquired technology and covenant not
to compete 453 672
Provision for doubtful accounts 247 281
Gain on renegotiaion of lease obligation (517)
Other adjustments to reconcile net income to net cash 42 8
Changes in operating assets and liabilities:
Trade receivables 4,938 (9,712)
Inventories 10,551 (11,605)
Prepaid expenses and other current assets (2,613) (2,203)
Other assets (164) 70
Accounts payable (5,534) 4,195
Accrued liabilities and other liabilities (2,511) (245)
Customer advances and deferred revenue (11,511) 12,362
Net cash provided by operating activities 5,792 4,976
Cash flows from investing activities:
Capital expenditures (3,891) (717)
Net cash (used in) investing activities (3,891) (717)
Cash flows from financing activities:
Proceeds from long-term debt 91,160
Repayment of long-term debt (10,663) (93,181)
Repayment of notes payable to affiliates (1,411)
Proceeds from the sale of common stock 45,337
Purchase of treasury stock (396) (72)
S corporation distribution (18,530) (2,093)
Net cash provided by (used in) financing activities 14,337 (4,186)
Effect of exchange rate changes on cash (218) 148
Net increase (decrease) in cash 16,020 (75)
Cash, beginning of period 2,616 1,574
Cash and temporary investments, end of period $18,636 $1,499
<FN>
See Notes to Condensed Consolidated and Combined Financial Statements
</TABLE>
<PAGE>
IPC INFORMATION SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED AND COMBINED
FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
1. In the opinion of management, the accompanying unaudited condensed
consolidated and combined financial statements include all necessary
adjustments (consisting of normal recurring accruals) and present fairly
IPC Information Systems, Inc.'s ("IPC" or the "Company") financial position
as of June 30, 1995, and the results of its operations for the three and
nine months ended June 30, 1995 and 1994, and its cash flows for the nine
months ended June 30, 1995 and 1994, 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, 1995, are not necessarily indicative of the results to be expected for
the full year. These financial statements should be read in conjunction with
IPC's 1994 Annual Report to stockholders and Form 10-K for the fiscal year
ended September 30, 1994.
2. Certain reclassifications have been made to the fiscal 1994 financial
statements in order to conform to the current period's condensed presentation.
3. The Company completed an initial public offering (the "Offering") of
3,250,000 shares of common stock at $15.00 per share on October 3, 1994.
During the nine months ended June 30, 1995, the Company paid long-term
debt of $10,663 and notes to stockholders of $1,411 and distributed $18,530 to
the pre-Offering stockholders from the proceeds of the Offering ($45,337).
Also, in connection with the Company's Offering, effective October 1, 1994,
IPC terminated its S corporation status and, as a result, is subject to
corporate federal income taxes in fiscal 1995. As an S corporation, the
Company was not subject to federal income taxes.
4. Temporary investments with original maturities of less than three months are
considered cash equivalents and consists of municipal bond funds at
June 30, 1995. Temporary investments are stated at cost, which approximates
fair value. These investments are not subject to significant market risk.
5. Classification of inventories is:
June 30, September 30,
1995 1994
Components and manufacturing work in process $10,161 $17,851
Inventory on customer sites awaiting installation 22,116 27,253
Parts and maintenance supplies 7,870 5,322
$40,147 50,426
<PAGE>
6. In December 1994, the Company signed a promissory note with a bank for a line
of credit up to $15,000 of which none is outstanding at June 30, 1995.
7. During April 1995, the Company acquired Bridge Electronics, Inc. (Bridge).
Bridge specializes in providing financial communications products to the global
foreign exchange community. The terms of the acquisition include a future
payment of $2 million in cash, IPC's common stock, valued at $700, with
possible additional payments contingent on future performance.
8. In June, the Company acquired a controlling interest in International
Exchange Network, LTD. (IPC IXnet). The Company acquired 80% of IPC IXnet for
providing $5,500 in working capital and a commitment to underwrite certain
debt financing for the start up phase of the proposed global network.
9. Knight Ventures, Inc. ("KVI"), a company owned by Peter J. Kleinknecht
and Richard P. Kleinknecht (the "Principal Stockholders"), and the former
parent of the Company, is currently in litigation with Contel Corporation
("Contel") over responsibility for approximately $6,500 of taxes, tax liens, tax
assessments and tax warrants with respect to Contel IPC (the "Predecessor
Company"), for the periods prior to the acquisition of the Company from Contel.
As a result of the above dispute, KVI has withheld payment on a note in the
amount of $4,548 (the "Note") to Contel associated with KVI's acquisition of the
Company.
The Note is guaranteed by Kleinknecht Electric Company ("KEC"), formerly
George Kleinknecht Inc. ("GKI"), an affiliated company, Richard P. Kleinknecht
and Peter J. Kleinknecht. The Note, originally due on January 31, 1992, bears
interest at 9% per annum, except in default, in which case the interest rate
increases to 12% per annum. Since the Company is not a guarantor of the
Note, and its assets are not pledged as collateral for the Note, the Note and
related accrued interest have not been reflected in the financial statements.
During 1992, Contel sought summary judgment on the Note and on the
executed guarantees. GKI, Peter J. Kleinknecht and Richard P. Kleinknecht,
guarantors, and KVI, cross-moved for an order granting summary judgment
declaring that, among other things, Contel is responsible for all pre-closing
taxes of the Company in excess of $338, as specified in the Tax Allocation
Agreement entered into as part of the purchase agreement between KVI and
Contel.
In September 1992, Contel's motion for summary judgment was denied, the
guarantors' motion was declared premature and the parties were directed to
serve formal pleadings. Included in other assets is $989 at June 30, 1995 and
September 30, 1994 which represent amounts due, pursuant to the Tax Allocation
Agreement, from Contel for pre-closing taxes paid by the Company. In addition,
the Company has a receivable of $115 at June 30, 1995 and September 30, 1994
which is included in other assets, for insurance premiums owed to the Company
by Contel.
Management believes Contel is fully responsible for the above-mentioned $6,500
and all related costs and expenses and that the aggregate receivable of $1,104
at June 30, 1995 is fully recoverable from Contel.
<PAGE>
10. As of May 9, 1994, the Company, KVI and the pre-Offering stockholders
entered into a Tax Allocation and Indemnification Agreement (the "Tax
Agreement") relating to their respective income tax liabilities and certain
related matters as a consequence of the Offering. The Tax Agreement
generally provides that the pre-Offering stockholders will be indemnified by
the Company with respect to federal and state income taxes (plus interest and
penalties) shifted from a C corporation taxable year to a taxable year in
which the Company was an S corporation, and that the Company will be
indemnified by the pre-Offering stockholders with respect to federal and state
income taxes (plus interest and penalties) shifted from an S corporation
taxable year to a C corporation taxable year. However, in the case of the
pre-Offering stockholders' obligation to indemnify the Company, such
obligation shall be limited to the tax benefit, if any, derived by the
pre-Offering stockholders due to the shift of taxable income from a taxable
year in which the Company was an S corporation to a C corporation taxable
year. Any payment made by the Company to the pre-Offering stockholders
pursuant to the Tax Agreement may be considered by the Internal Revenue Service
or the state taxing authorities to be nondeductible by the Company for income
tax purposes. In addition, the Company, KVI, Richard P. Kleinknecht and
Peter J. Kleinknecht have agreed, to the extent that either KVI or the
Principal Stockholders receive any cash proceeds or other benefit in the form
of a reduction in amounts payable on the Note to Contel as a consequence of
such litigation, the Principal Stockholders will pay to the Company the
lesser of (i) such benefit or (ii) the amount paid by the Company for taxes
and related charges subject to the dispute, plus the amount of any expenses
of such litigation incurred by the Company following the consummation of
the Offering. The Tax Agreement also provides that KVI shall assign to
the Company certain benefits and rights of KVI with respect to KVI's right
of first refusal to purchase certain businesses which may compete with the
Company. In consideration of the Principal Stockholders' agreement to make
such payments and KVI's assignment of such rights, the Company will pay
any and all expenses incurred in connection with such litigation between
KVI and Contel and will not proceed independently against or receive
any amount directly from Contel.
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in thousands, except per share data)
Results of Operations
Total revenues of $52,458 and $150,702 for the three and nine months ended
June 30, 1995 increased by 30.8 and 27.6 percent, respectively, over the
comparable prior-year periods.
Turret installation and related service revenues increased by $3,316 and
$18,066 or 9.4 percent and 19.2 percent, respectively, to $38,460 and
$112,126 in the three and nine months ended June 30, 1995 from $35,144 and
$94,060, respectively, in the comparable prior-year periods.
This rise is primarily attributable to the increased acceptance of Tradenet
MX. Management anticipates that sales of Tradenet MX will generate the
majority of turret sales and installation revenue for the foreseeable future.
Revenues from Information Transport System's installations and related service
increased significantly by $9,046 and $14,508 or 182.7 and 60.3 percent,
respectively, to $13,998 and $38,576 in the three and nine months ended
June 30, 1995 from $4,952 and $24,068, respectively, in the comparable
prior-year periods due to continuing development and expansion of the
Company's Information Transport Systems business.
Cost of revenues (as a percentage of revenues) of 69.2 and 69.4 percent,
respectively, for the three and nine months ended June 30, 1995 decreased
from 70.6 and 70.8 percent, respectively, in the comparable prior-year
periods due to continued efficiencies including manufacturing cost reductions.
Research and development expenses for the three and nine months ended
June 30, 1995 increased to $2,568 and $7,313, respectively, from $2,348 and
$5,687, respectively, in the comparable prior-year periods due to the
development of new products and enhancements to existing products.
Selling, general and administrative expenses for the three and nine months
ended June 30, 1995 increased to $7,721 and $22,222, respectively, from
$5,523 and $16,700, respectively, in the comparable prior-year periods.
These increases are attributable to a rise in headcount and other expenses
in support of higher business levels, the continued development and expansion
of the Company's Information Transport Systems business, and the Company's
status as a public company.
<PAGE>
Interest expense for the three and nine months ended June 30, 1995 decreased
to $105 and $330, respectively, from $367 and $1,171, respectively, in the
comparable prior-year periods due to the repayment of long-term debt
as discussed in "Liquidity and Capital Resources" below.
In the nine months ended June 30, 1994, the company renegotiated its obligation
in connection with certain vacant facilities resulting in a $517 gain.
The Company's effective tax rate for both the three and nine months ended
June 30, 1995 was 41 percent. Effective October 1, 1994, the Company terminated
its S corporation status, and as a result, is subject to federal income taxes.
Accordingly, the three and nine months ended June 30, 1995 reflects an
increase in the provision for income taxes as the comparable prior-year
periods tax provisions were based on the Company's S corporation status.
On a comparable basis, assuming the same effective tax rates and number of
shares outstanding, net income would have been $2,087 or $0.20 per share,
and $6,741 or $0.64 per share, respectively, for the three and nine months
ended June 30,1994.
Liquidity and Capital Resources
Net cash provided by financing activities was $14,337 for the nine months ended
June 30, 1995. On October 3, 1994 the Company completed its Offering of
3,250,000 shares of common stock at $15.00 per share and received Offering
proceeds of $45,337, net of underwriting discounts and commissions. During
the nine months ended June 30, 1995, Offering proceeds were used to repay
long-term debt of $10,663, repay notes payable to stockholders of $1,411
and pay an S corporation distribution of $18,530 to pre-Offering stockholders.
Net cash flows provided by operating activities was $5,792 for the nine months
ended June 30, 1995 compared with net cash flows provided by operating
activities of $4,976 for the nine months ended June 30, 1994. Net cash
provided by operations resulted from net income, reduced accounts receivable
and inventory, offset in part, by changes in accounts payable and
customer advances and deferred revenue.
Net cash used in investing activities for the nine months ended June 30, 1995
totaled $3,891 compared with $717 for the comparable prior year period.
Net cash flows used in investing activities resulted from property, plant
and equipment expenditures, primarily composed of machinery and equipment
and leasehold improvements.
As mentioned above, the Company repaid $10,663 of long-term debt with proceeds
from the Offering. During the nine months ended June 30, 1995, the Company
negotiated a $15,000 unsecured line of credit with a bank to maximize its
financial flexibility.
<PAGE>
During April 1995, the Company acquired Bridge Electronics, Inc. (Bridge).
Bridge specializes in providing financial communications products to the global
foreign exchange community. The terms of the acquisition include a future
payment of $2 million in cash and IPC's common stock, valued at $700, with
possible additional payments contingent on future performance.
In June, the Company acquired a controlling interest in International
Exchange Network, LTD. (IPC IXnet). The Company acquired 80% of IPC IXnet for
providing $5,500 in working capital and a commitment to underwrite certain debt
financing for the start up phase of the proposed global network.
The Company believes that the net cash from operations and existing credit
facilities will be sufficient to meet its working capital and capital
expenditure needs for the near future.
<PAGE>
Part II - Other Information
None
<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: August 11, 1995 By: /s/ Richard P. Kleinknecht
Chairman of the Board and
Chief Executive Officer
Dated: August 11, 1995 By: /s/_Peter J. Kleinknecht
Vice Chairman and President
Dated: August 11, 1995 By: /s/ Gregory Riedel
Chief Financial Officer
<PAGE>
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<MULTIPLIER> 1000
<CAPTION>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-1-1994
<PERIOD-END> JUN-30-1995
<CASH> 18636
<SECURITIES> 0
<RECEIVABLES> 36067
<ALLOWANCES> 1555
<INVENTORY> 40147
<CURRENT-ASSETS> 100953
<PP&E> 15740
<DEPRECIATION> 8340
<TOTAL-ASSETS> 116459
<CURRENT-LIABILITIES> 55464
<BONDS> 0
<COMMON> 107
0
0
<OTHER-SE> 54869
<TOTAL-LIABILITY-AND-EQUITY>116459
<SALES> 150702
<TOTAL-REVENUES> 150702
<CGS> 104638
<TOTAL-COSTS> 29535
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> (119)
<INCOME-PRETAX> 16648
<INCOME-TAX> 6826
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<NET-INCOME> 9822
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<EPS-DILUTED> .94
</TABLE>
