SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended September 30, 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
Incorporation or Organization) Identification No.)
Wall Street Plaza
88 Pine Street
New York, New York 10005
(Address of Principal Executive Zip Code
Offices)
(212) 825-9060
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of Class: Common Stock, $.01 Par Value
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 by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein
and will not be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.___
The aggregate market value of the voting stock held by non-
affiliates of the Registrant as of November 30, 1995, was
approximately $47.1 million based upon the last sale price
reported for such date on the Nasdaq National Market.
The number of shares of the Registrant's Common Stock
outstanding as of November 30, 1995 was 10,521,555.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Annual
Meeting of Stockholders of IPC Information Systems, Inc. (the
"Proxy Statement"), scheduled to be held on February 14, 1996,
are incorporated by reference in Part III of this Report on
Form 10-K.
<PAGE>1
PART I
ITEM 1. BUSINESS
IPC Information Systems, Inc. ("IPC" or the "Company") is
a worldwide industry leader in providing global specialized
voice, video and data solutions to the financial services
industry. IPC, with a presence in over 30 countries, has the
world's largest installed base of trading positions. IPC, with
its subsidiary International Exchange Networks, Ltd. ("IPC
iXnet"), is implementing a virtual trading environment to meet
the financial industry's highly specialized global
communication requirements.
The Company was established in 1973 as Interconnect
Planning Corporation to provide telephone equipment
specifically designed to perform in the demanding environment
of the financial trading community. In 1984, the Company, then
known as IPC Communications, Inc., sold shares of its common
stock to the public. In 1986, the Company was purchased by
Contel Corporation ("Contel") of Atlanta, Georgia, and became
known as Contel IPC (the "Predecessor Company"). Also in that
year, the Company opened its manufacturing facility in the
United States and commenced operations in the United Kingdom.
Contel, including the Predecessor Company, was acquired by GTE
Corporation in early 1991. In October 1991, the Predecessor
Company was acquired (the "Acquisition") and renamed IPC
Information Systems, Inc.. In 1992, the Company elected to
separate its operations in the United Kingdom from its
operations in the United States ("IPC-US") for tax planning
purposes. IPC-US also elected to be treated as an S
corporation for federal income tax purposes. IPC Information
Systems currently operates in the United Kingdom as a United
Kingdom unlimited liability company ("IPC-UK"), and is 50%
percent owned by each of HNG Corp. and RIE Corp.. HNG Corp.
and RIE Corp. are direct wholly owned subsidiaries of IPC-US.
On October 3, 1994 the Company completed an Initial Public
Offering (the "Offering") of 3,250,000 shares of common stock
at a price of $15.00 per share. Effective October 1, 1994,
prior to completing the Offering, the Company terminated its S
corporation status and became subject to corporate federal
income taxes.
During June, 1995 the Company acquired an 80% interest in
IPC iXnet, which is building an international virtual private
network to provide seamless global connectivity on a common
technology platform and value added functionality that is
tailored to the financial service industry's unique
communications needs. System capabilities will include linkage
of IPC's Tradenet MX digital voice communication systems,
emulation of direct, private lines, dial-up video, automatic
routing and other value-added services, features and products.
The Company's highly reliable, customized
telecommunications systems are capable of providing high speed
access to as many as 23,000 telephone lines and incorporate
many features designed to increase user productivity, speed and
quality of communication. The Company's systems are used on
financial trading floors (where they are known as "turrets" or
"dealerboards"), and in "command and control" systems by
utilities and emergency service providers. IPC provides a high
level of support for its products through annual or multi-year
service contracts with its customers. The Company has also
expanded into the design, integration, implementation and
support of local ("LAN") and wide area networks ("WAN") to
provide voice, data and video networking solutions for its
customers, marketed as Information Transport Systems.
During April, 1995 the Company acquired Bridge
Electronics, Inc. ("IPC Bridge"), a recognized leader in the
design, manufacture and marketing of specialized open-line
speaker systems used by the foreign exchange community and
other traders in the financial services industry and the
industry's only provider of digital speaker systems.
<PAGE>2
The Industry
Global Virtual Private Network. In fiscal 1996, IPC iXnet
will provide an international virtual private network
specifically designed for the financial services industry. An
international virtual private network is a network, operating
on a global basis, in which the user has all the services,
capabilities and performance of a dedicated private network,
but it is provided on a shared, switched network. The network
will provide seamless global connectivity on a common
technology platform and value added network functionality that
is tailored to the financial services industry's unique
communication needs. System capabilities will include linkage
of IPC's Tradenet MX digital voice communication systems,
emulation of direct private lines, dial up video, automatic
routing, and other value-added services, features and products.
Information Transport Systems. As opposed to the
monolithic network designs developed in the past, in which
large mainframe computers served numerous "dumb" terminals,
today's heterogeneous, distributed computing environment
consists of networked desktop personal computers and
workstations, print, facsimile and file servers, facsimile
machines and LAN and WAN connections.
These components may have different communication
protocols to be interfaced, and may involve hardware or
software from a variety of vendors. In a heterogeneous,
distributed computing environment, a wide range of physical
media options, such as copper, coaxial or fiber optic cable,
and physical and logical architectures may be present.
Designing a network that optimally balances efficient, high-
speed data flow, minimizes the cost of installation and ongoing
maintenance and provides both maximum responsiveness and
flexibility to the user can be extremely challenging.
Selecting the best physical media and associated components for
the network has become increasingly critical in network design.
While devices such as intelligent hubs, routers and bridges
have been developed to enable efficient data traffic flow
throughout a network and increase network capacity, these
devices only work to their optimum capabilities when all
aspects of the network are properly designed. In choosing the
physical media and associated components, network designers
must allow not only for current use but also for network
upgrade, expansion and reconfiguration.
Communications networks have become critically important
as companies have realized that the worldwide distribution of
information across their entire personnel base is vital to the
success of the enterprise. For example, the distribution of
market information in a financial services firm is no longer
restricted to personnel on the trading floor. This increased
need for information distribution and the advances in network
design require companies to develop and maintain internal
expertise or to outsource their needs to independent
specialists. In response to its awareness of this increasing
demand the Company implemented its Information Transport
Systems program specifically designed to provide voice, data
and video networking infrastructures to provide connectivity to
all of the customer owned devices which require it. These
systems are designed by the Information Transport Systems
engineers, in accordance with industry standards, to be
flexible and expandable. The Company's expertise in this field
encompasses network design, integrating hubs, routers, bridges
and similar components from various suppliers and all available
physical media, including copper, fiber optic and coaxial
cable.
Turrets. The turret industry is characterized by a
relatively small number of manufacturers of highly specialized
telecommunications systems sold primarily to companies in the
financial services industry. These systems must be
exceptionally reliable to accommodate the time critical nature
of trading activity. Trading floors may contain in excess of
1,000 turrets, each with access to as many as 600 telephone
lines. Although turrets are installed in addition to, and
communicate with the internal corporate telephone system (the
"PBX"), turrets have a multitude of enhanced features when
compared to the PBX, including: (i) superior speed and
reliability; (ii) non-blocking capabilities even under the
busiest trading conditions; (iii) log-on/log-off features to
enable trader mobility; (iv) line assignability to access
additional direct telephone lines as needed; and (v) multiple
programmable speakers.
<PAGE>3
Products and Services
Global Virtual Private Network
In fiscal 1996, IPC iXnet will provide an international
virtual private network specifically designed for the financial
services industry. An international virtual private network is
a network, operating on a global basis, in which the user has
all the services, capabilities and performance of a dedicated
private network, but it is provided on a shared, switched
network. The network will provide seamless global
connectivity on a common technology platform and value added
network functionality that is tailored to the financial
services industry's unique communication needs. System
capabilities will include linkage of IPC's Tradenet MX digital
voice communication systems, emulation of direct private lines,
dial up video, automatic routing, and other value-added
services, features and products.
Initially, the network will provide customers certain
benefits, including significantly faster connect times and
global network management resulting from using a common
equipment platform throughout the network, mitigating private
line costs as a result of these faster connect times, and
enhanced flexibility by providing customers with access on
demand to better handle periods of increased network traffic,
resulting in further savings to network users. Subsequently,
software enhancements will be added to provide value added
features specific to the financial services industry's
application requirements.
Information Transport Systems
The Company markets its expertise in the design,
implementation and maintenance of high speed data networks as
Information Transport Systems. This business line includes
three major product and service areas: structured wiring
systems, networking products and network implementation and
value added services. Information Transport Systems customers
purchase these products and services on a stand alone basis or
in bundled combinations.
Structured Wiring Systems. Structured wiring systems
provide physical connectivity among all communications devices,
such as telephone switching equipment (turret or PBX),
facsimile machines, computer networks and video conference
facilities. These structured wiring systems are designed in
accordance with industry standards to be flexible and
expandable. Structured wiring systems employ a combination of
fiber optic, coaxial and copper cabling systems. Providing a
customer with a structured wiring system includes several
distinct phases: network design, documentation, installation,
certification and ongoing service and maintenance. The Company
offers its structured wiring system customers design input on
various system elements, including diversity of cable routing,
uninterruptable power systems, security safeguards and cable
management systems. The Company places special emphasis on the
testing and certification phases of the project since today's
high speed networks demand that products be installed in
accordance with strict manufacturer specifications. Upon
certification, the Company guarantees structured wiring system
installations as to transmission characteristics against
defects for a period of five years. The Company also offers
extensive documentation of the network infrastructure, cable
layouts and all device connections. This information is
provided on hard copy and in computerized media. In
computerized form, the customer can maintain detailed records
of all changes and reconfigurations to the network.
Networking Products. In addition to structured wiring
systems, the Company markets and services a full line of
networking system products. These include local area network
hubs, adapters, bridges, routers, network management software
and protocol converters.
The Company sells these products on a stand alone basis or
fully installed, configured and integrated with customer
systems. These products and services allow the customer to
choose the best technology from a wide variety of vendors and
integrate these technologies to address the business needs of
the organization.
<PAGE>4
Network Implementation and Support. Complementing the
structured wiring and networking products offerings, the
Company offers a full line of technical and network
implementation and support services. These services are
available to customers on a project basis or as part of a long-
term technical services contract. The purpose of the long term
contract is to allow the customer to have continuous access to
high quality technical expertise. These services enable
customers to focus their resources on core business activities
rather than internal systems support. Such customers will have
access to a wide range of IPC technical and operational
resources, including network engineering analysis, help desk
support, user training and cabling and reconfiguration. These
services provide the customers with a single point of access to
a wide variety of technical services.
Value Added Services. The Company provides a wide range
of value added services including, total turnkey, virtual
trading rooms with coordination of trading room design,
consulting, engineering implemention, project management, the
staging and burn-in of workstations, technology and operational
outsourcing.
Turrets
A turret is designed to be a sophisticated telephone
system consisting of desktop consoles and backroom switching
equipment for personnel involved in activities that require
rapid access to telephone lines, and a high degree of
reliability, such as the trading activity of a financial
services company, and is installed in addition to, and
communicates with, the PBX. The turret system has enhanced
features and is highly reliable compared to a PBX. The desk
console often has multiple handsets and provides access to a
much larger number of telephone lines (up to 600). Turrets are
used by organizations that have mission critical communications
systems, in which personnel need to have rapid access to a
large number of lines to deliver or receive critical
information. For example, on a trading floor a lost connection
could result in a lost transaction. The system must be
completely "non-blocking" and allow all users to be on the
telephone at the same time even under the busiest conditions.
In sharp contrast, a typical PBX is designed to accommodate
only approximately 20% of users speaking at the same time.
A turret system installation project involves extensive
planning to ensure that all materials and labor are coordinated
to achieve an on time, on budget completion. Detailed research
is performed, defining all required features and lines. The
cabling infrastructure is installed and tested prior to
delivery of backroom switching equipment, usually a month
before "cut-over" (the time when the system use begins).
About two weeks prior to the cut-over, the desk consoles are
installed and the complete system is rigorously tested.
Currently, the largest trading floors have in excess of 1,200
turret positions with access to 8,000-10,000 telephone lines
and can take up to a year to complete.
IPC's design architecture is a major advantage of IPC's
turret products. IPC's current systems have a totally
distributed architecture with microprocessor units distributed
throughout the circuitry. As a result, there is no single
point in its turret system that can cause a failure of the
entire system.
Tradenet MX. Tradenet MX, a fully digital, distributed
architecture product, was designed on a patented mesh-switching
fault tolerant network, which is not vulnerable to isolated
component failure. Its totally distributed design avoids the
disadvantages of centralized processing by equipping each
circuit card with two SPARC microprocessors, providing a
combined 25 MIPS of processing power per circuit board.
Tradenet MX is designed as a platform combining hardware and
software upon which new features and applications can be added
to enhance the product. Because they are mainly software
based, these enhancements can be made quickly to enable the
Company to respond rapidly to developments in the market or to
a customer's specific requests. The customer can have a
continually up-to-date system by gradually upgrading. The
Tradenet MX platform is designed with the capability to switch
data and video as well as voice.
<PAGE>5
MX Compact. During 1994, the Company determined that a
more compact and less costly version of Tradenet MX was
required for smaller sized locations, both in the financial
services industry, and for utilities and emergency service
providers. In June 1994, the Company introduced the MX
Compact, designed with a capacity of 40 turrets with comparable
features of Tradenet MX. The MX Compact is packaged in a
single cabinet and competitively priced for smaller branch
offices in smaller markets.
Tradenet. The Tradenet turret is an analog system which
was introduced in 1989 and which incorporated significant
advancements from previous-generation turrets in a number of
areas. First, the Tradenet's console was upgraded to contain
larger line and feature keys and a bright electroluminescent
display. Additionally, the Tradenet was made easier to program
and contained more features than previous turrets. Finally,
the Tradenet was much smaller than the turrets it replaced, and
allowed market data terminals to be placed on top of the turret
console without obstructing line of sight between traders.
Exchangefone. Exchangefone, introduced in 1983, is an
extremely ruggedized key telephone specifically designed for
use on exchange floors. Exchangefone uses distributed
microprocessor technology to provide ease of feature
customization and a significant reduction in the cable between
the trading floor and the backroom switching equipment.
Open Line Speaker Systems. The Company manufactures open
line, digital, turnkey speaker systems for the financial
services industry. These speaker systems provide full-duplex
communications over two-wire or four-wire circuits that enable
brokers to react instantaneously when trading. From a single
microphone, brokers can broadcast simultaneously to numerous
customers. Additionally, these speaker systems contain Digital
Signal Processor software. This software enables the speaker
systems to be utilized at increased volumes with minimal
distortion, echo, feedback and sidetone.
The Company also manufactures multi-button key telephone
sets and intercom and speaker systems sold in conjunction with
turret positions. Additionally, IPC remarkets various other
related products including, among others, PBX systems, video
conferencing equipment and voice logging and recorder devices.
Turret Service. Following a standard one year warranty
period after installation of a turret system, a customer
generally enters into an annual or multi-year service contract,
paid either monthly or quarterly in advance. In addition,
turret services include moves, additions and changes to system
configurations.
<TABLE>
<CAPTION>
Current
Year List Price
Product Introduced Innovations Range
<S> <C> <C> <C>
Tradenet MX 1992 Fully digital switch and $8,500-
MX turret, digital line 15,000
interface, enhanced system
MX Compact 1994 management, mesh switching, $4,250-
programmable speakers, 7,000
multiple optional features,
reduced back room
Tradenet 1989 Advanced analog switch with $7,500-
enhanced feature set and 12,500
console ergonomics,
electroluminescent display,
touch screen module
Exchangefone 1983 Rugged design, microprocessor $5,000-
control, reduced cabling 7,000
Open Line 1995 Digital open-line with $5,000
Speaker digital signal processor echo 9,000
Systems canceled.
</TABLE>
<PAGE>6
Marketing and Sales
The Company presently markets its products domestically
and internationally through various distribution channels.
The Company has direct sales and service locations in New
York, London, Atlanta, Boston, Chicago, Cincinnati, Dallas,
Houston, Los Angeles, New Jersey, Philadelphia, Pittsburgh, San
Francisco, St. Louis, Toronto, Canada and Washington D.C. The
Company also has a strong network of established distribution
partners in Argentina, Australia, Austria, Belgium, Bermuda,
Brazil, Canada, France, Germany, Greece, Hong Kong, Indonesia,
Ireland, Italy, Japan, Kuwait, Luxembourg, Malaysia, Mexico,
the Netherlands, New Zealand, Singapore, Switzerland, Thailand
and Turkey. In order to provide both turret and Information
Transport Systems sales and service at each of these locations,
IPC has increased the requirements for its distributors to
include expertise in LAN design and installation. At a
minimum, each distributor will provide a resident qualified
systems engineer and will utilize IPC's proprietary system
testing equipment at each location.
IPC maintains a high profile in the financial services
market, and increasingly in the utilities and emergency
services markets, by using strategic advertising in industry
publications and participating in relevant trade shows. The
Company actively participates in industry seminars to
communicate IPC's capabilities to prospective customers.
For information about the Company's geographic segments,
see Note 11 to the Consolidated and Combined Financial
Statements. Such information is set forth herein on page 36 of
this Form 10-K.
Customers
The principal industries served by IPC include: financial
services, banking and stock/commodity exchanges. Other
targeted industries may include utilities, pharmaceutical,
health care, fashion, emergency services and insurance.
Historically, almost all of the Company's revenues have been
derived from sales to customers in the financial services
industry. No single customer accounted for more than 10% of
the Company's total revenues in fiscal 1995 or 1994.
Backlog
As of September 30, 1995, the Company had a backlog of
purchase contracts representing approximately $72.5 million of
future revenues, as compared with approximately $70.5 million
as of September 30, 1994. Due to the size and lead time of
orders, which can vary substantially, and because the Company
generally recognizes revenue upon the completion of an
installation, the amount of backlog at any date may not be
indicative of actual sales for any subsequent period. The
Company's backlog includes only orders for new installations
and does not reflect annual or multi-year service contracts or
orders for the reconfiguration, alteration or expansion of
existing systems, as such orders are normally completed within
one month.
Research and Development
Since 1973, IPC has designed several generations of
products that have been market leaders in both functionality
and reliability and continues to work closely with its
customers to understand their future requirements. The
capabilities of Tradenet MX to switch data and video as well as
voice signals provide opportunities for the Company to
integrate all of those services to the trader's desk. IPC also
holds patents that it believes will enable it to provide
important and marketable features to traders when certain ISDN
facilities become widely available in the future. In addition,
the Company is researching the provision of full motion video
to the trading desk.
<PAGE>7
ATM is an emerging technology that represents a new method
of switching and transporting data across disparate LANs and
WANs. ATM offers two primary advantages over current
networking technologies. First, ATM can move a wide range of
data types, such as voice, video, data and graphics, at speeds
of up to 2 gigabits per second. ATM provides a point-to-point
connection between any two network nodes that makes available
the full network bandwidth. Second, ATM allows the dynamic
reconfiguration of networks to adapt to the constantly changing
needs of workgroups. Today, LANs require the geographic
proximity of workgroups to a LAN server while ATM allows the
creation of logical networks independent of the location of the
individual nodes. ATM is expected to provide low cost
connectivity and the high bandwidth necessary to take advantage
of the most advanced applications, such as video conferencing
and interactive multimedia communications.
The Company is a member of the ATM Forum, a select group
of technology companies that exchange development information
regularly in order to enhance the participants' knowledge of
the technology. IPC has already begun research on enhancements
to its current digital switch that will enable it to connect to
an ATM network.
Manufacturing
The Company manufactures its products at a leased 85,000
square foot building in Westbrook, Connecticut. The facility
houses production lines, a repair department, inventory, a
training center and various support functions, including
production scheduling, purchasing and quality assurance
personnel and production lines for circuit board assembly.
Management believes that the manufacturing facility and
its resources are capable of handling expected demand for the
foreseeable future. The Company believes that there are
adequate supplies of labor in the immediate area of the
Westbrook facility.
Most components have a relatively short lead time of
approximately 30 days. However, there are a few long lead time
items, specifically displays and buttons, that need up to 24
weeks order time. The Company purchases certain key product
components that are made to order from single source suppliers.
Materials are ordered to a production forecast that is derived
by constantly monitoring sales activity. The Company believes
that its relationships with its suppliers are good, and it has
not experienced supply difficulties due to a supplier not being
able to produce goods.
Competition
The markets for sophisticated communications equipment and
Information Transport Systems are highly competitive. Although
some of the Company's competitors are substantially larger and
have greater resources, management believes that IPC's strong
market position is the result of its consistent ability to
produce high quality products, its established reputation for
the highest quality service, strong relationships with
customers, experienced management and sales and technical
staff.
In the worldwide market for trading turrets, IPC's main
competitors are V Band Corporation and British
Telecommunications plc. The Company also competes with Hitachi
Ltd., Telaid, Etrali S.A., Telenorma Gmbh (a division of Robert
Bosch Gmbh) and LM Ericsson. Management believes it has
significant advantages over its competitors by providing
superior quality products and outstanding customer service.
Direct competition to IPC in the Information Transport
Systems business is difficult to identify. Although a number
of companies can compete for parts of what the Company includes
in its customer solutions (for example, cable installation),
management believes that its expertise and global capability to
<PAGE>8
support the full range of Information Transport Systems
requirements of large national and international customers
provide it with significant competitive advantages.
Direct competition to IPC iXnet is also difficult to
identify. Although a large number of companies provide global
telecommunication services, management believes that IPC iXnet
will provide a unique value added service to the financial
services industry that will provide IPC iXnet with significant
competitive advantages.
Intellectual Property
The Company relies on a combination of patents, trade
secrets, trademarks, copyrights and other intellectual property
law, nondisclosure agreements and other protective measures to
protect its proprietary rights. The Company currently has 13
United States patents, including design patents, and five more
pending patent applications for its technologies. The Company
also relies on unpatented know-how and trade secrets and
employs various methods, including confidentiality agreements
with employees and consultants, to protect its trade secrets
and know-how. The Company also may desire to develop, produce
and market commercially viable new products, such as personal
communications systems, that may require new or renewed
licenses from others.
Employees
As of September 30, 1995, the Company had 598 full-time,
non-union employees worldwide, including 512 in the United
States and 86 in the United Kingdom. Of these, 56 were engaged
in marketing and sales, 73 in research, development and product
engineering, 106 in finance, branch and corporate
administration, 178 in manufacturing and 185 in operations.
An additional 464 United States workers are represented by
collective bargaining units, including 427 within the New York
metropolitan area provided under labor pooling agreements
between the Company and two of its affiliates. Contracts with
unions are negotiated every three years. Current agreements
expiring through June 11, 1998 provide benefits, wage rates,
wage increases and grievance and termination procedures. The
Company has never experienced a work stoppage. Management
believes that its current relations with labor are good and
that existing union contracts will be renewed.
Environmental Matters
The Company is subject to various federal, state and local
environmental laws and regulations, including those governing
the use, discharge and disposal of hazardous substances in the
ordinary course of its manufacturing process. Although
management believes that its current manufacturing operations
comply in all material respects with applicable environmental
laws and regulations, there is no assurance that environmental
legislation may not in the future be enacted or interpreted to
create environmental liability with respect to the Company's
facilities or operations.
ITEM 2. PROPERTIES
The Company leases its manufacturing facility in
Westbrook, Connecticut, its executive offices in New York City,
its research and development facility in Stamford, Connecticut
and its branch offices and sales offices in the United States
and in the United Kingdom.
The Company believes that its current facilities are
adequate for its immediate and short-term requirements and does
not anticipate the need for significant expansion in the
foreseeable future.
<PAGE>9
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various legal proceedings and
administrative actions, all of which are of an ordinary or
routine nature incidental to the operations of the Company. In
the opinion of the Company's management, such proceedings and
actions should not, individually or in the aggregate, have a
material adverse effect on the Company's financial condition or
results of operations. See "Certain Transactions and
Relationships -- Contel Litigation" contained in the Proxy
Statement, for a discussion of certain pending legal
proceedings, to which the Company is not a party, involving the
Acquisition of the Predecessor Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's common stock is listed on the Nasdaq
National Market (Nasdaq - IPCI). The following table sets
forth the high and low sales prices reported by the Nasdaq.
The common stock began trading on September 27, 1994.
For the year ended:
<TABLE>
<CAPTION>
September 30, September 30,
1995 1994
High Low High Low
<S> <C> <C> <C> <C>
First Quarter 15 1/4 11 N/A N/A
Second Quarter 14 11 1/4 N/A N/A
Third Quarter 15 1/2 11 1/2 N/A N/A
Fourth Quarter 18 3/4 12 16 1/4 15
</TABLE>
As of November 30, 1995 there were 56 holders of record of
the Company's stock.
To date, the Company has not paid any cash dividends to
its stock holders. Any future payment of cash dividends
will depend upon the Company's earnings and financial
condition, capital requirements and other relevant factors.
The Company does not intend to pay cash dividends
in the foreseeable future but intends to retain its
earnings for use in its business.
<PAGE>10
ITEM 6. SELECTED FINANCIAL DATA (unaudited)
(amounts in thousands, except earnings per share)
<TABLE>
<CAPTION>
Predecessor
Company
For the eleven For the ten
For the year ended months ended months ended
September 30, September 30 October 29,
1995 1994 1993 1992 1991
Statement of Operations:
<S> <C> <C> <C> <C> <C>
Revenues $206,254 $163,671 $112,714 $68,687 $58,371
Gross Profit 63,173 48,043 31,152 20,346 16,185
Net income (loss) 13,267 16,549 (1) 1,753 (3,478) (5,496)
Earnings per share $ 1.26
Weighted average
shares outstanding 10,506
Pro forma earnings per share $ 1.11 (2)
Pro forma weighted average
shares outstanding 8,535 (2)
Supplemental pro forma
earnings per share 0.88 (3)
</TABLE>
<TABLE>
<CAPTION>
September 30, September 30 October 29,
Balance Sheet Data: 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Working capital $ 46,851 $ 27,661 $ 16,696 $7,077 $11,597
Total Assets 128,036 110,702 70,120 44,488 35,434
Long-term debt 10,663 12,916 5,338
Notes payable to stockholders 1,411 1,411 1,411
Stockholders' equity 58,504 21,122 7,328 5,985 20,506
</TABLE>
[FN]
(1)Net income includes the cumulative effect of the Company's termination of its
S corporation status which resulted in a tax benefit of $ 3,295.
(2) Pro forma earnings per share was computed by dividing pro forma net income
(income before provision for income taxes less pro forma provision for
income taxes) by pro forma weighted average number of shares outstanding.
The pro forma provision for income taxes assumes that IPC-US was subject to
corporate federal income taxes for the year and excludes the tax benefit
associated with the termination of the Company's S corporation status
(See (1) above). Pro forma weighted average number of shares outstanding is
the historical weighted average number of shares outstanding during the year
adjusted to give effect to the number of shares whose proceeds were
necessary to pay the remaining S corporation distribution to pre-Offering
stockholders.
(3) Effective October 1, 1994, and in connection with the Company's initial
public offering, IPC converted from an S corporation to a C corporation.
Supplemental pro forma earnings per share for 1994 has been calculated using
the Company's reported income before taxes and giving effect for both the
Company's fiscal 1995 effective tax rate and weighted average shares
outstanding.
<PAGE>11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following tables set forth certain statements of operations data and its
percentage to total
revenues for the periods indicated:
<TABLE>
<CAPTION>
For the year ended
September 30,
1995 1994 1993
<S> <C> <C> <C>
Revenues:
Turret sales and installation............... $100,851 $70,166 $54,973
Turret service.............................. 50,057 51,433 45,586
Information Transport Systems sales
and installation.......... 39,096 33,363 8,678
Information Transport Systems service 16,250 8,709 3,477
Total revenues............................. 206,254 163,671 112,714
Cost of revenues............................ 143,081 115,628 81,562
Gross profit............................ 63,173 48,043 31,152
Research and development expenses...... 10,108 7,654 7,703
Selling, general and administrative
expenses 31,038 23,727 19,542
Income from operations.................. 22,027 16,662 3,907
Interest income/(expense), net.............. 233 (1,568) (1,404)
Gain on renegotiation of lease obligation on 517 451
Other income/(expense), net................. 226 65 74
Income before provision for income taxes 22,486 15,676 3,028
Provision/(benefit) for income taxes........ 9,219 (873) 1,275
Net income............................... $13,267 $16,549 $1,753
Revenues:
Turret sales and installation............... 48.9 % 42.9 % 48.8 %
Turret service.............................. 24. 3 31.4 40.4
Information Transport Systems sales
and installation 18. 9 20.4 7.7
Information Transport Systems service....... 7.9 5.3 3.1
Total revenues............................. 100.0 100.0 100.0
Cost of revenues............................ 69.4 70.6 72.4
Gross profit.......................... 30.6 29.4 27.6
Research and development expenses..... 4.9 4.7 6.8
Selling, general and administrative
expenses 15.0 14.5 17.3
Income from operations.................. 10.7 10.2 3.5
Interest income/(expense), net.............. 0.1 (0.9) (1.2)
Gain on renegotiation of lease obligation on 0.3 0.4
Other income/(expense), net................. 0.1 0.0 0.0
Income before provision for income taxes 10.9 9.6 2.7
Provision/(benefit) for income taxes........ 4.5 (0.5) 1.1
Net income............................... 6.4% 10.1% 1.6%
</TABLE>
<PAGE>12
Comparison of the year ended September 30, 1995 to the
year ended September 30, 1994
Revenues. Total revenues increased by $42.6 million or
26.0 %, to $206.3 million in the year ended September 30, 1995
from $163.7 million in the year ended September 30, 1994.
Revenues from turret installation and related service
increased by $29.3 million, or 24.1%, to $150.9 million in the
year ended September 30, 1995 from $121.6 million in the year
ended September 30, 1995. This increase 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 Systems sales and
related service increased by $13.3 million, or 31.6% to $55.3
million in the year ended September 30, 1995 from $42.1 million
in the year ended September 30, 1994. These increases were
attributable to the continuing development and expansion of
the Information Transport Systems business. Management expects
its Information Transport Systems business will continue to
grow more rapidly than the turret business and will represent
an increasing proportion of total revenues.
Gross Profit. The gross profit as a percentage of total
revenues increased to 30.6% for the year ended September 30,
1995 from 29.4% for the year ended September 30, 1994. This
increase in gross profit percentage is due to continued
installation efficiencies and manufacturing cost reductions.
Research and Development Expenses. Research and
development expenses increased by $2.5 million, or 32.1%, to
$10.1 million in the year ended September 30, 1995 from $7.7
million in the year ended September 30, 1994. The increase was
due to the ongoing development of new products and enhancements
to existing products. The Company believes that development of
new products and enhancements to existing products are
essential to its continuing success, and management intends to
continue to devote substantial resources to research and
product development in the future.
Selling, General and Administrative Expenses. Selling,
general and administrative expenses increased by $7.3 million,
or 30.8 %, to $31.0 million in the year ended September 30,
1995 from $23.7 million in the year ended September 30, 1994.
As a percentage of revenues, expenses increased to 15.0% for
the year ended September 30, 1995, from 14.5% for the year
ended September 30, 1994. These increases are attributable to
a rise in headcount and other expenses to support higher
business levels and the continued development and expansion of
the Company's Information Transport Systems business.
Interest Income / (Expense). Interest income / (expense)
increased to $0.2 million in income for the year ended
September 30, 1995 from $1.6 million in expense for the year
ended September 30, 1994. This increase was due to the
repayment of long-term debt from the proceeds of the Company's
initial public offering in October 1994 and interest earned on
temporary cash investments and short-term investments
throughout fiscal 1995.
Gain on Renegotiation of Lease Obligation on Vacant
Facilities. The Company renegotiated its obligation in
connection with certain vacant facilities resulting in a $0.5
million gain for the year ended September 1994.
Provision for Income Taxes. The Company's effective tax
rate for the year ended September 30, 1995 was 41%. Effective
October 1, 1994, the Company terminated its S corporation
status and, as a result, was subject to corporate federal
income taxes in fiscal 1995. Accordingly, the year ended
September 30, 1995 reflects an increase in the provision for
income taxes as the comparable prior year's tax provision was
based on the Company's S corporation status. On a comparable
basis, assuming the same effective tax rate and number of
shares outstanding after the Company's October, 1994 initial
public offering, net income
<PAGE>13
would have been $9.2 million or
$0.88 per share for the year ended September 30, 1994.
Comparison of the Year Ended September 30, 1994 to the
Year Ended September 30, 1993
Revenues. Total revenues increased by $51.0 million or
45.2%, to $163.7 million in the year ended September 30, 1994
from $112.7 million in the year ended September 30, 1993.
Revenues from turret sales and installation increased by
$15.2 million, or 27.6%, to $70.2 million in the year ended
September 30, 1994 from $55.0 million in the year ended
September 30, 1993. This increase is primarily attributable to
the increased acceptance of Tradenet MX and the continuing
level of activity in the financial services industry.
Management anticipates that sales of Tradenet MX will generate
the majority of turret sales and installation revenue for the
foreseeable future.
Revenues from turret service increased by $5.8 million, or
12.8%, to $51.4 million in the year ended September 30, 1994
from $45.6 million in the year ended September 30, 1993. The
increase was due to a higher level of moves, adds and changes
to existing installations.
Revenues from Information Transport Systems sales and
installation increased by $24.7 million, or 284.5% to $33.4
million in the year ended September 30, 1994 from $8.7 million
in the year ended September 30, 1993. Revenues from Information
Transport Systems service increased by $5.2 million, or 150.5%,
to $8.7 million in the year ended September 30, 1994 from $3.5
million in the year ended September 30, 1993. These increases
were attributable to the continuing development and expansion
of the Information Transport Systems business. Management
expects its Information Transport Systems business will
continue to grow more rapidly than the turret business and will
represent an increasing proportion of total revenues.
Management expects that service revenue from Information
Transport Systems will experience growth as the sales and
installation of Information Transport Systems products continue
to increase.
Gross Profit. Total gross profit increased by $16.9
million or 54.2%, to $48.0 million in the year ended September
30, 1994 from $31.2 million in the year ended September 30,
1993. The improvement was primarily due to an increase in gross
profit from turret sales and installation. The high level of
market acceptance of Tradenet MX led to increased unit volumes
and allowed the Company to reduce the level of discounts. This
combined with continuing cost reduction and installation
efficiency helped to increase gross profit margins for turret
sales and installation.
The gross profit as a percentage of total revenues
increased to 29.4% for the year ended September 30, 1994 from
27.6% for the year ended September 30, 1993. The increase in
the gross profit percentage in turret sales and installation
described above was partially offset by an increase in the
proportion of total revenues attributable to the Information
Transport Systems business which generally provide a lower
margin. To establish the Company's Information Transport
Systems business with certain large customers, the Company
accepted several installations at lower margins which had an
adverse effect on margins in the year ended September 30, 1994.
Research and Development Expenses. Research and
development expenses remained relatively stable at $7.6 million
in the year ended September 30, 1994 compared to $7.7 million
in the year ended September 30, 1993 . The slight decrease
resulted from a lower utilization of independent consultants.
The Company believes that development of new products and
enhancements to existing products are essential to its
continuing success, and management intends to continue to
devote substantial resources to research and product
development in the future.
Selling, General and Administrative Expenses. Selling,
general and administrative expenses increased by $4.2 million
or 21.4%, to $23.7 million in the year ended September 30, 1994
from $19.5
<PAGE>14
million in the year ended September 30, 1993. As a
percentage of revenues, such expenses were reduced to 14.5% for
the year ended September 30, 1994, from 17.3% for the year
ended September 30, 1993, as a result of increased revenues and
controlled expenditure growth . A portion of the increase in
the year ended September 30, 1994 relates to a $0.8 million
charge relating to an employment agreement for a senior
executive in connection with efforts associated with the
Company's Offering and a $0.9 million charge for administrative
service fees pursuant to labor pooling agreements entered into
as of October 1, 1993. In addition, expenses have increased
due to personnel additions to support expanding business
levels.
Interest Income / (Expense). Interest income /(expense)
increased to $1.6 million in net expense for the year ended
September 30, 1994 from $1.4 million in net expense for the
year ended September 30, 1993, due to increased usage of the
Company's line of credit necessitated by the growth in its
business and increased interest rates.
Gain on Renegotiation of Lease Obligation on Vacant
Facilities. The Company renegotiated its obligation in
connection with certain vacant facilities resulting in a $0.5
million gain for both the years ended September 1994 and 1993.
Provision for Income Taxes. For the years ended September
30, 1994 and 1993, IPC-US was an S corporation for United
States federal tax purposes. On September 29, 1994, IPC-US
filed a notification terminating its S corporation status,
effective October 1, 1994, and will be subject to corporate
federal income taxes in fiscal 1995. The benefit for income
taxes for the year ended September 30, 1994 of $0.9 million
results from a tax benefit in the amount of $3.3 million in
connection with the Company's termination of its S corporation
status partially offset by a provision for state taxes and the
taxes of IPC-UK. For the year ended September 30, 1994 the
provision for income taxes of $1.3 million relates primarily to
taxes payable for the taxable income of IPC-UK.
Liquidity and Capital Resources
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 year ended September 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. The remaining proceeds were invested in temporary
cash investments and short term investments
Net cash provided by operations was $7.3 million for the
year ended September 30, 1995. Net cash provided by operations
resulted from operating profits and inventory decreases from
production efficiencies, offset by increases in trade
receivables primarily from higher sales levels.
Net cash provided by operations was $7.3 million in the
year ended September 30, 1994. Increases in inventory due to
higher product demands and increases in trade receivables due
to higher sales levels were more than offset by funds provided
by increases in customer advances and deferred revenue and
accounts payable and higher operating profits.
Net cash used in operations was $5.2 million in the year
ended September 30, 1993 primarily from the funding of
inventory purchases required by increasing sales in the latter
part of the fiscal year, which was partially offset by funds
provided by accounts payable and customer advances and deferred
revenue.
Cash used in investing activities was $8.5 million, $1.2
million and $1.5 million for the years ended September 30,
1995, 1994 and 1993, respectively. Net cash flows used in
investing activities resulted from property, plant and
equipment expenditures, primarily composed of machinery and
equipment and leasehold improvements. In connection with the
Bridge Electronics, Inc. ("IPC Bridge") acquisition payment
<PAGE>15
scheduled for January, 1996 the Company purchased $2.0 million
of short-term investments during 1995.
In December, 1994 the Company signed a promissory note
with a bank for a line of credit up to $15 million. This line
of credit was not utilized during the year ended September 30,
1995.
In June of 1995, the Company acquired a controlling
interest in International Exchange Networks, Ltd. ("IPC
iXnet"). The Company acquired 80% of IPC iXnet for providing
$5.5 million in working capital. The acquisition was accounted
for using the purchase method of accounting.
In April of 1995, the Company acquired the assets of IPC
Bridge. The terms of the acquisition include a future payment
of $2 million in cash, 76,923 shares of the Company's common
stock and possible additional payments contingent on future
performance. The acquisition was accounted for using the
purchase method of accounting.
The Company believes that cash flows from operations and
existing credit facilities will be sufficient to meet its
working capital and capital expenditure needs for the near
future.
Quarterly Fluctuations and the Effects of Inflation
The size and lead time of new orders can vary
substantially and, since the Company generally recognizes
revenue from the sale and installation of turret systems and
Information Transport Systems on the completion of an
installation, the Company's quarterly results of operations may
fluctuate significantly. Management does not believe that
inflation has a significant effect on the Company's results.
Foreign Exchange
The Company's shipments to foreign distributors are
generally invoiced in US Dollars. As a result, the Company
believes its foreign exchange transaction exposure caused by
these shipments is insignificant.
Sales to the Company's customers in the United Kingdom are
denominated in British Pounds Sterling. The Company does not
hedge its net asset exposure to fluctuations in the US
Dollar/British Pound Sterling exchange rate. Accordingly, the
Company is subject to risks associated with such fluctuation.
However, adjustments to the Company's financial position as a
result of currency fluctuations have not been significant.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Financial Statements and Financial Statement
Schedule beginning on page 21.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
<PAGE>16
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND OTHER OFFICERS OF
THE REGISTRANT
a. Identification of Directors:
The information required by this Item is incorporated
herein by reference to the information contained under the
caption, "Election of Directors" in the Proxy Statement which
will be filed with the SEC within 120 days after the end of the
fiscal year covered by this Form 10-K (the "Proxy Statement") .
Such information is incorporated by reference pursuant to
General Instruction G(3).
b. Identification of Executive Officers:
The information required by this Item is incorporated
herein by reference to the information
contained under the captions "Election of Directors" and
"Management" in the Proxy Statement. Such
information is incorporated by reference, pursuant to General
Instruction G(3).
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated
herein by reference to the information contained under the
caption "Executive Compensation" in the Proxy Statement. Such
information is incorporated by reference, pursuant to General
Instruction G(3).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item is incorporated
herein by reference to the information contained under the
caption "Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement. Such information is
incorporated by reference, pursuant to General Instruction
G(3).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated
herein by reference to the information contained under the
caption "Certain Transactions and Relationships" in the Proxy
Statement. Such information is incorporated by reference,
pursuant to General Instruction G(3).
<PAGE>17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K.
(a)(1) Financial Statements Page(s)
Report of Independent Accountants 21
Consolidated and Combined Balance Sheets as of 22
September 30, 1995 and 1994
Consolidated and Combined Statements of Operations 23
for the Years Ended September 30, 1995, 1994 and 1993
Consolidated and Combined Statements of Cash Flows 24
for the Years Ended September 30, 1995, 1994 and 1993
Consolidated and Combined Statements of Stockholders' 25
Equity for the Years Ended September 30, 1995, 1994
and 1993
Notes to Consolidated and Combined Financial Statements 26-37
(a)(2) Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts 38
Schedules not listed have been omitted because they are
not applicable or are not required or the information
required to be set forth therein is included in the
Consolidated and Combined Financial Statements or notes
thereto.
<PAGE>18
<TABLE>
<CAPTION>
(a)(3) Exhibits
Exhibit No. Exhibit Title
<S> <C>
*3.2 Amended and Restated Bylaws of Registrant
*10.2.1 Letter Agreement, dated October 17, 1995, by
and between the Registrant and Richard P.
Kleinknecht amending the Employment
Agreement, dated May 9, 1994, by and between
the Registrant and Richard P. Kleinknecht.
*10.3.1 Letter Agreement, dated October 17, 1995, by
and between the Registrant and Peter J.
Kleinknecht amending the Employment
Agreement, dated May 9, 1994, by and between
the Registrant and Peter J. Kleinknecht.
*10.4.1 Letter Agreement, dated October 17, 1995, by
and between the Registrant and Jeffrey M. Gill
amending the Employment Agreement dated
August 29, 1994, by and between the Registrant
and Jeffrey M. Gill.
*10.14.1 Employer Agreement, dated as of
October 17, 1995, by and between the Registrant
and Steven Terrell Clontz.
21.2 Subsidiaries of the Registrant
* Filed as an exhibit to the Registrant's Report on Form 8-K,
filed November 30, 1995, and incorporated
herein by reference.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed with the Securities
and Exchange Commission
during the fourth quarter of the fiscal year covered
by this report.
</TABLE>
<PAGE>19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
IPC INFORMATION SYSTEMS, INC.
Date: December 29, 1995 By:/s/ RICHARD P.
KLEINKNECHT
Richard P. Kleinknecht
Chairman
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ RICHARD P. KLEINKNECHT Chairman and December 29,
Richard P. Kleinknecht Director 1995
/s/ PETER J. KLEINKNECHT Vice Chairman and December 29,
Peter J. Kleinknecht Director 1995
/s/ TERRY CLONTZ Chief Executive December 29,
Terry Clontz Officer, 1995
President and
Director
(Principal Executive Officer)
/s/ JEFFREY M. GILL Chief Operating December 29,
Jeffrey M. Gill Officer 1995
/s/ GREGORY RIEDEL Chief Financial December 29,
Gregory Riedel Officer 1995
(Principal Financial Officer)
(Principal Accounting Officer)
/s/ THEODORE J. JOHNSON Director December 29,
Theodore J. Johnson 1995
/s/ ROBERT J. MCINERNEY Director December 29,
Robert J. McInerney 1995
/s/ PETER M. STEIN Director December 29,
Peter M. Stein 1995
</TABLE>
<PAGE>20
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders
of IPC Information Systems, Inc.:
We have audited the consolidated and combined financial
statements and the financial statement schedule of IPC
Information Systems, Inc. listed in Item 14(a) of this Form 10-
K. These financial statements and financial statement schedule
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated and
combined financial position of IPC Information Systems, Inc. as
of September 30, 1995 and 1994, respectively, and the
consolidated results of their operations and their cash flows
for the year ended September 30, 1995 and the combined results
of their operations and their cash flows for the years ended
September 30, 1994 and 1993, in conformity with generally
accepted accounting principles. In addition, in our opinion,
the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken
as a whole, presents fairly, in all material respects, the
information required to be included therein.
COOPERS & LYBRAND L.L.P.
New York, New York
December 8, 1995
<PAGE>21
<TABLE>
IPC INFORMATION SYSTEMS, INC.
CONSOLIDATED AND COMBINED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
<CAPTION>
September 30,
September 30 September 30 1994
1995 1994 Pro Forma
Consolidated Combined See Note 1
(unaudited)
ASSETS:
<S> <C> <C> <C>
Current assets:
Cash and temporary cash investments.......... $15,786 $2,616 $17,389
Trade receivables, less allowance of $1,572
and $1331..................................... 50,513 39,450 39,450
Inventories.................................. 35,111 50,426 50,426
Prepaid expenses and other current assets. 9,526 8,117 5,032
Total current assets.................... 110,936 100,609 112,297
Property, plant and equipment, net.............. 9,236 4,797 4,797
Other assets, net............................... 7,864 5,296 5,296
Total assets............................ $128,036 $110,702 $122,390
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable.............................. $14,807 $15,542 $15,542
Accrued liabilities........................... 19,366 16,164 16,164
Customer advances and deferred revenue........ 29,912 39,831 39,831
Notes payable to stockholders....................... ...... 1,411
Total current liabilities............... 64,085 72,948 71,537
Long-term debt.................................. 10,663
Other liabilities............................... 5,447 5,969 5,969
Total liabilities....................... 69,532 89,580 77,506
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 7,451,883 shares
at September 30, 1995 and 1994, respectively;
IPC-UK: BP 1 par value, authorized, issued and outstanding 100
ordinary shares at September 30,1994....... 107 75 105
Paid-in capital............................... 45,853 8,986 45,101
Retained earnings ............................ 13,262 12,383
Less treasury stock, at cost, 242,185 shares in 1995
and 195,611 shares in 1994................. (718) (322) (322)
Total stockholders' equity.............. 58,504 21,122 44,884
Total liabilities and stockholders' equity $128,036 $110,702 $122,390
<FN>
See Notes to Consolidated and Combined Financial Statements.
</TABLE>
<PAGE>22
<TABLE>
IPC INFORMATION SYSTEMS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Amount)
<CAPTION>
For the year ended
Sept 30, 1995 Sept 30, 1994 Sept 30, 1993
Consolidated Combined Combined
<S> <C> <C> <C>
Revenues:
Product sales and installation............$139,947 $103,529 $63,651
Service........................ ........... 66,307 60,142 49,063
206,254 163,671 112,714
Cost of revenues:
Product sales and installation............ 95,174 74,233 48,294
Service................................... 47,907 41,395 33,268
143,081 115,628 81,562
Gross profit......................... 63,173 48,043 31,152
Research and development expenses.... 10,108 7,654 7,703
Selling, general and administrative
expenses.......................... 31,038 23,727 19,542
Income from operations............... 22,027 16,662 3,907
Interest income/(expense), net............... 233 (1,568) (1,404)
Gain on renegotiation of lease obligation on
vacant facilities 517 451
Other income/(expense), net.................. 226 65 74
Income before provision for income ta 22,486 15,676 3,028
Provision/(benefit) for income taxes......... 9,219 (873) 1,275
Net income........................... $13,267 $16,549 $1,753
Earnings per share........................... $ 1.26
Weighted average shares outstanding.... 10,506
Pro forma data (unaudited) (See Note 1):
Pro forma provision for income taxes.......... $ 6,184
Pro forma earnings per share ................ $ 1.11
Pro forma weighted average number of
shares outstanding..................................... . 8,535
<FN>
See Notes to Consolidated and Combined Financial Statements.
</TABLE>
<PAGE>23
<TABLE>
<CAPTION>
IPC INFORMATION SYSTEMS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
For the year ended
Sept 30, Sept 30, 1Sept 30, 1993
ConsolidaCombined Combined
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................ $13,267 $16,549 $1,753
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization.......... 2,058 2,317 2,151
Other amortization..................... 1,782 1,971 2,063
Provision for doubtful accounts........ 861 786 450
Deferred income taxes.................. (1,084) (4,256) 2
Gain on renegotiation of lease obligation (517) (451)
Changes in operating assets and liabilities:
Trade receivables......................(11,804) (11,783) (16,188)
Inventories............................ 15,440 (23,100) (12,325)
Prepaid expenses and other current assets (1,606) (3,545) 758
Other assets........................... (342) 142 (514)
Accounts payable....................... (717) 3,044 6,591
Accrued liabilities and other liabilitities (630) 3,190 1,666
Customer advances and deferred revenue. (9,882) 22,455 8,884
Net cash provided by (used in)
operating activities 7,343 7,253 (5,160)
Cash flows from investing activities:
Capital expenditures................... (6,499) (1,173) (1,494)
Purchase of short-term investment...... (2,007)
Net cash (used in) investing activities (8,506) (1,173) (1,494)
Cash flows from financing activities
Proceeds from long-term debt........... 123,211 91,145
Repayment of long-term debt............(10,663) (125,464) (83,567)
Repayment of notes payable to affiliates (1,411)
Proceeds from the sale of common stock. 45,337
Purchase of treasury stock............. (396) (72) (250)
S corporation distribution.............(18,530) (2,470)
Net cash provided by (used in)
financing activities 14,337 (4,795) 7,328
Effect of exchange rate changes on cash.... (4) (243) (62)
Net increase in cash....................... 13,170 1,042 612
Cash, beginning of period.................. 2,616 1,574 962
Cash, end of period........................ $15,786 $2,616 $1,574
Supplemental cash flow information:
Income taxes paid...................... $9,876 $ 1,390 $ 335
Interest paid.......................... $ 18 $ 1,157 $ 913
<FN>
See Notes to Consolidated and Combined Financial Statements.
</TABLE>
<PAGE>24
<TABLE>
IPC INFORMATION SYSTEMS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands)
<CAPTION>
Paid Retained Total
Par in earnings Treasury stockholders'
Value Capital (deficit) stock equity
<S> <C> <C> <C> <C> <C>
Consolidated balance, September 30, 1992 75 8,986 (3,076) 5,985
Translation adjustment..................................... (160) (160)
Net income................................................. 1,753 1,753
Purchase of treasury stock.......................................... $ (250) (250)
Combined balance, September 30, 1993........ 75 8,986 (1,483) (250) 7,328
Translation adjustment..................................... (213) (213)
Net income................................................. 16,549 16,549
Purchase of treasury stock.......................................... (72) (72)
S corporation distribution................................ . (2,470) (2,470)
Combined balance, September 30, 1994........ $75 $8,986 $12,383 ($322) $21,122
Translation adjustment..................................... (34) (34)
Net income................................................. 13,267 13,267
Net proceeds from initial public offering 32 42,219 42,251
Issuance of common stock under
employment contract................. 824 824
Purchase of treasury stock.......................................... (396) (396)
S corporation distribution........................ (6,176) (12,354) (18,530)
Consolidated balance, September 30, 1995.. $107 $45,853 $13,262 ($718) $58,504
<FN>
See Notes to Consolidated and Combined Financial Statements.
</TABLE>
<PAGE>25
IPC INFORMATION SYSTEMS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS, continued
(Dollars in Thousands, Except Per Share Amounts)
1. Change in Capitalization:
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. In connection with the Offering,
on May 9, 1994, the Company's stockholders approved a change
in the Company's capital stock to authorize 25,000,000 shares
of $.01 par value common stock and 10,000,000 shares of $.01
par value preferred stock. Pre-Offering stockholders
exchanged their shares for new common shares on a 620.991 for
1 basis prior to consummation of the Offering. The financial
statements reflect this change in capitalization.
Pro Forma Information
An unaudited pro forma balance sheet as of September 30, 1994
is presented with the historical balance sheets. The pro
forma balance sheet includes adjustments for: (a) recording
the proceeds of the Offering of $45,337, (b) charging the
deferred costs of the Offering of $3,086 against the proceeds
from the Offering and (c) payment of notes to stockholders of
$1,411, long-term debt of $10,663 and the distribution of
$18,530 to the pre-Offering stockholders from the proceeds of
the Offering.
Pro forma provision for income taxes for 1994 assumes that
IPC-US was subject to corporate federal income taxes for the
year and excludes the tax benefit associated with the
termination of the Company's S corporation status (see Note
10). The pro forma weighted average number of shares
outstanding is the historical weighted average number of
shares outstanding during the year adjusted to give effect to
the number of shares, at the initial offering price of $15.00
per share, whose proceeds were necessary to pay the remaining
S corporation distribution. The pro forma net income per
share has been computed by dividing pro forma net income
(income before provision for income taxes less pro forma
provision for income taxes) by the pro forma weighted average
number of shares outstanding.
2. Summary of Significant Accounting Policies:
Principles of Consolidation and Combination
The consolidated financial statements include the accounts of
IPC Information Systems, Inc. and its subsidiaries,
substantially all of which are wholly-owned. The combined
financial statements include the accounts of IPC-US and its
affiliated company, IPC-UK. Intercompany balances and
transactions have been eliminated.
Revenue Recognition
Revenue from product sales and installation is recognized
upon completion of the installation except for revenue from
sales to distributors, which is recognized upon shipment.
Under contract provisions, customers are progress-billed
prior to the completion of the installations. The revenue
related to these advance payments is deferred until the
system installations are completed. Revenues from "time and
material" orders and other services are recognized upon
completion of the services performed. Contracts for
maintenance are billed in advance, and are recorded as
deferred revenue and recognized ratably over the contractual
periods.
<PAGE>26
IPC INFORMATION SYSTEMS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS, continued
(Dollars in Thousands, Except Per Share Amounts)
Cash and Temporary Cash Investments
The Company places cash with several high quality financial
institutions and thereby limits the amount of credit exposure
to any single financial institution. Temporary cash
investments with original maturities of less than three
months are considered cash equivalents and consist of high
grade municipal bond funds and time deposits. Temporary cash
investments are stated at cost, which approximates fair
value. These investments are not subject to significant
market risk.
Trade Receivables
Trade accounts receivable potentially expose the Company to
concentrations of credit risk, as a large volume of business
is conducted with several major financial institutions,
primarily companies in the brokerage, banking and financial
services industries. To help reduce this risk, customers are
progress-billed prior to the completion of the contract.
Inventories
Inventories are stated at the lower of FIFO (first in, first
out) cost or market. Inventory costs include all direct
manufacturing costs and applied overhead.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and
depreciated on a straight-line basis over their estimated
useful lives. When property or equipment are sold, retired
or otherwise disposed of, the asset cost and related
accumulated depreciation are removed from the accounts; gains
and losses on such dispositions are reflected in current
operations.
Capitalized Product Development Costs
Capitalized product development costs represent costs
incurred after technological feasibility is established for
the related product. The amortization of capitalized product
development costs is, the greater of the amounts computed
based on the estimated revenue distribution over the products
revenue-producing lives, or the straight-line basis, not to
exceed four years, beginning when the product becomes
available for general release to customers. No product
development costs were capitalized in the years ended
September 30, 1995 and 1994. Unamortized capitalized product
development costs, which relate solely to the Tradenet MX
product, were $626 and $1,251 at September 30, 1995 and 1994,
respectively, and are included in other assets. Amortization
expense for each of the years ended September 30, 1995, 1994
and 1993 was $626.
Intangible Assets
Intangible assets, which are carried at cost less accumulated
amortization, consist primarily of acquired technology and
goodwill. Goodwill represents the excess of the cost over
the fair value of the identifiable tangible and intangible
assets acquired in various acquisitions. Costs allocated to
technology and goodwill acquired in acquisitions are
amortized on a straight-line basis over the periods
benefited, principally 4 to 10 years. The Company measures
the recoverability of acquired technology and goodwill based
on anticipated gross operating income.
Research and Development
Research and development expenditures are charged to expense
as incurred.
<PAGE>27
IPC INFORMATION SYSTEMS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS, continued
(Dollars in Thousands, Except Per Share Amounts)
Income Taxes
In accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"), the Company recognizes deferred income taxes for the
tax consequences in future years of differences between the
tax basis of assets and liabilities and their financial
reporting amounts at each year end, based on enacted tax laws
and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce
deferred tax assets to the amount that is "more likely than
not" to be realized. Provision for income taxes is the tax
payable for the period and the change during the period in
deferred tax assets and liabilities.
Foreign Currency Translation Adjustment
The balance sheets and statements of operations of IPC-UK are
measured using the local currency as the functional currency.
Assets and liabilities of IPC-UK are translated at the
average rate of exchange prevailing during the year.
Translation adjustments arising from the use of differing
exchange rates from period to period are included in the
cumulative translation adjustment account in stockholders
equity.
Earnings Per Share
Earnings per share are based on the weighted average number
of shares of common stock and common stock equivalents
outstanding during the period, computed in accordance with
the treasury stock method. Historical earnings per share
were $2.27 and $0.24 for the years ended September 30, 1994
and 1993, respectively.
Reclassifications
Certain reclassifications have been made to the previous
years' financial statements in order to conform to the
current period's presentation.
3. Acquisitions
During June, 1995 the Company acquired a controlling interest
in International Exchange Networks, Ltd. ("IPC iXnet"). The
Company acquired 80% of IPC iXnet for providing $5,500 in
working capital. The acquisition was accounted for using the
purchase method of accounting. Included in other assets at
September 30, 1995 is $1,222, representing the excess of the
cost over the fair value of the identifiable tangible assets
acquired allocated to acquired technology.
During April, 1995 the Company acquired the assets of Bridge
Electronics, Inc. ("IPC Bridge"). The terms of the
acquisition include a scheduled future payment in January,
1996 of $2,025 in cash, 76,923 shares of the Company's common
stock, valued at $700, scheduled to be issued in January,
1996 and possible additional payments contingent on future
performance. The acquisition was accounted for using the
purchase method of accounting. Included in other assets at
September 30, 1995 is $2,501, representing the excess of the
cost over the fair value of the identifiable tangible and
intangible assets acquired.
<PAGE>28
IPC INFORMATION SYSTEMS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS, continued
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
4. Inventories:
September 30,
1995 1994
<S> <C> <C>
Components and manufacturing work in process $9,245 $17,851
Inventory on customer sites awaiting installation 18,984 27,253
Parts and maintenance supplies 6,882 5,322
$35,111 $50,426
</TABLE>
<TABLE>
<CAPTION>
5. Property, Plant and Equipment:
September 30,
1995 1994
<S> <C> <C>
Land $329 $329
Machinery and equipment 13,501 8,561
Furniture and Fixtures 1,654 1,366
Leasehold improvements 2,789 1,520
18,273 11,776
Less, accumulated depreciation and amoritzation 9,037 6,979
$ 9,236 $4,797
</TABLE>
6. Long-Term Debt:
At September 30, 1994 the Company had outstanding debt from a
revolving loan and credit agreement, as amended, which
provided for revolving credit of up to $13,500. Borrowings
bore interest at Chemical Bank's announced prime rate plus
2.75% per annum; the interest rate at September 30, 1994 was
10.5%. In October 1994, the Company repaid its debt in full
from the proceeds of the Offering and terminated the
agreement under which the debt was incurred. 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
September 30, 1995.
7. Deferred Compensation and Other Benefit Plans:
The Company has assumed responsibility for deferred
compensation agreements with certain past key officers and
employees. Amounts to be paid range from $20-$75 per
individual per annum and are non-interest-bearing, with the
payments commencing on specified dates. Payments began in
1992 and continue through 2019. The gross and discounted
present value (using an interest rate of 7.5%), net of cash
payments, of the amounts to be paid under these agreements,
aggregated $7,450 and $3,606 at September 30, 1995 and $7,600
and $3,491 at September 30, 1994, respectively.
IPC INFORMATION SYSTEMS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS, continued
(Dollars in Thousands, Except Per Share Amounts)
Approximate payments for subsequent annual periods related to
the deferred compensation agreements, at September 30, 1995,
are as follows:
<TABLE>
<S> <C>
1996 $150
1997 188
1998 225
1999 280
2000 320
Thereafter 6,287
$7,450
In April 1995, IPC-US terminated its participation in a
defined contribution plan sponsored by Kleinknecht Electric
Company ("KEC"), an affiliated company, and adopted its own
plan for all eligible US employees. According to plan
provisions, IPC-US contributions are discretionary and are
subject to approval by the Board of Directors. Eligible
employees may contribute up to 15% of their annual
compensation. IPC-US contributed $520 for the year ended
September 30, 1995. For the years ended September 30, 1994
and 1993, the Company elected not to contribute to the plan.
IPC-UK has a defined contribution plan covering all UK
employees. Employee contributions are limited by statute,
generally not to exceed 17.5% of base salary. IPC-UK
contributions, net of forfeitures, for the years ended
September 30, 1995, 1994 and 1993 were $92, $76 and $47,
respectively.
The Company paid to KEC and Kleinknecht Electric Company -
New Jersey ("KEC-NJ"), also an affiliated company, in
accordance with labor pooling agreements, approximately
$5,074, $4,744 and $2,803 for the years ended September 30,
1995, 1994 and 1993, respectively, representing pass through
contributions to various union sponsored pension plans.
Stock Option and Incentive Plan
In 1994 the Company adopted a stock option and incentive
plan. There are a total of approximately 791,000 shares of
common stock reserved for issuance under the Company's stock
option plan at September 30, 1995. At September 30, 1995,
248,000 shares have been granted, net of 16,000 shares
cancelled, at prices ranging from $13.50 to $18.00. There
are 5,000 shares exercisable at September 30, 1995. At
September 30, 1995, an aggregate of approximately 543,000
shares remain available for grant.
The option plan also provides for the issuance of stock
appreciation rights and restricted stock features under which
shares of common stock may be issued to eligible employees.
No such awards have been made.
Employee Stock Purchase Plan
In 1994, the Company adopted an employee stock purchase plan.
There are a total of 526,813 shares of common stock reserved
for issuance under the Company's employee stock purchase plan
at September 30, 1995. The first plan year under the
employee stock purchase plan will expire as of December 31,
1995 and shares of common stock will be issued thereunder
during January 1996.
<PAGE>30
IPC INFORMATION SYSTEMS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS, continued
(Dollars in Thousands, Except Per Share Amounts)
8. Commitments and Contingencies:
Litigation
Knight Ventures, Inc. ("KVI"), a company principally 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 among other claims, responsibility for
approximately $3,300 of taxes, tax liens, tax assessments and
tax warrants with respect to Contel IPC (the "Predecessor
Company"), for 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 KEC, and the Principal
Stockholders. 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. KEC, the Principal Stockholders,
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 cross motion was declared premature and the
parties were directed to serve formal pleadings. Included in
other assets is $1,014 at September 30, 1995 and $989 at
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 both September 30, 1995 and 1994 which
is included in other assets, for insurance premiums owed to
the Company by Contel.
Management and outside legal counsel believe Contel is fully
responsible for the above-mentioned $3,300 and all related
costs and expenses and that the aggregate receivable of
$1,129, at September 30, 1995, is fully recoverable from
Contel.
Tax Allocation and Indemnification Agreement
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
<PAGE>31
IPC INFORMATION SYSTEMS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS, continued
(Dollars in Thousands, Except Per Share Amounts)
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, and the Principal Stockholders
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 provided that KVI 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.
Leases
The Company has entered into various operating leases for
real estate, equipment and automobiles.
Rental expenses under operating leases (excluding rentals on
vacant facilities) were $5,587, $5,252 and $4,323 for the
years ended September 30, 1995, 1994 and 1993, respectively.
Future minimum annual rental payments required under
noncancellable operating leases (including rentals on vacant
facilities) at September 30, 1995 are as follows:
</TABLE>
<TABLE>
<S> <C>
1996 $4,482
1997 4,581
1998 3,637
1999 2,488
2000 2,065
Thereafter 1,688
$18,941
</TABLE>
The Company has accrued for the minimum annual rental and
estimated building operating costs under noncancellable
operating leases for vacated facilities. These leases extend
through May 1998. The gross and discounted present value of
the accrued liability, net of payments made, approximated
$1,958 and $1,844 at September 30, 1995 and $3,367 and $3,086
at September 30, 1994, respectively. The discount rate
applied was 6.8%.
Employment Agreements
The Company has executed employment contracts for future
services, that vary in length up to 5 years, with certain
senior executives for which the Company has a minimum
commitment aggregating approximately $9,300 at September 30,
1995.
<PAGE>32
IPC INFORMATION SYSTEMS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS, continued
(Dollars in Thousands, Except Per Share Amounts)
9. Related Party Transactions:
Services Provided
Affiliated companies performed various services and provided
certain equipment to the Company. Services and/or equipment
provided by affiliates are billed to the Company and settled
through a periodic cash transfer to the affiliate.
Approximately $38,666, $36,293 and $22,395 of technical
labor, and $2,083, $1,767 and $1,746 of administrative labor
was provided through agreements with KEC and KEC-NJ during
the years ended September 30, 1995, 1994 and 1993,
respectively.
Effective October 1, 1993, the Company formalized in writing
existing arrangements with KEC and KEC-NJ with respect to a
pool of field technicians utilized by all three companies.
KEC and KEC-NJ are responsible for administering the payroll
and related services for these technical and clerical workers
and the Company reimburses all compensation and benefits paid
by KEC and KEC-NJ attributable to services performed for the
Company plus a fee equal to 2.5% of such costs. For the
years ended September 30, 1995 and 1994, KEC and KEC-NJ
billed the Company payroll administrative services of $1,024
and $922, respectively.
Approximately $2,986 of subcontract labor was provided by KEC
during the year ended September 30, 1993. For the year ended
September 30, 1993, KEC billed the Company administrative
services of $200.
A portion of the Company's New York branch operation is co-
located with KEC in a building owned by the Principal
Stockholders. For each of the years ended September 30,
1995, 1994 and 1993, the Company was charged approximately
$430 for rent expense. In addition, for the years ended
September 30, 1995, 1994 and 1993, the Company rented on a
month to month basis two other facilities from entities
controlled by the Principal Stockholders for which the
Company was charged approximately $55, $130 and $98,
respectively.
Equipment Rentals
Equipment rentals from an affiliated company were $975,
$1,201 and $754 for the years ended September 30, 1995, 1994
and 1993, respectively.
Subcontracts and Other
The Company and other companies controlled by the Principal
Stockholders periodically subcontract certain work to one
another. Amounts charged to companies controlled by the
Principal Stockholders under subcontracts with IPC for the
years ended September 30, 1995 and 1994 were approximately
$2,220 and $128, respectively, while amounts charged to IPC
under subcontracts with companies controlled by the Principal
Stockholders were approximately $587 and $993, respectively.
In addition to the foregoing, the Company, KEC and KEC-NJ
entered into a 20 year agreement dated as of May 9, 1994,
with respect to business opportunities regarding cabling of
communication infrastructures. KEC and KEC-NJ have agreed
not to bid for or accept cabling jobs in competition with the
Company, if it intends to bid or accept such work. In
addition, because the Company is not a licensed electrical
contractor, it has agreed to refrain from bidding for or
accepting without the consent of KEC or KEC-NJ, as the case
may be, all opportunities that combine both electrical and
cabling work. The Company has also agreed to continue to
refer to KEC and KEC-NJ certain
<PAGE>33
IPC INFORMATION SYSTEMS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS, continued
(Dollars in Thousands, Except Per Share Amounts)
electrical contracting bid
opportunities identified from time to time. Pursuant to such
agreement, all estimates for cabling work shall be generated
by the Company on behalf of KEC, and KEC will pay the Company
a nominal amount for preparing such estimates.
The Company and companies controlled by the Principal
Stockholders also charge each other certain miscellaneous
expenses, including, but not limited to, office equipment
rentals and certain other administrative expenses.
10.Income Taxes:
Pretax earnings consisted of the following:
<TABLE>
For the For the For the
Year Ended Year Ended Year Ended
September 30, September 30, September 30
1995 1994 1993
<S> <C> <C> <C>
Pretax earnings:
United States $17,158 $ 9,760 $ 191
Foreign 5,328 5,916 2,837
Total pretax earnings $22,486 $15,676 $3,028
</TABLE>
Effective October 1, 1992, IPC-US elected to be treated as
an S corporation for federal income tax purposes. In the
years ended September 30, 1994 and 1993 the Company was not
subject to federal income taxes. The Company's income was
passed through and taxed directly to the stockholders.
On September 29, 1994, IPC-US filed a notification
terminating its S corporation status, effective October 1,
1994. For the year ended September 30, 1995, the Company
was subject to corporate federal income taxes.
The provision (benefit) for income taxes consisted of the
following:
<TABLE>
<CAPTION>
For the For the For the
Year Ended Year Ended Year Ended
September 30, September 30, September 30
1995 1994 1993
<S> <C> <C> <C>
Current:
Federal $ 5,887
State and local 2,558 $1,160 $ 265
Foreign 1,858 2,223 1,012
10,303 3,383 1,277
Deferred:
Termination of S
corporation status (3,295)
Federal (673)
State and local (359) (744) (32)
Foreign (52) (217) 30
(1,084) (4,256) (2)
Income tax $ 9,219 $ (873) $1,275
provision / (benefit)
</TABLE>
<PAGE>34
IPC INFORMATION SYSTEMS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS, continued
(Dollars in Thousands, Except Per Share Amounts)
The components of net deferred tax assets are as follows:
<TABLE>
<CAPTION>
September 30,
1995 1994
U.S Foreign Total U.S Foreign Total
<S> <S> <S> <S> <S> <S> <S>
Deferred tax assets:
Excess of book over tax
depreciation $1,133 $ 26 $1,159 $1,257 $ 30 $1,287
Amortization of intangibles 25 25 23 23
Inventory and receivables 2,602 214 2,816 1,598 158 1,756
Accrued expenses 1,570 1,570 1,626 1,626
Total deferred tax assets 5,330 240 5,570 4,504 188 4,692
Deferred tax liabilities:
Investment income (1) (1)
Amortization of intangibles (227) (1) (228) (433) (433)
Total deferred tax liabilities (227) (1) (228) (433) (1) (434)
$5,103 $239 $5,342 $4,071 $187 $4,258
</TABLE>
These net deferred tax assets arise from temporary
differences related to depreciation, the amortization of
intangible assets, the allowance for doubtful accounts,
inventory valuation and the Company's various accruals. No
valuation allowance was required at September 30, 1995 and
1994.
A reconciliation between the statutory U.S. federal income
tax rate and the Company's effective tax rate is:
<TABLE>
<CAPTION>
September 30,
1995
<S> <C>
Statutory U.S. federal tax rate 35.0%
State and local income taxes,
net of federal benefit 6.4
Tax exempt interest income (0.5)
Other, net 0.1
41.0%
</TABLE>
<PAGE>35
IPC INFORMATION SYSTEMS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS, continued
(Dollars in Thousands, Except Per Share Amounts)
11. Operations by Geographic Areas:
Information about the Company's operations by geographic area
is as follows:
<TABLE>
<CAPTION>
For the For the For the
Year Ended Year Ended Year Ended
September 30, 1995 September 30, 1994 September 30, 1993
<S> <C> <C> <C>
Revenues:
United States $186,355 $142,130 $ 94,135
United Kingdom 19,899 21,541 18,579
$206,254 $163,671 $112,714
Operating Profits:
United States $30,714 $20,371 $ 3,220
United Kingdom 4,192 5,345 8,099
Corporate (12,879) (9,054) (7,412)
$22,027 $16,662 $ 3,907
Identifiable Assets
United States $ 98,228 $ 94,530 $56,688
United Kingdom 25,417 8,799 8,024
Corporate 4,391 7,373 5,408
$128,036 $110,702 $70,120
</TABLE>
Included in the United States revenues are export sales to
unaffiliated customers of $17,063, $12,849 and $3,167 for the
years ended September 30, 1995, 1994 and 1993, respectively.
Transfers from the United States to the United Kingdom,
eliminated in consolidation, were $7,999, $6,764 and $6,117 for
the years ended September 30, 1995, 1994 and 1993,
respectively.
No single customer accounted for 10% or more of total
revenues. Corporate assets are principally prepaids,
intangibles and other assets.
<PAGE>36
IPC INFORMATION SYSTEMS
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS, continued
(Dollars in Thousands, Except Per Share Amounts)
12. Quarterly Financial Information (Unaudited)
The following tables set forth unaudited quarterly financial information for the
years ended September 30, 1995 and 1994:
<TABLE>
<CAPTION>
Quarter Ended
December 31 March 31 June 30 September 30
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Year Ended
September 30, 1995:
Total revenues $47,716 $50,528 $52,458 $55,552
Gross profit 14,511 15,415 16,138 17,109
Net income 3,068 3,268 3,486 3,445
Earnings per share $ 0.29 $ 0.31 $0.33 $ 0.33
Year Ended
September 30, 1994:
Total revenues $38,313 $39,719 $40,096 $45,543
Gross profit 11,122 11,548 11,796 13,577
Net income 4,051 2,930 2,679 6,889
</TABLE>
Net income in the fourth quarter of 1994 includes the
cumulative effect of the Company's termination of its S
corporation status which resulted in a tax benefit of $3,295.
<PAGE>37
Schedule II
<TABLE>
<CAPTION>
IPC INFORMATION SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in Thousands)
<S> <C> <C> <C> <C>
COL. A COL. B COL. C COL. D COL. E
Balance
at Additions
Beginning Charged to Costs Charged to Balance at End
Description of Period and Expenses Other Account Deductions of Period
For the Year September 30, 1993
Provision for Doubtful
Accounts $ 532 $ 450 $ 159 (1) $ 823
Provision for Inventory
Obsolescense.......... $7,515 $ 1,715 5305 (2) $3,925
For the Year September 30, 1994
Provision for Doubtful
Accounts $ 823 $786 $278(1) $1,331
Provision for Inventory
Obsolescense...$3,925 $ 2,062 $427 (2) $5,560
For the Year September 30, 1995
Provision for Doubtful
Accounts $1,331 $ 861 $620 (1) $1,572
Provision for Inventory
Obsolescense..$5,560 $3,052 $1123(2) $7,489
<FN>
(1) Doubtful Accounts Written Off, Net of Cash Recovered
(2) Inventory Written Off
</TABLE>
<TABLE> <S> <C>
[MULTIPLIER] 1000
<S> <C>
<PERIOD TYPE> 12-MOS
<FISCAL-YEAR END> SEPT-30-1995
<PERIOD END> SEPT-30-1995
[CASH] 15,786
[SECURITIES] 0
[RECEIVABLES] 50,513
[ALLOWANCES] 1,572
[INVENTORY] 35,111
[CURRENT-ASSETS] 110,936
[PP&E] 9,236
[DEPRECIATION] 9,037
[TOTAL-ASSETS] 128,036
[CURRENT-LIABILITIES] 64,085
[BONDS] 0
[COMMON] 107,637
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[OTHER-SE] 58,397
<TOTAL-LIABILITY-AND-EQUITY128,036
[SALES] 206,254
[TOTAL-REVENUES] 206,254
[CGS] 143,081
[TOTAL-COSTS] 184,227
[OTHER-EXPENSES]
[LOSS-PROVISION]
[INTEREST-INCOME] 233
[INCOME-PRETAX] 22,486
[INCOME-TAX] 9,219
[INCOME-CONTINUING] 13,267
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 13,267
[EPS-PRIMARY] 1.26
[EPS-DILUTED]
</TABLE>
Commission File No. 0-25492
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
____________________
Exhibits
to
Form 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES ACT OF 1934
____________________
IPC Information Systems, Inc.
(Exact name of registrant as specified in its charter)
____________________
<PAGE>
<TABLE>
<CAPTION>
Exhibit Index
Exhibit Sequential
No. Exhibit Title Page Number
<S> <S> <S>
*3.2 Amended and Restated Bylaws of Registrant
*10.2.1 Letter Agreement, dated October 17, 1995 by
and between the Registrant and Richard P.
Kleinknecht amending the Employment
Agreement, dated May 9, 1994 by and
between the Registrant and Richard P. Kleinknecht
*10.3.1 Letter Agreement, dated October 17, 1995 by
and between the Registrant and Peter J. Kleinknecht
amending the Employment Agreement, dated
May 9, 1994 by and between the Registrant
and Peter J. Kleinknecht
*10.4.1 Letter Agreement, dated October 17, 1995 by
and between the Registrant and
Jeffrey M. Gill amending the Employment
Agreement, dated August 29, 1994 by and between
the Registrant and Jeffrey M. Gill
*10.14.1 Employment Agreement, dated as of October 17,
1995, by and between the Registrant and Stephen T. Clontz
21.2 Subsidiaries of the Registrant 1
* - Filed as an Exhibit to the Registrant's Report on Form
8-K, filed November 30,1995 and incorporated herein by
reference.
Exhibit 21.2
Exhibit 21.2
Subsidiaries of the Registrant
HNG Corp., a Delaware corporation
RIE Corp., a Delaware corporation
IPC Information Systems, a United Kingdom unlimited
liability company
IPC Information Systems Far East, Inc., a Delaware company
IPC Bridge, Inc., a New York corporation
International Exchange Networks, Ltd. a Delaware corporation
(80% owned)
</TABLE>
