United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1996
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 incorporation
(IRS Employer Identification No.)
or organization)
Wall Street Plaza, 88 Pine Street, New York, NY 10005
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 212 825-9060
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No_________
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the close of the period covered by
this report.
Class Outstanding at June 30, 1996
Common Stock par value $0.01 10,857,669 shares
<PAGE>
IPC INFORMATION SYSTEMS, INC.
INDEX TO FORM 10-Q
PAGE
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at
June 30, 1996 and September 30, 1995 2
Condensed Consolidated Statements of
Operations for the Three and Nine Months Ended
June 30, 1996 and 1995 3
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended June 30, 1996 and 1995 4
Notes to Condensed Consolidated Financial
Statements 5 - 6
ITEM 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7 - 9
PART II. OTHER INFORMATION 10
SIGNATURES 11
<PAGE>
IPC INFORMATION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
June 30, September 30,
1996 1995
<S> <C> <C>
ASSETS:
Current assets:
Cash and temporary cash
investments................................. $2,089 $15,786
Trade receivables, less allowance
of $1,587 and $1,584, respectively . 55,759 50,513
Inventories........................................ 44,087 35,111
Prepaid expenses and other current
assets......................................... 7,344 9,526
Total current assets................. 109,279 110,936
Property, plant and equipment, net....... 20,439 9,236
Other assets, net................................ 7,140 7,864
Total assets........................... $136,858 $128,036
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Note payable.................................... $9,200
Accounts payable............................. 14,251 $14,807
Accrued liabilities............................. 15,752 19,366
Customer advances and deferred
revenue....................................... 17,382 29,912
Short-term lease commitments......... 1,108
Total current liabilities............ 57,693 64,085
Long-term lease commitments.......... 4,454
Other liabilities................................ 4,586 5,447
Total liabilities....................... 66,733 69,532
Commitments and contingencies
Stockholders' equity:
Preferred stock - $0.01 par value,
authorized 10,000,000 shares,
none issued and outstanding
Common stock - $0.01 par value,
authorized 25,000,000 shares;
issued 10,857,669 and 10,763,740
shares at June 30, 1996 and
September 30, 1995, respectively... 108 107
Paid-in capital................................. 46,822 45,853
Retained earnings........................... 23,913 13,262
Less treasury stock, at cost......... (718) (718)
Total stockholders' equity...... 70,125 58,504
Total liabilities and
stockholders' equity.......... $136,858 $128,036
<FN>
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE>
IPC INFORMATION SYSTEMS, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS (unaudited)
(Amounts in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenues:
Product sales and
installation................... $52,606 $34,134 $142,137 $102,471
Service.......................... 16,818 18,324 49,235 48,231
69,424 52,458 191,372 150,702
Cost of revenues:
Product sales and
installation................... 36,171 22,753 97,631 69,711
Service.......................... 12,513 13,567 35,185 34,927
48,684 36,320 132,816 104,638
Gross profit........... 20,740 16,138 58,556 46,064
Research and development
expenses..................... 2,958 2,568 8,966 7,313
Selling, general and
administrative expenses. 11,382 7,721 31,449 22,222
Income from operations. 6,400 5,849 18,141 16,529
Interest income /
(expense), net................ (401) 60 (304) 119
Income before provision
for income taxes.......... 5,999 5,909 17,837 16,648
Provision for income taxes... 2,298 2,423 7,019 6,826
Net income ........... $3,701 $3,486 $10,818 $9,822
Earnings per share............. $ 0.35 $ 0.33 $ 1.02 $ 0.94
Weighted average shares
outstanding................... 10,613 10,506 10,581 10,500
<FN>
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE>
IPC INFORMATION SYSTEMS, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS (unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine months ended June 30,
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income....................... $10,818 $6,336
Adjustments to reconcile
net income to net cash
provided by (used in)
operating activities:
Depreciation and
amortization expense... 2,654 821
Other amortization ........ 1,511 827
Provision for doubtful
accounts..................... 286 232
Changes in operating
assets and liabilities:
Accounts receivables..... (5,793) 304
Inventories.................... (10,564) 4,584
Prepaid expenses and
other current assets.... 136 (2,002)
Other assets................ (3) 2
Accounts payable......... (454) (4,955)
Accrued liabilities and
other liabilities............ (1,850) (722)
Customer advances and
deferred revenue.......... (12,323) (2,750)
Net cash (used in)
provided by operating
activities............... (15,582) 2,677
Cash flows from investing activities:
Capital expenditures....... (6,940) (2,573)
Proceeds from sale of
short-term investment.. 2,007
Acquisition of Bridge
Electronics, Inc.......... (2,500)
Net cash (used in)
investing activities.. (7,433) (2,573)
Cash flows from financing activities:
Net proceeds from note
payable...................... 9,200
Repayment of long-term
debt........................... (10,663)
Repayment of notes
payable to affiliates...... (1,411)
Proceeds from exercise
of stock options........... 98
Proceeds from the sale
of common stock......... 45,337
Purchase of treasury
stock........................... (396)
S corporation distribution... (17,812)
Net cash provided by
financing activities............. 9,298 15,055
Effect of exchange rate changes
on cash........................................ 20 6
Net (decrease) increase in cash........ (13,697) 15,165
Cash, beginning of period................. 15,786 2,616
Cash and temporary cash
investments, end of period.............. $2,089 $17,781
<FN>
See Notes to Condensed Consolidated Financial Statements
</TABLE>
<PAGE>
IPC INFORMATION SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
1. In the opinion of management, the accompanying unaudited
condensed consolidated financial statements include all necessary
adjustments (consisting of normal recurring accruals) and present
fairly IPC Information Systems, Inc.'s ("IPC" or the "Company")
financial position as of June 30, 1996, and the results of its
operations for the three and nine months ended June 30, 1996 and
1995, and its cash flows for the nine months ended June 30, 1996
and 1995, in conformity with generally accepted accounting
principles for interim financial information applied on a
consistent basis. The results of operations for the three and nine
months ended June 30, 1996, are not necessarily indicative of the
results to be expected for the full year. These financial
statements should be read in conjunction with IPC's 1995 Annual
Report to stockholders and Form 10-K for the fiscal year ended
September 30, 1995.
2. Classification of inventories is:
<TABLE>
June 30, September 30,
1996 1995
<S> <C> <C>
Components and manufacturing work in process $13,224 $9,245
Inventory on customer sites awaiting installation 22,967 18,984
Parts and maintenance supplies 7,896 6,882
$44,087 $35,111
</TABLE>
3. During April, 1996 the Company signed a promissory note with a
bank increasing the Company's line of credit from $15,000 to
$25,000. At June 30, 1996 $9,200 of the line is outstanding at an
interest rate of 6.75%.
4. In connection with the Company's implementation of an
international virtual private network, the Company has entered into
capital lease agreements totaling approximately $5,500 for certain
network switching equipment.
5. As of May 15, 1996, Knight Ventures, Inc. ("KVI") a company
owned by Peter J. Kleinknecht and Richard P. Kleinknecht (the
"Principal Stockholders"), and the former parent of the Company,
agreed to settle its litigation with Contel Corporation ("Contel").
Management anticipates that this settlement shall have no material
impact on the financial condition of the Company.
6. As of May 9, 1994, the Company, KVI and the Principal
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
Company's initial public offering. In addition, the Company, KVI,
Richard P. Kleinknecht and Peter J. Kleinknecht have agreed, to the
extent that either KVI or the Principal Stockholders receive any
cash proceeds or other benefit in the form of a reduction in
<PAGE>
amounts payable to Contel as a consequence of the 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 Company's initial public offering. In
connection with the settlement agreement made on May 15, 1996 (see
note 5), the Principal Stockholders have agreed to remit amounts
due the Company in accordance with the tax agreement. Management
anticipates such remittance shall not have a material impact on the
Company's financial condition.
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in thousands, except per share data)
Overview
IPC is a rapidly growing worldwide industry leader in providing
globally integrated telecommunications services to the financial
services industry. The Company's highly reliable, customized
telecommunications systems are used on financial trading floors where
they are known as "turrets" or "dealerboards." In 1993, the Company
launched its Information Transport Systems ("I.T.S.") business to
provide and support the design and implementation of cabling
infrastructures and an expanded product offering including LAN and WAN
hubs and routers, and video conferencing systems. IPC, with its
recently acquired subsidiary, International Exchange Networks, Ltd.
("IXnet"), is implementing a facilities-based global network (the
"IXnet Network") designed for the specialized international
telecommunications requirements of the financial services industry.
The Company's historical operations are separated into two lines
of business: turret systems and I.T.S. The Company accounts for sales
of turret systems to distributors and direct sales and installations of
turret systems as "turret sales and installation." The Company
accounts for revenues from turret system maintenance, including annual
and multi-year service contracts, and from moves additions and changes
to existing turret system installations as "turret service." The
Company accounts for revenues from I.T.S. design, integration and
implementation projects, from sales of intelligent network products,
such as hubs, bridges and routers, from on-site maintenance of customer
I.T.S., including annual and multi-year contracts, and from the
provision of outsourcing services for the support, expansion and
upgrading of existing customer networks as "I.T.S. sales, installation
and service."
Revenue from turret and I.T.S. sales and installation is
recognized upon completion of the installation, except for revenue from
sales of turret systems to distributors, which is recognized upon
shipment of turret products by IPC. To reduce the Company's exposure
to customer credit risk, invoices are submitted during various stages
of the installation. The revenue attributable to such advance payments
is deferred until system installation is completed. In addition,
contracts for annual recurring turret and I.T.S. services are generally
billed in advance, and are recorded as revenues ratably ( on a monthly
basis ) over the contractual periods. Revenue from moves, additions
and changes to turret systems is recognized upon completion, which
usually occurs in the same month or the month following the order for
services.
Due to the substantial sales price of the Company's large turret
and I.T.S. installations and the Company's recognition of revenue only
upon completion of installations, revenues and operating results could
fluctuate significantly from quarter to quarter. However, the
Company's service business generates a more consistent revenue stream
than sales and installation and, consequently, these fluctuations may
be somewhat diminished in the future as the Company's service business
expands.
<PAGE>
Revenues from IXnet have not been material to the Company's
results of operations for the historical periods presented herein. The
initial deployment of the IXnet Network requires certain capital and
operating expenditures to establish the network infrastructure prior to
the realization of revenues. While developing the IXnet Network will
require additional infrastructure investments, beyond the network
operating centers already completed in New York and London, it is the
Company's strategy that as IXnet's business grows, an increasing
portion of IXnet's capital expenditures will be driven by contractual
customer demand. The Company believes that the initial infrastructure
investments for the IXnet Network provide operating leverage such that
revenue derived from additional demand driven capital and operating
expenditures will more quickly result in positive cash flow
contribution. Management anticipates that revenues from IXnet's
operations will be material to the Company in the future. However, no
such material impact is anticipated for the 1996 fiscal year and no
assurance can be given that revenues from such operations will have a
material positive effect on the Company in the future.
Results of Operations
Total revenues of $69,424 and $191,372 for the three and nine months
ended June 30, 1996 increased by 32.3% and 27.0%, respectively, from
$52,458 and $150,702, respectively, in the comparable prior-year
periods.
Turret sales and installation and related service revenues increased by
$7,133 and $16,559 or 18.5% and 14.8%, respectively, to $45,593 and
$128,685 in the three and nine months ended June 30, 1996 from $38,460
and $112,126 respectively, in the comparable prior-year periods. This
rise is primarily attributable to the increased acceptance of Tradenet
MX. Management anticipates that sales of Tradenet MX will generate the
majority of turret sales and installation revenue for the foreseeable
future.
Revenues from Information Transport System's ("ITS") sales and
installation and related service increased by $9,833 and $24,111 or
70.2% and 62.5%, respectively, to $23,831 and $62,687 in the three and
nine months ended June 30, 1996 from $13,998 and $38,576, respectively,
in the comparable prior-year periods due principally to continuing
development and expansion of the Company's Information Transport
Systems business.
Cost of revenues (as a percentage of revenues) of 70.1% for the three
months ended June 30, 1996, increased from 69.2% in the comparable
prior-year period, primarily due to increased ITS sales and
installations. The percentage of cost of revenues to revenues for the
nine months ended June 30, 1996 of 69.4% remained unchanged when
compared to the comparable prior year period.
Research and development expenses for the three and nine months ended
June 30, 1996 increased to $2,958 and $8,966, respectively, from $2,568
and $7,313, respectively, in the comparable prior-year periods, due to
the development of new products and enhancements to existing products.
Also, research and development expenses for the three and nine months
ended June 30, 1996 include development expenses by IPC Bridge. Bridge
Electronics, Inc., now known as IPC Bridge, was acquired by the Company
in April 1995.
<PAGE>
Selling, general and administrative expenses for the three and nine
months ended June 30, 1996 increased to $11,382 and $31,449
respectively, from $7,721 and $22,222, respectively, in the comparable
prior-year periods. These increases are attributable to an increase in
headcount and other expenses in support of higher business levels,
start-up costs associated with the Company's subsidiary, International
Exchange Networks, Ltd. ("IPC IXnet") in implementing an international
virtual private network for the financial services industry and the
continued development and expansion of the Company's Information
Transport Systems business. As the Company deploys its international
network, management anticipates that selling and administrative
expenses will increase. These expenses will be incurred prior to the
realization of revenues.
Interest expense increased to $487 and $710 for the three and nine
months ended June 30, 1996, respectively, from $104 and $329,
respectively, in the comparable prior year periods due primarily to the
Company's utilization of it's line of credit, as well as the capital
lease agreements entered into in connection with the Company's
implementation of an international virtual private network.
Liquidity and Capital Resources
Net cash flows used in operating activities was $15,582 for the nine
months ended June 30, 1996 compared with net cash flows provided by
operating activities of $2,677 for the nine months ended June 30, 1995.
Net cash used in operations were from changes in accounts receivable,
inventory and customer advances and deferred revenue offset in part, by
changes in depreciation, amortization and net income. Accounts
receivable and inventories increased during the period due to higher
business volumes and shorter lead times.
Cash used in investing activities for the nine months ended June 30,
1996 totaled $7,433 compared with $2,573 for the comparable prior-year
period. Net cash flows used in investing activities resulted from the
acquisition payment for IPC Bridge and property, plant and equipment
expenditures, primarily composed of machinery and equipment and
leasehold improvements offset in part, by proceeds from the sale of a
short-term investment.
Net cash provided by financing activities was $9,298 for the nine
months ended June 30, 1996 compared with $15,055 provided by
financing activities for the comparable prior-year period. The activity
for the nine months ended June 30, 1996 primarily relates to net
proceeds from bank borrowings.
In connection with the Company's implementation of its network, the
Company has entered into capital lease agreements totaling
approximately $5,500 for certain network switching equipment.
The Company believes that the net cash from operations and existing
credit facilities will be sufficient to meet its working capital and
capital expenditure needs for the near future.
<PAGE>
Part II - Other Information
ITEM 4. None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibit Number 27 Financial Data Schedule
(b) Form 8-K - None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
IPC INFORMATION SYSTEMS, INC.
Dated: August 9, 1996 By: /s/ Terry Clontz
Terry Clontz
President and
Chief Executive Officer
Dated: August 9, 1996 By: /s/ Gregory Riedel
Gregory Riedel
Chief Financial Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from the unaudited balance sheet of IPC Information Systems
at June 30, 1996 and the unaudited condensed statement
of income for the nine month period ending June 30, 1996
and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> JUN-30-1996
<CASH> 2089
<SECURITIES> 0
<RECEIVABLES> 55759
<ALLOWANCES> 0
<INVENTORY> 44087
<CURRENT-ASSETS> 109279
<PP&E> 20439
<DEPRECIATION> 7344
<TOTAL-ASSETS> 136858
<CURRENT-LIABILITIES> 57639
<BONDS> 0
0
0
<COMMON> 108
<OTHER-SE> 70017
<TOTAL-LIABILITY-AND-EQUITY> 136858
<SALES> 191372
<TOTAL-REVENUES> 191372
<CGS> 132816
<TOTAL-COSTS> 173231
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 304
<INCOME-PRETAX> 17837
<INCOME-TAX> 7019
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10818
<EPS-PRIMARY> 1.02
<EPS-DILUTED> 1.02
</TABLE>
