United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 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 (IRS Employer Identification No.)
incorporation or organization)
Wall Street Plaza, 88 Pine Street, New York, NY 10005
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 212 825-9060
Indicate by check mark whether the registrant: (1) has filed
all reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No_________
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the close of the period
covered by this report.
Class Outstanding at March 31, 1996
Common Stock par value $0.01 10,610,017 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
March 31, 1996 and September 30, 1995 2
Condensed Consolidated Statements of
Operations for the Three and Six Months Ended
March 31, 1996 and 1995 3
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended March 31, 1996 and 1995 4
Notes to Condensed Consolidated Financial
Statements
5 - 7
ITEM 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations
8 - 10
PART II. OTHER INFORMATION
11
SIGNATURES
12
<PAGE>
IPC INFORMATION SYSTEMS, INC.
CONDENSED CONSOLIDATED
BALANCE SHEETS (unaudited)
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
March 31, September 30,
1996 1995
<S> <C> <C>
ASSETS:
Current assets:
Cash and temporary cash investments.. $3,394 $15,786
Trade receivables, less allowance of
$1,584 and $1,572, respectively ...... 53,764 50,513
Inventories.............................46,759 35,111
Prepaid expenses and other current
assets.................................8,896 9,526
Total current assets.................. 112,813 110,936
Property, plant and equipment, net........ 12,546 9,236
Other assets, net.......................... 7,309 7,864
Total assets...........................$132,668 $128,036
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable.......................... $25,401 $14,807
Accrued liabilities.........................18,356 19,366
Customer advances and deferred
revenue............................... 16,511 29,912
Short-term debt...........................1,000
Total current liabilities............ 61,268 64,085
Other liabilities............................5,123 5,447
Total liabilities.......................66,391 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 10,852,203 and 10,763,740
shares at March 31, 1996 and
September 30, 1995, respectively... 107 107
Paid-in capital........................46,751 45,853
Retained earnings......................20,137 13,262
Less treasury stock, at cost........ (718) (718)
Total stockholders' equity...... 66,277 58,504
Total liabilities and
stockholders' equity.... $132,668 $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 Ended Six Months Ended
March 31, March 31,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenues:
Product sales and installation.$45,347 $34,613 $89,531 $68,337
Service.........................16,851 15,915 32,417 29,907
62,198 50,528 121,948 98,244
Cost of revenues:
Product sales and installation..31,341 23,422 61,460 46,958
Service........................ 11,578 11,691 22,672 21,360
42,919 35,113 84,132 68,318
Gross profit..................19,279 15,415 37,816 29,926
Research and development
expenses.........................3,015 2,437 6,008 4,745
Selling, general and administrative
expenses........................10,257 7,528 19,970 14,442
Income from operations... 6,007 5,450 11,838 10,739
Provision for income taxes........ 2,366 2,182 4,721 4,403
Net income ................. $3,641 $3,268 $7,117 $6,336
Earnings per share.............. $ 0.34 $ 0.31 $ 0.67 $ 0.60
Weighted average shares
outstanding.................. 10,609 10,489 10,564 10,497
<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>
Six months ended March 31,
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income............. $7,117 $6,336
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization
expense..................................1,611 821
Other amortization .................... 1,027 827
Provision for doubtful accounts.... 121 232
Changes in operating assets and
liabilities:
Accounts receivables................ (3,820) 304
Inventories...............................(12,720) 4,584
Prepaid expenses and other
current assets.......................(1,436) (2,002)
Other assets...........................(16) 2
Accounts payable.................10,748 (4,955)
Accrued liabilities and other
liabilities.............................1,432 (722)
Customer advances and deferred
revenue..............................(13,159) (2,750)
Net cash (used in) provided
by operating activities.....(9,095) 2,677
Cash flows from investing activities:
Capital expenditures...............(4,233) (2,573)
Proceeds from sale of short-term
investment............................2,007
Acquisition of Bridge Electronics,
Inc.......................................(2,240)
Net cash (used in) investing
activities........................(4,466) (2,573)
Cash flows from financing activities
Net proceeds from short-term debt.1,000
Repayment of long-term debt.......... (10,663)
Repayment of notes payable to
affiliates...................................... (1,411)
Proceeds from exercise of stock
options.......................................17
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...........................1,017 15,055
Effect of exchange rate changes on cash.. 152 6
Net (decrease) increase in cash.............. (12,392) 15,165
Cash, beginning of period....................... 15,786 2,616
Cash and temporary cash investments,
end of period......................................$3,394 $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 March 31,
1996,
and the results of its operations for the three and six
months ended
March 31, 1996 and 1995, and its cash flows for the six
months
ended March 31, 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 six months ended March 31, 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. Certain reclassifications have been made to the fiscal
1995 financial
statements in order to conform to the current period's
presentation.
3. Classification of inventories is:
<TABLE>
March 31, September
30,
1996
1995
<S> <C> <C>
Components and manufacturing
work in process $12,770 $9,245
Inventory on customer sites
awaiting installation 25,506 18,984
Parts and maintenance supplies 8,483 6,882
$46,759 $35,111
</TABLE>
4. The Company maintains a promissory note with a bank for a
line
of credit up to $15,000 of which $1,000 is outstanding at
March 31, 1996.
In April, 1996 the Company revised the note increasing the
line of credit
up to $25,000.
5. In connection with the Company's implementation of an
international
virtual private network, the Company has committed to
capital leases
totaling approximately $5,500 for certain network switching
equipment.
6. Knight Ventures, Inc. ("KVI"), a company owned by Peter
J. Kleinknecht
and Richard P. Kleinknecht (the "Principal Stockholders"),
and the former
parent of the Company, is currently in litigation with
Contel Corporation ("Contel")
over 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 the periods prior to the
acquisition of the
Company from Contel. As a result of the above dispute, KVI
has withheld
payment on a note in the amount of $4,548 (the "Note") to
Contel associated
with KVI's acquisition of the Company.
<PAGE>
The Note is guaranteed by Kleinknecht Electric Company
("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
March 31, 1996 and
September 30, 1995 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 March
31, 1996 and
September 30, 1995 which is included in other assets, for
insurance
premiums owed to the Company by Contel.
Management believes Contel is fully responsible for the
above-mentioned
$3,300 and all related costs and expenses and that the
aggregate receivable
of $1,129 at March 31, 1996 is fully recoverable from
Contel.
7. As of May 9, 1994, the Company, KVI and the pre-Offering
stockholders
entered into a Tax Allocation and Indemnification Agreement
(the "Tax Agreement") relating to their respective income
tax liabilities and
certain related matters as a consequence of the Offering.
The Tax Agreement
generally provides that the pre-Offering stockholders will
be indemnified by the
Company with respect to federal and state income taxes (plus
interest and
penalties) shifted from a C corporation taxable year to a
taxable year in which
the Company was an S corporation, and that the Company will
be indemnified
by the pre-Offering stockholders with respect to federal and
state income taxes
(plus interest and penalties) shifted from an S corporation
taxable year to a
C corporation taxable year. However, in the case of the pre-
Offering
stockholders' obligation to indemnify the Company, such
obligation shall be
limited to the tax benefit, if any, derived by the pre-
Offering stockholders due
to the shift of taxable income from a taxable year in which
the Company was
an S corporation to a C corporation taxable year. Any
payment made by
the Company to the pre-Offering stockholders pursuant to the
Tax Agreement
may be considered by the Internal Revenue Service or the
state taxing
authorities to be nondeductible by the Company for income
tax purposes.
In addition, the Company, KVI, Richard P. Kleinknecht and
Peter J. Kleinknecht
have agreed, to the extent that either KVI or the Principal
Stockholders receive
any cash proceeds or other benefit in the form of a
<PAGE>
reduction in amounts payable on the Note to Contel as a
consequence
of such litigation, the Principal Stockholders will pay to
the Company
the lesser of (i) such benefit or (ii) the amount paid by
the Company
for taxes and related charges subject to the dispute, plus
the amount
of any expenses of such litigation incurred by the Company
following
the consummation of the Offering. The Tax Agreement also
provides
that KVI shall assign to the Company certain benefits and
rights of KVI
with respect to KVI's right of first refusal to purchase
certain businesses which
may compete with the Company. In consideration of the
Principal Stockholders'
agreement to make such payments and KVI's assignment of such
rights, the
Company will pay any and all expenses incurred in connection
with such litigation
between KVI and Contel and will not proceed independently
against or receive any
amount directly from Contel.
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in thousands, except per share data)
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 $62,198 and $121,948 for the three and six
months ended
March 31, 1996 increased by 23.0% and 24.1%, respectively,
from $50,528
and $98,244, respectively, in the comparable prior-year
periods.
Turret sales and installation and related service revenues
increased by $4,381
and $9,426 or 12.3% and 12.8%, respectively, to $42,429 and
$83,092 in the
three and six months ended March 31, 1996 from $37,768 and
$73,666
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 I.T.S. sales and installation and related
service increased by
$7,009 and $14,278 or 54.9% and 58.1%, respectively, to
$19,769 and $38,856
in the three and six months ended March 31, 1996 from
$12,760 and $24,578,
respectively, in the comparable prior-year periods due to
continuing development
and expansion of the Company's I.T.S. business.
Cost of revenues (as a percentage of revenues) of 69.0% for
both the three and
six months ended March 31, 1996 decreased from 69.5% in the
comparable
prior-year periods, primarily due to continued installation
efficiencies including
manufacturing cost reductions.
Research and development expenses for the three and six
months ended
March 31, 1996 increased to $3,015 and $6,008, respectively,
from $2,437
and $4,745, 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 six
months ended
March 31, 1996 include development expenses by IPC Bridge.
Bridge
Electronics, Inc., now known as IPC Bridge, was acquired by
the Company
in April 1995.
Selling, general and administrative expenses for the three
and six months
ended March 31, 1996 increased to $10,257 and $19,970
respectively,
from $7,622 and $14,501, 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
<PAGE>
with IXnet in implementing the IXnet Network for the
financial services
industry and the continued development and expansion of the
Company's
I.T.S. business.
The Company's effective tax rate for the three and six
months ended
March 31, 1996 was 39.4% and 39.9%, respectively, compared
to 40.0%
and 41.0%, respectively, in the comparable prior year
periods.
Liquidity and Capital Resources
Net cash flows used in operating activities was $9,095 for
the six months
ended March 31, 1996 compared with net cash flows provided
by operating
activities of $2,677 for the six months ended March 31,
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 accounts payable 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 six months ended
March 31, 1996
totaled $4,466 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 $1,017 for the
six months ended
March 31, 1996 compared with $15,055 provided by financing
activities for
the comparable prior-year period. The activity for the six
months ended
March 31, 1996 primarily relates to net proceeds from short-
term debt.
In connection with the Company's implementation the IXnet
Network, the
Company has committed to capital leases totaling
approximately $5,500
for certain network switching equipment. The Company does
not have any
other material commitments for capital expenditures.
In December 1994, the Company signed a promissory note with
a bank for
a line of credit up to $15,000. This line was not utilized
during the year ended
September 30, 1995. At March 31, 1996, $1,000 was
outstanding under the
line. In April, 1996, the Company revised the note
increasing the line of credit
up to $25,000.
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. Submission of Matters to a Vote of Security
Holders
The annual meeting of the stockholders (the "Meeting") of
the Company was
held on February 14, 1996.
The Company's stockholders voted at this Meeting on the
following matters,
which were set forth in full in the Company's proxy
statement dated
January 16, 1996.
Election of Directors
Nominee For Withhold
Theodore J. Johnson 10,203,711 52,599
Terry Clontz 10,250,185 6,125
A majority of the outstanding voting stock of the Company
voted for the
election of the two nominees. The directors whose terms of
office continued
after the Meeting are Robert McInerney, Peter Stein, Richard
P. Kleinknecht
and Peter J. Kleinknecht.
Ratification of the firm of Coopers & Lybrand L.L.P. as the
independent
auditors to audit the Company's financial statements for the
fiscal year
1996 was approved by a vote of 10,178,386 in favor, 54,524
against and
23,400 abstaining.
Amendment to the Stock Option and Incentive Plan (the
"Plan") to provide
for an increase from 790,220 to 1,579,337 in the number of
shares of
common stock available for issuance upon exercise of options
or the grant
of restricted stock awards under the Plan was approved by a
vote of
8,021,383 in favor, 1,500,805 against, 40,221 abstaining
and 693,901
broker non-votes.
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: May 6, 1996 By:_/S/ Terry
Clontz________________
Terry Clontz
President and
Chief Executive Officer
Dated: May 6, 1996 By:_/s/ Gregory
Riedel______________
Gregory Riedel
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> MAR-31-1996
<CASH> 3,394
<SECURITIES> 0
<RECEIVABLES> 55,348
<ALLOWANCES> 1,584
<INVENTORY> 46,759
<CURRENT-ASSETS> 112,813
<PP&E> 12,546
<DEPRECIATION> 0
<TOTAL-ASSETS> 132,668
<CURRENT-LIABILITIES> 61,268
<BONDS> 0
0
0
<COMMON> 107
<OTHER-SE> 66,170
<TOTAL-LIABILITY-AND-EQUITY> 132,668
<SALES> 121,948
<TOTAL-REVENUES> 121948
<CGS> 84,132
<TOTAL-COSTS> 110,110
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 11,838
<INCOME-TAX> 4,721
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,117
<EPS-PRIMARY> 0.67
<EPS-DILUTED> 0
