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 December 31, 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 incorporation (I.R.S. Employer Identification
or organization) No.)
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 December 31, 1995
Common Stock par value $0.01 10,521,555 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
December 31, 1995 and September 30, 1995 2
Condensed Consolidated Statements of Operations for the
Three Months Ended December 31, 1995 and 1994 3
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended December 31, 1995 and 1994 4
Notes to Condensed Consolidated Financial Statements 5 - 6
ITEM 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7 - 8
PART II. OTHER INFORMATION 9
SIGNATURES 10
<PAGE>
IPC INFORMATION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
December 31, September 30,
1995 1995
<S> <C> <C>
ASSETS:
Current assets:
Cash and temporary cash investments....... $12,781 $15,786
Trade receivables, less allowance
of $1,582 and $1,572, respectively ........... 46,607 50,513
Inventories................................................ 37,067 35,111
Prepaid expenses and other current assets.. 9,982 9,526
Total current assets........................ 106,437 110,936
Property, plant and equipment, net............... 10,175 9,236
Other assets, net........................................ 7,467 7,864
Total assets.................................... $124,079 $128,036
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable...................................... $15,727 $14,807
Accrued liabilities....................................... 17,281 19,366
Customer advances and deferred revenue..... 23,605 29,912
Total current liabilities....................... 56,613 64,085
Other liabilities............................................. 5,461 5,447
Total liabilities.................................. 62,074 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 10,763,740 shares at
December 31, 1995 and
September 30, 1995................................ 107 107
Paid-in capital............................................ 45,853 45,853
Retained earnings...................................... 16,763 13,262
Less treasury stock, at cost.................... (718) (718)
Total stockholders' equity................. 62,005 58,504
Total liabilities and stockholders' equity. $124,079 $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
December 31, December 31,
1995 1994
<S> <C> <C>
Revenues:
Product sales and installation................... $44,184 $33,724
Service................................................... 15,566 13,992
59,750 47,716
Cost of revenues:
Product sales and installation................... 30,119 23,536
Service................................................... 11,094 9,669
41,213 33,205
Gross profit.................................... 18,537 14,511
Research and development expenses........... 2,993 2,308
Selling, general and administrative expenses. 9,707 6,914
Income from operations................... 5,837 5,289
Provision for income taxes........................... 2,355 2,221
Net income .................................... $3,482 $3,068
Earnings per share...................................... $ 0.33 $ 0.29
Weighted average shares outstanding........... 10,521 10,505
<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>
Three Months Ended
December 31, December 31,
1995 1994
<S> <C> <C>
Cash flows from operating activities:
Net income.................................... $3,482 $3,068
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization............. 779 426
Other amortization............................. 510 451
Provision for doubtful accounts............ 64 162
Changes in operating assets and liabilities:
Trade receivables................................. 3,606 4,870
Inventories........................................... (2,119) 1,111
Prepaid expenses and other current assets. (488) (417)
Other assets....................................... (12) 2
Accounts payable................................ 1,003 (5,770)
Accrued liabilities and other liabilities.... (2,123) (1,752)
Customer advances and deferred revenue. (6,154) (2,433)
Net cash (used in) operating activities.(1,452) (282)
Cash flows from investing activities:
Capital expenditures............................... (1,767) (870)
Net cash (used in) investing activities..(1,767) (870)
Cash flows from financing activities
Repayment of long-term debt...................... (10,663)
Repayment of notes payable to affiliates...... (1,411)
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. 15,055
Effect of exchange rate changes on cash.................... 214 240
Net (decrease) increase in cash................................. (3,005) 14,143
Cash, beginning of period.......................................... 15,786 2,616
Cash and temporary cash investments, end of period.. $12,781 $16,759
<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 December 31, 1995, and the results of its
operations and its cash flows for the three months ended December
31, 1995 and 1994, in conformity with generally accepted accounting
principles for interim financial information applied on a
consistent basis. The results of operations for the three months
ended December 31, 1995, are not necessarily indicative of the
results to be expected for the full year. These financial
statements should be read in conjunction with IPC's 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>
December 31, September 30,
1995 1995
<S> <C> <C>
Components and manufacturing
work in process $9,596 $ 9,245
Inventory on customer sites
awaiting installation 20,403 18,984
Parts and maintenance supplies 7,068 6,882
$37,067 $35,111
</TABLE>
4. 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 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
<PAGE>
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 at
December 31, 1995 and September 30, 1995 is $1,014 which represents
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 December 31, 1995 and September
30, 1995 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
December 31, 1995 is fully recoverable from Contel.
5. As of May 9, 1994, the Company, KVI and the pre-Offering
stockholders entered into a Tax Allocation and Indemnification
Agreement (the "Tax Agreement") relating to their respective income
tax liabilities and certain related matters as a consequence of the
Offering. The Tax Agreement generally provides that the pre-
Offering stockholders will be indemnified by the Company with
respect to federal and state income taxes (plus interest and
penalties) shifted from a C corporation taxable year to a taxable
year in which the
Company was an S corporation, and that the Company will be
indemnified by the pre-Offering stockholders with respect to
federal and state income taxes (plus interest and penalties)
shifted from an S corporation taxable year to a C corporation
taxable year.
However, in the case of the pre-Offering stockholders' obligation
to indemnify the Company, such obligation shall be limited to the
tax benefit, if any, derived by the pre-
Offering stockholders due to the shift of taxable income from a
taxable year in which the Company was an S corporation to a C
corporation taxable year. Any payment made by
the Company to the pre-Offering stockholders pursuant to the Tax
Agreement may be considered by the Internal Revenue Service or the
state taxing authorities to be nondeductible by the Company for
income tax purposes. In addition, the Company, KVI, Richard P.
Kleinknecht and Peter J. Kleinknecht have agreed, to the extent
that either KVI or the Principal Stockholders receive any cash
proceeds or other benefit in the form of a reduction in amounts
payable on the Note to Contel as a consequence of such litigation,
the Principal Stockholders will pay to the Company the lesser of
(i) such benefit or (ii) the amount paid by the Company for taxes
and related charges subject to the dispute, plus
the amount of any expenses of such litigation incurred by the
Company following the consummation of the Offering. The Tax
Agreement also provides that KVI shall assign to the Company
certain benefits and rights of KVI with respect to KVI's right of
first refusal to purchase certain businesses which may compete with
the Company. In consideration of the Principal Stockholders'
agreement to make such payments and KVI's assignment of
such rights, the Company will pay any and all expenses incurred in
connection with such litigation between KVI and Contel and will not
proceed independently against or receive any amount directly from
Contel.
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in thousands, except per share data)
Results of Operations
Total revenues of $59,750 for the three months ended December 31, 1995
increased by 25.2 percent from $47,716 in the comparable prior-year
period.
Turret sales and installation and related service revenues increased by
$4,765 or 13.3 percent to $40,663 in the three months ended December
31, 1995 from $35,898 in the comparable prior-year period. 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 sales and installation and
related service increased significantly by $7,269 or 61.5 percent to
$19,087 in the three months ended December 31, 1995 from $11,818, in
the comparable prior-year period due to the continuing development and
expansion of the Company's Information Transport Systems business.
Cost of revenues (as a percentage of revenues) of 69.0 percent for the
three months ended December 31, 1995 decreased from 69.6 percent in the
comparable prior-year period, primarily due to continued efficiencies
including manufacturing cost reductions.
Research and development expenses for the three months ended December
31, 1995 increased to $2,993 from $2,308 in the comparable prior-year
period, due to the development of new products and enhancements to
existing products. Also, research and development expenses for the
three months ended December 31, 1995 include development expenses
incurred 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 months ended
December 31, 1995 increased to $9,707, from $6,914 in the comparable
prior-year period. These increases are attributable to a rise in
headcount and other expenses in support of higher business levels,
start-up costs associated with the Company's subsidiary, International
Exchange Network, 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.
The Company's effective tax rate for the three months ended December
31, 1995 and 1994 was approximately 40 percent and 42 percent,
respectively.
<PAGE>
Liquidity and Capital Resources
Net cash flows used in operating activities was $1,453 for the three
months ended December 31, 1995 compared with net cash flows used in
operating activities of $282 for the three months ended December 31,
1994. Net cash used in operations resulted mainly from customer
advances and deferred revenue offset in part, by changes in accounts
payable, accounts receivable and net income.
Net cash used in investing activities for the three months ended
December 31, 1995 totaled $1,767 compared with $870 for the comparable
prior year period. Net cash flows used in investing activities
resulted from property, plant and equipment expenditures, primarily
composed of machinery and equipment.
In connection with the Company's implementation of an international
virtual private network, the Company has committed to purchase
approximately $4.5 million for certain network switching equipment.
The Company will finance this purchase through long-term capital
leases.
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 6. Exhibits and Reports on Form 8-K
(a) Exhibit Number 27 Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K dated October 17, 1995 was filed pursuant to
Item 5 (Other Events).
<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: February 8, 1996 By: /s/ Terry Clontz
Terry Clontz
President and Chief Executive Officer
Dated: February 8, 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 December 31, 1995 and the unaudited condensed statement
of income for the three-month period ending December 31, 1995
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> DEC-31-1995
<CASH> 12,781
<SECURITIES> 0
<RECEIVABLES> 46,607
<ALLOWANCES> 1,582
<INVENTORY> 37,067
<CURRENT-ASSETS> 106,437
<PP&E> 10,175
<DEPRECIATION> 7,762
<TOTAL-ASSETS> 124,079
<CURRENT-LIABILITIES> 56,613
<BONDS> 0
0
0
<COMMON> 107
<OTHER-SE> 61,898
<TOTAL-LIABILITY-AND-EQUITY> 124,079
<SALES> 59,750
<TOTAL-REVENUES> 59,750
<CGS> 41,213
<TOTAL-COSTS> 54,164
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (63)
<INCOME-PRETAX> 5,837
<INCOME-TAX> 2,355
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,482
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.33
</TABLE>
