SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K AMENDMENT #1
Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended September 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 (IRS 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 29, 1996, was
approximately $75.3 million based upon the last sale price
reported for such date on the Nasdaq Stock Market.
The number of shares of the Registrant's Common Stock
outstanding as of November 29, 1996 was 10,650,172.
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, 1997,
are incorporated by reference in Part III of this Report on
Form 10-K.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<PAGE>
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
financial position of IPC Information Systems, Inc. as of
September 30, 1996 and 1995 and the consolidated results of
their operations and their cash flows for the years ended
September 30, 1996 and 1995 and the combined results of their
operations and their cash flows for the year ended September
30, 1994, 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 11, 1996
<PAGE>
IPC INFORMATION SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
September 30,
1996 1995
<S> <C> <C>
ASSETS:
Current assets:
Cash and temporary cash investments... $2,306 $15,786
Trade receivables, less allowance
of $1,521 and $1,572................ 66,468 50,513
Inventories......................... 36,367 35,111
Prepaid expenses and other current
assets.............................. 7,284 9,526
Total current assets............. 112,425 110,936
Property, plant and equipment, net..... 21,867 9,236
Other assets, net...................... 6,665 7,864
Total assets..................... $140,957 $128,036
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Note payable......................... $13,900
Accounts payable..................... 14,369 $14,807
Accrued liabilities.................. 13,502 19,366
Customer advances and deferred
revenue.............................. 19,446 29,912
Short-term lease commitments......... 940
Total current liabilities........ 62,157 64,085
Long-term lease commitments............ 3,429
Other liabilities...................... 3,656 5,447
Total liabilities................ 69,242 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 10,860,000 and 10,763,740
shares at September 30, 1996
and 1995, respectively............. 109 107
Paid-in capital...................... 46,831 45,853
Retained earnings ................... 25,493 13,262
Less treasury stock, at cost,
242,185 shares.................. (718) (718)
Total stockholders' equity....... 71,715 58,504
Total liabilities and
stockholders' equity........... $140,957 $128,036
<FN>
See Notes to Consolidated and Combined Financial Statements.
</TABLE>
<PAGE>
IPC INFORMATION SYSTEMS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except Per Share Amount)
<TABLE>
<CAPTION>
For the year ended September 30,
1996 1995 1994
Consolidated Consolidated Combined
<S> <C> <C> <C>
Revenues:
Product sales and installation... $178,513 $139,947 $103,529
Service.......................... 70,995 66,307 60,142
249,508 206,254 163,671
Cost of revenues:
Product sales and installation... 122,897 95,174 74,233
Service.......................... 49,793 47,907 41,395
172,690 143,081 115,628
Gross profit.................. 76,818 63,173 48,043
Research and development expenses. 11,467 10,108 7,654
Selling, general and
administrative expenses.......... 45,143 31,038 23,727
Income from operations...... 20,208 22,027 16,662
Interest income/(expense), net.... (678) 233 (1,568)
Gain on renegotiation of lease
obligation on vacant facilities.. 517
Other income/(expense), net....... 591 226 65
Income before provision for
income taxes............... 20,121 22,486 15,676
Provision/(benefit) for
income taxes..................... 7,992 9,219 (873)
Net income.................. $12,129 $13,267 $16,549
Earnings per share................ $1.15 $1.26
Weighted average shares
outstanding...................... 10,590 10,506
Pro forma data (unaudited) (See Note 7):
Pro forma provision for income taxes........................ $6,184
Pro forma earnings per share ............................... $1.11
Pro forma weighted average shares outstanding............... 8,535
<FN>
See Notes to Consolidated and Combined Financial Statements.
</TABLE>
<PAGE>
IPC INFORMATION SYSTEMS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
For the year ended September 30,
1996 1995 1994
Consolidated Consolidated Combined
<S> <C> <C> <C>
Cash flows from operating activities:
Net income....................... $12,129 $13,267 $16,549
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation and amortization... 4,351 2,058 2,317
Other amortization.............. 2,037 1,782 1,971
Provision for doubtful accounts. 240 861 786
Deferred income taxes........... 674 (1,084) (4,256)
Gain on renegotiation of lease
obligation..................... (517)
Changes in operating assets and liabilities:
Trade receivables............... (16,385) (11,804) (11,783)
Inventories..................... (1,678) 15,440 (23,100)
Prepaid expenses and other
current assets................. (288) (1,606) (3,545)
Other assets.................... 130 (342) 142
Accounts payable................ (950) (717) 3,044
Accrued liabilities and other
liabilities.................... (4,691) (630) 3,190
Customer advances and deferred
revenue........................ (10,306) (9,882) 22,455
Net cash (used in) provided
by operating activities..... (14,737) 7,343 7,253
Cash flows from investing activities:
Capital expenditures............ (11,747) (6,499) (1,173)
Purchase of short-term
investment..................... (2,007)
Proceeds from sale of short-term
investment..................... 2,007
Acquisition of Bridge
Electronics, Inc............... (2,997)
Net cash (used in) investing
activities.................. (12,737) (8,506) (1,173)
Cash flows from financing activities:
Net proceeds from note payable.. 13,900
Proceeds from long-term debt.... 123,211
Principal payments on capital
leases......................... (221)
Repayment of long-term debt..... (10,663) (125,464)
Repayment of notes payable to
affiliates..................... (1,411)
Proceeds from the exercise of
stock options.................. 106
Proceeds from the sale of common
stock.......................... 45,337
Purchase of treasury stock...... (396) (72)
S corporation distribution...... (18,530) (2,470)
Net cash provided by (used in)
financing activities........ 13,785 14,337 (4,795)
Effect of exchange rate changes
on cash.......................... 209 (4) (243)
Net (decrease) increase in cash.... (13,480) 13,170 1,042
Cash and temporary cash investments,
beginning of period.............. 15,786 2,616 1,574
Cash and temporary cash investments,
end of period.................... $2,306 $15,786 $2,616
Supplemental disclosures of cash flow information:
Cash paid during the year for-
Income taxes.................... $6,863 $9,876 $1,390
Interest........................ $ 756 $ 18 $1,157
Non-cash investing and financing activities-
Capital lease obligations....... $4,369
Issuance of stock for the
acquisition of Bridge
Electronics, Inc. ............. $ 700
<FN>
See Notes to Consolidated and Combined Financial Statements.
</TABLE>
<PAGE>
IPC INFORMATION SYSTEMS, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in Thousands)
<TABLE>
<CAPTION>
Total
Paid- Retained stock-
Common in earnings Treasury holders'
stock capital (deficit) stock equity
<S> <C> <C> <C> <C> <C>
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
Translation adjustment. 102 102
Net income............. 12,129 12,129
Issuance of common stock
in acquisition......... 1 699 700
Issuance of common stock
under stock purchase
plan................... 1 171 172
Issuance of common stock
under stock option plan. 108 108
Consolidated balance,
September 30, 1996...... $109 $46,831 $25,493 ($718) $71,715
<FN>
See Notes to Consolidated and Combined Financial Statements.
</TABLE>
<PAGE>
IPC INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS,
(Dollars in Thousands, Except Per Share Amounts)
1. The Company:
IPC Information Systems, Inc. ("the Company") provides
globally integrated telecommunications products and services
to the financial services industry primarily in the United
States and United Kingdom. The Company is in the business of
designing, manufacturing, installing and servicing trading
room voice communication workstations and installing and
servicing comprehensive Local Area Networks. In addition,
International Exchange Networks Ltd. ("IXNET"), a subsidiary
of the Company, has implemented a facilities-based global
network designed for the specialized international
telecommunications requirements of the financial services
industry.
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. 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. Contracts for
maintenance are billed in advance, and are recorded as
deferred revenue and recognized ratably over the contractual
periods. Revenue from network services are recognized in the
month the related service is provided.
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.
<PAGE>
IPC INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS,Continued
(Dollars in Thousands, Except Per Share Amounts)
Property, Plant and Equipment
Property, plant and equipment are stated at cost and
depreciated on a straight-line basis over their estimated
useful lives. Network switching equipment are stated at
cost. Various costs are capitalized during the installation
and expansion of the network. Depreciation is calculated
using the straight line method over the estimated useful
lives beginning in the year the asset was placed into
service.
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, 1996 and 1995. There are no unamortized
product development costs at September 30, 1996. Unamortized
product development costs at September 30, 1995 was $626 and
is included in other assets. Amortization expense for each
of the years ended September 30, 1996, 1995 and 1994 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 7 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.
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.
Use of Estimates
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during the reported period. Actual results could
differ from those estimates.
<PAGE>
IPC INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS,Continued
(Dollars in Thousands, Except Per Share Amounts)
Foreign Currency Translation Adjustment
The balance sheets and statements of operations of IPC's UK
subsidiary ("IPC-UK") are measured using the local currency
as the functional currency. Assets and liabilities of IPC-UK
are translated at the year end exchange rate. Revenue and
expense amounts 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 was
$2.27 for the year ended September 30, 1994.
3. Acquisitions:
During June 1995, the Company acquired a controlling interest
in International Exchange Networks, Ltd. ("IXNET"). The
Company acquired 80% of IXNET for providing $5,500 in working
capital. The acquisition was accounted for using the
purchase method of accounting. Included in other assets is
$1,041 and $1,222 at September 30, 1996 and 1995,
respectively, 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 included a payment in January 1996 of $2,025 in
cash and 76,923 shares of the Company's common stock, valued
at $700. Additionally, during fiscal 1996, the Company made
$1,000 in contingent acquisition payments based on IPC
Bridge's performance. The acquisition was accounted for
using the purchase method of accounting. Included in other
assets is $3,202 and $2,501 at September 30, 1996 and 1995,
respectively, representing the excess of the cost over the
fair value of the identifiable tangible and intangible assets
acquired.
4. Inventories:
`
<TABLE>
<CAPTION>
September 30,
1996 1995
<S> <C> <C>
Components and manufacturing work in process $13,913 $ 9,245
Inventory on customer sites awaiting
installation 12,503 18,984
Parts and maintenance supplies 9,951 6,882
$36,367 $35,111
</TABLE>
<PAGE>
IPC INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS,Continued
(Dollars in Thousands, Except Per Share Amounts)
5. Property, Plant and Equipment:
<TABLE>
<CAPTION>
September 30,
1996 1995
<S> <C> <C>
Machinery and Equipment $19,479 $13,027
Furniture and Fixtures 2,006 1,654
Leasehold Improvements 5,424 2,789
Network Switching Equipment 1,600 -
Network Switching Equipment
under capital leases 4,619 -
Total depreciable property, plant and 33,128 17,470
equipment
Less, accumulated depreciation and
amortization (13,376) (9,037)
$19,752 $ 8,433
Land 329 329
Construction in Progress 1,786 474
$21,86 $ 9,236
</TABLE>
6. Note Payable:
In 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 September 30, 1996, $13,900 of the line was
outstanding and is payable upon demand. The weighted average
interest rate on borrowings for fiscal year 1996 was 6.31%.
At September 30, 1995 there was no amount outstanding on the
line of credit.
7. Initial Public Offering:
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
Pro forma provision for income taxes for 1994 assumes that
IPC 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
11). 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.
<PAGE>
IPC INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS,Continued
(Dollars in Thousands, Except Per Share Amounts)
8. 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 $7,300 and $3,732 at September 30, 1996 and
$7,450 and $3,606 at September 30, 1995, respectively.
Approximate payments for subsequent annual periods related to
the deferred compensation agreements, at September 30, 1996,
are as follows:
<TABLE>
<S> <C>
1997 $187
1998 225
1999 280
2000 320
2001 390
Thereafter 5,898
$7,300
</TABLE>
In April 1995, IPC 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
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 contributed $556
and $520 for the years ended September 30, 1996 and 1995,
respectively. For the year ended September 30, 1994, 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, 1996, 1995 and 1994 were $229, $92 and $76,
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
$7,750, $5,074 and $4,744 for the years ended September 30,
1996, 1995 and 1994, respectively, representing pass through
contributions to various union sponsored pension plans.
<PAGE>
IPC INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS,Continued
(Dollars in Thousands, Except Per Share Amounts)
Stock Option and Incentive Plan
The following table summarizes stock option plan activity:
<TABLE>
<CAPTION>
Shares
Under Option Option Prices
<S> <C> <C>
Balance, September 30, 1994
Granted 263,500 $13.50 - $18.00
Canceled (16,000) $15.00
Balance, September 30, 1995 247,500 $13.50 - $18.00
Granted 573,000 $14.125 - $19.00
Granted 25,000 $25.00
Granted 25,000 $40.00
Exercised (8,964) $13.75 - $15.00
Canceled (35,335) $13.75 - $19.00
Balance, September 30, 1996 826,201
Exercisable,
September 30, 1996 66,535
</TABLE>
Employees generally vest in stock options over a period of
three to five years. As of September 30, 1996, the Company
had reserved 1,579,337 shares of common stock for the
exercise of options.
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.
During October 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation." The disclosure
requirements under this Standard will affect the Company
beginning in fiscal 1997 for all of its stock options granted
after September 30, 1995. The Statement allows alternate
accounting methods and the Company intends to account for
stock options as in the past under Accounting Principles
Board Opinion No. 25. The Company will disclose certain pro
forma information required by the Statement beginning with
the Company's next annual report.
Employee Stock Purchase Plan
In 1994, the Company adopted an employee stock purchase plan
and reserved 526,813 shares of common stock for issuance
thereunder. Under the stock purchase plan, the Company's
employees may purchase shares of common stock at a price per
share that is the lesser of the common stock fair market
value on the first business day of the purchase period or 90%
of the common stock fair market value on the last day of the
purchase period, but in no event less than 85% of the common
stock fair market value on either the option grant date or
option exercise date. Through September 30, 1996, 10,373
shares have been issued and 516,440 shares are reserved for
future issuances under this plan.
<PAGE>
IPC INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS,Continued
(Dollars in Thousands, Except Per Share Amounts)
9. Commitments and Contingencies:
Litigation
Knight Ventures, Inc. ("KVI"), a company principally owned by
Richard P. Kleinknecht and Peter J. Kleinknecht (the
"Principal Stockholders"), and the former parent of the
Company, agreed to settle its litigation with Contel
Corporation ("Contel") over, among other claims,
responsibility for taxes, tax liens, tax assessments and tax
warrants with respect to Contel IPC, for periods prior to the
acquisition of the Company from Contel.
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 termination of its S Corporation
status and its initial public offering. In addition, the
Company, KVI and the Principal Stockholders agreed, to the
extent that either KVI or the Principal Stockholders receives
any cash proceeds or other benefit in the form of a reduction
in amounts payable to Contel, as a consequence of the
litigation, they 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.
As of May 15, 1996, Contel, KVI, the Principal Stockholders
and the Company, although not a party to the litigation,
entered into a settlement agreement and mutual releases. In
connection with this settlement agreement, KVI has executed,
and the Principal Stockholders have guaranteed, a note payable
to the Company, in the amount of $1,300, to fulfill
obligations under the Tax Agreement.
Operating 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 $6,513, $5,587 and $5,252 for the
years ended September 30, 1996, 1995 and 1994, respectively.
Future minimum annual rental payments required under
noncancellable operating leases (including rentals on vacant
facilities) at September 30, 1996 are as follows:
<TABLE>
<S> <C>
1997 $5,688
1998 4,707
1999 3,270
2000 2,757
2001 2,474
Thereafter 4,282
$23,178
</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,
<PAGE>
IPC INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS,Continued
(Dollars in Thousands, Except Per Share Amounts)
approximated $1,224 and $1,200 at September 30, 1996 and
$1,958 and $1,844 at September 30, 1995, respectively. The
discount rate applied was 6.8%.
Capital Leases
IXNET has entered into two capital leases during fiscal 1996
to purchase certain network switching equipment used for
IXNET's international private network.
Future minimum lease payments required under noncancellable
capital leases at September 30, 1996 are as follows:
<TABLE>
<S> <C>
1997 $1,326
1998 1,327
1999 1,208
2000 850
2001 638
5,349
Less, amount representing interest (980)
Present value of net minimum lease payments under
capital leases $4,369
</TABLE>
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 $6,466 at September 30,
1996.
10.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 respective affiliate.
Approximately $52,592, $38,666 and $36,293 of technical
labor, and $2,327, $2,083 and $1,767 of administrative labor
was provided through agreements with KEC and KEC-NJ during
the years ended September 30, 1996, 1995 and 1994,
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, 1996, 1995 and 1994, KEC and KEC-NJ
billed the Company payroll administrative services of $1,374,
$1,024 and $922, respectively.
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,
1996, 1995 and 1994, the Company was charged approximately
$430 for rent expense. In addition, for the years
<PAGE>
IPC INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS,Continued
(Dollars in Thousands, Except Per Share Amounts)
ended September 30, 1996, 1995 and 1994, 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 $30, $55 and $130,
respectively.
Equipment Rentals
Equipment rentals from an affiliated company were $898, $975
and $1,201 for the years ended September 30, 1996, 1995 and
1994, 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, 1996, 1995 and 1994 were
approximately $993, $2,220 and $128, respectively, while
amounts charged to IPC under subcontracts with companies
controlled by the Principal Stockholders were approximately
$703, $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 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.
11.Income Taxes:
Pretax earnings consisted of the following:
<TABLE>
<CAPTION>
For the year ended September 30,
1996 1995 1994
<S> <C> <C> <C>
Pretax earnings:
United States $10,020 $17,158 $ 9,760
Foreign 10,101 5,328 5,916
Total pretax earnings $20,121 $22,486 $15,676
</TABLE>
Effective October 1, 1992, IPC-US elected to be treated as an
S corporation for federal income tax purposes. In the year
ended September 30, 1994 the Company was not subject to
federal income taxes. The Company's income was passed through
and taxed directly to the stockholders.
<PAGE>
IPC INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS,Continued
(Dollars in Thousands, Except Per Share Amounts)
On September 29, 1994, IPC-US filed a notification
terminating its S corporation status, effective October 1,
1994. For the years ended September 30, 1996 and 1995, the
Company was subject to corporate federal income taxes.
The provision (benefit) for income taxes consisted of the
following:
<TABLE>
<CAPTION>
For the year ended September 30,
1996 1995 1994
<S> <C> <C> <C>
Current:
Federal $1,844 $ 5,887
State and local 1,967 2,558 $1,160
Foreign 3,507 1,858 2,223
7,318 10,303 3,383
Deferred:
Termination of
S corporation
status (3,295)
Federal 513 (673)
State and local 207 (359) (744)
Foreign (46) (52) (217)
674 (1,084) (4,256)
Income tax
provision / (benefit) $7,992 $ 9,219 $ (873)
</TABLE>
The components of net deferred tax assets are as follows:
<TABLE>
<CAPTION>
September 30,
1996 1995
US Foreign Total US Foreign Total
<S> <C> <C> <C> <C> <C> <C>
Deferred tax assets:
Excess of book over
tax depreciation $917 $59 $976 $1,133 $26 $1,159
Amortization
intangibles 66 66 25 25
Inventory and
receivables 2,172 221 2,393 2,602 214 2,816
Accrued expenses 1,228 5 1,233 1,570 1,570
Total deferred tax
assets 4,383 285 4,668 5,330 240 5,570
Deferred tax
liabilities:
Amortization of
intangibles (227) (1) (228)
____ ____ ____ ____ ____ ____
Total deferred tax
liabilities (227) (1) (228)
____ ____ ____ ____ ____ ____
Net deferred
tax asset $4,383 $285 $4,668 $5,103 $239 $5,342
</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, 1996 and
1995.
<PAGE>
IPC INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS,Continued
(Dollars in Thousands, Except Per Share Amounts)
A reconciliation between the statutory US federal income tax
rate and the Company's effective tax rate, excluding minority
interest, is as follows:
<TABLE>
<CAPTION>
For the year ended
September 30,
1996 1995
<S> <C> <C>
Statutory US federal tax rate 35.0% 35.0%
State and local income taxes,
net of federal benefit 6.8 6.4
Tax exempt interest income (0.5)
Other, net (0.8) 0.1
41.0% 41.0%
</TABLE>
12. Operations by Geographic Areas:
Information about the Company's operations by geographic area
is as follows:
<TABLE>
<CAPTION>
For the year ended September 30,
1996 1995 1994
<S> <C> <C> <C>
Revenues:
United States $ 202,926 $ 186,355 $ 142,130
United Kingdom 46,582 19,899 21,541
$ 249,508 $ 206,254 $ 163,671
Operating Profits:
United States $ 24,485 $ 30,714 $ 20,371
United Kingdom 9,745 4,192 5,345
Corporate (14,022) (12,879) (9,054)
$20,208 $22,027 $16,662
Identifiable Assets:
United States $ 111,829 $ 98,228 $ 94,530
United Kingdom 17,547 25,417 8,799
Corporate 11,581 4,391 7,373
$ 140,957 $ 128,036 $ 110,702
</TABLE>
Included in the United States revenues are export sales to
unaffiliated customers of $16,126, $17,063 and $12,849 for the
years ended September 30, 1996, 1995 and 1994, respectively.
Transfers from the United States to the United Kingdom,
eliminated in consolidation, were $12,681, $7,999 and $6,764
for the years ended September 30, 1996, 1995 and 1994,
respectively.
For the year ended September 30, 1996, approximately 13% of
total revenues were from one customer. Corporate assets are
principally prepaids, intangibles and other assets.
<PAGE>
IPC INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS,Continued
(Dollars in Thousands, Except Per Share Amounts)
13. Quarterly Financial Information (unaudited)
The following tables set forth unaudited quarterly financial
information for the years ended September 30, 1996 and 1995:
<TABLE>
<CAPTION>
Quarter Ended
December 31 March 31 June 30 September 30
<S> <C> <C> <C> <C>
Year Ended
September 30, 1996:
Net Revenues $59,750 $62,198 $69,424 $58,136
Gross Profit 18,537 19,279 20,740 18,262
Net earnings 3,482 3,641 3,701 1,305
Earnings per Share $0.33 $0.34 $0.35 $0.12
Year Ended
September 30, 1995:
Net Revenues $47,716 $50,528 $52,458 $55,552
Gross Profit 14,511 15,415 16,138 17,109
Net earnings 3,068 3,268 3,486 3,445
Earnings per Share $0.29 $0.31 $0.33 $0.33
</TABLE>
The quarterly earnings per share information is computed separately
for each period. Therefore, the sum of such quarterly per share
amounts may differ from the total for the year.
<PAGE>
Schedule II
IPC INFORMATION SYSTEMS, INC.
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in Thousands)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
Additions
Balance Charged to
at Charged to costs and Balance
Beginning costs and Other at End
Description of Period Expenses Accounts Deductions of Period
<S> <C> <C> <C> <C> <C>
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 $1,123(2) $7,489
For the Year
September 30, 1996
Provision for
Doubtful Accounts $1,572 $240 $291(1) $1,521
Provision for Inventory
Obsolescense... $7,489 $1,143 $2,267(2) $6,365
<FN>
(1) Doubtful Accounts Written Off, Net of Cash Recovered
(2) Inventory Written Off
</TABLE>
<PAGE>
