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, 1997
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, 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, 1997
Common Stock par value $0.01 10,671,791 shares
<PAGE>
IPC INFORMATION SYSTEMS, INC.
INDEX TO FORM 10-Q
PAGE
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements (unaudited)
Consolidated Balance Sheets at June 30, 1997
and September 30, 1996 2
Consolidated Statements of Operations for the
Three and Nine Months Ended June 30, 1997 and 1996 3
Consolidated Statements of Cash Flows for the
Nine Months Ended June 30, 1997 and 1996 4
Notes to Consolidated Financial Statements 5
ITEM 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations 6 - 9
PART II. OTHER INFORMATION 10
SIGNATURES 11
<PAGE>
IPC INFORMATION SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
June 30, September 30,
1997 1996
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents....$ 1,820 $ 2,306
Trade receivables, less
allowance of $1,517 and
$1,521...................... 62,828 66,468
Inventories.................. 42,929 36,367
Prepaid expenses and other
current assets.............. 14,389 7,284
Total current assets..... 121,966 112,425
Property, plant and equipment,
net............................ 36,370 21,867
Other assets, net............... 6,240 6,665
Total assets.............$ 164,576 $ 140,957
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Note payable..................$ 9,000 $ 13,900
Accounts payable.............. 17,905 14,369
Accrued liabilities........... 19,394 12,963
Customer advances and deferred
revenue..................... 25,602 19,446
Current portion of capital
leases....................... 2,688 940
Total current liabilities.. 74,589 61,618
Lease obligations, net of
current portion.............. 10,025 3,429
Other liabilities............. 3,780 4,195
Total liabilities.......... 88,394 69,242
Commitments and contingencies
Stockholders' equity:
Preferred stock - $0.01 par
value, authorized 10,000,000
shares, none issued and
outstanding..................
Common stock - $0.01 par value,
authorized 25,000,000 shares;
issued 10,913,976 and
10,860,000 shares; outstanding
10,671,791 and 10,617,815 at
June 30, 1997 and September 30,
1996, respectively............ 109 109
Paid-in capital................ 47,661 46,831
Retained earnings.............. 29,130 25,493
Less treasury stock, at cost,
242,185.................... (718) (718)
Total stockholders' equity..... 76,182 71,715
Total liabilities and
stockholders' equity..........$ 164,576 $ 140,957
<FN>
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
IPC INFORMATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues:
Product sales and
installation......... $ 45,378 $ 52,606 $ 131,288 $ 142,137
Service............ 23,504 16,818 63,187 49,235
68,882 69,424 194,475 191,372
Cost of revenues:
Product sales and
installation......... 32,679 36,171 91,915 97,631
Service............... 15,478 12,513 43,447 35,185
48,157 48,684 135,362 132,816
Gross profit.......... 20,725 20,740 59,113 58,556
Research and development
expenses............. 2,299 3,098 7,344 9,206
Selling, general and
administrative expenses. 15,811 11,636 45,546 31,926
Income from operations. 2,615 6,006 6,223 17,424
Interest income/(expense),
net.................... (546) (401) (1,316) (304)
Other income/(expense),
net.................... (19) 394 344 717
Income before provision
for income taxes....... 2,050 5,999 5,251 17,837
Provision for income
taxes.................. 863 2,298 2,257 7,019
Net income.......$ 1,187 $ 3,701 $ 2,994 $ 10,818
Earnings per share......$ 0.11 $ 0.35 $ 0.28 $ 1.02
Weighted average shares
outstanding............ 10,672 10,613 10,663 10,581
<FN>
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
IPC INFORMATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Nine months ended June 30,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income.......................... $ 2,994 $ 10,818
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities:
Depreciation and amortization
expense.......................... 5,555 2,654
Other amortization................ 716 1,511
Provision for doubtful accounts... 189 286
Changes in operating assets and
liabilities:
Trade receivables................. 4,023 (5,793)
Inventories....................... (6,217) (10,564)
Prepaid expenses and other current
assets........................... (5,908) 136
Other assets...................... (50) (3)
Accounts payable.................. 3,364 (454)
Accrued liabilities and other
liabilities...................... 6,307 (1,850)
Customer advances and deferred
revenue.......................... 5,974 (12,323)
Net cash provided by (used in)
operating activities............... 16,947 (15,582)
Cash flows from investing activities:
Capital expenditures.............. (10,175) (6,940)
Proceeds from sale of short-term
investment....................... 2,007
Contingent acquisition payments to
Bridge Electronics, Inc.......... (1,125) (2,500)
Net cash (used in) investing
activities......................... (11,300) (7,433)
Cash flows from financing activities:
Net repayments of note payable.... (4,900)
Net proceeds from note payable.... 9,200
Principal payments on capital
leases........................... (1,212)
Proceeds from exercise of stock
options.......................... 40 98
Net cash (used in) provided by
financing activities............... (6,072) 9,298
Effect of exchange rate changes on
cash............................... (61) 20
Net (decrease) in cash.............. (486) (13,697)
Cash and cash equivalents, beginning
of period.......................... 2,306 15,786
Cash and cash equivalents, end of
period............................. $ 1,820 $ 2,089
<FN>
See Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
IPC INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Dollar amounts in thousands)
(unaudited)
1. In the opinion of management, the accompanying unaudited
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, 1997, and the
results of its operations for the three and nine months ended
June 30, 1997 and 1996, and its cash flows for the nine months
ended June 30, 1997 and 1996, 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, 1997 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 1996 Annual Report to stockholders and Form 10-K for the
fiscal year ended September 30, 1996.
2. Classification of inventories:
<TABLE>
June 30, September 30,
1997 1996
<S> <C> <C>
Components and manufacturing
work in process $12,440 $13,913
Inventory on customer sites
awaiting installation 22,107 12,503
Parts and maintenance supplies 8,382 9,951
$42,929 $36,367
</TABLE>
3. The Company maintains a promissory note with a bank for a
line of credit up to $25,000 of which $9,000 is outstanding
at June 30, 1997. Interest rates ranged from 6.38% to 7.75%
during the quarter ended June 30, 1997 as compared to a range
of 6.19% to 6.75% in the comparable prior-year period.
4. Certain reclassifications have been made to the fiscal 1996
financial statements in order to conform to the current
period's presentation.
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollar amounts in thousands, except per share data)
Overview
IPC is a worldwide industry leader in providing
comprehensive telecommunications services to the financial
services industry on a global basis. 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 in building cabling
infrastructures and an expanded product offering including
LAN and WAN hubs and routers, and video conferencing systems.
IPC, through its subsidiary, International Exchange Networks,
Ltd. ("IXnet"), has implemented a facilities-based global
network (the "IXnet Network") designed for the specialized
international telecommunications requirements of the financial
services industry.
IPC's goal is to be the preferred single source provider
of integrated voice, data and video communications solutions
and services to the financial services industry on a worldwide
basis. The Company intends to leverage its existing extensive
customer relationships to provide a continually growing portion
of their global telecommunications requirements through a
combination of new products and services developed by IPC and
IXnet. This is to be accomplished through the continued
deployment of a facilities-based global network and the
integration of the network with IPC's product offerings.
The Company's operations are separated into three lines
of business: turret systems, I.T.S. and network services (IXnet).
The Company accounts for sales of turret systems to distributors
and direct sales and installations of turret systems as "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 "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 as "sales and installation". I.T.S.
revenue from on-site maintenance of cabling and LAN
infrastructure, including annual and multi-year contracts,
and from the provision of outsourcing services for the support,
expansion and upgrading of existing customer networks are
classified as "service". Additionally, the Company classifies
revenues derived from the IXnet Network as "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. Invoices
representing progress payments are submitted during various
stages of the installation. The revenue attributable to such
billing 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
<PAGE>
in the same month or the month following the order for services.
Revenue from network services are recognized in the month the
service is provided.
Due to the substantial sales price of the Company's large
turret and I.T.S. installations and the Company's recognition
of revenue upon completion of installations, revenues and
operating results could fluctuate significantly from quarter
to quarter. However, the Company's service revenues and network
services business generates a more consistent revenue stream
than sales and installation and, consequently, these fluctuations
could be somewhat diminished in the future as the Company's
service business expands.
Results of Operations
Total revenues of $68,882 and $194,475, for the three and nine
months ended June 30, 1997 decreased by 0.8% and increased by
1.6%, respectively, from $69,424 and $191,372, respectively,
in the comparable prior-year periods.
Turret installation and related service revenues decreased by
$152 and increased by $8,567 or 0.3% and 6.7%, respectively,
to $44,560 and $135,787, in the three and nine months ended
June 30, 1997 from $44,712 and $127,220, respectively, in the
comparable prior-year periods. The decrease in the quarter
ended June 30, 1997 was attributable to lower product sales of
the Company's prior generation analog product, partially offset
by an increase in service revenues. Turret revenue growth for
the nine months ended June 30, 1997 is from the continued
acceptance of the Company's digital TRADENET MX(R) product,
particularly in the UK, and higher revenues from third party
products sold by IPC, typically in connection with turret
products.
Revenues from I.T.S. sales, installation and service decreased
by $4,646 and $15,672 or 19.5% and 25.0%, respectively, to
$19,185 and $47,015 in the three and nine months ended June 30,
1997 from $23,831 and $62,687, respectively, in the comparable
prior-year periods. The decrease in revenue for the quarter
ended June 30, 1997 is due to various large job installations
shifting out of the current quarter which could be realized in
the near future. The decrease for the nine months ended June 30,
1997 is from the revenue shift mentioned above, also, I.T.S.
revenues in the nine months ended June 30, 1996, benefited
from a large global installation cutover for a customer in
the UK.
Revenues from network services grew to $5,137 and $11,673,
respectively, in the three and nine months ended June 30,
1997 from $881 and $1,465, respectively, in the comparable
prior-year periods. The increase resulted from IXnet's
implementation of its global telecommunication network during
fiscal 1996, increasing the number of customers to 127 at
June 30, 1997 from 27 at June 30, 1996. At June 30, 1997,
recurring monthly annualized revenues (based upon recurring
revenues incurred in the final month of the quarter) exceeded
$22 million, an increase of approximately 46% when compared
to the previous quarter.
<PAGE>
Cost of revenues (as a percentage of revenues) of 69.9% and
69.6%, respectively, for the three and nine months ended
June 30, 1997 remained relatively constant when compared
to the comparable prior-year periods. Although the June 30,
1997 three and nine month revenue mix favored turrets, which
typically have higher margins than I.T.S. and network services
revenue, turret revenue included a larger mix of third party
product revenue, which typically have lower margins than I.T.S.
and network services revenue.
Research and development expenses for the three and nine months
ended June 30, 1997 decreased to $2,299 and $7,344, respectively,
from $3,098 and $9,207 in the comparable prior-year periods from
the consolidation of research and development organizations and
the termination of development work on ATM. Also, current year
spending has a higher mix of software development as opposed to
hardware applications. The Company intends to focus on the
integration of the TRADENET MX(R)turret with IXnet's network
capabilities as well as investing in the enhancement of existing
products in the TRADENET MX(R) family to sustain the Company's
leadership position in voice-based trading system products.
Selling, general and administrative expenses for the three and
nine months ended June 30, 1997 increased to $15,811 and $45,546,
respectively, from $11,636 and $31,926 in the comparable
prior-year periods. These increases are attributable to an
increase in people resources, and other expenses required to
build, manage and grow the global businesses. Specifically,
the Company intends to incur additional start-up costs and
network deployment costs associated with IXnet's implementation
of a global virtual private network for the financial services
industry. Additionally, included in selling, general and
administrative expenses for the nine months ended June 30, 1997
is $650 or $0.4 per share representing the settlement of an
employment agreement with the former Chief Operating Officer.
As the Company deploys its global network, management
anticipates that selling, general and administrative expenses
will increase. These expenses may be incurred prior to the
realization of revenues.
Interest expense for the three and nine months ended June 30,
1997 increased to $546 and $1,316, respectively, from $401 and
$304 in the comparable prior-year periods. This increase was
due to the utilization of the Company's line of credit during
fiscal 1997 and interest expense associated with the increase
in capital lease obligations.
The Company's effective tax rate for the three and nine months
ended June 30, 1997, excluding minority interest and a tax
adjustment, was 41.0%, which is consistent with the comparable
prior-year periods.
In February 1997, the FASB issued SFAS No. 128, "Earnings per
Share" (SFAS 128), which simplifies existing computational
guidelines, revises disclosure requirements and increases the
comparability of earnings per share data on an international
basis. The Company is currently evaluating the new statement.
However, the impact of adoption of SFAS 128 on the Company's
financial statements is not expected to be significant. This
statement is effective for financial statements for periods
ending after December 15, 1997 and requires restatement of
prior-period earnings per share data.
<PAGE>
Liquidity and Capital Resources
Net cash provided by operating activities for the nine months
ended June 30, 1997 was $16,947 compared with net cash used
in operating activities for the nine months ended June 30,
1996 of $15,582. Net cash provided by operations resulted
from changes in working capital and an increase in depreciation
and amortization expense. Depreciation and amortization
expense increase is largely the result of $9,450 in capital
lease additions entered into during the year by the Company.
Cash used in investing activities for the nine months ended
June 30, 1997 totaled $11,300 compared with $7,433 for the
comparable prior-year period. Net cash used in investing
activities resulted from contingent acquisition payments
based on IPC BRIDGE's performance and expenditures for
property, plant and equipment, composed of IXnet network
costs, machinery and equipment and leasehold improvements.
Net cash used in financing activities of $6,072 for the nine
months ended June 30, 1997 resulted from net repayments of
the Company's short-term note payable and principal payments
on capital leases. The Company maintains a promissory note
with a bank for a line of credit up to $25,000 of which $9,000
is outstanding at June 30, 1997. In July, the Company
increased its short-term credit facilities to $35,000 by
entering into a unsecured line of credit with a additional
bank for $10,000.
In April 1997, the Company purchased its sole manufacturing
facility and related land in Westbrook, Connecticut for $2,540
using the Company's short-term credit facility. In July 1997,
this purchase was refinanced through a mortgage agreement with
a bank for $2,182. The term of the mortgage is for eight years
with a twenty year payout bearing interest at libor plus 125
basis points. The Company entered into an interest rate swap
agreement with its bank in order to fix the interest rate over
the eight year term at an effective interest rate of 7.85%.
The Company does not have any other material commitments for
capital expenditures.
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.
With respect to any forward-looking comments contained herein,
the Company refers readers to the cautionary statement under
the Private Securities Litigation Reform Act of 1995, contained
in the Company's Report on Form 10-K for the fiscal year ended
September 30, 1996.
<PAGE>
Part II - Other Information
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 14, 1997 By: /s/ TERRY CLONTZ
Terry Clontz
President and
Chief Executive Officer
Dated: August 14, 1997 By: /s/ BRIAN REACH
Brian L. Reach
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, 1997 and the unaudited condensed statement
of income for the nine-month period ending June 30, 1997
and is qualified in its entirety by reference to such
financial statements.
<MULTIPLIER>1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 1820
<SECURITIES> 0
<RECEIVABLES> 62828
<ALLOWANCES> 0
<INVENTORY> 42929
<CURRENT-ASSETS> 14389
<PP&E> 36370
<DEPRECIATION> 0
<TOTAL-ASSETS> 164576
<CURRENT-LIABILITIES> 74589
<BONDS> 0
0
0
<COMMON> 109
<OTHER-SE> 76073
<TOTAL-LIABILITY-AND-EQUITY> 164576
<SALES> 194475
<TOTAL-REVENUES> 194475
<CGS> 135362
<TOTAL-COSTS> 135362
<OTHER-EXPENSES> 52546
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1316
<INCOME-PRETAX> 5251
<INCOME-TAX> 2257
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2994
<EPS-PRIMARY> .28
<EPS-DILUTED> 0
</TABLE>
