IPC INFORMATION SYSTEMS INC, 10-Q, 1998-08-14

IPC INFORMATION SYSTEMS INC
10-Q, 1998-08-14
TELEPHONE & TELEGRAPH APPARATUS

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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, 1998
-------------
Commission file number 0-25492
-------

IPC Information Systems, Inc.
-----------------------------
(Exact Name of registrant as specified in its charter)

Delaware 58-1636502
-------- ----------
(State or other jurisdiction of incorporation (IRS Employer Identification No.)
or organization)

Wall Street Plaza, 88 Pine Street, New York, NY 10005
-----------------------------------------------------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code 212 825-9060
------------

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes X No
--------- ---------

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

Class Outstanding at July 31, 1998
- ---------------------------- ----------------------------
Common Stock par value $0.01 8,076,188 shares

<PAGE>

IPC INFORMATION SYSTEMS, INC.

INDEX TO FORM 10-Q
<TABLE>
<CAPTION>

PAGE
----
<S> <C>

PART I FINANCIAL INFORMATION

ITEM 1 Financial Statements (unaudited)

Consolidated Balance Sheets at June 30, 1998
and September 30, 1997 2

Consolidated Statements of Operations for the Three and
Nine Months Ended June 30, 1998 and 1997 3

Consolidated Statements of Cash Flows for the
Nine Months Ended June 30, 1998 and 1997 4

Notes to Consolidated Financial Statements 5 - 9

ITEM 2

Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 15

PART II. OTHER INFORMATION 15 - 17

SIGNATURES 18
</TABLE>

<PAGE>

IPC INFORMATION SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS (unaudited)
(Dollar amounts in thousands, except per share amounts)

<TABLE>
<CAPTION>
June 30, September 30,
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................................... $ 13,009 $ 1,465
Trade receivables, less allowance of $1,700 and $1,515, respectively ........ 68,221 61,791
Inventories ................................................................. 45,112 33,557
Prepaid expenses and other current assets ................................... 11,643 13,426
--------- ---------
Total current assets ......................................... 137,985 110,239

Property, plant and equipment, net ............................................. 50,048 38,314
Debt issuance costs, net ....................................................... 10,934 --
Goodwill, net .................................................................. 16,840 8,481
Other assets, net .............................................................. 1,764 1,328
--------- ---------
========= =========
Total assets ................................................. $ 217,571 $ 158,362
========= =========

LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Notes payable ................................................................ $ -- $ 3,200
Accounts payable ............................................................. 16,919 18,042
Accrued liabilities .......................................................... 25,827 21,395
Customer advances and deferred revenue ....................................... 38,471 17,682
Current portion of capital leases ............................................ 4,068 2,987
--------- ---------
Total current liabilities .................................... 85,285 63,306
Senior unsecured notes ........................................................ 183,275 --
Long-term debt, net of current portion ........................................ -- 2,133
Lease obligations, net of current portion ..................................... 12,501 10,336
Other liabilities ............................................................. 3,725 5,677
--------- ---------
Total liabilities ............................................ 284,786 81,452
--------- ---------

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;
8,076,188 shares issued and outstanding at June 30, 1998; 21,865,350 shares
issued;
21,380,980 shares outstanding at September 30, 1997 ....................... 81 109
Paid-in capital .............................................................. 4,797 47,922
Retained earnings ............................................................ (72,093) 29,597
Less treasury stock, at cost, none and 484,370 shares at June 30, 1998 and
September 30, 1997, respectively .......................................... -- (718)
--------- ---------
Total stockholders' (deficit) equity ......................... (67,215) 76,910
--------- ---------
Total liabilities and stockholders' (deficit) equity ......... $ 217,571 $ 158,362
========= =========
</TABLE>

See Notes to Consolidated Financial Statements

2
<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,
------------------------ ------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Product sales and installation ................................. $ 45,428 $ 45,378 $ 115,711 $ 131,288
Service ........................................................ 32,526 23,504 90,442 63,187
-------- --------- --------- ---------
77,954 68,882 206,153 194,475
-------- --------- --------- ---------
Cost of revenue:
Product sales and installation ................................. 26,391 32,679 67,186 91,915
Service ........................................................ 20,027 15,478 57,089 43,447
-------- --------- --------- ---------
46,418 48,157 124,275 135,362
-------- --------- --------- ---------
Gross profit .................................... 31,536 20,725 81,878 59,113

Research and development expenses ................................. 2,322 2,299 7,382 7,344
Selling, general and administrative expenses ...................... 20,837 15,811 54,403 45,546
Change in control expense ......................................... 10,640 -- 10,640 --
-------- --------- --------- ---------
(Loss) income from operations ................... (2,263) 2,615 9,453 6,223
Interest expense, net ............................................. (3,781) (546) (4,669) (1,316)
Other income (expense), net ....................................... 20 (19) (61) 344
-------- --------- --------- ---------
(Loss) income before provision for income taxes . (6,024) 2,050 4,723 5,251
(Benefit) provision for income taxes .............................. (2,185) 863 2,814 2,257
-------- --------- --------- ---------
Net (loss) income ............................... $ (3,839) $ 1,187 $ 1,909 $ 2,994
======== ========= ========= =========

Basic (loss) earnings per share ................................... $ (0.31) $ 0.06 $ 0.11 $ 0.14
-------- --------- --------- ---------

Basic weighted average shares outstanding ......................... 12,495 21,344 16,627 21,326
-------- --------- --------- ---------

Diluted earnings per share ........................................ -- $ 0.06 $ 0.11 $ 0.14
-------- --------- --------- ---------

Diluted weighted average shares outstanding ....................... -- 21,344 16,873 21,354
-------- --------- --------- ---------
</TABLE>

See Notes to Consolidated Financial Statements

3
<PAGE>
IPC INFORMATION SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(Dollar amounts in thousands)

<TABLE>
<CAPTION>
Nine Months Ended
June 30,
-----------------------
1998 1997
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................................................. $ 1,909 $ 2,994
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization expense ................................................... 7,457 5,555
Goodwill amortization ................................................................... 1,998 466
Non-cash interest on senior discount notes............................................... 3,264 --
Other interest amortization ............................................................. 439 250
Provision for doubtful accounts ......................................................... 1,529 189
Changes in operating assets and liabilities:
Trade receivables ....................................................................... (6,733) 4,023
Inventories ............................................................................. (11,029) (6,217)
Prepaid expenses and other current assets ............................................... 1,991 (5,908)
Other assets ............................................................................ (431) (50)
Accounts payable ........................................................................ (2,159) 3,364
Accrued liabilities and other liabilities ............................................... 5,858 6,307
Customer advances and deferred revenue .................................................. 20,401 5,974
--------- --------
Net cash provided by operating activities ................................. 24,494 16,947
Cash flows from investing activities:
Capital expenditures .................................................................... (11,865) (10,175)
Purchase of Mxnet, net of cash acquired ................................................. (6,660) --
Contingent acquisition payments to Bridge Electronics, Inc............................... (875) (1,125)
--------- --------
Net cash (used in) investing activities ................................... (19,400) (11,300)
Cash flows from financing activities:
Net repayments of note payable .......................................................... (3,200) (4,900)
Proceeds from issuance of senior discount notes ......................................... 180,011 --
Proceeds from Equity Investment ......................................................... 54,721 --
Purchase of IPC Common Stock at Merger .................................................. (200,271) --
Debt issuance costs related to the Merger ............................................... (11,146) --
Other obligations due at Merger ......................................................... (2,625) --
Equity charges at Merger ................................................................ (5,884) --
Principal payments on capital leases .................................................... (2,477) (1,212)
Repayment of long-term debt ............................................................. (2,178) --
Proceeds from exercise of stock options ................................................. 467 40
--------- --------
Net cash provided by (used in) financing activities ....................... 7,418 (6,072)
Effect of exchange rate changes on cash ......................................................... (968) (61)
--------- --------
Net increase (decrease) in cash ................................................................. 11,544 (486)
Cash and cash equivalents, beginning of period................................................... 1,465 2,306
--------- --------
Cash and cash equivalents, end of period ........................................................ $ 13,009 $ 1,820
========= ========
</TABLE>

See Notes to Consolidated Financial Statements

4
<PAGE>

IPC INFORMATION SYSTEMS, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)

1. In the opinion of management, the accompanying unaudited consolidated
financial statements include all necessary adjustments (consisting of normal
recurring accruals and appropriate intercompany elimination adjustments) and
present fairly IPC Information Systems, Inc.'s ("IPC" or the "Company")
financial position as of June 30, 1998, and the results of its operations for
the three and nine months ended June 30, 1998 and 1997, and its cash flows for
the nine months ended June 30, 1998 and 1997, 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, 1998 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 Form 10-K for the fiscal year ended September 30, 1997.

2. Merger:

On April 30, 1998, the Company merged (the "Merger") with Arizona
Acquisition Corp. ("AAC"). Upon the Merger, the Company issued $247.4 million
aggregate principal amount at maturity ($180.0 million initial proceeds upon
issuance) of its ten year, 10-7/8% senior discount notes due 2008 (the "Notes").
A portion of the proceeds of the Notes ($145.6 million), together with $54.7
million of capital provided by AAC (the "Equity Investment") were used to
repurchase 9,536,665 shares of IPC common stock, at a price of $21.00 per share,
from IPC shareholders who did not elect to retain stock of the surviving
corporation upon the Merger. Prior to the Merger, AAC was owned by (i) Cable
Systems Holdings LLC ("CSH LLC"), whose membership interests were owned by
Citicorp Venture Capital, Ltd. and David Kirby and John O'Mara, private
investors, (ii) CSH LLC's indirect subsidiary Cable Systems International, Inc.
and (iii) the investment fund of Lawrence Smith & Horey III, L.P.

The Company also entered into a $55.0 million revolving credit facility
(the "Revolving Credit Facility") that expires in the year 2003 with Morgan
Stanley Senior Funding, Inc., as syndication agent, to be used for working
capital and other purposes.

In connection with the Merger, the Company incurred various
non-recurring costs totaling $27.7 million. These costs consist primarily of
professional fees, printing costs, change of control costs and other expenses.
The Company incurred in the current quarter a non-recurring charge for change in
control expenses of $10.6 million. This non-recurring charge is a portion of the
$27.7 million referred to above and consists primarily of certain change in
control bonuses and severance payments aggregating $4.2 million, payments to
option holders, upon cancellation of their stock options, aggregating $5.9
million and miscellaneous other expenses aggregating $0.5 million. As a result
of this non-recurring $10.6 million charge, the Company incurred a net loss in
the quarter ending June 30, 1998. Because this loss results directly from the
non-recurring charge incurred in connection with the Merger, the Company does
not expect this loss to materially impact its liquidity or

5
<PAGE>

ongoing operations. Excluding the $10.6 million charge, net income for the three
months ended June 30, 1998 (the "Three Month 1998 Period") would have been $2.1
million. Basic and diluted earnings per share would have been $0.17 per share.
Net income for the nine months ended June 30, 1998 (the "Nine Month 1998
Period") would have been $7.9 million. Basic and diluted earnings per share
would have been $0.47 per share and $0.46 per share, respectively.

3. Recapitalization:

Under the terms of the Merger Agreement, subject to dissenters' rights, each
share of common stock of the Company ("IPC Common Stock") was converted at the
election of the holder thereof into either (i) the right to receive $21.00 in
cash or (ii) the right to retain one share of common stock of the surviving
corporation ("Surviving Corporation Common Stock"), subject to proration in
certain circumstances. Additionally, in conjunction with the Merger, the Company
purchased the 20% interest in its subsidiary, International Exchange Networks,
LTD ("IXnet") which it did not previously own (the "IXnet Exchange"). The
following table reconciles the pre-merger outstanding shares of IPC Common Stock
to the Surviving Corporation Common Stock as of April 30, 1998 (not adjusting
for the Stock Dividend, see footnote 7):

Shares
------
<S> <C>

Pre-merger shares outstanding 10,740,445
Repurchase and retirement of IPC Common Stock (9,536,665)
------------
Shares converted to Surviving Corporation
Common Stock 1,203,780

Issuance of Surviving Corporation Common
Stock related to the Equity Investment 2,605,743

Exchange of 560 shares of IXnet Common Stock
for Surviving Corporation Common Stock 228,571

Issued and outstanding shares of
Surviving Corporation Common Stock 4,038,094
============
</TABLE>

4. Pro Forma Net Income and Earnings Per Share:

Assuming the Merger was consummated on October 1, 1996, the beginning of
the Company's latest completed fiscal year, pro forma net income for the Three
Month 1998

6
<PAGE>
Period would have been $0.7 million or $0.08 per share. Pro forma results for
the Nine Month 1998 Period would have been a net loss of $0.2 million or $0.03
per share .

Pro forma net loss for the three and nine months ended June 30, 1997
(the "Three and Nine Month 1997 Periods") would have been $2.0 million and $6.2
million, respectively. Pro forma basic loss per share for the Three and Nine
Month 1997 Periods would have been $0.25 per share and $0.77 per share,
respectively.

The pro forma adjustments (net of tax at IPC's 44% incremental tax
rate), included interest expense related to the Notes, amortization of Notes and
Revolving Credit Facility issuance costs, and goodwill amortization associated
with the IXnet Exchange. Additionally, the pro forma financial information
excludes the non-recurring change in control expense related to the leveraged
recapitalization. These pro forma adjustments were applied to the respective
consolidated financial statements of the Company to reflect and account for the
Merger as a recapitalization; accordingly the historical basis of the Company's
assets and liabilities have not been impacted.

5. Components of inventories:

(Dollar amounts in thousands)
June 30, September 30,
1998 1997
----------------- --------------

<S> <C> <C>
Parts, subassemblies and manufacturing work in process $11,553 $10,917
Inventory on customer sites awaiting installation 27,533 14,230
Parts and maintenance supplies in field 6,026 8,410
-------------- -----------

$45,112 $33,557
============== ===========
</TABLE>

6. Notes Payable:

As a result of the Merger, the Company's short-term credit facilities
with various banks of up to $35.0 million were terminated and replaced with the
Revolving Credit Facility. At June 30, 1998, there was no outstanding balance
under this credit facility.

7. Stock Dividend:

On May 29, 1998, the Company announced the declaration of a two-for-one
stock split issued in the form of a one-for-one stock dividend (the "Stock
Dividend"). The Stock Dividend was distributed on June 24, 1998 to holders of
record on June 10, 1998. As a result of the Stock Dividend, the number of shares
increased from 4,038,094 shares (the number of shares issued and outstanding
subsequent to the Merger and IXnet Exchange) to 8,076,188 shares at June 30,
1998.

7
<PAGE>

8. The following is a reconciliation of the numerators and denominators for the
computations of basic and diluted earnings per share:

(Amounts in thousands,
except per share amounts)
Three months ended Nine months ended
June 30, June 30,
-------- --------
1998 1997 1998 1997
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic earnings per share computation

Numerator ($3,839) $1,187 $1,909 $2,994
---------- --------- --------- ---------
Denominator:
Weighted average common shares
outstanding 12,495 21,344 16,627 21,326
---------- --------- --------- ---------
Total shares 12,495 21,344 16,627 21,326
========== ========= ========= =========
Basic EPS ($0.31) $0.06 $0.11 $0.14
========== ========= ========= =========

Diluted earnings per share computation

Numerator - $1,187 $1,909 $2,994
---------- --------- --------- ---------
Denominator:
Weighted average common shares
outstanding - 21,344 16,627 21,326
Common stock equivalent of stock options - - 246 28
---------- --------- --------- ---------
Total shares - 21,344 16,873 21,354
========== ========= ========= =========
Diluted EPS - $0.06 $0.11 $0.14
========== ========= ========= =========
</TABLE>

Basic and diluted earnings per share for the Three and Nine Month 1997
Periods are retroactively adjusted to reflect the Stock Dividend.

Approximately 857,438 options were outstanding for the nine months ended
June 30, 1998 and 2,190,132 and 761,968 options for the three and nine months
ended June 30,1997, respectively, which were not included in the computation of
diluted EPS because the options exercise price exceeded the average market price
of the Company's common stock for each period. Since the quarter ended June 30,
1998 resulted in a net loss, common stock equivalents would have had an
anti-dilutive effect, therefore, diluted earnings per share has not been
calculated.

9. Subsequent Event:

8
<PAGE>

required regulatory licenses. This acquisition will be financed through a
combination of cash balances, the Revolving Credit Facility and other
borrowings.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (unaudited)

Overview

IPC Information Systems, Inc. (together with its subsidiaries,
the "Company" or "IPC") is a leader in providing integrated telecommunications
equipment and services that facilitate the execution of transactions by the
financial trading community. Such transactions involve the trading of equity and
debt securities, commodities, currencies and other financial instruments. The
Company designs, manufactures, installs and services trading room voice
communication systems ("turret systems") and installs and services the cabling
infrastructure and networks which provide financial traders with desktop access
to time-sensitive communications and data. The Company's primary customers
include securities and investment banking firms, merchant and commercial banks,
interdealer brokers, foreign exchange and commodity brokers and dealers,
securities and commodity exchanges, mutual and hedge fund companies, asset
managers and insurance companies. The Company uses an integrated approach to
marketing its products and services, leveraging its established customer base
throughout the financial trading community. In addition, through its subsidiary,
International Exchange Networks, Ltd. ("IXnet"), the Company operates an
international voice and data network (the "IXnet Network"), providing a variety
of dedicated private line, managed data and switched services, which has been
specifically designed to meet the specialized telecommunications requirements of
the financial trading community.

The Company's operations include turret systems, Information Transport
Systems ("I.T.S.") and network services (IXnet). The Company reports sales of
turret systems to distributors and direct sales and installations of turret
systems as "Product sales and installation." The Company reports revenue 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 reports revenue from the design, integration and
implementation projects, from sales of intelligent network products, such as
hubs, bridges and routers as "Product sales and installation." The Company
reports revenue 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 "Service."
Additionally, the Company reports revenue 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 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 revenue ratably (on a monthly basis) over the contractual periods.
Revenue

9
<PAGE>

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. Revenue from network services are recognized in the month
the service is provided.

Cost of revenue for turret systems and I.T.S. includes material and
labor associated with the installation of a project or service. Cost of revenue
for network services includes charges from carriers for bandwidth associated
with network service revenue.

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, revenue 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 could be somewhat diminished in the future as
the Company's service business expands.

The Company also entered into a $55.0 million Revolving Credit Facility
with Morgan Stanley Senior Funding, Inc., as syndication agent, to be used for
working capital and other purposes.

In connection with the Merger, the Company incurred various
non-recurring costs of $27.7 million. These costs consist primarily of
professional fees, printing costs, change of control costs and other expenses.
The Company incurred in the current quarter a non-recurring charge for change in
control expenses of approximately $10.6 million. This non-recurring charge is a
portion of the $27.7 million referred to above and consists primarily of certain
change in control bonuses and severance payments aggregating $4.2 million,
payments to option holders, upon cancellation of their stock options,
aggregating $5.9 million and miscellaneous other expenses aggregating $0.5
million. As a result this non-recurring $10.6 million charge, the Company
incurred a net loss in the quarter ending June 30, 1998. Because this loss
results directly from the non-recurring charge incurred in connection with the
Merger, the Company does not expect this loss to materially impact its liquidity
or ongoing operations. Excluding the $10.6 million charge, net income for the
three months ended June 30, 1998 (the "Three Month 1998 Period") would have been
$2.1 million. Basic and diluted earnings per share would have been $0.17 per
share. Net income for the nine months ended June 30, 1998 (the "Nine Month 1998
Period") would have been and $7.9

10
<PAGE>

million. Basic and diluted earnings per share would have been $0.47 per share
and $0.46 per share, respectively.

Results of Operations
- ---------------------

Revenue. Total revenue for the Three Month 1998 Period increased by $9.1 million
or 13.2% to $78.0 million from $68.9 million for the Three Month 1997 Period.
Total revenue for the Nine Month 1998 Period increased by $11.7 million or 6.0%
to $206.2 million from $194.5 million for the Nine Month 1997 Period.

Turret revenue increased by $7.1 million or 15.9% to $51.6 million in
the Three Month 1998 Period from $44.5 million in the Three Month 1997 Period.
The revenue increase related to sales of new installations and related service
in Three Month 1998 Period of $4.9 million and $2.2 million, respectively, as
compared to the prior year period. The increase in sales of new installations is
from a higher volume of completed projects, principally involving the Company's
digital Tradenet MX(R) product, completed and recognized as revenue in the
current period as compared to the similar period of the prior year. The increase
in service revenue is principally due to the Company's expanding customer base.

Turret revenue in the Nine Month 1998 Period increased by $4.1 million
or 3.0% to $139.9 from $135.8 million in the Nine Month 1997 Period. The revenue
increase related to higher service revenue of $6.7 million offset, in part, by a
decrease in new installations of $2.6 million in the Nine Month 1998 Period as
compared to the prior year period. As with the Three Month 1998 period, higher
service revenue for the Nine Month 1998 Period related to the Company's
expanding customer base. The decrease in sales of new installations in the
current period is the result of lower revenue from third party products,
partially offset by an increase in revenue from the Company's Tradenet MX
product.

I.T.S. revenue decreased by $2.7 million or 14.1% to $16.5 million in
the Three Month 1998 Period from $19.2 million in the Three Month 1997 Period.
I.T.S. revenue decreased by $6.0 million or 12.8% to $41.1 million in the Nine
Month 1998 Period from $47.0 million in the Nine Month 1997 Period. New
installation projects decreased by $4.8 million and $13.0 million, respectively,
in the Three and Nine Month 1998 Periods as compared to similar periods of the
prior year. Partially offsetting the decrease in I.T.S. installation revenue is
an increase in service related revenue of $2.1 and $7.0 million, respectively,
in the Three and Nine Month 1998 Periods as compared to the comparable prior
year periods. The decrease in sales of new installation projects in both the
Three and Nine Month 1998 Periods is due to the Company strengthening its
procedures on the selection of new revenue opportunities to ensure only projects
with a potential for higher profit contribution are pursued.

Revenue from network services, classified as service revenue, increased
by $4.7 and $13.5 million or 91.6% and 115.7%, respectively, to $9.8 and $25.2
million in the Three and Nine Month 1998 Periods from $5.1 and $11.7 million in
the comparable prior year periods. The increase is related to the growing
customer base and increased customer utilization of IXnet's international
telecommunication network. Annualized recurring revenue for the month

11
<PAGE>

ending June 30, 1998 was $39.6 million, an increase of 74.7% as compared with
the prior year period.

Cost of Revenue. Total cost of revenue (as a percentage of revenue) for the
Three and Nine Month 1998 Periods of 59.5% and 60.3%, respectively, decreased as
compared to 69.9% and 69.6% in the comparable prior year periods.

Product sales and installation cost of revenue (as a percentage of
revenue) for each of the Three and Nine Month 1998 Periods was 58.1% which
decreased as compared to 72.0% and 70.0% in the comparable prior year periods.
The lower cost of product revenue is primarily related to an increased
percentage of turret installation revenue from products manufactured by the
Company (Tradenet MX) during the Three and Nine Month 1998 Periods as compared
with revenue for the Three and Nine Month 1997 Periods. Turret sales and
installation from manufactured products have a lower cost of revenue as compared
to third party products and I.T.S. product sales and installation.

Service cost of revenue (as a percentage of revenue) for the Three and
Nine Month 1998 Periods of 61.6% and 63.1% decreased as compared to 65.9% and
68.8% in the comparable prior year periods. The decrease in the current periods
is primarily related to higher service revenue from increased utilization of the
IXnet Network, a higher percentage of turret maintenance revenue in turret
service revenue in the current period (turret maintenance revenue typically has
a lower cost of revenue as compared to turret moves, additions and changes) and
improved efficiencies for I.T.S. service projects as compared to the prior year
periods.

Research and Development. Research and development expense was $2.3 million in
each of the three month periods ended June 1998 and 1997. For the Nine Month
1998 Period, research and development expense was $7.4 million as compared to
$7.3 million in the Nine Month 1997 Period. Research and development expenses
are focused on the continued integration of the Tradenet MX turret with the
IXnet Network as well as the enhancement of existing features of the Tradenet MX
family to sustain the Company's leadership position in voice-based products.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("S,G&A") increased by $5.0 million and $8.9 million or
31.8% and 19.4%, respectively, to $20.8 million and $54.4 million in the Three
and Nine Month 1998 periods from $15.8 million and $45.5 million in the
comparable prior year periods. The increase is primarily related to increases of
$4.5 million and $9.4 million, respectively, associated with the expansion of
the IXnet Network. Depreciation and amortization represented $2.5 million and
$5.1 million of the IXnet S,G&A increase during the Three and Nine Month 1998
Periods. The Company intends to continue to invest in the IXnet Network. As the
Company deploys this network, management anticipates that S,G&A will increase.
These expenses will be incurred prior to the realization of revenue.

Interest Income (Expense). Interest expense, net for the three and nine months
ended June 30, 1998 increased $3.2 million and $3.4 million to $3.7 million and
$4.7 million, respectively.

12
<PAGE>

The increase is primarily related to interest expense associated with the
issuance of the Notes and related amortization of debt issuance costs. Also
contributing to this increase, was higher levels of capital leases in the Three
and Nine Month 1998 Periods as compared to the prior year periods.

Provision for Income Taxes. The Company's effective tax rate was a benefit of
36.3% for the Three Month 1998 Period compared to 41.2% expense in the similar
period of the prior year. For the Nine Month 1998 Period the effective tax rate
was 59.6% as compared with 43.0 in the similar period of the prior year. The
effective tax rate benefit and higher effective tax rate expense in the Three
and Nine Month 1998 Periods as compared to the similar periods of the prior year
is related to the increase in IXnet's losses for which the Company is not able
to receive certain state statutory tax benefits.

Liquidity and Capital Resources

Since the Company's initial public offering in fiscal 1995, the Company
has satisfied its cash requirements through cash provided by operations, capital
lease financing and bank lines of credit. The Company's principal uses of cash
are to fund working capital requirements, losses of its IXnet subsidiary and
capital expenditures principally related to the expansion of IXnet's
international telecommunications network.

Net cash provided by operating activities was $24.5 million in the nine
months ended June 30, 1998 as compared to net cash provided by operating
activities of $16.9 million in the similar period of the prior year. The
increase is primarily related to higher non-cash adjustments to net income and
lower working capital requirements due to a stronger backlog with higher
customer progress billings in the Nine Month 1998 Period as compared with the
comparable prior year period. The increase in non-cash adjustments to net income
is primarily related to an increase in depreciation and amortization expense
from capital expenditures and capital lease obligations entered into by the
Company in fiscal 1997 and during the nine months ended June 30, 1998,
principally for the IXnet Network. Goodwill amortization increased related to
the acquisition of MXnet in the second quarter of the current year and the IXnet
Exchange. Also, contributing to the increase, was interest expense related to
the Notes for which cash payments do not commence until November 1, 2001.

Cash used in investing activities was $19.4 million in the current
period as compared with $11.3 million in the comparable prior year period. The
increase is primarily related to the payment in the current quarter of a
promissory note for the purchase of MXnet. Net cash used in investing activities
also include expenditures related to the final payments due with respect to the
acquisition of IPC Bridge and for property, plant and equipment, principally for
the IXnet Network.

On February 13, 1998, the Company purchased, by the issuance of a
promissory note in the amount of $6.7 million for all of the issued and
outstanding common stock of MXnet, a wholly owned subsidiary of National
Discount Brokers Group Inc. The promissory note was paid on April 8, 1998 plus
accrued interest. In addition MXnet entered into employment agreements with four
MXnet executives which included signing and retention bonuses in the

13
<PAGE>

aggregate amount of $1.1 million payable over two years. This acquisition was
accounted for as a purchase and resulted in approximately $5.5 million of
goodwill.

The Company also entered into a $55.0 million revolving credit facility
that expires in the year 2003 with Morgan Stanley Senior Funding, Inc., as
syndication agent, to be used for working capital and other purposes.

In connection with the Merger, the Company incurred various
non-recurring costs totaling $27.7 million. These costs consist primarily of
professional fees, printing costs, change of control costs and other expenses.
The Company incurred in the current quarter a non-recurring charge of $10.6
million. This non-recurring charge is included in the $27.7 million referred to
above and consists primarily of certain change in control bonuses and severance
payments aggregating $4.2 million, payments to option holders, upon cancellation
of their stock options, aggregating $5.9 million and miscellaneous other
expenses aggregating $0.5 million. As a result of this non-recurring $10.6
million charge, the Company incurred a net loss in the quarter ending June 30,
1998. Because this loss results directly from the non-recurring charge incurred
in connection with the Merger, the Company does not expect this loss to
materially impact its liquidity or ongoing operations.

In connection with the implementation of the IXnet Network, IXnet has
entered into capital lease agreements for certain network switching equipment,
aggregating approximately $8.9 million for the nine months ended June 30, 1998
as compared with $5.1 million for the similar period of the prior year.

14
<PAGE>

On August 10, 1998, IXnet, agreed to purchase Saturn Global Network
Services Holdings Limited, a global networking subsidiary of Marshalls Finance
Limited, for approximately (pounds sterling)30 million. The companies expect to
close the transaction upon transfer of required regulatory licenses. This
acquisition will be financed through a combination of cash balances, the
Revolving Credit Facility and other borrowings.

The Company believes that cash flows from operations and credit
facilities will be sufficient to meet its working capital and capital
expenditure needs for the near future. The Company does not rule out seeking
additional debt or equity for other corporate purposes, including acquisitions.

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, 1997.

Part II - Other Information

ITEM 1. Legal Proceedings - None

ITEM 2. Changes in Securities - None

ITEM 3. Defaults Upon Senior Securities - None

ITEM 4. Submission of Matters to a Vote of Security Holders

The Annual Meeting of the Stockholders (the "Annual Meeting") of the Company was
held on April 30, 1998.

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 April, 10 1998.

1. Election of Directors:

Nominee For Withhold
- ------- --- --------
<S> <C> <C>
Richard P. Kleinknecht 9,534,056 6,249
Peter J. Kleinknecht 9,532,056 8,249
</TABLE>

A majority of the outstanding shares of the Company were voted for the
election of the two nominees for election to the Board. The other directors
whose terms of office continued after the Annual Meeting and would expire in
subsequent years are S. Terry Clontz, Theodore J. Johnson, Robert J. McInerney
and Peter M. Stein.

Effective as of April 30, 1998 and by unanimous written consent of the
Board of Directors of the Company, the number of directors was increased from
six to nine. Upon the Merger, Messrs. Peter J. Kleinknecht, Theodore J. Johnson,
Robert J. McInerney and Peter M. Stein submitted their resignations as directors
of the Company, as required under the Agreement and Plan of Merger between the
Company and AAC. In accordance with the by-laws of the Company and by unanimous
written consent of the remaining directors, the Board elected Richard M. Cashin,
Jr., David Y. Howe, Peter A. Woog, Richard W. Smith,

15
<PAGE>

Kilin To, David Walsh and
Robert J. McInerney to fill the vacant positions on the Board and to serve until
such time as their successors are duly elected and qualified or until their
earlier death, resignation or removal.

2. Ratification of the firm of PricewaterhouseCoopers LLP (formerly, Coopers &
Lybrand L.L.P.) as the independent auditors to audit the Company's financial
statements for the fiscal year 1998 was approved by a vote of 9,535,160 in
favor, 2,645 against and 2,500 abstaining.

3. The merger agreement between IPC Information Systems, Inc. and Arizona
Acquisition Corp. was approved by a vote of 9,529,744 in favor, 8,511
against and 2,050 abstaining.

4. A proposal to approve certain amendments to, and the restatement of, IPC's
Certificate of Incorporation, as included in Annex B of the Proxy Statement,
was approved by a vote of 9,530,515 in favor, 7,661 against and 2,129
abstaining.

5. A proposal to approve and adopt the IPC Information Systems, Inc. 1998 Stock
Incentive Plan for selected employees, directors and consultants of the
Company and its subsidiaries, contingent upon approval of the merger
agreement, was approved by a vote of 9,491,305 in favor, 42,700 against and
6,300 abstaining.

6. A proposal to authorize the Board of Directors of IPC, in its discretion, to
vote upon such other business as may properly come before the Annual Meeting
and any adjournment or postponement thereof, including, without limitation,
a motion to adjourn the Annual Meeting to another time or place for the
purpose of soliciting additional proxies in order to approve the Merger
Agreement, or otherwise was approved by a vote of 9,314,765 in favor,
222,240 against and 3,300 abstaining.

ITEM 5. Other Information

Effective June 7, 1998 the Company's common stock became listed on the
American Stock Exchange, trading under a new symbol IPI. The Company, after the
Merger but prior to June 7, 1998, was previously listed on the NASDAQ Small Cap
Market, trading under the symbol IPCX. Prior to the Merger, the Company was
listed on the NASDAQ National Market, trading under the symbol IPCI.

ITEM 6. Exhibits and Reports on Form 8-K

(a) Exhibit Number 27 Financial Data Schedule

(b) Form 8-K

Listing of Exhibits:

4.1 Indenture dated as of April 30, 1998 between IPC Information
Systems, Inc. and the United States Trust Company of New York, as
indenture trustee.

10.15.1 Amended and Restated Investors Agreement, dated as of April 9, 1998,
by and among, IPC Information Systems, Inc., Cable Systems Holding,
LLC, Cable Systems International, Inc. Richard P. Kleinknecht, David
Walsh, Anthony Servidio and Lawrence, Smith & Horey III, L.P.

16
<PAGE>

10.22 Credit Agreement dated as of April 30, 1998 among IPC Information
Systems, Inc. IPC Funding Corp., Morgan Stanley Senior Funding,
Inc., ("MSSF"), as syndication agent and arranger, Goldman Sachs
credit Partners L.P., as documentation agent, General Electric
Capital Corporation, as collateral agent, and MSSF, as
administration agent.

99 Press Release issued May 1, 1998.

17
<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, 1998 By: /s/ TERRY CLONTZ
-------------------------
Terry Clontz
President and
Chief Executive Officer

Dated: August 14, 1998 By: /s/ BRIAN REACH
-------------------------
Brian L. Reach
Vice President, Chief Financial Officer

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