United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1998
Commission file number 0-25492
IPC Information Systems, Inc.
------------------------------------------------------
(Exact Name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 58-1636502
- ------------------------------- ---------------------------------
<S> <C>
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
</TABLE>
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 April 29, 1998
- ---------------------------- -----------------------------
Common Stock par value $0.01 10,740,445 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 March 31, 1998
and September 30, 1997 2
Consolidated Statements of Operations for the Three and
Six Months Ended March 31, 1998 and 1997 3
Consolidated Statements of Cash Flows for the
Six Months Ended March 31, 1998 and 1997 4
Pro Forma Consolidated Balance Sheet at March 31, 1998 5
Pro Forma Consolidated Statement of Operations for the
Six Months Ended March 31, 1998 6
Notes to Consolidated Financial Statements 7 - 12
ITEM 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations 13 - 18
PART II. OTHER INFORMATION 18
SIGNATURES 19
</TABLE>
<PAGE>
IPC INFORMATION SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS (unaudited)
(Dollar amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
March 31, September 30,
1998 1997
--------- ---------
ASSETS:
<S> <C> <C>
Current assets:
Cash and cash equivalents ................................................... $ 8,435 $ 1,465
Trade receivables, less allowance of $1,815 and $1,515, respectively ........ 68,162 61,791
Inventories ................................................................. 43,778 33,557
Prepaid expenses and other current assets ................................... 15,395 13,426
--------- ---------
Total current assets ............................................ 135,770 110,239
Property, plant and equipment, net ............................................. 46,642 38,314
Goodwill, net .................................................................. 13,157 8,481
Other assets, net .............................................................. 1,544 1,328
--------- ---------
Total assets..................................................... $ 197,113 $ 158,362
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Notes payable ................................................................ $ 6,710 $ 3,200
Accounts payable ............................................................. 19,612 18,042
Accrued liabilities .......................................................... 28,421 21,395
Customer advances and deferred revenue ....................................... 36,471 17,682
Current portion of capital leases ............................................ 3,618 2,987
--------- ---------
Total current liabilities ....................................... 94,832 63,306
Long-term debt, net of current portion ........................................ 2,110 2,133
Lease obligations, net of current portion ..................................... 11,661 10,336
Other liabilities ............................................................. 4,959 5,677
--------- ---------
Total liabilities ............................................... 113,562 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; issued
10,982,630 and 10,932,675 shares; outstanding 10,740,445 and
10,690,490 at March 31, 1998 and September 30, 1997, respectively ......... 110 109
Paid-in capital .............................................................. 48,651 47,922
Retained earnings ............................................................ 35,508 29,597
Less treasury stock, at cost, 242,185 shares .............................. (718) (718)
--------- ---------
Total stockholders' equity ...................................... 83,551 76,910
--------- ---------
Total liabilities and stockholders' equity ...................... $ 197,113 $ 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 Six Months Ended
March 31, March 31,
---------------------- ----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Product sales and installation ........................... $ 31,842 $ 46,114 $ 70,283 $ 85,912
Service .................................................. 29,303 20,068 57,914 39,681
--------- --------- --------- ---------
61,145 66,182 128,197 125,593
--------- --------- --------- ---------
Cost of revenue:
Product sales and installation ........................... 18,610 30,903 40,795 59,236
Service .................................................. 18,822 14,465 37,062 27,969
--------- --------- --------- ---------
37,432 45,368 77,857 87,205
--------- --------- --------- ---------
Gross profit ................................ 23,713 20,814 50,340 38,388
Research and development expenses ........................... 2,657 2,319 5,061 4,691
Selling, general and administrative expenses ................ 17,006 16,242 33,563 30,089
--------- --------- --------- ---------
Income from operations ...................... 4,050 2,253 11,716 3,608
Interest income/(expense), net .............................. (452) (307) (892) (770)
Other income/(expense), net ................................. (38) 102 (77) 363
--------- --------- --------- ---------
Income before provision for income taxes .... 3,560 2,048 10,747 3,201
Provision for income taxes .................................. 1,406 807 4,999 1,394
--------- --------- --------- ---------
Net income .................................. $ 2,154 $ 1,241 $ 5,748 $ 1,807
========= ========= ========= =========
Basic earnings per share .................................... $ 0.20 $ 0.12 $ 0.54 $ 0.17
--------- --------- --------- ---------
Basic weighted average shares outstanding ................... 10,740 10,651 10,726 10,651
--------- --------- --------- ---------
Diluted earnings per share .................................. $ 0.20 $ 0.12 $ 0.53 $ 0.17
--------- --------- --------- ---------
Diluted weighted average shares outstanding ................. 10,892 10,651 10,883 10,684
--------- --------- --------- ---------
</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>
Six Months Ended
March 31,
----------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................... $ 5,748 $ 1,807
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization expense ..................... 5,063 3,411
Other amortization ........................................ 971 465
Provision for doubtful accounts ........................... 574 170
Interest on notes payable ................................. 50
Changes in operating assets and liabilities:
Trade receivables ......................................... (5,707) 9,215
Inventories ............................................... (9,702) (5,970)
Prepaid expenses and other current assets ................. 850 (1,909)
Other assets .............................................. (154) (59)
Accounts payable .......................................... 524 5,820
Accrued liabilities and other liabilities ................. 4,386 1,860
Customer advances and deferred revenue .................... 18,396 4,639
-------- --------
Net cash provided by operating activities ......... 20,999 19,449
Cash flows from investing activities:
Capital expenditures ......................................... (8,302) (4,511)
Contingent acquisition payments to Bridge Electronics, Inc. .. (750) (750)
-------- --------
Net cash (used in) investing activities ........... (9,052) (5,261)
Cash flows from financing activities:
Net repayments of note payable ............................... (3,200) (12,700)
Principal payments on capital leases ......................... (1,533) (662)
Repayment of long-term debt .................................. (23)
Proceeds from exercise of stock options ...................... 468 40
-------- --------
Net cash (used in) financing activities ........... (4,288) (13,322)
Effect of exchange rate changes on cash ......................... (689) (525)
-------- --------
Net increase in cash ............................................ 6,970 341
Cash and cash equivalents, beginning of period .................. 1,465 2,306
-------- --------
Cash and cash equivalents, end of period ........................ $ 8,435 $ 2,647
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
IPC INFORMATION SYSTEMS, INC.
Pro Forma Consolidated Balance Sheet (unaudited)
March 31, 1998
(Dollar amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro forma
Historical adjustments Pro forma
---------- ----------- ---------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents ..................................................... $ 8,435 $ 9,127 (a) $ 17,562
Trade receivables, less allowance of $1,815 ................................... 68,162 -- 68,162
Inventories ................................................................... 43,778 -- 43,778
Prepaid expenses and other current assets ..................................... 15,395 (4,179)(e) 11,216
--------- --------- ---------
Total current assets ............................................ 135,770 4,948 140,718
Property, plant and equipment, net .............................................. 46,642 46,642
Goodwill, net ................................................................... 13,157 5,333 (i) 18,490
Other assets, net ............................................................... 1,544 11,211 (e) 12,755
--------- --------- ---------
Total assets .................................................... $ 197,113 $ 21,492 $ 218,605
========= ========= =========
Current liabilities:
Note payable .................................................................. 6,710 -- $ 6,710
Accounts payable .............................................................. 19,612 -- 19,612
Accrued liabilities ........................................................... 28,421 $ (3,681)(f) 21,562
(3,096)(e)
(1,500)(g)
1,418 (f)
Customer advances and deferred revenue ........................................ 36,471 36,471
Current portion of capital leases ............................................. 3,618 3,618
--------- --------- ---------
Total current liabilities ....................................... 94,832 (6,859) 87,973
Senior secured revolving credit ................................................. -- -- --
Long-term debt, net of current portion .......................................... 2,110 -- 2,110
Lease obligations, net of current portion ....................................... 11,661 -- 11,661
Senior unsecured notes .......................................................... -- 180,011 (b) 180,011
Other liabilities ............................................................... 4,959 (1,125)(g) 3,834
--------- --------- ---------
Total liabilities ............................................... 113,562 172,027 285,589
--------- --------- ---------
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 March 31, 1998 - 10,982,630 shares, Pro Forma - 4,063,492 shares;
outstanding March 31, 1997 - 10,740,445, Pro Forma - 4,063,492 shares ....... 110 26 (c) 41
(95)(d)
(3)(h)
3 (i)
Paid-in capital ................................................................. 48,651 54,695 (c) 5,330
5,330 (i)
(103,346)(d)
Retained earnings (deficit) ..................................................... 35,508 (96,829)(d) (72,355)
(5,635)(e)
(4,684)(f)
(715)(h)
Less treasury stock, at cost, March 31, 1997 - 242,185 shares,
Pro Forma - none ............................................................ (718) 718 (h) --
--------- --------- ---------
Total stockholders' equity (deficit) .............................. 83,551 (150,535) (66,984)
--------- --------- ---------
Total liabilities and stockholders' equity (deficit) .............. $ 197,113 $ 21,492 $ 218,605
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
IPC INFORMATION SYSTEMS, INC.
Pro Forma Consolidated Statement Of Operations (unaudited)
For the six months ended March 31, 1998
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro forma
Historical adjustments Pro forma
--------- --------- ---------
<S> <C> <C> <C>
Revenue:
Product sales and installation .................................... $ 70,283 $ 70,283
Service ........................................................... 57,914 57,914
--------- --------- ---------
128,197 -- 128,197
Cost of revenue:
Product sales and installation .................................... 40,795 40,795
Service ........................................................... 37,062 37,062
--------- --------- ---------
77,857 -- 77,857
--------- --------- ---------
Gross profit ......................................... 50,340 -- 50,340
Research and development expenses .................................... 5,061 5,061
Selling, general and administrative expenses ......................... 33,563 $ 381 (i) 33,944
--------- --------- ---------
Income from operations ............................... 11,716 (381) 11,335
Interest income/(expense), net ....................................... (892) (10,646)(k) (12,180)
(642)(j)
Other income/(expense), net .......................................... (77) (77)
--------- --------- ---------
Income before provision for income taxes ............. 10,747 (11,669) (922)
Provision (benefit) for income taxes ................................. 4,999 (5,134)(l) (135)
--------- --------- ---------
Net income ........................................... $ 5,748 $ (6,535) $ (787)
========= ========= =========
Basic earnings per share ............................................. $ 0.54 $ (0.19)
--------- ---------
Weighted average shares outstanding .................................. 10,726 4,063
--------- ---------
Diluted earnings per share ........................................... $ 0.53 $ (0.19)
--------- ---------
Diluted Weighted average shares outstanding .......................... 10,883 4,063
--------- ---------
</TABLE>
See Notes to Consolidated Financial Statements
6
<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 present fairly IPC Information Systems, Inc.'s ("IPC" or
the "Company") financial position as of March 31, 1998, and the results of its
operations for the three and six months ended March 31, 1998 and 1997, and its
cash flows for the six months ended March 31, 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 six
months ended March 31, 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. Components of inventories:
<TABLE>
<CAPTION>
(Dollar amounts in thousands)
March 31, September 30,
1998 1997
---- ----
<S> <C> <C>
Parts, subassemblies and manufacturing work in process $12,326 $10,917
Inventory on customer sites awaiting installation 25,848 14,230
Parts and maintenance supplies in field 5,603 8,410
------- -------
$43,778 $33,557
======= =======
</TABLE>
3. On February 13, 1998, the Company purchased, by the issuance of a promissory
note in the amount of $6.7 million, plus accrued interest, due on April 8, 1998,
all of the issued and outstanding common stock of Mxnet Inc. ("Mxnet"), a wholly
owned subsidiary of National Discount Brokers Group Inc. In addition MXnet
entered into employment agreements with four MXnet executives which included
signing and retention bonuses in the 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.
4. Notes Payable:
The Company maintains short-term credit facilities with various banks up to
$35.0 million of which none was outstanding at March 31, 1998. The weighted
average interest rate was 6.63% during the six months ended March 31, 1998 as
compared to 6.46% for the year ended September 30, 1997.
7
<PAGE>
In connection with the acquisition of MXnet, notes payable at March 31, 1998
includes a promissory note in the amount $6.7 million due on April 8, 1998.
5. The following is a reconciliation of the numerators and denominators for the
computations of basic and diluted earnings per share:
<TABLE>
<CAPTION>
(Amounts in thousands,
except per share amounts)
Three months ended Six months ended
March 31, March 31,
--------- ---------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic earnings per share computation
Numerator $2,154 $1,241 $5,748 $1,807
---------- --------- --------- ---------
Denominator:
Weighted average common shares
outstanding 10,740 10,651 10,726 10,651
---------- --------- --------- ---------
Total shares 10,740 10,651 10,726 10,651
---------- --------- --------- ---------
Basic EPS $0.20 $0.12 $0.54 $0.17
========== ========= ========= =========
Diluted earnings per share computation
Numerator $2,154 $1,241 $5,748 $1,807
---------- --------- --------- ---------
Denominator:
Weighted average common shares
outstanding 10,740 10,651 10,726 10,651
Common stock equivalent of stock options 152 -0- 157 33
---------- --------- --------- ---------
Total shares 10,892 10,651 10,883 10,684
---------- --------- --------- ---------
Diluted EPS $0.20 $0.12 $0.53 $0.17
========== ========= ========= =========
</TABLE>
Approximately 150,000 options were outstanding for the three and six months
ended March 31, 1998 and 1,111,833 and 208,500 for the three and six months
ended March 31, 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.
6. Subsequent event:
On December 18, 1997, IPC and Arizona Acquisition Corp. ("AAC") entered
into an Agreement and Plan of Merger (the "Merger Agreement"). The Merger
Agreement provided, among other things, for the merger of AAC with and into IPC
(the "Merger"), with IPC as the Surviving Corporation. Under the terms of the
Merger Agreement, subject to dissenters' rights, each share of common stock of
the Company would be converted at the election of the
8
<PAGE>
holder thereof into either (i) the right to receive $21.00 in cash or (ii) the
right to retain one share of Surviving Corporation Common Stock, subject to
proration in certain circumstances. The Merger would be accounted for as a
leveraged recapitalization and was subject to majority stockholder approval and
regulatory approval. As a result of the Merger, AAC's parent, Cable Systems
Holdings, LLC ("CSH LLC"), a majority of whose membership interests are owned by
Citicorp Venture Capital, Ltd. and others, will receive in exchange for its
shares of common stock of AAC not less than 54% nor more than 90% of the number
of shares of Surviving Corporation Common Stock outstanding after the Merger.
On April 30, 1998 the Company completed the Merger. The Company issued
$247.4 million aggregate principal amount at maturity ($180.0 million initial
proceeds upon issuance) of its 10-7/8% senior discount notes, the proceeds of
which, together with $54.7 million of capital provided by CSH LLC, its indirect
subsidiary Cable Systems International, Inc. and the investment fund Lawrence
Smith & Horey III, L.P., were used to repurchase shares of IPC common stock from
IPC stockholders who chose to receive cash in exchange for their shares. 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.
At March 31, 1998, the Company had deferred $4.2 million of cost related
to the Merger and financings, of which approximately $1.1 million has been paid.
7. Pro Forma Consolidated Financial Information:
The unaudited consolidated pro forma financial information (the "Pro
Forma Financial Information") of the Company is based on historical consolidated
financial statements of the Company and gives effect to the Merger transactions
which occurred on April 30, 1998 (the "Merger Transactions"). The unaudited
consolidated pro forma statements of operations for the six months ended March
31, 1998 gives effect to the Merger Transactions as if they had occurred at
October 1, 1996. The unaudited pro forma balance sheet give effect to the Merger
Transactions as if they had occurred on March 31, 1998. The pro forma
adjustments are based upon available information and upon certain assumptions
that management believes are reasonable under the circumstances. The Pro Forma
Financial Information and accompanying notes indicated below should be read in
conjunction with the historical consolidated financial statements of the
Company, including the notes thereto, and other financial information pertaining
to the Company. The Pro Forma Financial Information does not purport to
represent what the Company's actual results of operations or actual financial
position would have been if the Merger Transactions in fact occurred on these
dates or to project the Company's results of operations or financial position
for any future period or date.
In connection with the Merger, the Company will incur various one-time
costs, currently estimated at $25.2 million. These costs consist primarily of
professional fees, printing costs, change of control costs and other expenses.
While the exact timing, nature and amount of these costs are subject to change,
the Company will incur a one-time charge of approximately $8.4 million in the
quarter ending June 30, 1998. This one-time charge is included in the $25.2
million referred to above and consists of certain change in control
9
<PAGE>
bonuses and severance payments aggregating $2.4 million and payment to option
holders, upon cancellation of their stock options, aggregating $6.0 million. As
a result of the foregoing, the Company expects to incur a net loss in the
quarter ending June 30, 1998. Because this loss results directly from the
one-time charge incurred in connection with the Merger Transactions, the Company
does not expect this loss to materially impact its liquidity or ongoing
operations.
The pro forma adjustments indicated below were applied to the respective
historical 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 has not been impacted thereby.
(a) Represents the cash available at March 31, 1998 after application of the
proceeds from the Notes and the equity investment to fund the repurchase of
IPC Common Stock, repay certain other obligations and related fees and
expenses due on consummation of the Merger Transactions.
<TABLE>
<CAPTION>
(Amounts in thousands)
<S> <C>
Proceeds from Notes $ 180,011
Equity Investment 54,721
Repurchase of IPC Common Stock (200,270)
Repayment of certain other obligations (2,625)
Fees and expenses (22,710)
---------
Cash available from Merger Transactions $ 9,127
=========
</TABLE>
The following table reconciles the total cost and expenses related to
the Merger Transactions to the amount due upon consummation of the Merger.
<TABLE>
<CAPTION>
(Amounts in thousands)
<S> <C>
Total professional fees, printing costs and other expenses $16,846
Less: Amounts paid on account 1,083
-------
Net due on consummation of Merger 15,763
-------
Change of control costs 8,365
Less: Amounts payable over two years subsequent to consummation of
the Merger 1,418
-------
Net due on consummation of Merger 6,947
-------
Total due on consummation of Merger $22,710
=======
</TABLE>
In connection with the repurchase and cancellation of IPC Common Stock,
the issuance of Surviving Corporation Common Stock related to the Equity
Investment and the exchange of the IXnet Common Stock for Surviving Corporation
Common Stock, the following table reconciles the pre-merger outstanding shares
of IPC Common Stock to the pro forma Surviving Corporation Common Stock issues
and outstanding at March 31, 1998.
10
<PAGE>
<TABLE>
<S> <C>
Pre-merger shares outstanding 10,740,445
Repurchase and retirement of IPC Common Stock (9,536,665)
Issuance of Surviving Corporation Common Stock related to
the Equity Investment 2,605,744
Exchange of 560 shares of IXnet Common Stock for surviving
Corporation Common Stock 253,968
---------
Pro forma issued and outstanding shares of Surviving
Corporation Common Stock 4,063,492
=========
</TABLE>
(b) Represents the gross proceeds to the Company from the issuance of the Notes.
(c) Represents the issuance of 2,605,744 shares of Surviving Corporation Common
Stock at $21 per share.
(d) Represents the repurchase and cancellation by the Company of 9,536,665
shares of IPC Common Stock at March 31, 1998 at $21 per share.
(e) In connection with the Merger Transactions, the Company incurred
approximately $25,211 in fees and expenses. These fees and expenses include
$8,365 of change in control costs (see notes (a) and (f) and $16,846 (see
note (a)) of professional fees, printing costs and other expenses. Of the
$16,846 in anticipated costs, $4,179 was included in prepaid expenses and
other current assets and $3,096 was included in accrued liabilities at March
31, 1998. The $16,846 of fees are as follows:
<TABLE>
<S> <C>
Fees and other expenses related to the Revolving Credit Facility,
to be amortized over five years commencing with the Merger $ 1,626
Fees and other expenses related to the Notes, to be amortized
over ten years commencing with the Merger 9,585
-------
Prepaid debt issuance costs $11,211
Fees and other expenses related to the Merger Agreement, charged to
paid-in-capital at the Merger 5,635
-------
Total professional fees, printing costs and other expenses $16,846
=======
</TABLE>
(f) The Company incurred $8,365 of change of control costs related to the
cancellation of stock options in the amount of $5,949 and change of control
severance and bonus of $2,416. Of the $2,416 in change of control severance and
bonus, $1,418 will be paid in periods subsequent to the Merger. The pro forma
consolidated balance sheet at March 31, 1998 reflects the above change of
control costs, net of a $3,681 tax benefit.
Because the above change of control expenses are non-recurring, they
have been excluded from the pro forma consolidated statement of operations for
the six months ended March 31, 1998.
(g) In connection with the change of control, the payment of certain other
obligations, in the amount of $2,625 at March 31, 1998, became due at the
Merger.
11
<PAGE>
(h) Represents the cancellation, at the Merger, of 242,185 shares of IPC Common
Stock held in treasury.
(i) Represents the purchase of the minority interest in IXnet, a subsidiary of
the Company, by the Company for 253,968 shares of Surviving Corporation
Common Stock having an aggregate value of $5,333 at $21 per share. Such
amount has been allocated to goodwill and will be amortized over seven
years. The pro forma amortization for the six months ended March 31, 1998
was $381.
(j) Represents the amortization of debt issuance cost over the respective terms
of the debt financings, for the six months ended March 31, 1998.
<TABLE>
<S> <C>
Revolving Credit Facility $163
Notes 479
----
$642
====
</TABLE>
(k) Represents (i) interest expense on the Notes, at an interest rate of
10.875%, compounded semi-annually, (ii) accretion of discount on Notes and
(iii) interest income on cash available from the Merger Transactions, at an
assumed effective interest rate of 5.25% for the six months ended March 31,
1998.
<TABLE>
<S> <C>
Interest expense on the Notes $10,882
Accretion of discount on the Notes 4
Less: interest income 240
-------
$10,646
=======
</TABLE>
(l) Represents the income tax benefit related to the pro forma adjustments, for
the six months ended March 31, 1998, at the Company's federal and state
incremental tax rate of 44%.
12
<PAGE>
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 "turret 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
"turret 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 "I.T.S. 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 "I.T.S.
service." Additionally, the Company reports revenue derived from the IXnet
Network as "network services."
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 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.
13
<PAGE>
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 services 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.
In connection with the Merger, the Company will incur various one-time
costs currently estimated at $25.2 million. These costs consist primarily of
professional fees, printing costs, change of control costs and other expenses.
While the exact timing, nature and amount of these costs are subject to change,
the Company will incur a one-time charge of approximately $8.4 million in the
quarter ending June 30, 1998. This one-time charge is included in the $25.2
million referred to above and consists of certain change in control bonuses and
severance payments aggregating $2.4 million and payment to option holders, upon
cancellation of their stock options, aggregating $6.0 million. As a result of
the foregoing, the Company expects to incur a net loss in the quarter ending
June 30, 1998. Because this loss results directly from the one-time charge
incurred in connection with the Merger Transactions, the Company does not expect
this loss to materially impact its liquidity or ongoing operations.
Results of Operations
Revenue. Total revenues for the three months ended March 31, 1998 (the "Three
Month 1998 Period") decreased by $5.0 million or 7.6% to $61.2 million from
$66.2 million for the three months ended March 31,1997 (the "Three Month 1997
Period"). Total revenues for the six months ended March 31, 1998 (the "Six Month
1998 Period") increased by $2.6 million or 2.1% to $128.2 million from $125.6
million for the six months ended March 31,1997 (the "Six Month 1997 Period").
Turret revenue decreased by $13.9 million and $3.0 million or 26.1% and
3.2%, respectively, to $39.3 and $88.3 million, respectively, in the Three and
Six Month 1998 Periods from $53.2 and $91.2 million, respectively, in the Three
and Six Month 1997 Periods. The revenue decrease related to sales of new
installations in the Three and Six Month 1998 Periods of $16.9 million and $7.5
million, respectively, was attributable to the completion of two large trading
floor projects in the Three Month 1997 Period, having an aggregate value of
$17.4 million, without comparable size projects in the current periods. The
decrease in sales of new installations was offset in part by a increase in
service revenue of $3.1 million and $4.6 million, respectively, for the Three
and Six Month 1998 Periods principally due to the Company's increased customer
base.
14
<PAGE>
I.T.S. revenue increased by $4.4 million or 46% to $13.9 million in the
Three Month 1998 Period from $9.5 million in the Three Month 1997 Period. I.T.S.
revenue decreased by $3.2 million or 11.7% to $24.6 million in the Six Month
1998 Period from $27.8 million in the Six Month 1997 Period. I.T.S. revenue for
the Three Month 1998 Period from sales of new installations increased by $2.7
million as compared with the Three Month 1997 Period. I.T.S. revenue for the Six
Month 1998 Period from sales of new installations decreased by $8.1 million as
compared to the Six month 1997 Period. The decrease is primarily due to fewer
new installation projects being completed in the Six Month 1998 Period.
Partially offsetting the decrease in I.T.S. installation revenue was an increase
in service related revenue of $1.7 and $4.9 million in the Three and Six Month
1998 Periods as compared to the comparable prior-year periods. The increase in
service revenue is partially related to moves, adds and changes and maintenance
service revenue from several large new installation projects which were
recognized as revenue in prior quarters.
Revenue from network services, classified as service revenue, increased
by $4.5 and $8.8 million or 128.5% and 135.4%, respectively, to $8.0 and $15.3
million in the Three and Six Month 1998 Periods from $3.5 and $6.5 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 revenue for the month ending March 31,
1998 was $31.8 million, an increase in excess of 118.4% as compared with the
comparable prior year period.
Cost of Revenue. Total cost of revenue (as a percentage of revenue) for the
Three and Six Month 1998 Periods were 61.2% and 60.7%, respectively, decreased
as compared to 68.6% and 69.4% in the comparable prior year periods.
Product sales and installation cost of revenue (as a percentage of
revenue) for the Three and Six Month 1998 Periods of 58.4% and 58.0% decreased
as compared to 67.0% and 68.9% in the comparable prior-year periods. The lower
cost of turret revenue resulted from a higher percentage of revenue from
products manufactured by the Company (Tradenet MX) during the three and six
months ended March 31, 1998 as compared with the revenue for the similar periods
of the prior year. Turret sales and installation from manufactured products have
a lower cost of revenue as compared to third party products and I.T.S. sales,
and installation.
Service cost of revenue (as a percentage of revenue) for the Three and
Six Month 1998 Periods of 64.2% and 64.0% decreased as compared to 72.0% and
70.1% in the comparable prior year periods. The decrease in the Three Month 1998
Period is from higher revenue from increased utilization of the IXnet Network,
offset in part by a higher cost of revenue (as a percentage of revenue) from
combined turret and I.T.S. service revenue. Although turret and I.T.S. service
revenue increased, it contained a higher percentage of revenue from turret move,
additions and change and I.T.S. service revenue in the Three Month 1998 Period
as compared to the similar prior year period. Turret move, addition and change
and I.T.S. service revenue typically have higher costs of revenue as compared to
turret maintenance revenue.
15
<PAGE>
Service cost of revenue (as a percentage of revenue) for the Six Month
1998 Period decreased from higher utilization of the IXnet Network and a higher
percentage of service revenue from turrets as compared to the similar prior year
period. Turret service revenue typically has a lower cost of revenue as compared
to I.T.S. service revenue.
Research and Development. Research and development expenses increased by $0.3
and $0.4 million, respectively, in the Three and Six Month 1998 Periods to $2.6
and $5.1 million, respectively, as compared to $2.3 and $4.7 million in the
Three and Six Month 1997 Periods. Research and development expenses have
remained relatively consistent due to initiatives taken by the Company in fiscal
1997 to ensure research and development spending is 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 $0.8 and $3.5 million or 4.7% and
11.5%, respectively, to $17.0 and $33.6 million in the three and six month
periods from $16.2 and $30.1 in the comparable prior-year periods.
Approximately, $2.8 and $4.9 million, respectively, of the increase (of which
$1.0 and $1.3 million, respectively, is depreciation) in the Three and Six Month
1998 Periods is due to costs associated with the expansion of the IXnet Network.
This was partially offset by a decrease (excluding the above amounts related to
IXnet) of $2.1 and $1.5 million in the Three and Six Month 1998 Periods,
respectively, from lower variable expenses associated with a decrease in total
combined turret and I.T.S. revenue and a reduction in certain fixed corporate
expenses. 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 six months
ended March 31, 1998 increased $0.2 and $0.1 million to $0.5 and $0.9 million,
respectively. The increase resulted from higher levels of capital leases and
long term debt which was partially offset by lower utilization of the Company's
revolving credit facilities.
Provision for Income Taxes. The Company's effective tax rate was 39.5% and
46.5% for the Three and Six Month 1998 Periods compared to 39.4% and 43.5%,
respectively, for the Three and Six Month 1997 Periods.
Liquidity and Capital Resources
Since the Company's initial public offering in fiscal 1995, the Company
has satisfied its cash requirements through 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 expansions of IXnet's international
telecommunications network.
Net cash provided by operating activities was $21.0 million in the six
months ended March 31, 1998 as compared to net cash provided by operating
activities for the six months
16
<PAGE>
ended March 31, 1997 of $19.4 million. Net cash provided by operating activities
for the six months ended March 31, 1998 reflects a significant improvement in
income from operations, higher depreciation expense and lower working capital
from progress billings resulting from a higher level of new installation
projects in process at customer sites as compared with the comparable prior-year
period. The increase in depreciation and amortization expense is largely the
result of increased capital expenditures and capital lease obligations entered
into by the Company in fiscal 1997 and during the six months ended March 31,
1998 principally for the IXnet Network. Approximately, $3.4 million of property,
plant and equipment was financed with capital lease obligations during the six
months ended March 31, 1998 as compared with $7.3 million in the similar period
of the prior year and $10.8 million for the year ended September 30, 1997.
Cash used in investing activities was $9.1 million in the six months
ended March 31, 1998 as compared with $5.3 million in the comparable prior year
period. Net cash used in investing activities include expenditures related to
the acquisition of IPC Bridge and for property, plant and equipment, principally
for the IXnet Network.
The Company maintains short-term credit facilities with various banks up
to $35.0 million of which none was outstanding at March 31, 1998. The weighted
average interest rate was 6.63% during the six months ended March 31, 1998 as
compared to 6.46% for the year ended September 30, 1997.
In April 1997, the Company purchased its sole manufacturing facility and
related land in Westbrook, Connecticut for $2.5 million using the Company's
short-term credit facility. In July 1997, this purchase was refinanced through a
mortgage agreement with a bank for $2.2 million. 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%. On April 30, 1998 the Company paid the outstanding
balance on the mortgage.
On February 13, 1998, the Company purchased, by the issuance of a
promissory note in the amount of $6.7 million, plus accrued interest, due on
April 8, 1998, all of the issued and outstanding common stock of MXnet, a wholly
owned subsidiary of National Discount Brokers Group Inc. In addition MXnet
entered into employment agreements with four MXnet executives which included
signing and retention bonuses in the 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.
In connection with the implementation of the IXnet Network, IXnet has
entered into capital lease agreements for certain network switching equipment,
aggregating approximately $2.8 million for the six months ended March 31, 1998
as compared with $11.2 million for the similar period of the prior-year.
On December 18, 1997, IPC and Arizona Acquisition Corp. ("AAC") entered
into an Agreement and Plan of Merger (the "Merger Agreement"). The Merger
Agreement provided,
17
<PAGE>
among other things, for the merger of AAC with and into IPC (the "Merger"), with
IPC as the Surviving Corporation. Under the terms of the Merger Agreement,
subject to dissenters' rights, each share of common stock of the Company would
be 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 Surviving
Corporation Common Stock, subject to proration in certain circumstances. The
Merger would be accounted for as a leveraged recapitalization and was subject to
majority stockholder approval and regulatory approval. As a result of the
Merger, AAC's parent, Cable Systems Holdings, LLC ("CSH LLC"), a majority of
whose membership interests are owned by Citicorp Venture Capital, Ltd. and
others, will receive in exchange for its shares of common stock of AAC not less
than 54% nor more than 90% of the number of shares of Surviving Corporation
Common Stock outstanding after the Merger.
On April 30, 1998 the Company completed the Merger. The Company issued
$247.4 million aggregate principal amount at maturity ($180.0 million initial
proceeds upon issuance) of its 10-7/8% senior discount notes, the proceeds of
which, together with $54.7 million of capital provided by CSH LLC, its indirect
subsidiary Cable Systems International, Inc. and the investment fund Lawrence
Smith & Horey III, L.P., were used to repurchase shares of IPC common stock from
IPC stockholders who chose to receive cash in exchange for their shares. 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.
At March 31, 1998, the Company had deferred $4.2 million of cost related
to the Merger and financings, of which approximately $1.1 million has been paid.
As a result of the merger on April 30, 1998, IPC will incur a loss in
its fiscal 1998 third quarter ended June 30, 1998. This one-time charge
approximating $8.4 million consists of certain change in control payments
related to the cancellation of stock options, bonuses and severance costs.
Because this is a one-time charge related to the merger, the Company does not
expect this loss to materially impact liquidity or ongoing operations.
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.
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 6. Exhibits and Reports on Form 8-K
(a) Exhibit Number 27 Financial Data Schedule
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IPC INFORMATION SYSTEMS, INC.
Dated: May 13, 1998 By: /s/ TERRY CLONTZ
------------------------------
Terry Clontz
President and
Chief Executive Officer
Dated: May 13, 1998 By: /s/ BRIAN REACH
------------------------------
Brian L. Reach
Vice President, Chief Financial Officer
19
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<PERIOD-END> MAR-31-1998
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