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, 1999
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 April 30, 1999
- ---------------------------- -----------------------------
Common Stock par value $0.01 8,076,188 shares
<PAGE>
IPC INFORMATION SYSTEMS, INC.
INDEX TO FORM 10-Q
PAGE
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at March 31, 1999
and September 30, 1998 2
Condensed Consolidated Statements of Operations for the Three
and Six Months Ended March 31, 1999 and 1998 3
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended March 31, 1999 and 1998 4
Notes to Condensed Consolidated Financial Statements 5 - 10
ITEM 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 17
PART II. OTHER INFORMATION 18
SIGNATURES 19
<PAGE>
IPC INFORMATION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(Dollar amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
--------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 12,039 $ 28,084
Trade receivables, less allowance of $2,258 and $2,442, respectively 62,430 71,521
Inventories 44,226 40,046
Prepaid expenses and other current assets 19,109 15,904
-------- --------
Total current assets 137,804 155,555
Property, plant and equipment, net 67,357 56,763
Debt issuance costs, net 10,428 10,707
Goodwill, net 64,935 15,639
Other assets 1,959 2,628
-------- --------
Total assets $282,483 $241,292
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Revolving credit borrowings $ 16,808 $ --
Current portion of notes payable 4,941 --
Accounts payable 21,292 20,094
Accrued liabilities 48,972 40,704
Customer advances and deferred revenue 35,312 39,119
Current portion of capital leases 5,341 4,462
-------- --------
Total current liabilities 132,664 103,379
Senior unsecured notes 198,627 188,223
Notes payable, net of current portion 7,263 --
Lease obligations, net of current portion 14,553 12,490
Other liabilities 3,756 3,741
-------- --------
Total liabilities 356,863 307,833
-------- --------
Commitments and contingencies
Stockholders' deficit:
Preferred stock - $0.01 per share par value, authorized 10,000,000 shares;
none issued and outstanding
Common stock - $0.01 per share par value, authorized 25,000,000 shares;
8,076,188 shares issued and outstanding 81 81
Paid-in capital 4,797 4,797
Retained deficit (79,258) (71,419)
-------- --------
Total stockholders' deficit (74,380) (66,541)
-------- --------
Total liabilities and stockholders' deficit $282,483 $241,292
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
IPC INFORMATION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
------------------ --------------------
1999 1998 1999 1998
-------- ------- --------- --------
<S> <C> <C> <C> <C>
Revenue:
Product sales and installation $38,803 $31,842 $ 73,159 $ 70,283
Service 42,130 29,303 75,524 57,914
------- ------- -------- --------
80,933 61,145 148,683 128,197
------- ------- -------- --------
Cost of revenue:
Product sales and installation 22,774 18,610 41,557 40,795
Service 26,735 18,822 47,933 37,062
-------- ------- -------- --------
49,509 37,432 89,490 77,857
-------- ------- -------- --------
Gross profit 31,424 23,713 59,193 50,340
Research and development expenses 2,571 2,657 5,339 5,061
Selling, general and administrative expenses 24,691 17,006 46,395 33,563
-------- ------- -------- --------
Income from operations 4,162 4,050 7,459 11,716
Interest expense, net (6,953) (452) (13,144) (892)
Other income/(expense), net (22) (38) 54 (77)
-------- ------- -------- --------
(Loss) income before provision for income taxes (2,813) 3,560 (5,631) 10,747
Provision for income taxes 478 1,406 1,319 4,999
-------- ------- -------- --------
Net (loss) income $ (3,291) $ 2,154 $ (6,950) $ 5,748
======== ======= ======== ========
Basic (loss) earnings per share $ (0.41) $ 0.10 $ (0.86) $ 0.27
======== ======= ======== ========
Basic weighted average shares outstanding 8,076 21,480 8,076 21,452
======== ======= ======== ========
Diluted earnings per share $ 0.10 $ 0.26
======= ========
Diluted weighted average shares outstanding 21,784 21,766
======= ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
IPC INFORMATION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Six months ended
March 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (6,950) $ 5,748
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 9,278 5,063
Amortization of goodwill 4,071 818
Non-cash interest on senior discount notes 10,404 --
Other interest amortization 813 203
Provision for doubtful accounts 672 574
Changes in operating assets and liabilities:
Trade receivables 11,267 (5,707)
Inventories (2,194) (9,702)
Prepaid expenses and other current assets (2,010) 850
Other assets 239 (154)
Accounts payable (1,094) 524
Accrued liabilities and other liabilities 938 4,386
Customer advances and deferred revenue (4,783) 18,396
-------- -------
Net cash provided by operating activities 20,651 20,999
-------- -------
Cash flows from investing activities:
Capital expenditures (9,410) (8,302)
Acquisitions, net of cash acquired (40,418) --
Contingent acquisition payments to Bridge Electronics, Inc. -- (750)
-------- -------
Net cash used in investing activities (49,828) (9,052)
-------- -------
Cash flows from financing activities:
Net repayment of notes payable -- (3,200)
Proceeds from revolving credit borrowings 22,082 --
Repayments of revolving credit borrowings (5,276) --
Principal payments on capital leases (2,376) (1,533)
Debt issuance costs (384) --
Repayment of long-term debt (555) (23)
Proceeds from the exercise of stock options -- 468
Other (42) --
-------- -------
Net cash provided by (used in) financing activities 13,449 (4,288)
-------- -------
Effect of exchange rate changes on cash and cash equivalents (317) (689)
-------- -------
Net (decrease) increase in cash and cash equivalents (16,045) 6,970
-------- -------
Cash and cash equivalents, beginning of period 28,084 1,465
-------- -------
Cash and cash equivalents, end of period $ 12,039 $ 8,435
======== =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
IPC INFORMATION SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
(Dollar amounts in thousands, except per share amounts)
1. In the opinion of management, the accompanying unaudited condensed
consolidated financial statements include all necessary adjustments (consisting
of normal recurring accruals and appropriate intercompany elimination
adjustments) for a fair presentation of the financial position of IPC
Information Systems, Inc. ("IPC" or the "Company") as of March 31, 1999, and the
results of its operations for the three and six months ended March 31, 1999 and
1998, and its cash flows for the six months ended March 31, 1999 and 1998, 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, 1999 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,
1998.
2. Certain reclassifications have been made to the fiscal 1998 financial
statements in order to conform to the current period's condensed consolidated
presentation.
3. Components of inventories:
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
--------- -------------
<S> <C> <C>
Components and manufacturing work in process $12,536 $13,639
Inventory on customer sites awaiting installation 25,214 21,516
Parts and maintenance supplies 6,476 4,891
------- -------
$44,226 $40,046
======= =======
</TABLE>
4. Revolving credit borrowings:
In April 1998, the Company entered into a five-year $55,000 senior secured
revolving credit agreement (the "Revolving Credit Facility"), with Morgan
Stanley Senior Funding, Inc., as syndication agent, General Electric Capital
Corp., as Administrative Agent, and other lending parties, to be used for
working capital and other general corporate purposes. The Revolving Credit
Facility is subject to borrowing base limitations based upon eligible accounts
receivable and inventory. At March 31, 1999, total availability under the
Revolving Credit Facility approximated $26,643, of which $16,806 was utilized.
The weighted average interest rate during the three and six months ended March
31, 1999 was 8.09% and 8.67%, respectively. The Revolving Credit Facility also
provides a $10,000 sublimit for the issuance of letters of credit, of which
$8,114 was outstanding as of March 31, 1999.
5. Acquisitions:
On December 18, 1998 IPC, through its wholly owned subsidiary,
International Exchange Networks Ltd. ("IXnet"), acquired all of the outstanding
shares of Saturn Global Network Services
5
<PAGE>
Holdings Limited ("Saturn") from Marshalls 106 Limited ("Marshalls") (the
"Saturn Acquisition"). The purchase price included the payment of cash in the
amount of $35,666 (paid by the Company through a combination of cash from
operations and borrowings from the Revolving Credit Facility) and the issuance
by IXnet of a promissory note, guaranteed by the Company, in the amount of
$7,545, bearing interest at the UK Sterling Base Rate, as defined, plus three
percent and payable in three annual installments ("Marshalls Note"). In
addition, the Company assumed indebtedness of Saturn due to Marshalls in the
amount of $4,968 payable over 24 months with interest at 9.25% (the "Saturn
Note"). Under the agreement, the Marshalls Note is subject to certain rights of
offset.
Saturn, a UK Holding Company, owns telecommunication network operating
subsidiaries in the United Kingdom, USA, Hong Kong, Australia, Japan and
Singapore. It has established a business selling managed premium grade voice and
data communication services to the financial community, similar to IXnet but
focused on Europe, Australia and the Pacific Rim; therefore, its customer base
and network facilities are geographically complementary to IXnet.
The Saturn Acquisition was accounted for using the purchase method of
accounting and resulted in approximately $49,000 in goodwill of which
approximately $47,700 remains unamortized at March 31, 1999.
The following unaudited pro forma statement of operations for the six
months ended March 31, 1999 and 1998, gives effect to the Saturn Acquisition as
if it had occurred at the beginning of the fiscal year for each of the periods
presented (amounts in thousands, except per share amounts).
<TABLE>
<CAPTION>
For the six months ended
March 31,
------------------------
1999 1998
-------- --------
<S> <C> <C>
Revenue $153,442 $140,856
(Loss) income before provision for income taxes $ (8,067) $ 5,901
Net (loss) income $ (9,680) $ 2,647
Basic (loss) earnings per share $ (1.20) $ 0.12
Diluted earnings per share (a) -- 0.12
Basic weighted average shares outstanding $ 8,076 $ 21,452
Diluted weighted average shares outstanding $ -- $ 21,766
</TABLE>
(a) Since the six months ended March 31, 1999 resulted in a pro forma net loss,
common stock equivalents would have had an anti-dilutive effect. Therefore,
diluted earnings per share has not been calculated.
Pro forma adjustments include: (i) amortization of goodwill over 10 years;
(ii) interest expense on the Saturn Note and the Marshalls Note; and (iii)
interest expense from revolving credit borrowings for the Saturn Acquisition.
All pro forma adjustments were tax effected using the effective tax rate for
each period. The pro forma financial information presented above is not
necessarily indicative of the operating results which would have been achieved
had the Saturn Acquisition occurred at the beginning of the fiscal year for each
of the periods presented or of the results to be achieved in the future.
On December 31, 1998, the Company purchased the assets of Reuters Voice
Systems ("RVS"), a business unit of Reuters Group PLC, for approximately $5,700
(the "RVS Acquisition"). The purchase was financed through a combination of cash
from operations and borrowings under the Revolving Credit Facility.
6
<PAGE>
The RVS Acquisition was accounted for using the purchase method of
accounting and resulted in approximately $4,700 in goodwill, of which
approximately $4,100 remains unamortized at March 31, 1999.
6. Stock Dividend:
On May 29, 1998, the Company declared a two-for-one stock split effected
in the form of a 100% stock dividend (the "Stock Dividend"). The Stock Dividend
was distributed on June 24, 1998 to holders of record on June 10, 1998. Unless
otherwise indicated, all share and per share data, including stock option
information, is stated to reflect the Stock Dividend.
7. Earnings Per Share:
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).
<TABLE>
<CAPTION>
Three months Six months
ended Ended
March 31, March 31,
1999 1998 1999 1998
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Basic earnings per share computation
Numerator - Net (loss) income $ (3,291) $ 2,154 $(6,950) $ 5,748
Denominator -
Weighted average common shares
outstanding 8,076 21,480 8,076 21,452
-------- ------- ------- -------
Basic (loss) earnings per share $ (0.41) $ 0.10 $ (0.86) $ 0.27
======== ======= ======= =======
Diluted earnings per share computation
Numerator - Net (loss) income $ 2,154 $ 5,748
Denominator:
Weighted average common shares
outstanding 21,480 21,452
Dilutive stock options 304 314
------- -------
Total shares 21,784 21,766
------- -------
Diluted earnings per share $ 0.10 $ 0.26
======= =======
</TABLE>
Since the three and six months ended March 31, 1999 resulted in a net
loss, common stock equivalents would have had an anti-dilutive effect.
Therefore, diluted earnings per share has not been calculated. Approximately
150,000 options that were outstanding for the three and six months ended March
31, 1998 were not included in the computation of diluted earnings per share
because the associated exercise prices exceeded the average market price of the
Company's common stock for the period.
8. Comprehensive Income:
Effective October 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This statement
requires the Company to include within its financial statements information on
comprehensive income, which is defined as all activity impacting equity from
non-owner sources. For the Company, comprehensive income includes
7
<PAGE>
net income and foreign currency translation adjustments. Total comprehensive
Income, net of taxes, was a net loss of $7,995 and net income of $6,073 for the
six months ended March 31, 1999 and 1998, respectively.
9. Business Segments:
The Company's operations include Trading Systems, Information Transport
Systems ("I.T.S.") and network services (IXnet). Trading Systems reports sales
of turret systems to distributors and direct sales and installations of turret
systems as "Product sales and installation." It 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." I.T.S. reports revenue from the design, integration and
implementation of cabling infrastructure projects, including Local and Wide Area
Networks, and from the sales of intelligent network products, such as hubs,
bridges and routers, as "Product sales and installation." It reports revenue
from on-site maintenance of customer cable infrastructure, 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, IXnet reports revenue derived from the IXnet network as "Service."
<TABLE>
<CAPTION>
Trading
Systems I.T.S IXnet Corporate Consolidated
--------- --------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
Six Months ended March 31, 1999
Revenue:
Product sales and installation $56,933 $16,226 $ -- $ -- $ 73,159
Service 34,332 8,680 32,512 -- 75,524
Intersegment -- -- 99 -- 99
-------- ------- -------- ------- --------
Total revenue (a) $91,265 $24,906 32,611 $ -- $148,782
======== ======= ======== ======= ========
Gross profit 45,493 3,330 10,370 -- 59,193
Research and development 5,339 -- -- -- 5,339
Selling, general & administrative 12,973 2,263 24,935 6,224 46,395
-------- ------- -------- ------- --------
Income (loss) from operations $27,181 $ 1,067 $(14,565) $(6,224) $ 7,459
======== ======= ======== ======= ========
Depreciation and amortization $ 2,590 $ 168 $ 9,508 $ 1,083 $ 13,349
======== ======= ======== ======= ========
EBITDA (b) $ 29,771 $ 1,235 $ (5,057) $(5,141) $ 20,808
======== ======= ======== ======= ========
Total assets (c) $125,578 $31,465 $125,440 $ -- $282,483
======== ======= ======== ======= ========
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Trading
Systems I.T.S IXnet Corporate Consolidated
---------- --------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
Six Months ended March 31, 1998
Revenue:
Product sales and installation $ 57,895 $12,388 $ -- $ -- $ 70,283
Service 30,380 12,191 15,343 -- 57,914
Intersegment 85 85
-------- ------- ------- ------- --------
Total revenue (a) $ 88,275 $24,579 $15,428 $ -- $128,282
======== ======= ======= ======= ========
Gross profit 42,251 3,832 4,257 -- 50,340
Research and development 5,061 -- -- -- 5,061
Selling, general & administrative 11,525 2,996 12,005 7,037 33,563
-------- ------- ------- ------- --------
Income (loss) from operations $ 25,665 $ 836 $(7,748) $(7,037) $ 11,716
======== ======= ======= ======= ========
Depreciation and amortization $ 2,345 $ 264 $ 2,588 $ 684 $ 5,881
======== ======= ======= ======= ========
EBITDA (b) $ 28,010 $ 1,100 $(5,160) $(6,353) $ 17,597
======== ======= ======= ======= ========
Total assets (c) $131,130 $24,516 $41,467 $ -- $197,113
======== ======= ======== ======= ========
</TABLE>
(a) The following is a reconciliation of total reportable segment revenue to
the Company's consolidated total revenue:
Six months ended
March 31,
---------------------
1999 1998
---------- ----------
Total revenue for reportable segments $148,782 $128,282
Elimination of intersegment revenue 99 85
-------- --------
Total consolidated revenue $148,683 $128,197
======== ========
(b) Earnings before interest, taxes, depreciation and amortization ("EBITDA")
represents income (loss) from operations before depreciation and
amortization.
(c) The Company's management reviews corporate assets combined with Trading
System's assets. In addition, Trading System's total assets are net of
$100,591 at March 31, 1999 and $27,747 at March 31, 1998 relating to
amounts due from affiliates eliminated in consolidation.
10. Effects of Recently Issued Accounting Standards:
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives
and Hedging Activities," which establishes accounting and reporting standards
for derivative instruments and hedging activities. This standard is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999. The
Company does not currently use derivative financial instruments.
9
<PAGE>
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-1, "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 is effective for
financial statements for years beginning after December 15, 1998. The Company
does not anticipate the adoption of this standard to have a material effect on
its financial position, results of operations or cash flows.
11. Subsequent Events:
Acquisition of V Band Corporation
In April 1999, the Company signed a definitive agreement to acquire V Band
Corporation ("V Band") through a merger for approximately $1,500. The merger
provides for a cash payment of $0.27 for each outstanding V Band share and is
subject to approval by V Band's shareholders and the satisfaction of certain
other customary conditions to closing. The transaction will be financed by IPC
through cash from operations and is expected to close during the second quarter
of calendar 1999. Thomas Feil, a founder and major shareholder of V Band, has
entered into a separate agreement with IPC to vote his shares in favor of the
merger. V Band is a leading supplier of mission critical digital voice
communications systems, similar to products sold by IPC's trading systems
division . V Band's products and services are used primarily by the financial
services organizations for the trading of stocks, bonds and other financial
instruments.
Initial Public Offering
On April 8, 1999 the Company announced its intention to reorganize IXnet
into a holding company to facilitate the sale of up to 20% of the common stock
in an initial public offering. The number of shares to be sold, pricing and
timing of the offering will be determined by the Company and its underwriters.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (unaudited)
Overview
The Company 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 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 IXnet, the Company operates a telecommunication network which
provides a variety of dedicated private line, managed data and switched network
services (the "IXnet Network"), which has been specifically designed to meet the
specialized telecommunications requirements of the financial trading community.
The Company's operations include Trading Systems, Information Transport
Systems ("I.T.S.") and network services ("IXnet"). Trading Systems reports sales
of turret systems to distributors and direct sales and installations of turret
systems as "Product sales and installation." It 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." I.T.S. reports revenue from design, integration and implementation of
cabling infrastructure projects including Local and Wide Area Networks, and from
sales of intelligent network products, such as hubs, bridges and routers, as
"Product sales and installation." It reports revenue from on-site maintenance of
customer cable infrastructure, 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, IXnet
reports revenue derived from the use of its international network as "Service."
Revenue from trading systems and I.T.S. sales and installation is
recognized upon completion of the installation, except for revenue from sales of
turret products to distributors, which is recognized upon shipment by IPC.
Invoices representing progress payments on direct product sales are submitted
during various stages of the installation. The revenue attributable to such
advance billings 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 IXnet
network services are recognized in the month that the service is provided,
except for installation revenue which is amortized over the average customer
contract life.
Cost of revenue for turret systems and I.T.S. includes material and labor
associated with the installation of a project or the service performed. Cost of
revenue for IXnet network services includes charges from carriers for
telecommunication lines and circuits and amortization of the purchase of
intercontinental, undersea fiber optic cable facilities known as indefeasible
rights of use "IRU's" associated with such service revenue.
11
<PAGE>
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 period to period. However, the Company's service business
from all three divisions generates a more consistent revenue stream than sales
and installation and, consequently, these fluctuations (as a percentage of total
revenue) could be somewhat diminished in the future as the Company's service
business expands.
On May 29, 1998, the Company declared a two-for-one stock split effected
in the form of a 100% stock dividend (the "Stock Dividend"). The Stock Dividend
was distributed on June 24, 1998 to holders of record on June 10, 1998. Unless
otherwise indicated, all share and per share data, including stock option
information, is stated to reflect the Stock Dividend.
On April 30, 1998, Arizona Acquisition Corp. was merged into the Company
(the "Merger"). In connection with the Merger, the Company issued $247.4 million
aggregate principal amount at maturity of 10 7/8% Senior Discount Notes due 2008
(the "Notes"). The Notes were issued under an indenture between IPC, as issuer,
and United States Trust Company of New York, as trustee. The indenture contains
certain restrictive covenants which impose limitations on IPC and its
subsidiaries, including, (i) indebtedness, (ii) restricted payments, (iii)
dividends, (iv) issuance and sale of capital stock of subsidiaries, (v) issuance
of guarantees by subsidiaries, (vi) certain transactions with shareholders and
affiliates, (vii) liens, (viii) sale-leaseback transactions, (ix) asset sales,
and (x) maintaining various financial ratios.
Results of Operations
Comparison of the Three Months ("Q2 1999") and Six Months ("YTD 1999") ended
March 31, 1999 to the Three Months ("Q2 1998") and Six Months ("YTD 1998") ended
March 31, 1998
Revenue. Total revenue increased $19.9 million, or 32.4%, to $81.0 million
in Q2 1999 from $61.1 million in Q2 1998. Total revenue increased $20.5 million
or 16.0% to $148.7 million in YTD 1999 from $128.2 million in YTD 1998.
Turret installation and related service revenue increased $8.0 million, or
20.3%, to $47.3 million in Q2 1999 from $39.3 million in Q2 1998. YTD 1999
turret installation and related service revenue increased $3.0 million, or 3.4%,
to $91.3 million from $88.3 million in YTD 1998.
Turret sales and installation revenue increased $6.4 million in Q2 1999 to
$29.6 million and decreased $1.0 million to $56.9 million in YTD 1999 as
compared to the similar periods of the prior year. The increase in Q2 1999 is
primarily related to the timing of large installation projects (projects greater
than $1.5 million in revenue) recognized as revenue when compared to Q2 1998.
Turret service revenue increased $1.6 million to $17.7 million in Q2 1999
from $16.1 million in Q2 1998. Turret service revenue increased $4.0 million to
$34.3 million in YTD 1999 from $30.3 million in YTD 1998. Approximately $1.3
million of the increase is related to the acquisition of RVS. Higher service
revenue also resulted from the Company's expanding customer base.
Revenue from I.T.S. sales and related service was flat at $13.9 million in
Q2 1999 when compared to Q2 1998. YTD 1999 I.T.S. sales and related service
revenue increased by $0.3 million to $24.9 million from $24.6 million in YTD
1998.
12
<PAGE>
Revenue from new I.T.S. installation projects in Q2 1999 and YTD 1999 was
$10.5 million and $16.2 million, respectively, as compared to $8.6 million and
$12.4 million, respectively, in Q2 1998 and YTD 1998. Service related revenue
was $3.4 million and $8.7 million, respectively, in Q2 1999 and YTD 1999 as
compared to $5.3 million and $12.2 million, respectively, in Q2 1998 and YTD
1998. The decrease in Q2 1999 and YTD 1999 is primarily related to a large
customer service contract which expired at the end of fiscal year 1998 and was
not renewed. Due to this singular occurrence, the Company anticipates that
I.T.S. service revenue for the current fiscal year may be less than the prior
year.
Revenue from IXnet's network services increased $11.8 million, or 148%, to
$19.8 million in Q2 1999 from $8.0 million in Q2 1998. YTD 1999 network services
revenue increased $17.2 million, or 112.4%, to $32.5 million from $15.3 million
in YTD 1998. Approximately $8.6 million of the increase in Q2 1999 and $10.8
million of the increase in YTD 1999 is revenue related to the acquisition of
MXNet Inc. ("MXNet") in the second quarter of fiscal 1998 and Saturn in December
1998. In addition, higher network services revenue resulted from increased
customer utilization of IXnet's international telecommunication network. The
IXnet revenue run rate at the end of Q2 1999 (annualized recurring revenue for
the last month of the period) was $80.9 million, an increase of $49.1 million,
or 154.4% as compared with the similar period of the prior year.
Cost of Revenue. Cost of revenue (as a percentage of product sales and
installation revenue) for Q2 1999 and YTD 1999 was 60.9% and 60.1%,
respectively, which decreased as compared to 61.2% and 60.7%, respectively, in
Q2 1998 and YTD 1998.
Product sales and installation cost of revenue (as a percentage of product
sales and installation revenue) for Q2 1999 and YTD 1999 was 58.7% and 56.8%,
respectively, as compared to 58.4% and 58.0%, respectively, in Q2 1998 and YTD
1998. The decrease for YTD 1999 is primarily related to cost efficiencies
realized from the manufacturing of the Company's digital Tradenet MX(R) product.
Service cost of revenue (as a percentage of service revenue) for Q2 1999
and YTD 1999 was 63.5% as compared to 64.2% and 64.0% in Q2 1998 and YTD 1998.
The decreases are primarily related to higher network services revenue from
increased utilization of the IXnet network and a greater percentage of turret
maintenance revenue in service revenue (turret maintenance revenue typically has
a lower cost of revenue as compared to turret moves, additions and changes).
Research and Development Expenses. Research and development expenses were
$2.6 million and $5.3 million in Q2 1999 and YTD 1999 as compared to $2.7
million and $5.1 million in Q2 1998 and YTD 1998. Research and development
efforts continue to be focused on the development of the next generation of
trading systems products including integration of the Tradenet MX turret with
the IXnet Network as well as enhancement of existing features of the Tradenet MX
family to sustain the Company's leadership position in voice-based trading
system products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") increased by $7.7 million, or 45.2%, to $24.7
million in Q2 1999 from $17.0 million in Q2 1998. SG&A expenses increased $12.8
million, or 38.2%, to $46.4 million in YTD 1999 from $33.6 million in YTD 1998.
Depreciation and amortization, including amortization of goodwill from
acquisitions, represented $4.6 million of the increase in Q2 1999 and $7.5
million of the increase in YTD 1999. The balance of the increase in the current
periods are principally related to personnel costs attributable to internal
growth and the acquisitions of MXNet, Saturn and RVS. Also contributing to the
SG&A increase in YTD 1999, is a non-recurring charge of $0.8 million relating to
a separation
13
<PAGE>
agreement and release between the Company and Terry Clontz, the Company's former
President and Chief Executive Officer. The Company intends to continue to invest
in the IXnet network. As the Company continues to deploy this network, the
Company anticipates that SG&A expenses will continue to increase. These expenses
may be incurred prior to the realization of anticipated revenue.
Interest Expense, net. Interest expense, net increased $6.5 million to
$7.0 million in Q2 1999 and increased $12.3 million to $13.1 million in YTD
1999. The increase is principally related to non-cash interest expense of $5.5
million and $10.9 million, respectively, in Q2 1999 and YTD 1999, respectively,
associated with the issuance of Senior Discount Notes in April 1998. Also
contributing to the increases in the current periods are interest expense from
increased levels of Revolving Credit Facility borrowings and capital leases.
Provision for Income Taxes. The Company's effective tax rate for Q2 1999
and YTD 1999 was a negative 17.0% and 23.4%, respectively, compared to 39.5% and
46.5% in the similar periods of the prior year. Although the Company incurred a
net loss for Q2 1999 and YTD 1999, income taxes were provided due to a
limitation on the Company's ability to utilize foreign tax credits to offset
taxes paid outside of the United States, a valuation allowance for the Company's
net operating loss carryforwards and an increase in IXnet's pre-tax losses for
which the Company is not able to receive certain state statutory tax benefits.
Liquidity and Capital Resources
From the Company's initial public offering in fiscal 1995 until the Merger
in April 1998, the Company satisfied its cash requirements through cash provided
by operations, capital lease financing and certain unsecured bank lines of
credit. The Company's principal uses of cash are to fund working capital
requirements, operating losses and capital expenditures of its IXnet subsidiary
and acquisitions, principally related to the expansion of IXnet's international
telecommunications network.
On April 8, 1999 the Company announced its intention to reorganize IXnet
into a holding company to facilitate the sale of up to 20% of the common stock
in an initial public offering. The number of shares to be sold, pricing and
timing of the offering will be determined by the Company and its underwriters.
Net cash provided by operating activities was $20.7 million in YTD 1999 as
compared to $21.0 million in YTD 1998.
Cash used in investing activities was $49.8 million and $9.1 million for
YTD 1999 and YTD 1998, respectively. Cash used in investing activities was
related to the acquisitions of Saturn and RVS, as well as expenditures for
property, plant and equipment, principally consisting of network equipment and
machinery and equipment primarily for IXnet.
Cash provided by financing activities was $13.4 million in YTD 1999 as
compared to a use of cash of $4.3 million in YTD 1998. The increase is
principally related to $16.8 million in net borrowings under the Revolving
Credit Facility primarily used to finance the acquisitions of Saturn and RVS.
In April 1998, the Company entered into the Revolving Credit Facility with
Morgan Stanley Senior Funding, Inc., as syndication agent, General Electric
Capital Corp. as Administrative Agent and other lending parties, to be used for
working capital and other general corporate purposes. The Revolving Credit
Facility is subject to borrowing base limitations based upon eligible accounts
receivable and inventory. At March 31, 1999, total availability under the
Revolving Credit Facility
14
<PAGE>
approximated $26.6, million of which $16.8 million was utilized. The weighted
average interest rate during Q2 1999 and YTD 1999 was 8.09% and 8.67%,
respectively. The Revolving Credit Facility also provides a $10.0 million
sublimit for the issuance of letters of credit, of which $8.1 million was
outstanding as of March 31, 1999.
On December 18, 1998 IPC, through its wholly owned subsidiary, IXnet,
acquired all of the outstanding shares of Saturn Global Network Services
Holdings Limited ("Saturn") from Marshalls 106 Limited ("Marshalls"). The
purchase price included the payment of cash in the amount of $35.7 million (paid
by the Company through a combination of cash from operations and borrowings from
the Revolving Credit Facility) and the issuance by IXnet of a promissory note,
guaranteed by the Company, in the amount of $7.5 million, bearing interest at
the UK Sterling Base Rate, as defined, plus three percent and payable in three
annual installments ("Marshalls Note"). In addition, the Company assumed
indebtedness of Saturn due to Marshalls in the amount of $5.0 million payable
over 24 months with interest at 9.25% (the "Saturn Note"). Under the agreement,
the Marshalls Note is subject to certain rights of offset.
On December 31, 1998, the Company purchased the assets of RVS, a business
unit of Reuters Group PLC, for approximately $5.7 million. The purchase was
financed through a combination of cash from operations and borrowings under the
Revolving Credit Facility.
In April 1999, the Company signed a definitive agreement to acquire V Band
Corporation ("V Band") through a merger for approximately $1,500. The merger
provides for a cash payment of $0.27 for each outstanding V Band share and is
subject to approval by V Band's shareholders and the satisfaction of certain
other customary conditions to closing. The transaction will be financed by IPC
through cash from operations and is expected to close during second quarter of
calendar 1999. Thomas Feil, a founder and major shareholder of V Band, has
entered into a separate agreement with IPC to vote his shares in favor of the
merger. V Band is a leading supplier of mission critical digital voice
communications systems. V Band's products and services are used primarily by the
financial services organizations for the trading of stocks, bonds and other
financial instruments.
In connection with the implementation of the IXnet Network, IXnet has
entered into capital lease agreements for certain network switching equipment
totaling approximately $5.3 million and $2.8 million in YTD 1999 and YTD 1998,
respectively.
The Company believes that cash flows from operations and existing credit
facilities will be sufficient to meet its working capital and capital
expenditure needs at least through September 2000. The Company does not rule out
seeking additional debt or equity financing (see "Subsequent Events") for other
corporate purposes.
Euro
On January 1, 1999, several members of the European Union established
fixed conversion rates between their existing sovereign currencies, and adopted
the Euro as their new legal currency. Since its adoption, the Euro has not had a
material adverse effect on the Company's business or financial condition.
Impact of Year 2000
The Year 2000 issue is the result of computer-controlled systems using two
digits rather than four to define the applicable year. For example, computer
programs that have time-sensitive
15
<PAGE>
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including among other things, a temporary inability
to process transactions, deliver products and services to customers, send
invoices, or engage in similar normal business activities.
The Company has assessed its Year 2000 compliance for the products that it
manufactures and the services it provides, along with those products
manufactured by others which the Company represents and sells. The Company is
taking steps to obtain Year 2000 compliance status updates from vendors that
supply products for resale and services which the Company either uses internally
or resells as part of the IXnet Network and expects to conclude on remedial
alternatives, if any, by June 30, 1999. Until such compliance updates are
complete, the Company will not be able to completely evaluate whether its
systems, products or services will need to be revised to be Year 2000 compliant.
However, at this point in time, the Company believes that its products and the
products it resales are Year 2000 compliant or can be made Year 2000 compliant
or Year 2000 ready, as the case may be, with upgrades to both the hardware and
software made available by the Company and its vendors.
In addition, the Company has made available to trading systems customers
its trading system laboratory located in Westbrook, CT, to independently verify
and test such compliance with respect to current trading systems products.
The Company is in the process of converting to an enterprise-wide
management information system which, through software updates to both the
application and operating systems scheduled to be completed by June 30, 1999, is
expected to be Year 2000 compliant.
The Company estimated it will spend approximately $2.0 million in
connection with identifying, evaluating or addressing Year 2000 readiness and
compliance issues, excluding the costs associated with the conversion to an
enterprise-wide management information system, which was undertaken for
operational reasons. To date, the Company has incurred approximately $1.6
million related to Year 2000 compliance. Most of the Company's expenses in
connection with Year 2000 compliance have related to, and are expected to
continue to relate to, the operating costs associated with time spent by
employees in the evaluation process and Year 2000 compliance matters generally.
There can be no assurance that the Company will not discover Year 2000 or
readiness compliance problems in its systems, products or services that will
require substantial revision. In addition, there can be no assurance that
third-party software, hardware or services incorporated into the Company's
material systems, products or services will not need to be revised or replaced,
all of which could be time-consuming and expensive. The failure of the Company
to fix or replace its internally developed software, third-party software,
hardware or services on a timely basis could result in lost revenues, increased
operating costs, the loss of customers and other business interruptions any of
which could have a material adverse effect on the Company's business, results of
operations and financial condition. Moreover, the failure to adequately address
Year 2000 compliance issues related to its products and services could result in
claims of mismanagement, misrepresentation or breach of contract and related
litigation, which could be costly and time-consuming to defend.
In addition, there can be no assurance that third party providers of
products and services, including telecommunications and utility companies, and
the Company's customer base, primarily in the financial services industry, will
be Year 2000 compliant. The failure of such entities to be Year 2000 compliant
could result in a systematic failure, beyond the control of the Company, such as
16
<PAGE>
prolonged telecommunications or electrical failure, or the inability of
customers to make payment for services, which could have a material adverse
effect on the Company's business, results of operations and financial condition.
As discussed above, the Company is engaged in an ongoing Year 2000
compliance assessment and has not yet developed any contingency plans. The
results of the Company's enterprise-wide system conversion and responses
received from vendors and service providers will be taken into account in
determining the nature and extent of any contingency plans.
- -------------------------------------------------------------------------------
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, 1998.
- -------------------------------------------------------------------------------
17
<PAGE>
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 - None
ITEM 5. Other Information
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibit Number 27 Financial Data Schedule
(b) Form 8-K
The Company filed with the Securities and Exchange Commission ("SEC") a
current report on Form 8-K dated, January 4, 1999, reporting information under
items 2 and 7 thereof and providing the following exhibits:
2.3 Agreement for Sale/Purchase of the Issued Share Capital of Saturn Global
Network Services Holdings Limited dated August 7, 1998 (as amended on
December 18, 1998) among Marshalls 106 Limited, Marshalls Finance
Limited, International Exchange Networks, Ltd. and IPC Information
Systems, Inc.
99 Press Release issued on December 21, 1998
An amendment to this current report on Form 8-K, was filed with the SEC on
February 11, 1999, reporting information under Items 2 and 7.
The Company filed with the Securities and Exchange Commission ("SEC") a
current report on Form 8-K dated, April 23, 1999, reporting information under
item 2 thereof and providing the following exhibits:
99.1 Press release issued on April, 8 1999
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 17, 1999 By: /s/ GERALD E. STARR
---------------------------
Gerald E. Starr
President and
Chief Executive Officer
Dated: May 17, 1999 By: /s/ BRIAN L. REACH
---------------------------
Brian L. Reach
Vice President, Chief Financial Officer
19
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