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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 10-Q þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended December 31, 2004 or o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From to   Commission File Number 333-82540 IPC ACQUISITION CORP.  Delaware
    
    74-3022102(State or other jurisdiction of incorporation or organization)
    
    (IRS Employer Identification No.)88 Pine Street, Wall Street Plaza, 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 þ     No o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). Yes
o     No
þ 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 January 31, 2005Common Stock, par value $0.01
    
    14,718,592 shares




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IPC ACQUISITION CORP. INDEX PagePart I. Financial Information:Item 1. Financial StatementsA) Consolidated Balance Sheets as of December 31, 2004 and September 30, 2004
    
    
    2B) Consolidated Statements of Operations for the Three Months Ended December 31, 2004 and
2003
    
    
    3C) Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2004 and
2003
    
    
    4D) Notes to Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    22Item 3. Quantitative and Qualitative Disclosure About Market Risk
    
    
    34Item 4. Controls and Procedures
    
    
    34Part II. Other Information:Item 1. Legal Proceedings
    
    
    35Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    35Item 3. Defaults Upon Senior Securities
    
    
    36Item 4. Submission of Matters to a Vote of Security Holders
    
    
    36Item 5. Other Information
    
    
    36Item 6. Exhibits
    
    
    36Signature
    
    
    37EX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION
  1




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Part I  Financial Information: 
 Item 1. Financial Statements IPC ACQUISITION CORP. 
 CONSOLIDATED BALANCE SHEETS
 (In Thousands Except Share Amounts)
 December 31,
    
    
    September 30,2004
    
    
    2004(Unaudited)AssetsAssets:Cash
    
    $
    8,737
    
    
    $
    27,270Accounts receivable, net of allowance of $1,605 and $1,264, respectively
    
    
    55,214
    
    
    
    57,259Inventories, net
    
    
    42,312
    
    
    
    31,176Due from former affiliate
    
    
    4,986
    
    
    
    7,117Prepaid and other current assets
    
    
    4,256
    
    
    
    4,041Deferred taxes
    
    
    13,751
    
    
    
    13,132Current assets of discontinued operations
    
    
    145
    
    
    
    2,548Total current assets
    
    
    129,401
    
    
    
    142,543Property, plant and equipment, net
    
    
    24,648
    
    
    
    24,846Customer relationships, net
    
    
    147,701
    
    
    
    147,939Technology, net
    
    
    26,007
    
    
    
    27,692Trade name
    
    
    16,300
    
    
    
    16,300Goodwill
    
    
    92,260
    
    
    
    82,621Deferred financing costs, net
    
    
    11,866
    
    
    
    12,283Other assets
    
    
    1,252
    
    
    
    1,035Non-current assets of discontinued operations
    
    
    40
    
    
    
    40Total assets
    
    $
    449,475
    
    
    $
    455,299Liabilities and Stockholders EquityLiabilities:Current portion of long term debt
    
    $
    483
    
    
    $
    2,157Accounts payable
    
    
    6,641
    
    
    
    14,594Accrued expenses and other current liabilities
    
    
    24,402
    
    
    
    35,984Income taxes payable
    
    
    7,888
    
    
    
    9,147Customer advances on installation contracts
    
    
    30,177
    
    
    
    21,984Deferred revenue on maintenance contracts
    
    
    14,628
    
    
    
    14,007Current portion of guarantees on former parent obligations
    
    
    
    
    
    
    155Current liabilities of discontinued operations
    
    
    668
    
    
    
    639Total current liabilities
    
    
    84,887
    
    
    
    98,667Term loan
    
    
    47,239
    
    
    
    47,293Senior subordinated notes
    
    
    150,000
    
    
    
    150,000Deferred purchase consideration
    
    
    3,000
    
    
    
    Deferred taxes
    
    
    25,212
    
    
    
    23,150Deferred compensation
    
    
    2,673
    
    
    
    2,686Guarantees on former parent obligations and other long-term liabilities
    
    
    260
    
    
    
    260Total liabilities
    
    
    313,271
    
    
    
    322,056Commitments and ContingenciesStockholders equity:Common stock, $0.01 par value, (25,000,000 shares authorized;
14,718,592 shares issued and outstanding at December 31, 2004 and
September 30, 2004)
    
    
    147
    
    
    
    147Paid in capital
    
    
    146,759
    
    
    
    146,479Notes receivable for purchases of common stock
    
    
    (278
    )
    
    
    (276
    )Deferred stock compensation
    
    
    (871
    )
    
    
    (645
    )Accumulated deficit
    
    
    (21,441
    )
    
    
    (21,672
    )Accumulated other comprehensive income
    
    
    11,888
    
    
    
    9,210Total stockholders equity
    
    
    136,204
    
    
    
    133,243Total liabilities and stockholders equity
    
    $
    449,475
    
    
    $
    455,299
 The accompanying notes are an integral part of the consolidated financial statements. 2




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IPC ACQUISITION CORP. 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (In Thousands) (Unaudited)
 Three Months EndedDecember 31,2004
    
    
    2003Revenue:Product sales and installations
    
    $
    22,470
    
    
    $
    21,458Service
    
    
    43,455
    
    
    
    31,23665,925
    
    
    
    52,694Cost of goods sold (depreciation shown separately):Product sales and installations
    
    
    12,414
    
    
    
    11,138Service
    
    
    21,240
    
    
    
    15,541Depreciation and amortization
    
    
    1,082
    
    
    
    74234,736
    
    
    
    27,421Gross profit
    
    
    31,189
    
    
    
    25,273Research and development
    
    
    4,031
    
    
    
    3,409Selling, general and administrative
    
    
    17,133
    
    
    
    12,924Depreciation and amortization
    
    
    1,479
    
    
    
    1,331Amortization of intangibles
    
    
    4,021
    
    
    
    3,776Income from operations
    
    
    4,525
    
    
    
    3,833Other income (expense):Interest expense, net
    
    
    (5,629
    )
    
    
    (5,522
    )Other income, net
    
    
    1,405
    
    
    
    447Income (loss) from continuing operations before income taxes
    
    
    301
    
    
    
    (1,242
    )Income tax expense
    
    
    127
    
    
    
    372Income (loss) from continuing operations
    
    
    174
    
    
    
    (1,614
    )Discontinued operations (Note 3):Income (loss) from discontinued operations
    
    
    100
    
    
    
    (265
    )Income tax expense (benefit)
    
    
    43
    
    
    
    (115
    )Income (loss) from discontinued operations, net of tax
    
    
    57
    
    
    
    (150
    )Net income (loss)
    
    $
    231
    
    
    $
    (1,764
    )
 The accompanying notes are an integral part of the consolidated financial statements. 3




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IPC ACQUISITION CORP. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In Thousands) (Unaudited)
 Three Months EndedDecember 31,2004
    
    
    2003Cash flows from operating activities:Net income (loss)
    
    $
    231
    
    
    $
    (1,764
    )Income (loss) from discontinued operations
    
    
    57
    
    
    
    (150
    )Income (loss) from continuing operations
    
    
    174
    
    
    
    (1,614
    )Adjustments to reconcile income (loss) from continuing operations to net
cash provided by (used in) operating activities:Depreciation and amortization
    
    
    2,561
    
    
    
    2,073Amortization of intangibles
    
    
    4,021
    
    
    
    3,776Amortization of deferred financing costs
    
    
    530
    
    
    
    464Provision for doubtful accounts
    
    
    208
    
    
    
    74Deferred income taxes
    
    
    (47
    )
    
    
    (792
    )Amortization of guarantees on former parent obligations
    
    
    (155
    )
    
    
    (339
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    4,659
    
    
    
    7,965Due from former affiliate
    
    
    2,131
    
    
    
    Inventories
    
    
    (6,740
    )
    
    
    (907
    )Prepaids and other current assets
    
    
    (131
    )
    
    
    786Other assets
    
    
    (157
    )
    
    
    (326
    )Accounts payable, accrued expenses and other liabilities
    
    
    (22,754
    )
    
    
    (4,335
    )Income taxes payable
    
    
    (1,810
    )
    
    
    (127
    )Customer advances and deferred revenue
    
    
    6,289
    
    
    
    1,182Net cash provided by (used in) continuing operations
    
    
    (11,221
    )
    
    
    7,880Net cash provided by discontinued operations
    
    
    2,489
    
    
    
    11,620Net cash provided by (used in) operating activities
    
    
    (8,732
    )
    
    
    19,500Cash flows from investing activities:Capital expenditures
    
    
    (1,893
    )
    
    
    (1,741
    )Payment of Gains US and UK earn-out consideration and deferred purchase price
    
    
    
    
    
    
    (6,756
    )Acquisitions, net of cash acquired
    
    
    (5,936
    )
    
    
    (5,528
    )Net cash used in investing activities
    
    
    (7,829
    )
    
    
    (14,025
    )Cash flows from financing activities:Principal payments on term loan
    
    
    (1,728
    )
    
    
    (137
    )Issuance costs for term loan amendment
    
    
    (113
    )
    
    
    Deferred compensation payments
    
    
    (13
    )
    
    
    (27
    )Payment of special cash dividend
    
    
    
    
    
    
    (17,839
    )Net cash used in financing activities
    
    
    (1,854
    )
    
    
    (18,003
    )Effect of exchange rate changes on cash
    
    
    (118
    )
    
    
    16Net decrease in cash
    
    
    (18,533
    )
    
    
    (12,512
    )Cash, beginning of period
    
    
    27,270
    
    
    
    25,800Cash, end of period
    
    $
    8,737
    
    
    $
    13,288Supplemental disclosures of cash flow information:Cash paid during the periods for:Income taxes
    
    $
    1,706
    
    
    $
    945Interest
    
    $
    9,195
    
    
    $
    9,656
 The accompanying notes are an integral part of the consolidated financial statements. 4




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IPC ACQUISITION CORP. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
 December 31, 2004 (Unaudited)
 1. Basis of Presentation The accompanying unaudited consolidated financial statements include the accounts of IPC
Acquisition Corp. (the Company) and its wholly and partially owned subsidiaries. The unaudited
consolidated financial statements have been prepared in accordance with U.S. generally accepted
accounting principles for interim financial reporting and the requirements of Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include certain information and footnote disclosures
required by U.S. generally accepted accounting principles for annual financial reporting and should
be read in conjunction with the audited consolidated financial statements included in the Companys
Form 10-K for the fiscal year ended September 30, 2004, as filed with the Securities and Exchange
Commission. These unaudited consolidated financial statements reflect all adjustments, consisting only of
normal recurring adjustments, that are, in the opinion of management, necessary for a fair
presentation of the results of operations for the interim periods presented. Interim period
operating results may not be indicative of the operating results to be expected for the full year
or any other interim period. The unaudited consolidated financial statements for the three months ended December 31, 2004
and 2003 include the accounts of the Company and its wholly and partially owned subsidiaries. The
results of operations of any acquired businesses have been included in the Companys financial
statements from their respective acquisition dates through December 31, 2004. Intercompany balances
and transactions have been eliminated. Summary of Significant Accounting Policies Revenue Recognition Revenue from product sales and installation is recognized upon completion of the installation
or, for contracts that are completed in stages and include contract specified milestones, upon
achieving such contract milestones, and the delivery and customer acceptance of a fully functional
system. Revenue from sales to distributors is recognized upon shipment. Customers are generally
progress-billed prior to the completion of the installations. The revenue related to these advance
payments is deferred until the system installations are completed or specified milestones are
attained. Costs incurred on uncompleted contracts and stages are accumulated and recorded as
inventory awaiting installation. The cost of providing a warranty on the Companys equipment is
estimated and accrued at the time the equipment is sold. In addition, contracts for annual
recurring services are generally billed in advance, and are recorded as revenue ratably (on a
monthly basis) over the contractual periods. Revenue from moves, adds and changes, commonly known
as MACs, to turret systems is recognized upon completion, which generally occurs in the same month
or the month following the order for services. Revenue from network services is generally billed at
the beginning of the month and recognized in the same month. Revenue from software licenses is recognized in accordance with SOP No. 97-2, Software
Revenue Recognition, as amended by SOP 98-9, Modification
of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions. Software revenue is recognized when a customer
enters into a non-cancelable contract or license agreement, the software product has been
delivered, there are no uncertainties surrounding product acceptance, there are no significant
future performance obligations, the contract or license fees are fixed or determinable and
collection is considered probable. Amounts received in advance of meeting these criteria are
deferred. Revenue from support and maintenance contracts is recognized ratably over the contract
period. For certain installation contracts, revenue from product installation sales is recognized in
accordance with EITF 00-21, Revenue Arrangements with Multiple Deliverables, which was adopted in
the 2003 fiscal year. Under this pronouncement, products or services
sold to the same entity that
are entered into at or near the same time are presumed to have been negotiated as a package and are
evaluated as a single arrangement when considering whether there are one or more units of
accounting. In arrangements when multiple products or services are sold, the delivered items are
considered separate units of accounting if the delivered item has value to the customer on a
standalone basis and there is objective and reliable evidence of fair value of the undelivered
items. Undelivered item revenues are included in the liability section as deferred revenue on the
balance sheet at their fair value with the corresponding costs held as an asset in inventory until
delivery has occurred and revenue is earned. Cash and Cash Equivalents The Company maintains cash with several high credit quality financial institutions. Temporary
cash investments with original maturities of three months or less are considered cash equivalents.
Temporary cash investments are stated at cost, which approximates fair value. These investments are
not subject to significant market risk. 5




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IPC ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
December 31, 2004 (Unaudited) Trade Receivables Trade accounts receivable potentially expose the Company to concentrations of credit risk, as
a large volume of business is conducted with several major financial institutions, primarily
companies in the brokerage, banking and financial services industries. To help reduce this risk,
customers are progress-billed prior to the completion of the contract. Uncollected accounts
receivable recorded in customer advances amounted to $11.4 million at December 31, 2004 and $12.4
million at September 30, 2004. The Company performs periodic credit evaluations of its customers financial condition and
although the Company does not generally require collateral, it does require cash payments in
advance when the assessment of credit risk associated with a customer is substantially higher than
normal. Credit losses have consistently been within managements expectations and are provided for
in the consolidated financial statements. Allowance for Doubtful Accounts The Company evaluates the collectibility of its accounts receivable based on a combination of
factors. Where the Company is aware of circumstances that may impair a specific customers ability
to meet its financial obligations to the Company, the Company records a specific allowance against
amounts due to it and thereby reduces the net receivable to the amount the Company reasonably
believes is likely to be collected. For all other customers, the Company recognizes allowances for
doubtful accounts based on the length of time the receivables are outstanding, industry and
geographic concentrations, the current business environment and its historical experience. If the
financial condition of the Companys customers deteriorates or if economic conditions worsen,
additional allowances may be required. Inventories Inventories are stated at the lower of FIFO (first in, first out) cost or market but not in
excess of net realizable value. Inventory costs include all direct manufacturing costs and applied
overhead. Allowances are established based on managements estimate of inventory on hand that is
potentially obsolete or for which its market value is below cost. Property, Plant and Equipment Property, plant and equipment are stated at cost and depreciated on a straight-line basis over
the shorter of their estimated useful lives or related contract terms beginning in the year the
asset was placed into service. Normal repair and maintenance costs are expensed as incurred. The
useful lives by asset category are as follows: Buildings
    
    
    20
    yearsFurniture
fixrures and equipment
    
    
    5
    yearsNetwork
equipment
    
    
    3
    yearsComputer
software
    
    
    3
    years
 Leasehold improvements are amortized over the lesser of the lease term or the estimated useful
life of the improvements. Impairment of Long-Lived Assets The Company reviews long-lived assets, including property, plant and equipment and definite
lived intangible assets, for impairment whenever events or changes in business circumstances
indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss
would be recognized when the aggregate of estimated undiscounted future cash flows expected to
result from the use of the assets and the eventual disposition is less than its carrying amount.
Impairment, if any, is assessed using discounted cash flows. No impairments have occurred to date. Goodwill and Other Intangible Assets Goodwill represents the excess of the cost over the net of the fair value of the identifiable
tangible and intangible assets acquired and the fair value of liabilities assumed in acquisitions.
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 142 Goodwill and
Other Intangible Assets (SFAS No. 142), effective upon the acquisition of IPC Information
Systems and, in accordance with SFAS No. 142, there is no amortization of goodwill and intangible
assets that have 6




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IPC ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
December 31, 2004 (Unaudited) indefinite useful lives. However, such assets are tested for impairment annually using the two-step
process specifically provided in SFAS No. 142. Other intangible assets are carried at cost.
Technology is amortized over estimated useful lives of between 3 to 7 years, customer relationships are amortized over estimated useful lives of 8 to 20 years, and
proprietary software is amortized over its estimated useful life of 7 years. Trade name has been
deemed to have an indefinite life and will not be subject to amortization, but instead will be
subject to annual impairment tests in accordance with the provisions of SFAS No. 142. In
determining that the trade name has an indefinite life, the Company considered the following
factors: the ongoing active use of its trade name, which is directly associated with its market
leading position in the mission-critical voice communications business, the lack of any legal, regulatory or contractual
provisions that may limit the useful life of the trade name, the lack of any substantial costs to
maintain the asset, the positive impact on its trade name generated by its other ongoing business
activities (including marketing and development of new technology and new products) and its
commitment to products branded with its trade name over its 30 year history. The Companys acquired
trade name has significant market recognition and the Company expects to derive benefits from the
use of such assets beyond the foreseeable future. The Company completed the required annual fair value test as of July 1, 2004 (the first day of
the fourth quarter of 2004), and concluded that there was no impairment to its recorded goodwill or
trade name. There have been no indicators of impairment during the first quarter of the 2005 fiscal
year. The Company believes the recorded values of goodwill of $92.3 million and trade name of $16.3
million at December 31, 2004 are fully recoverable. Deferred Financing Costs As part of the acquisition of IPC Information Systems in December 2001, the Company
capitalized certain debt issuance costs in the amount of $17.4 million relating to the
establishment of the senior secured credit facilities and the issuance of the senior subordinated
notes. These costs are being amortized over the respective lives of the debt using the effective
interest method. In September 2003 and December 2004, the Company amended and restated its senior
secured credit facilities to more favorable terms. Additional debt issuance costs of $1.6 million
in September 2003 and $0.1 million in December 2004 were incurred and are also being amortized
using the effective interest method according to EITF Issue No. 96-19 Debtors Accounting for a
Modification or Exchange of Debt Instruments. Amortization expense related to deferred financing
costs is included in interest expense in the accompanying consolidated statements of operations and
aggregated approximately $0.5 million for each of the three months ended December 31, 2004 and
2003. Research and Development Research and development expenditures are charged to expense as incurred. Income Taxes In accordance with SFAS No. 109, Accounting for Income Taxes (SFAS No. 109), the Company
recognizes deferred income taxes for the tax consequences in future years of differences between
the tax basis of assets and liabilities and their financial reporting amounts at each year end,
based on enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount that is more likely than not to be
realized. The provision for income taxes is the tax payable for the period and the change during
the period in deferred tax assets and liabilities. Use of Estimates The preparation of financial statements in conformity with United States generally accepted
accounting principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. 7




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IPC ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
December 31, 2004 (Unaudited) Foreign Currency Translation Adjustment The balance sheets and statements of operations of the Companys foreign operations are
measured using the local currency as the functional currency except
for its subsidiaries in Hong Kong and Singapore, whose functional currency is the U.S. dollar. Assets and liabilities of these foreign operations
are translated at the period-end exchange rate and revenue and expense amounts are translated at
the average rates of exchange prevailing during the period. The resulting foreign currency
translation adjustments are accumulated as a component of other comprehensive income. Gains and
losses resulting from foreign currency transactions are recognized in other income (expense),
including net gains of approximately $1.2 million for the three months ended December 31, 2004 and
$0.1 million for the three months ended December 31, 2003. Fair Value of Financial Instruments The Companys financial instruments at December 31, 2004 consist of accounts receivable,
accounts payable and debt. As of December 31, 2004, the Company did not have any derivative financial instruments. The Company
believes the reported carrying amounts of its accounts receivable and accounts payable approximates
fair value, based upon the short term nature of these accounts. The fair value of borrowings under
the senior secured credit facilities was $48.1 million at December 31, 2004 as it bears interest at
a floating rate. The fair value of the senior subordinated notes was $166.5 million at December 31,
2004, based upon quoted trading prices at such date. StockBased Compensation As permitted by Financial Accounting Standards Board (FASB) Statement No. 123, Accounting for Stock-Based Compensation (SFAS 123), the Company has elected to follow Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations in
accounting for its employee option plans. Under APB 25, no compensation expense is recognized at
the time of an option grant if the exercise price of the employee stock option is fixed and equals
or exceeds the fair market value of the underlying common stock on the date of the grant and the
number of shares to be issued pursuant to the exercise of such options are fixed on the date of the
grant. Pro forma information regarding net income (loss) and earnings (loss) per share is required by
SFAS 123, and has been determined as if the Company had been accounting for its employee stock
options under the fair value method of that Statement. The fair value of each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions used for grants in the
following periods: Three Months EndedDecember 31,2004
    
    
    2003Risk free interest rate
    
    
    3.75
    %
    
    
    2.1
    %Expected life
    
    4 years
    
    4 yearsExpected volatility
    
    
    41.7
    %
    
    
    71.2
    %
 The Black-Scholes option valuation model was developed for use in estimating the fair value of
traded options that have no vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumptions including the expected stock
price volatility. Because the Companys employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective input assumptions can
materially affect the fair value estimate, in managements opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of options granted is
amortized to expense over their vesting periods. The weighted-average grant date fair value of
options granted was $14.49 for the three months ended December 31, 2004 and $4.24 for the three
months ended December 31, 2003. The Companys pro forma net income (loss) for all periods presented
is shown below. These amounts may not necessarily be indicative of the pro forma effect of SFAS 123
for future periods in which options may be granted. As a result of the dividend paid in December 2003, the fair value of the Companys common
stock was reduced by the amount of the dividend, or $1.22 per share. The exercise price of certain
stock option grants was modified to reflect the revised fair value and additional compensation
expense has been included in the pro forma disclosure to account for the incremental fair 8




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IPC ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
December 31, 2004 (Unaudited) value of the modified options that have vested. The effect of the modification relating to unvested
options will be recognized over the vesting period. If the Company elected to recognize compensation expense based on the fair value of the
options granted at grant date, as prescribed by SFAS 123, net income (loss) would have been
adjusted to the pro forma amounts indicated in the table below (in thousands): Three Months EndedDecember 31,2004
    
    
    2003Reported net income (loss)
    
    $
    231
    
    
    $
    (1,764
    )Add back total stock-based
employee compensation
determined under APB 25
intrinsic value method, net
of tax
    
    
    28
    
    
    
    Deduct total stock-based
employee compensation
expense determined under
fair value based method for
all awards, net of tax
effect
    
    
    (427
    )
    
    
    (438
    )Pro forma net loss
    
    $
    (168
    )
    
    $
    (2,202
    )
 Reclassifications Certain items in the December 31, 2003 consolidated financial statements have been
reclassified from amounts previously reported to conform to the presentation of the December 31,
2004 consolidated financial statements. Guarantees FASB Interpretation No. 45 (FIN 45) requires that upon issuance of a guarantee, the
guarantor must disclose and recognize a liability for the fair value of the obligation it assumes
under that guarantee. The requirements of FIN 45 are applicable to the Companys guarantee of a
real estate lease for a former affiliate. The Companys guarantees subject to the recognition and
disclosure requirements of FIN 45 were not material as of December 31, 2004 and September 30, 2004. The Company provides certain indemnification provisions within its product sales agreements,
to protect its customers from any liabilities or damages resulting from a claim of misappropriation
or infringement by third parties relating to its software. The Company has never incurred a
liability relating to one of these indemnification provisions in the past and management believes
that the likelihood of any future payout relating to these provisions is unlikely. Therefore, the
Company has not recorded a liability during any period for these indemnification provisions. Comprehensive Income (Loss) The balance sheets and statements of operations of the Companys foreign operations are
measured using the local currency as the functional currency except for its subsidiaries in Hong
Kong and Singapore, whose functional currency is the U.S. dollar. Assets and liabilities of these
foreign operations are translated at the period-end exchange rate and revenue and expense amounts
are translated at the average rates of exchange prevailing during the period. The resulting foreign
currency translation adjustments are accumulated as a component of other comprehensive income
(loss). Three Months EndedDecember 31,(dollars in thousands)
    
    2004
    
    
    2003Reported net income (loss)
    
    $
    231
    
    
    $
    (1,764
    )Translation adjustment, net of tax
    
    
    2,678
    
    
    
    3,114Total comprehensive income
    
    $
    2,909
    
    
    $
    1,350
 Recent Accounting Pronouncements On December 16, 2004, the FASB issued Statement No. 123 (revised 2004), Share-Based Payment,
which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement
123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB
Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar
to the approach described in Statement 123. However, Statement 123(R) requires all share-based
payments to employees, including grants of employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure is no longer an alternative. The Company
will adopt Statement 123(R) on July 1, 2005. Statement 123(R) permits public companies to adopt its
requirements using one of two methods: 9




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IPC ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
December 31, 2004 (Unaudited) 1) A modified prospective method in which compensation cost is recognized beginning with the
effective date (a) based on the requirements of Statement 123(R) for all share-based payments
granted after the effective date and (b) based on the requirements of Statement 123 for all
awards granted to employees prior to the effective date of Statement 123(R) that remain unvested
on the effective date. 2) A modified retrospective method which includes the requirements of the modified
prospective method described above, but also permits entities to restate based on the amounts
previously recognized under Statement 123 for purposes of pro forma disclosures either (a) all
prior periods presented or (b) prior interim periods of the year of adoption. The
Company will adopt Statement 123(R) on July 1, 2005, however, management is still
evaluating which method to adopt. As permitted by Statement 123, the company currently accounts for share-based payments to
employees using Opinion 25s intrinsic value method and, as such, generally recognizes no
compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)s fair
value method will have a significant impact on our result of operations, although it will have no
impact on our overall financial position. The impact of adoption of Statement 123(R) cannot be
predicted at this time because it will depend on levels of share-based payments granted in the
future. However, had we adopted Statement 123(R) in prior periods, the impact of that standard
would have approximated the impact of Statement 123 as described in the disclosure of pro forma net
income and earnings per share in Note 1 to our consolidated financial statements. Statement 123(R)
also requires the benefits of tax deductions in excess of recognized compensation cost to be
reported as a financing cash flow, rather than as an operating cash flow as required under current
literature. This requirement will reduce net operating cash flows and increase net financing cash
flows in periods after adoption. The Company cannot estimate what those amounts will be in the
future because they depend on, among other things, when employees exercise stock options. In November 2004, the FASB issued FAS 151, Inventory Costs  an amendment of ARB No. 43,
Chapter 4 (FAS 151). FAS 151 amends the guidance in Accounting Research Bulletin (ARB) No. 43,
Chapter 4, to clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage). FAS 151 requires that these costs be recognized as
current period charges regardless of whether they are abnormal. In addition, FAS 151 requires that
allocation of fixed production overheads to the costs of manufacturing be based on the
normal capacity of the production facilities. The provisions of FAS 151 are effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. The Company does not expect this
new standard to have a material effect on its consolidated financial position or results of
operations. 2. Acquisitions Orbacom Acquisition On November 30, 2004, IPC Information Systems Holdings, Inc, a subsidiary of the Company,
acquired 100% of the common stock of Orbacom Systems, Inc. (Orbacom) for a maximum purchase price of $18 million in cash, including up to $7 million in contingent earnout commitments. Orbacom provides specialized radio
consoles and computer aided dispatch software for use in command and control communications and
serves the missioncritical communications needs of government agencies and corporations
responsible for public safety dispatch, management of natural gas and energy infrastructures, air,
freight and rail transportation, government command applications including homeland security, and
critical industrial communications.  The Company will report the operations of Orbacom in its Command and Control segment. The following table summarizes preliminary estimates, pending completion of a third-party
valuation of acquired intangible assets, of the fair value of the assets acquired and the
liabilities assumed at the date of the acquisition. The purchase price on the date of the
acquisition exceeded the fair market value of the net assets acquired
by approximately $7.8 million
and was preliminarily recorded as goodwill on the consolidated balance sheet. The primary factor
that contributed to a purchase price that resulted in the recognition
of goodwill is that this acquisition enables the Company to expand its range of
products and services available to industries that address mission-critical command and control
operations. The goodwill and intangible assets identified are not amortizable for income tax purposes. 10




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IPC ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
December 31, 2004 (Unaudited) Condensed Balance Sheet (dollars in thousands)Current assets
    
    $
    7,676Property, plant and equipment, net
    
    
    258Goodwill
    
    
    7,816Total assets acquired
    
    
    15,750Current liabilities
    
    
    3,829Other long-term liabilities
    
    
    667Deferred purchase price
    
    
    3,000Total liabilities assumed
    
    
    7,496Consideration at closing
    
    $
    8,254
 The acquisition of Orbacom was accounted for using the purchase method of accounting in
accordance with SFAS 141 and accordingly the purchase price was allocated to the tangible and
intangible assets acquired and liabilities assumed on the basis of their respective fair values.
The Companys consolidated results of operations for the three months ended December 31, 2004
include the operating results of Orbacom from November 30, 2004, the closing date of the
acquisition, and is included in the Command and Control segment. The following table represents the
preliminary allocation of the excess of the purchase price over the historical cost of the net
tangible assets acquired (dollars in thousands): Cash paid at closing
    
    $
    8,000Deferred purchase price
    
    
    3,000Transaction costs
    
    
    354Total consideration
    
    
    11,354Historical cost of net tangible assets acquired
    
    
    (2,345
    )Excess of purchase price over net tangible assets acquired
    
    $
    9,009Preliminary allocation of excess purchase price:Residual goodwill (indefinite life)
    
    $
    7,816Deferred
taxes
    
    
    (474
    )Step-up inventory to fair value
    
    
    1,667Total allocation of excess purchase price
    
    $
    9,009
 The Company is
in the process of finalizing its plans for the integration of the Orbacom purchase into the rest of
the business. There may be additional accruals for restructuring as the Company
evaluates and integrates real estate and leases, personnel, product
lines and selling and marketing strategies. Any such adjustments, if
incurred, will be reflected in the final purchase price allocation. On a proforma basis, the
Orbacom acquisition did not have a material impact on the
Companys consolidated results of operations for the three months ended
December 31, 2004 and 2003. Gains Asia Acquisition On January 6, 2004, the Company purchased Gains International Asia Holdings Limited (Gains
Asia) from GSCP 2000 and other private equity funds affiliated with Goldman, Sachs & Co. for
approximately $17.4 million in cash consideration, including an advance payment of $5.5 million
made in October 2003, an $11.7 million payment at closing, and a $0.2 million payment in April
2004. This transaction followed the acquisition of Gains US and UK in April 2003 and completes the
purchase of all the Gains related entities. With the acquisition of Gains Asia, the Company
expanded its private global voice and data network into the Asia Pacific region. The following table summarizes the carryover basis of the assets acquired and the liabilities
assumed at the date of the acquisition. The Company paid approximately $5.5 million in excess of
the carryover basis of the net assets acquired to GSCP 2000 and other private equity funds
affiliated with Goldman, Sachs & Co. This excess payment has been treated as a distribution and the
assets and liabilities have been recorded at carryover basis based on the amount GSCP 2000 paid for
them. The intangible assets are not amortizable for income tax purposes. Condensed Balance Sheet (dollars in thousands)Current assets
    
    $
    5,123Property, plant and equipment, net
    
    
    991Intangible assets
    
    
    8,393Total assets acquired
    
    
    14,507Current liabilities
    
    
    2,252Advance payment and other liabilities
    
    
    5,848Total liabilities assumed
    
    
    8,100Distribution
to parent
    
    
    5,510Consideration at closing
    
    $
    11,917
 11




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##### Table of Contents



IPC ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
December 31, 2004 (Unaudited) Set forth below is the unaudited pro forma consolidated results of operations of the Company
for the three months ended December 31, 2003, assuming the acquisition of Gains Asia occurred as of
the beginning of the period. The unaudited pro forma condensed financial information is presented for informational
purposes only and does not purport to represent the consolidated results of operations of the Company for the
period described above had the Gains Asia acquisition occurred as of the beginning of
the period, or to project the results for any future period. Three MonthsEndedDecember 31,(dollars in thousands)
    
    2003Revenue
    
    $
    56,221Loss from continuing operations
    
    $
    (986
    )Net loss
    
    $
    (1,136
    )
 3. Discontinued Operations In May 2004, the Board of Directors of the Company approved a formal plan to sell certain
assets related to its Information Transport Systems (I.T.S.) segment to a group of private
investors. The I.T.S. segment was a low margin business that no longer fit into the Companys
long-term growth plans. The sale closed in July 2004. Under the terms of the sale agreement and the transition services agreement, the Company
agreed to continue funding payroll and material procurement through October 31, 2004. Such amounts
are due to the Company by the new company (Newco) and are secured by the billings on such work to
the customer as well as all the assets sold to Newco. The Company has agreed to provide billing and
collection services and the collection of amounts due to the Company by Newco is through the right
of offset of collections on Newco customer billings. The Company has also agreed to allow Newco to
obtain labor through the Companys labor pooling agreement with Kleinknecht Electric CompanyNew
York (KEC-NY) and Kleinknecht Electric CompanyNew Jersey (KEC-NJ) for one year and has
obtained consent from KEC-NY and KEC-NJ for such use. As of December 31, 2004, the amount outstanding due to the Company from Newco and collectible
by the right of offset through Newcos billings and collections is $5.0 million. In accordance with FASB Statement No. 144 Accounting for the Impairment or Disposal of
Long-Lived Assets, the Company has reported the results of operations of this business as income
(loss) from discontinued operations. All prior periods 12




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IPC ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
December 31, 2004 (Unaudited) have been restated to conform to this presentation. As a result, the assets and liabilities of this
discontinued operation have been reclassified on the balance sheet from the historical
classifications and presented under the captions assets of discontinued operations and
liabilities of discontinued operations, respectively. The assets and liabilities of discontinued operations as of December 31, 2004 and September
30, 2004 are as follows (dollars in thousands): December 31,
    
    
    September 30,2004
    
    
    2004Assets of discontinued operations:Accounts receivable, net
    
    $
    145
    
    
    $
    2,518Other current assets
    
    
    
    
    
    
    30Other assets
    
    
    40
    
    
    
    40$
    185
    
    
    $
    2,588Liabilities of discontinued operations:Accounts payable and accrued expenses
    
    $
    668
    
    
    $
    639
 The results of operations related to discontinued operations for the three months ended
December 31, 2004 and 2003 are as follows (dollars in thousands): Three Months EndedDecember 31,2004
    
    
    2003Revenue
    
    $
    
    
    
    $
    7,473Costs of goods sold
    
    
    
    
    
    
    7,314Gross profit
    
    
    
    
    
    
    159Operating expenses
    
    
    (100
    )
    
    
    424Operating
income (loss) before income taxes
    
    
    100
    
    
    
    (265
    )Income tax expense (benefit)
    
    
    43
    
    
    
    (115
    )Income (loss) from discontinued operations
    
    $
    57
    
    
    $
    (150
    )
 4. Inventories (dollars in thousands) December 31,
    
    
    September 30,2004
    
    
    2004Components and manufacturing work in process
    
    $
    13,344
    
    
    $
    13,450Inventory on customer sites awaiting installation
    
    
    24,226
    
    
    
    15,401Parts and maintenance supplies
    
    
    4,742
    
    
    
    2,325$
    42,312
    
    
    $
    31,176
 5. Goodwill and Intangible Assets (dollars in thousands) The Company adopted SFAS 142 in December 2001. Under SFAS 142, goodwill and intangible
assets that have indefinite useful lives are no longer amortized. Rather, they are reviewed for
impairment annually or more frequently if certain indicators arise. The following table reflects
the changes in goodwill for the three months ended December 31, 2004: Financial
    
    
    CommandServices
    
    
    and Control
    
    
    ConsolidatedBalance at October 1, 2004
    
    $
    82,621
    
    
    $
    
    
    
    $
    82,621Additions (primarily related to the acquisition of Orbacom)
    
    
    
    
    
    
    7,816
    
    
    
    7,816Effect of currency translation adjustments
    
    
    1,823
    
    
    
    
    
    
    
    1,823Balance at December 31, 2004
    
    $
    84,444
    
    
    $
    7,816
    
    
    $
    92,260
 The following table reflects the gross carrying amount and accumulated amortization of the
Companys intangible assets included in the consolidated balance sheets as of the dates indicated: 13




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IPC ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
December 31, 2004 (Unaudited) December 31,
    
    
    September 30,2004
    
    
    2004Intangible assets:Amortized intangible assets:Technology
    
    $
    46,044
    
    
    $
    46,044Customer relationships
    
    
    163,123
    
    
    
    163,123Effect of currency translation adjustments
    
    
    9,802
    
    
    
    7,721Accumulated amortization-technology
    
    
    (20,037
    )
    
    
    (18,352
    )Accumulated amortization-customer relationships
    
    
    (25,224
    )
    
    
    (22,905
    )Net carrying amount
    
    
    173,708
    
    
    
    175,631Non-amortized intangible assets:Trade name
    
    
    16,300
    
    
    
    16,300Net carrying amount
    
    $
    190,008
    
    
    $
    191,931
 Amortization expense for those intangible assets required to be amortized under SFAS 142
was $4.0 million for the three months ended December 31, 2004 and $3.8 million for the three months
ended December 31, 2003. Estimated annual amortization expense for fiscal year 2005 and each of the four succeeding
fiscal years for identifiable intangible assets required to be amortized under SFAS 142 are as
follows: 2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009Estimated annual amortization expense
    
    $
    16,052
    
    
    $
    15,948
    
    
    $
    15,740
    
    
    $
    15,740
    
    
    $
    10,423
 6. Accrued Expenses and Other Current Liabilities (in thousands) December 31,
    
    
    September 30,2004
    
    
    2004Accrued compensation and benefits
    
    $
    9,231
    
    
    $
    12,851Warranty reserves
    
    
    1,697
    
    
    
    1,577Sales taxes payable
    
    
    10
    
    
    
    2,698Job accruals
    
    
    1,518
    
    
    
    1,093Accrued transaction costs
    
    
    2,100
    
    
    
    1,885Accrued carrier costs
    
    
    4,480
    
    
    
    5,621Current portion of deferred compensation
    
    
    856
    
    
    
    856Accrued interest
    
    
    1,227
    
    
    
    5,232Other accruals
    
    
    3,283
    
    
    
    4,171$
    24,402
    
    
    $
    35,984
 7. Long Term Debt Senior Secured Credit Facilities On December 20, 2001, the Company entered into the senior secured credit facilities
comprised of a $105.0 million term loan and a $15.0 million revolving credit facility. On September
2, 2003, the Company amended and restated its senior secured credit facilities. The amended and
restated senior secured credit facilities consisted of a $25.0 million revolving credit facility
and a $55.0 million term loan. The term loan was borrowed in full at closing. On April 20, 2004,
the Company completed an agreement to increase the availability under the revolving credit facility
by $10.0 million. As of December 31, 2004 the total amount available for borrowing and letters of
credit under the revolving credit facility is $35.0 million, of which $30.7 million was available
as of December 31, 2004, after taking into account $4.3 million of outstanding letters of credit,
provided, however, that the Company can increase the committed amount under these facilities by up
to $15.0 million so long as one or more lenders agrees to provide this incremental commitment and
other customary conditions are satisfied. The Companys senior secured credit facilities mature on
September 2, 2008. For the three months ended December 31, 2004, the weighted average interest
rate for borrowings outstanding under the senior secured credit facilities was 5.54%. The senior
secured credit facilities and related interest expense is recorded on the Companys Financial
Services segment with no allocation of interest expense made to the Command and Control segment.
The Company is also required to pay a commitment fee equal to 0.50% per annum of the average daily
unused amount of the committed amount of the revolving credit facility, a fronting fee in an amount
not to exceed 0.50% per annum of the average aggregate daily amount available to be drawn under all
letters of credit issued under the Companys senior secured credit facilities and customary
administrative agent and letter of credit charges. 14




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IPC ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
December 31, 2004 (Unaudited) Borrowings under the Companys senior secured credit facilities bear interest, at the
Companys election, either based on a prime rate index plus the applicable margin or a LIBOR rate
index plus the applicable margin. The applicable margin is: based on the Companys senior secured
leverage ratio, as defined in the senior secured credit facilities. If the senior secured leverage
ratio is greater than 1.00:1.00, the allocable margin is with respect to LIBOR rate loans, 4.00%
per annum and with respect to prime rate loans, 3.00% per annum, and if the Companys senior
secured leverage ratio is less than 1.00:1.00, with respect to LIBOR rate loans, 3.50% per annum
and with respect to prime rate loans, 2.50% per annum. Mandatory prepayments of the senior secured credit facilities are required upon the occurrence
of certain events, including certain asset sales, equity issuances and debt issuances, as well as
from 50% of the Companys excess cash flow, as defined in the senior secured credit facilities, in
2005 and thereafter. Excess cash flow is defined in the Companys credit agreement as: (1) the sum
of net income, interest expense, provisions for taxes, depreciation expense, amortization expense,
other non-cash items affecting net income and to the extent included in calculating net income,
expenses incurred by the Company in connection with an amendment of the then existing credit
agreement, certain restructuring expenses and prepayment premiums in connection with prepayment of
loans under the then existing credit agreement, plus (2) a working capital adjustment less (3)
scheduled repayments of debt, capital expenditures, cash acquisitions and certain investments, cash
interest expense and provisions for taxes based on income. As required, the Company made the
mandatory excess cash flow payment of $6.6 million for the fiscal year ended September 30, 2004, of
which $5.0 million was paid at September 30, 2004 and $1.6 million was paid on December 29, 2004. Obligations under the senior secured credit facilities are secured by a first priority
security interest in substantially all of the Companys assets and the assets of its domestic
subsidiaries and by a pledge of 100% of the shares of its domestic subsidiaries and 65% of the
shares of direct foreign subsidiaries. The Companys domestic subsidiaries have unconditionally
guaranteed its obligations under the senior secured credit facilities. The senior secured credit facilities contain customary affirmative covenants as well as
negative covenants that, among other things, restrict the Companys and its subsidiaries ability
to: incur additional indebtedness (including guarantees of certain obligations); create liens;
engage in mergers, consolidations, liquidations and dissolutions; sell assets; enter into capital
leases; pay dividends or make other payments in respect of capital stock; make acquisitions; make
investments, loans and advances; enter into transactions with affiliates; make payments with
respect to or modify subordinated debt instruments; enter into sale and leaseback transactions;
change the fiscal year or lines of business; and enter into agreements with negative pledge clauses
or clauses restricting subsidiary distributions. The senior secured credit facilities also contain minimum interest coverage and fixed charge
coverage ratios and maximum senior secured and total leverage ratios as well as a restriction on
the amount of capital expenditures the Company can incur in a fiscal
year. At December 31, 2004,
the Company was in compliance with all requirements of the senior secured credit facilities. As of December 31, 2004, remaining annual principal repayments required under the term loan
are as follows (in thousands): 2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Total$ 483
    
    
    $
    483
    
    
    $
    11,961
    
    
    $
    34,795
    
    
    
    
    
    
    $
    47,722
 Senior Subordinated Notes The Company issued $150.0 million in aggregate principal amount of 11.50% senior
subordinated notes on December 20, 2001 to fund a portion of the consideration for the acquisition
of IPC Information Systems. Under the terms of the indenture governing the senior subordinated
notes, the Company may, subject to certain restrictions, issue additional notes up to a maximum
aggregate principal amount of $250.0 million. The senior subordinated notes mature on December 15,
2009 and are callable, at the Companys option, beginning in December 2005. The senior subordinated
notes are general unsecured obligations of the Company, are subordinated in right of payment to all
existing and future senior debt, including the senior secured credit facilities, are pari passu in
right of payment with any future senior subordinated indebtedness of the Company, and are
unconditionally guaranteed by certain of the Companys domestic restricted subsidiaries. The senior
subordinated notes and related interest expense is recorded on the Companys Financial Services
segment with no allocation of interest expense made to the Command and Control segment. Interest on the senior subordinated notes accrues at the rate of 11.50% per annum and is
payable semi-annually in arrears on June 15 and December 15. Pursuant to a registration rights
agreement entered into at the time the senior subordinated notes were issued, on June 21, 2002 the
Company completed an exchange offer registered under the Securities Act of 1933, as amended, in 15




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IPC ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
December 31, 2004 (Unaudited) which 100% of the outstanding senior subordinated notes were exchanged for a different series of
senior subordinated notes having substantially identical terms. The indenture governing the senior subordinated notes contains covenants that impose
significant restrictions on the Company. These restrictions include limitations on the ability of
the Company and its restricted subsidiaries to: incur indebtedness or issue preferred shares; pay
dividends or make distributions in respect of capital stock or to make other restricted payments;
create liens; agree to payment restrictions affecting restricted subsidiaries; consolidate, merge,
sell or otherwise dispose of all or substantially all of its assets; enter into transactions with
affiliates; and designate subsidiaries as unrestricted subsidiaries. 8. Commitments and Contingencies Warranties The Company records a reserve for future warranty costs based on current segment sales,
historical experience and managements judgment regarding anticipated rates of warranty claims and
cost per claim. The adequacy of the recorded warranty liability is assessed each quarter and
adjustments are made as necessary. The specific terms and conditions of the warranties vary
depending on the products sold and the countries in which the Company does business. Changes in the
warranty liability during the periods presented are as follows: Three Months EndedDecember 31,2004
    
    
    2003Balance at beginning of period
    
    $
    1,577
    
    
    $
    1,889Provision
for current period
    
    
    338
    
    
    
    321Liability
assumed with purchase of  Orbacom
    
    
    262
    
    
    
    Material and labor usage
    
    
    (480
    )
    
    
    (425
    )Balance at end of period
    
    $
    1,697
    
    
    $
    1,785
 Litigation Except for the lawsuits described below, of which the first two involve the Companys former I.T.S.
segment, the Company is not a party to any pending legal proceedings other than claims and lawsuits
arising in the normal course of business. Under the terms of the sale agreement, the Company
remains liable for all pre-closing liabilities relating to the I.T.S. segment, including the two
lawsuits described below. Management believes the proceedings will not have a material adverse
effect on the Companys consolidated financial condition or results of operations. On June 27, 2000, an action was brought against several defendants, including the Companys
subsidiary, IPC Communications, Inc., in the United States District Court for the Southern District
of New York by two telecommunications cabling contractors alleging that IPC Communications, Inc.
violated federal antitrust and New York state law by conspiring with the International Brotherhood
of Electrical Workers Local Union Number 3, AFL-CIO, and five electrical contractors to exclude
plaintiffs from telecommunications wiring and systems installation jobs in the New York City
metropolitan area. Subsequently, the complaint was amended to add an additional plaintiff and an
additional defendant contractor. The Company believes the suit is without merit. However, there can
be no assurance that the resolution of this lawsuit will ultimately be favorable. Plaintiffs are
seeking injunctive relief and damages from the defendants, jointly and severally, in excess of an
aggregate of $75.0 million. On September 8, 2003, an action was brought against several defendants, including the
Companys subsidiary, IPC Information Systems, Inc. and its President, in the United States
District Court for the Eastern District of New York by Advance Relocation & Storage Co., Inc., a
moving company. The complaint alleges that IPC Information Systems, Inc. and 23 other defendants
violated the Racketeer Influenced and Corrupt Organizations Act and engaged in tortious
interference with prospective business advantage by preventing the plaintiff from obtaining work as
a mover in jobs performed in large commercial buildings in New York City. The Company believes the
suit is without merit and intends to vigorously defend against all claims alleged against it in the
complaint. Plaintiffs are seeking injunctive relief and damages from the defendants, jointly and
severally, in an aggregate amount of approximately $7.0 million. On December 3, 2003, Hamilton County Emergency Communications District sued a former affiliate
of Orbacom in the United States Court for the Eastern District of Tennessee at Chattanooga. The
complaint asserts claims for breach of contract in connection with the installation of public
safety communications systems and the provision of services to Hamilton County. The complaint seeks
damages of approximately $600,000. 16




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IPC ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
December 31, 2004 (Unaudited) The Company acquired Orbacom on November 30, 2004. On January 6, 2005, Hamilton amended its
complaint to add IPC Information Systems, LLC as a defendant. The amended complaint alleges new
claims against IPC Information Systems, LLC for violations of the Uniform Fraudulent Transfer Act
by entering into a concerted plan to take actions to place the assets of an affiliate of Orbacom
beyond the reach of the court. The Company is fully indemnified by the selling Orbacom shareholders for all costs incurred by
the Company in the action and have held back $3 million of the
purchase price payable to the former Orbacom shareholders. On January 7, 2005, the Company served
the Orbacom shareholder representative notice of its request for indemnification under the Stock
Purchase Agreement, dated as of October 1, 2004, among the Company, IPC Information Systems
Holdings, Inc. and Orbacom and each of the sellers listed therein. On December 15, 2004, IPC Information Systems, LLC commenced two lawsuits arising out of the
unauthorized copying of its proprietary software. The first action was filed in the Southern
District of New York against The Odyssey Group, Inc. doing business as The O&R Group, Inc. The
complaint alleges that the Odyssey Group infringed the Companys copyrights by soliciting and
obtaining an unauthorized copy of its proprietary software from Advanced Business Communications
Ltd. (ABC), a Canadian company. The Companys complaint seeks recovery of the software, injunctive
relief and unspecified damages from the defendants. The Odyssey Group has asserted counterclaims
against us seeking aggregate damages of approximately $3 million for injurious falsehood, slander
per se and interference with prospective economic advantage. The
Company believes the counterclaims are without merit and intends to
vigorously defend against them. The second action was filed in the Alberta Court of Queens Bench against ABC and its two
principals. The statement of claim against ABC alleges misappropriation of the Companys software,
breach of contract, breach of fiduciary and common law duties and conversion and seeks injunctive
relief and monetary damages. ABC has asserted counterclaims against the Company seeking aggregate
damages of approximately $450,000 for breach of contract. The
Company believes the counterclaims are without merit and intends to
vigorously defend against them. 9. Income Taxes The Companys effective tax rate for the three months ended December 31, 2004 was 42.1% and
was 29.9% for the three months ended December 31, 2003. The Companys effective tax rate reflects the
Companys foreign, federal and state taxes, the non-deductibility of foreign losses for federal tax
purposes, the non-deductibility of certain expenses and, for the three months ended December 31,
2003, taxable income at several of the Companys foreign subsidiaries. The Company has U.S. federal net operating loss carryforwards of approximately $16.9 million
at September 30, 2004, which expire through September 30, 2022. As of September 30, 2004, the
Company has recognized deferred tax assets related to its US federal and state net operating loss
carryforwards of approximately $6.8 million. In determining whether it is more likely than not that
the Company will realize the benefits of the net deferred tax assets from US operations, the
Company considered all available evidence, both positive and negative. The principal factors that
led the Company to recognize these benefits were: (1) US results of operations for the period ended
September 30, 2002 reported a loss before income taxes of $22.1 million, after reflecting charges
of $34.3 million resulting from the fair-value inventory adjustments under the purchase price
allocation (which, as a result of the Internal Revenue Code Section 338(h)(10) tax election,
jointly made by the Company and Global Crossing, also generated deductions for income tax
purposes); (2) US results of operations for subsequent fiscal years are expected to generate
sufficient taxable income to fully utilize these tax loss carryforwards; and (3) the Companys
conclusion that the net US deferred tax assets were generated by an event (the Companys purchase
of the business), rather than a continuing condition. As of December 31, 2004, no circumstances
have arisen that would require the Company to change such conclusion. The aggregate amount of taxes for which the Company has received notices of taxes due and
estimated amounts for probable assessments from various jurisdictions and recognized as tax
liabilities under purchase accounting is approximately $6.5 million and, as of December 31, 2004,
the Company has made settlement payments aggregating $1.9 million, including a $1.1 million payment
made to one jurisdiction in May 2004. The Company estimates that its exposure for additional tax
liabilities relating to periods prior to the acquisition in excess of amounts accrued is zero,
which has been reduced from an original range of zero to $36.0 million as a result of the Companys
settlement negotiations. In computing its estimated potential tax liabilities, the Company took
into account tax returns in certain jurisdictions where the statutes of limitations have not yet
expired. Under those tax returns as filed, the remaining liability is zero. Although the Company
believes that all those tax returns have been filed correctly, such returns may be audited and
additional taxes may be assessed (or refunds may be granted). Payment by the Company of a
significant amount of these potential tax liabilities should not have a material adverse effect on
the Companys financial condition and results of operations. 17




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##### Table of Contents



IPC ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
December 31, 2004 (Unaudited) 10. Business Segment Information The Company, headquartered in New York, provides mission-critical voice communications
solutions to the financial services trading industry as well as the command and control operations
including power, energy, utility and transportation companies, public safety organizations and
government and military agencies. Through September 30, 2004, the Companys operations included three segments named Trading Systems, I.T.S. and
Network Services. The I.T.S. segment was sold in June 2004 and is reported as discontinued
operations for all periods presented. With the sale of I.T.S. and the acquisition of Orbacom, the
Company has now realigned its operations and has two segments named Financial Services and Command
and Control. Both the Financial Services and Command and Control segments report revenue as
follows:  
    sales of equipment to distributors and direct sales and installations of turret systems,
radio consoles and computer aided dispatch software as Product sales and installations;
and
    revenue from equipment maintenance, including annual and multi-year service contracts,
sales of network voice and data services and from MACs to existing equipment installations
as Service. The Companys primary measures to evaluate performance are direct margin (revenue less cost of
goods sold, excluding indirect costs and depreciation and amortization) and income from operations. The following tables represent business segment information for the Companys two operating
segments, Financial Services and Command and Control, for the three months ended December 31, 2004
and 2003 (in thousands): Financial
    
    
    CommandFor the Three Months Ended December 31, 2004
    
    Services
    
    
    and Control
    
    
    ConsolidatedRevenue:Product sales and installations
    
    $
    22,249
    
    
    $
    221
    
    
    $
    22,470Service
    
    
    42,944
    
    
    
    511
    
    
    
    43,455Total revenue
    
    
    65,193
    
    
    
    732
    
    
    
    65,925Direct cost of goods sold
    
    
    25,707
    
    
    
    360
    
    
    
    26,067Direct margin
    
    
    39,486
    
    
    
    372
    
    
    
    39,858Research and development
    
    
    3,181
    
    
    
    239
    
    
    
    3,420Selling, general and administrative
    
    
    9,388
    
    
    
    888
    
    
    
    10,276Segment profit
    
    
    26,917
    
    
    
    (755
    )
    
    
    26,162Other segment data:Corporate research and development
    
    
    611
    
    
    
    
    
    
    
    611Corporate selling, general and administrative
    
    
    6,857
    
    
    
    
    
    
    
    6,857Depreciation and amortization
    
    
    2,553
    
    
    
    8
    
    
    
    2,561Intangibles amortization
    
    
    4,021
    
    
    
    
    
    
    
    4,021Indirect cost (fixed and variable)
    
    
    7,452
    
    
    
    135
    
    
    
    7,587Interest expense, net
    
    
    5,629
    
    
    
    
    
    
    
    5,629Other income, net
    
    
    1,405
    
    
    
    
    
    
    
    1,405Income tax provision (benefit)
    
    
    127
    
    
    
    
    
    
    
    127Goodwill as of December 31, 2004
    
    $
    84,444
    
    
    $
    7,816
    
    
    $
    92,260Total assets as of December 31, 2004 (1)
    
    $
    433,899
    
    
    $
    15,391
    
    
    $
    449,475Capital expenditures
    
    $
    1,893
    
    
    $
    
    
    
    $
    1,893
   (1)
    
    Total consolidated assets includes the assets of discontinued operations of the I.T.S. segment of $ 185 18




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##### Table of Contents



IPC ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
December 31, 2004 (Unaudited) Financial
    
    
    CommandFor the Three Months Ended December 31, 2003
    
    Services
    
    
    and Control
    
    
    ConsolidatedRevenue:Product sales and installations
    
    $
    21,388
    
    
    $
    70
    
    
    $
    21,458Service
    
    
    30,926
    
    
    
    310
    
    
    
    31,236Total revenue
    
    
    52,314
    
    
    
    380
    
    
    
    52,694Direct cost of goods sold
    
    
    21,391
    
    
    
    150
    
    
    
    21,541Direct margin
    
    
    30,923
    
    
    
    230
    
    
    
    31,153Research and development
    
    
    2,668
    
    
    
    
    
    
    
    2,668Selling, general and administrative
    
    
    7,166
    
    
    
    
    
    
    
    7,166Segment profit
    
    
    21,089
    
    
    
    230
    
    
    
    21,319Other segment data:Corporate research and development
    
    
    741
    
    
    
    
    
    
    
    741Corporate selling, general and administrative
    
    
    5,758
    
    
    
    
    
    
    
    5,758Depreciation and amortization
    
    
    2,073
    
    
    
    
    
    
    
    2,073Intangibles amortization
    
    
    3,776
    
    
    
    
    
    
    
    3,776Indirect cost (fixed and variable)
    
    
    5,138
    
    
    
    
    
    
    
    5,138Interest expense, net
    
    
    5,522
    
    
    
    
    
    
    
    5,522Other income (expense), net
    
    
    447
    
    
    
    
    
    
    
    447Income tax provision (benefit)
    
    
    372
    
    
    
    
    
    
    
    372Goodwill as of December 31, 2003
    
    $
    83,956
    
    
    $
    
    
    
    $
    83,956Total assets as of December 31, 2003 (1)
    
    $
    400,453
    
    
    $
    
    
    
    $
    421,692Capital expenditures
    
    $
    1,741
    
    
    $
    
    
    
    $
    1,741
   (1)
    
    Total consolidated assets includes the assets of discontinued operations of the I.T.S. segment of $ 21,239 11. Guarantor Subsidiaries Financial Information Certain of the Companys domestic restricted subsidiaries guarantee the senior secured
credit facilities and the senior subordinated notes. These subsidiary guarantees are both full and
unconditional, as well as joint and several. Information regarding the guarantors is as follows (in
thousands): Non-IPC
    
    
    Guarantor
    
    
    GuarantorCondensed Consolidated Balance Sheet at December 31, 2004
    
    Acquisition
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedAssets:Cash
    
    $
    43
    
    
    $
    (199
    )
    
    $
    8,893
    
    
    $
    
    
    
    $
    8,737Accounts receivable, net
    
    
    
    
    
    
    23,724
    
    
    
    31,490
    
    
    
    
    
    
    
    55,214Inventories, net
    
    
    
    
    
    
    25,997
    
    
    
    30,210
    
    
    
    (13,895
    )
    
    
    42,312Prepaid and other current assets
    
    
    13,751
    
    
    
    7,147
    
    
    
    2,217
    
    
    
    (122
    )
    
    
    22,993Due from (to) affiliate
    
    
    171,422
    
    
    
    (141,456
    )
    
    
    (29,966
    )
    
    
    
    
    
    
    Current assets of discontinued operations
    
    
    
    
    
    
    145
    
    
    
    
    
    
    
    
    
    
    
    145Total current assets
    
    
    185,216
    
    
    
    (84,642
    )
    
    
    42,844
    
    
    
    (14,017
    )
    
    
    129,401Investment in subsidiaries
    
    
    157,207
    
    
    
    10,524
    
    
    
    12,632
    
    
    
    (180,363
    )
    
    
    Property, plant and equipment, net
    
    
    
    
    
    
    19,697
    
    
    
    4,951
    
    
    
    
    
    
    
    24,648Goodwill and intangibles, net
    
    
    
    
    
    
    190,166
    
    
    
    92,102
    
    
    
    
    
    
    
    282,268Deferred financing costs, net
    
    
    11,866
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,866Other assets
    
    
    
    
    
    
    474
    
    
    
    778
    
    
    
    
    
    
    
    1,252Non-current assets of discontinued operations
    
    
    
    
    
    
    40
    
    
    
    
    
    
    
    
    
    
    
    40Total assets
    
    $
    354,289
    
    
    $
    136,259
    
    
    $
    153,307
    
    
    $
    (194,380
    )
    
    $
    449,475Liabilities and stockholders equity:Current portion of long-term debt
    
    $
    483
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    483Accounts payable, accrued expenses and other current liabilities
    
    
    1,227
    
    
    
    22,252
    
    
    
    15,452
    
    
    
    
    
    
    
    38,931Customer advances and deferred revenue
    
    
    
    
    
    
    21,134
    
    
    
    23,671
    
    
    
    
    
    
    
    44,805Current liabilities of discontinued operations
    
    
    
    
    
    
    668
    
    
    
    
    
    
    
    
    
    
    
    668Total current liabilities
    
    
    1,710
    
    
    
    44,054
    
    
    
    39,123
    
    
    
    
    
    
    
    84,887Long-term debt
    
    
    197,239
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    197,239Other long-term liabilities
    
    
    19,136
    
    
    
    5,933
    
    
    
    6,076
    
    
    
    
    
    
    
    31,145Total liabilities
    
    
    218,085
    
    
    
    49,987
    
    
    
    45,199
    
    
    
    
    
    
    
    313,271Total stockholders equity
    
    
    136,204
    
    
    
    86,272
    
    
    
    108,108
    
    
    
    (194,380
    )
    
    
    136,204Total liabilities and stockholders equity
    
    $
    354,289
    
    
    $
    136,259
    
    
    $
    153,307
    
    
    $
    (194,380
    )
    
    $
    449,475
 19




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##### Table of Contents



IPC ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
December 31, 2004 (Unaudited) Non-IPC
    
    
    Guarantor
    
    
    GuarantorCondensed Consolidated Balance Sheet at September 30, 2004
    
    Acquisition
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedAssets:Cash
    
    $
    3,028
    
    
    $
    13,057
    
    
    $
    11,185
    
    
    $
    
    
    
    $
    27,270Accounts receivable, net
    
    
    
    
    
    
    23,054
    
    
    
    34,205
    
    
    
    
    
    
    
    57,259Inventories, net
    
    
    
    
    
    
    22,164
    
    
    
    17,388
    
    
    
    (8,376
    )
    
    
    31,176Prepaid and other current assets
    
    
    13,132
    
    
    
    9,863
    
    
    
    1,417
    
    
    
    (122
    )
    
    
    24,290Due from (to) affiliate
    
    
    181,288
    
    
    
    (156,593
    )
    
    
    (24,695
    )
    
    
    
    
    
    
    Current assets of discontinued operations
    
    
    
    
    
    
    2,548
    
    
    
    
    
    
    
    
    
    
    
    2,548Total current assets
    
    
    197,448
    
    
    
    (85,907
    )
    
    
    39,500
    
    
    
    (8,498
    )
    
    
    142,543Investment in subsidiaries
    
    
    146,692
    
    
    
    10,524
    
    
    
    12,632
    
    
    
    (169,848
    )
    
    
    Property, plant and equipment, net
    
    
    
    
    
    
    20,077
    
    
    
    4,769
    
    
    
    
    
    
    
    24,846Goodwill and intangibles, net
    
    
    
    
    
    
    185,341
    
    
    
    89,211
    
    
    
    
    
    
    
    274,552Deferred financing costs, net
    
    
    12,283
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,283Other assets
    
    
    
    
    
    
    335
    
    
    
    700
    
    
    
    
    
    
    
    1,035Non-current assets of discontinued operations
    
    
    
    
    
    
    40
    
    
    
    
    
    
    
    
    
    
    
    40Total assets
    
    $
    356,423
    
    
    $
    130,410
    
    
    $
    146,812
    
    
    $
    (178,346
    )
    
    $
    455,299Liabilities and stockholders equity:Current portion of long-term debt
    
    $
    2,157
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2,157Accounts payable, accrued expenses and other current liabilities
    
    
    5,232
    
    
    
    32,408
    
    
    
    22,240
    
    
    
    
    
    
    
    59,880Customer advances and deferred revenue
    
    
    
    
    
    
    16,907
    
    
    
    19,084
    
    
    
    
    
    
    
    35,991Current liabilities of discontinued operations
    
    
    
    
    
    
    639
    
    
    
    
    
    
    
    
    
    
    
    639Total current liabilities
    
    
    7,389
    
    
    
    49,954
    
    
    
    41,324
    
    
    
    
    
    
    
    98,667Long-term debt
    
    
    197,293
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    197,293Other long-term liabilities
    
    
    18,498
    
    
    
    2,946
    
    
    
    4,652
    
    
    
    
    
    
    
    26,096Total liabilities
    
    
    223,180
    
    
    
    52,900
    
    
    
    45,976
    
    
    
    
    
    
    
    322,056Total stockholders equity
    
    
    133,243
    
    
    
    77,510
    
    
    
    100,836
    
    
    
    (178,346
    )
    
    
    133,243Total liabilities and stockholders equity
    
    $
    356,423
    
    
    $
    130,410
    
    
    $
    146,812
    
    
    $
    (178,346
    )
    
    $
    455,299
 Non-Condensed Consolidated Statement of Operations
    
    IPC
    
    
    Guarantor
    
    
    GuarantorFor the Three Months Ended December 31, 2004
    
    Acquisition
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenue
    
    $
    
    
    
    $
    53,312
    
    
    $
    27,774
    
    
    $
    (15,161
    )
    
    $
    65,925Cost of goods sold
    
    
    
    
    
    
    27,960
    
    
    
    16,418
    
    
    
    (9,642
    )
    
    
    34,736Gross profit
    
    
    
    
    
    
    25,352
    
    
    
    11,356
    
    
    
    (5,519
    )
    
    
    31,189Other operating expenses
    
    
    55
    
    
    
    18,622
    
    
    
    7,987
    
    
    
    
    
    
    
    26,664Income (loss) from operations
    
    
    (55
    )
    
    
    6,730
    
    
    
    3,369
    
    
    
    (5,519
    )
    
    
    4,525Interest income (expense) and other income (expense), net
    
    
    (5,596
    )
    
    
    107
    
    
    
    1,265
    
    
    
    
    
    
    
    (4,224
    )Income tax provision
    
    
    
    
    
    
    87
    
    
    
    40
    
    
    
    
    
    
    
    127Equity in earnings (losses) from investees
    
    
    5,882
    
    
    
    1,955
    
    
    
    
    
    
    
    (7,837
    )
    
    
    Income (loss) from continuing operations
    
    
    231
    
    
    
    8,705
    
    
    
    4,594
    
    
    
    (13,356
    )
    
    
    174Income (loss) from discontinued operations, net of tax
    
    
    
    
    
    
    57
    
    
    
    
    
    
    
    
    
    
    
    57Net income (loss)
    
    $
    231
    
    
    $
    8,762
    
    
    $
    4,594
    
    
    $
    (13,356
    )
    
    $
    231
 Non-Condensed Consolidated Statement of Operations
    
    IPC
    
    
    Guarantor
    
    
    GuarantorFor the Three Months Ended December 31, 2003
    
    Acquisition
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenue
    
    $
    
    
    
    $
    37,370
    
    
    $
    17,098
    
    
    $
    (1,774
    )
    
    $
    52,694Cost of goods sold
    
    
    
    
    
    
    19,817
    
    
    
    9,659
    
    
    
    (2,055
    )
    
    
    27,421Gross profit
    
    
    
    
    
    
    17,553
    
    
    
    7,439
    
    
    
    281
    
    
    
    25,273Other operating expenses
    
    
    
    
    
    
    15,863
    
    
    
    5,577
    
    
    
    
    
    
    
    21,440Income  from operations
    
    
    
    
    
    
    1,690
    
    
    
    1,862
    
    
    
    281
    
    
    
    3,833Interest income (expense) and other income (expense), net
    
    
    (5,468
    )
    
    
    278
    
    
    
    115
    
    
    
    
    
    
    
    (5,075
    )Income tax
provision (benefit)
    
    
    
    
    
    
    (205
    )
    
    
    577
    
    
    
    
    
    
    
    372Equity in earnings (losses) from investees
    
    
    3,704
    
    
    
    98
    
    
    
    
    
    
    
    (3,802
    )
    
    
    Income (loss) from continuing operations
    
    
    (1,764
    )
    
    
    2,271
    
    
    
    1,400
    
    
    
    (3,521
    )
    
    
    (1,614
    )Loss  from discontinued operations, net of tax
    
    
    
    
    
    
    (150
    )
    
    
    
    
    
    
    
    
    
    
    (150
    )Net income (loss)
    
    $
    (1,764
    )
    
    $
    2,121
    
    
    $
    1,400
    
    
    $
    (3,521
    )
    
    $
    (1,764
    )
 20




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##### Table of Contents



IPC ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-Continued
December 31, 2004 (Unaudited) Non-Condensed Consolidated Statement of Cash Flows
    
    IPC
    
    
    Guarantor
    
    
    GuarantorFor the Three Months Ended December 31, 2004
    
    Acquisition
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet cash provided by (used in) continuing operations
    
    $
    (11,058
    )
    
    $
    6,451
    
    
    $
    (6,614
    )
    
    $
    
    
    
    $
    (11,221
    )Net cash provided by discontinued operations
    
    
    
    
    
    
    2,489
    
    
    
    
    
    
    
    
    
    
    
    2,489Net cash provided by (used in) operating activities
    
    
    (11,058
    )
    
    
    8,940
    
    
    
    (6,614
    )
    
    
    
    
    
    
    (8,732
    )Capital expenditures
    
    
    
    
    
    
    (1,062
    )
    
    
    (831
    )
    
    
    
    
    
    
    (1,893
    )Intercompany borrowings
    
    
    9,914
    
    
    
    (15,185
    )
    
    
    5,271
    
    
    
    
    
    
    
    Acquisitions, net of cash
    
    
    
    
    
    
    (5,936
    )
    
    
    
    
    
    
    
    
    
    
    (5,936
    )Net cash provided by (used in) investing activities
    
    
    9,914
    
    
    
    (22,183
    )
    
    
    4,440
    
    
    
    
    
    
    
    (7,829
    )Principal payments on term loan
    
    
    (1,728
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,728
    )Deferred compensation payments
    
    
    
    
    
    
    (13
    )
    
    
    
    
    
    
    
    
    
    
    (13
    )Issuance costs for term loan amendment
    
    
    (113
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (113
    )Net cash used in financing activities
    
    
    (1,841
    )
    
    
    (13
    )
    
    
    
    
    
    
    
    
    
    
    (1,854
    )Effect of exchange rate changes on cash
    
    
    
    
    
    
    
    
    
    
    (118
    )
    
    
    
    
    
    
    (118
    )Net increase (decrease) in cash
    
    
    (2,985
    )
    
    
    (13,256
    )
    
    
    (2,292
    )
    
    
    
    
    
    
    (18,533
    )Cash at beginning of period
    
    
    3,028
    
    
    
    13,057
    
    
    
    11,185
    
    
    
    
    
    
    
    27,270Cash at end of period
    
    $
    43
    
    
    $
    (199
    )
    
    $
    8,893
    
    
    $
    
    
    
    $
    8,737
 Non-Condensed Consolidated Statement of Cash Flows
    
    IPC
    
    
    Guarantor
    
    
    GuarantorFor the Three Months Ended December 31, 2003
    
    Acquisition
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet cash provided by (used in) continuing operations
    
    $
    (10,259
    )
    
    $
    14,592
    
    
    $
    3,547
    
    
    $
    
    
    
    $
    7,880Net cash provided by discontinued operations
    
    
    
    
    
    
    11,620
    
    
    
    
    
    
    
    
    
    
    
    11,620Net cash provided by (used in) operating activities
    
    
    (10,259
    )
    
    
    26,212
    
    
    
    3,547
    
    
    
    
    
    
    
    19,500Capital expenditures
    
    
    
    
    
    
    (1,437
    )
    
    
    (304
    )
    
    
    
    
    
    
    (1,741
    )Intercompany borrowings
    
    
    23,273
    
    
    
    (12,393
    )
    
    
    (10,880
    )
    
    
    
    
    
    
    Payment of Gains US and UK earnout and deferred purchase price
    
    
    
    
    
    
    (6,756
    )
    
    
    
    
    
    
    
    
    
    
    (6,756
    )Advance payment on acquisition of Gains Asia
    
    
    
    
    
    
    (5,528
    )
    
    
    
    
    
    
    
    
    
    
    (5,528
    )Net cash provided by (used in) investing activities
    
    
    23,273
    
    
    
    (26,114
    )
    
    
    (11,184
    )
    
    
    
    
    
    
    (14,025
    )Principal payments on term loan
    
    
    (137
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (137
    )Deferred compensation payments
    
    
    
    
    
    
    (27
    )
    
    
    
    
    
    
    
    
    
    
    (27
    )Payment of special cash dividend, net
    
    
    (17,839
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,839
    )Net cash used in financing activities
    
    
    (17,976
    )
    
    
    (27
    )
    
    
    
    
    
    
    
    
    
    
    (18,003
    )Effect of exchange rate changes on cash
    
    
    
    
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    16Net increase (decrease) in cash
    
    
    (4,962
    )
    
    
    71
    
    
    
    (7,621
    )
    
    
    
    
    
    
    (12,512
    )Cash at beginning of period
    
    
    9,088
    
    
    
    3,135
    
    
    
    13,577
    
    
    
    
    
    
    
    25,800Cash at end of period
    
    $
    4,126
    
    
    $
    3,206
    
    
    $
    5,956
    
    
    $
    
    
    
    $
    13,288
 12. Subsequent Events The
Company declared a special cash dividend of approximately $20
million, or $1.36 per share, which will be payable on February 14,
2005 to all shareholders of record of its outstanding common stock as of that date. As a result of this dividend, the Company intends to reprice
the exercise price of all of its outstanding stock options in order
to provide equitable treatment to holders of stock options to
purchase the Companys common stock. 21




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion of our financial condition and results of
operations with our consolidated financial statements and related notes included elsewhere in this
filing. Some of the matters discussed in this filing include forward-looking statements. Statements
that are predictive in nature, that depend upon or refer to future events or conditions or that
include words like expects, anticipates, intends, plans, believes, estimates, thinks,
and similar expressions are forward-looking statements. These statements involve known and unknown
risks, uncertainties and other risk factors, including but not limited to:  
    risks associated with substantial indebtedness, leverage and debt service;
    performance of our business and future operating results;
    risks of competition in our existing and future markets;
    loss or retirement of any key executives;
    general business and economic conditions;
    market acceptance issues, including the failure of products or services to generate anticipated sales levels; and
    other risks described in our 10-K for the year ended September 30, 2004 Our actual results and performance may be materially different from any future results or
performance expressed or implied by these forward-looking statements. Although we believe that these statements are based upon reasonable assumptions, we can give
no assurance that our goals will be achieved. Given these uncertainties, prospective investors are
cautioned not to place undue reliance on these forward-looking statements. These forward-looking
statements are made as of the date of this filing. We assume no obligation to update or revise them
or provide reasons why actual results may differ. Business Overview We provide mission-critical voice communications solutions to enterprises globally, primarily in the financial services industry. Since 1973, we have designed, manufactured, installed and serviced specialized telephony systems, also referred to as turrets, which are used on trading floors across the world. We manage our business through two major operating segments called Financial Services and Command and Control.
In October 2004 we formed the Command and Control segment in connection with a substantial increase in our efforts to address what we identified as growth opportunities in that market. We are a leader within the financial trading community based on the
number of turret positions and related equipment installed worldwide. We are also a leader in technology innovation in our industry,
 particularly in the area of Voice-over Internet Protocol, or VoIP, communications solutions. We built additional lines of business upon that core offering, expanding our product and service portfolio to address other communications needs of the financial
services industry. Additionally, we recently increased our efforts to address the needs of customers involved in command and control operations centers
of the following industries which we target: public safety; government and military; power, energy, and utility; and transportation. We plan to expand the offerings and operations of our Command and Control segment both through internal investments in our product offerings and professional staff, as well as through acquisitions that we believe will supplement our portfolio of offerings and our distribution channels. In
November 2004, we completed our first acquisition in the Command and Control segment, Orbacom Systems, Inc. Revenue from product sales and installations is recognized upon completion of the installation or, for contracts that are
 completed in stages and include contract specified milestones, upon achieving those contract milestones and delivery
and customer acceptance of a fully functional system. Revenue from sales to distributors is recognized upon shipment.
Revenue from moves, adds and changes to turret systems is recognized upon completion, which generally occurs in the same month or the month
following the order for services. Revenue from network services is generally billed in the beginning of the month and recognized in the same month. 22




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##### Table of Contents



Large installation projects
are not numerous; however, their occurrence causes fluctuations when comparing periods, as
revenue is not recognized until completion of the installation or achievement of contract
milestones. We believe the demand for new turret systems is primarily event driven, the
result of physical facility moves of trading positions, the addition of new trading positions
 due to customer growth and the need to upgrade older technology. Large facility moves and
mergers can also result in large installation projects, which cause uneven revenue streams
period over period. For a description of our critical accounting
policies, see Summary of Critical Accounting Policies below. Operating Focus since December 2001 In December 2001, Global Crossing and its affiliates sold IPC Information Systems to a group of investors led
by GS Capital Partners 2000, L.P. Since that time, we operated as an independent company and focused our efforts
on five key initiatives to improve our operating performance. These initiatives included:   Upgrade our portfolio of businesses and quality of financial
results.
  In March 2002, in order to expand our geographic presence in the Asia Pacific region, we purchased the customer base and related assets outside of Japan of the turret business of Hitachi, Ltd.


 In April 2003, in order to supplement our equipment business with
complementary offerings of specialized network services, we purchased Gains International (US) Inc, and Gains International (Europe) Limited.

 In August 2003, in order to expand our product offering to include a software-based VoIP hoot and intercom product, we invested in and gained control
of Purple Voice, and subsequently completed the acquisition in September 2004.

 In January 2004, we purchased Gains International Asia Holdings to extend our network services
presence in the Asia Pacific region.

 In July 2004, we divested the operations and assets of our Information Transport Systems, or I.T.S., segment in order
to exit a construction-related cabling business we viewed as highly cyclical and moderately profitable.

 In November 2004, to expand the product offerings and distribution channels of our newly formed Command and Control segment, we acquired Orbacom Systems Inc.

Our services revenues have increased from $85.7 million in 2002 to $148.7 million in 2004, representing 36% of total revenues in 2002, and 56% of total revenues in 2004. We believe our
services businesses are less subject to industry capital spending cycles than our equipment sales businesses.

 Increase our geographic reach and penetration in selected countries. Since 2001 we opened direct offices in Japan, Germany, Italy, and France. We also acquired operations and offices in the Asia Pacific and EMEA regions through our acquisitions of Hitachi's turret business and the Gains International business.
Our penetration in the EMEA and Asia Pacific regions has increased as a result of these activities, as measured by number of turrets installed and circuits of network services.

 Expand our portfolio of product and service offerings. Since 2001 we expanded our offerings through investment in internal
research and development as well as through acquisitions of products, services and technologies.

 Network and Related Services. Through the acquisitions of the Gains International business, we acquired a base of customers, a global network, operations centers, personnel and expertise to enable us to offer specialized network services to the same client base served by our communications
equipment business. Since that acquisition we increased
the revenues and operating profits of the acquired entities by adding those services to the portfolio of offerings
sold by our account representatives. We also added other related services, including offerings to audit and groom our customers' networks, and continuity services designed to monitor both equipment and network resources and proactively address potential disruptions to service.

 VoIP and Software Offerings. Leveraging the potential of VoIP technology, we internally developed technologies that enhance the capabilities of our equipment offerings with new solutions for business continuity, compliance, user productivity, converged voice, video and data, and system administration on an enterprise level. Additionally, through the acquisition of Purple Voice, we added to our portfolio a
set of software-based, VoIP offerings that extend core trading room functionality to off-floor individuals and offices, including retail brokerages.

23



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##### Table of Contents





 Command and Control Offerings. With the acquisition of Orbacom Systems, Inc, and through internal development efforts, we added proprietary radio integration, computer aided dispatch, and console offerings, as well as integrated third-party offerings for records management and other functions required in command and control applications.

 Establish technical leadership and market penetration of our VoIP platform. In 2001, we introduced the first VoIP trading floor communications systems to the market. We succeeded in building market adoption of our technologies and have added to the platforms capabilities through continuous research and
development efforts. As of September 30, 2004, we had shipped approximately 20,000 positions of our VoIP platform, and have gradually increased the percentage of positions
shipped that are VoIP to 70% of shipments in the fourth quarter of 2004. In 2005 we expect more than 75% of our positions shipped will be VoIP solutions.

 Extend our offerings into new markets with similar demand characteristics. We believe that the market for command and control communications solutions shares many common demand characteristics with those of the financial services industry. Our experience has shown us that they share similar communications needs, including intercom, broadcast intercom, private lines, integration of various communications
sources and media in common consoles. We also observed that the mission-critical nature of communications in each setting drive other business similarities,
resulting in what we concluded are favorable industry dynamics that are well suited to our product offerings, expertise, and corporate resources.

Recent Events

We declared a special cash dividend of approximately $20
million, or $1.36 per share, which will be payable on February 14,
2005 to all shareholders of record of our outstanding common stock as of that date. As a result of this dividend, we intend to reprice
the exercise price of all of our outstanding stock options in order
to provide equitable treatment to holders of stock options to
purchase our common stock.

Summary of Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based
upon our consolidated financial statements, which have been prepared
in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we
periodically evaluate our estimates. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these estimates.

We believe the following critical accounting policies affect our more significant judgments
and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

Revenue from product sales and installations is recognized upon completion of the installation
or, for contracts that are completed in stages and include contract specified milestones, upon
achieving such contract milestones, and delivery and customer acceptance of a fully functional
system. Revenue from sales to distributors is recognized upon shipment. Customers are generally
progress-billed prior to the completion of the installations. The revenue related to these advance
payments is deferred until the system installations are completed or specified milestones are
attained. Costs incurred on uncompleted contracts and stages are accumulated and recorded as
inventory awaiting installation. The cost of providing a warranty are estimated and accrued at the
time the equipment is sold. In addition, contracts for annual recurring services are generally
billed in advance, and are recorded as revenue ratably (on a monthly basis) over the contractual
periods. Revenue from MACs to turret systems is recognized upon completion, which generally occurs
in the same month or the month following the order for services. Revenue from network services is
generally billed in the beginning of the month and recognized in the same month.

Revenue from software licenses is recognized in accordance with SOP No. 97-2, Software
Revenue Recognition, as amended by SOP 98- 9, Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions. Software revenue is recognized when a customer
enters into a non-cancelable contract or license agreement, the software product has been
delivered, there are no uncertainties surrounding product acceptance, there are no significant
future performance obligations, the contract or license fees are fixed or determinable and
collection is considered probable. Amounts received in advance of meeting these criteria are
deferred. Revenue from support and maintenance contracts is recognized ratably over the contract
period.

For certain installation contracts, revenue from product installation sales is recognized in
accordance with EITF 00-21, Revenue Arrangements with Multiple Deliverables, which was adopted in
the 2003 fiscal year. Under this pronouncement, products or services
sold to the same entity that
are entered into at or near the same time are presumed to have been negotiated as a package and are
evaluated as a single arrangement when considering whether there are one or more units of
accounting. In arrangements when multiple products or services are sold, the delivered items are
considered separate units of accounting if the delivered item has value to the customer on a
standalone basis and there is objective and reliable evidence of fair value of the undelivered
items. Undelivered item revenues are included in the liability section as deferred revenue on the
balance sheet at their fair value with the corresponding costs held as an asset in inventory until
delivery has occurred and revenue is earned.

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##### Table of Contents



Allowance for Doubtful Accounts We evaluate the collectibility of our accounts receivable based on a combination of factors.
Where we are aware of circumstances that may impair a specific customers ability to meet its
financial obligations to us, we record a specific allowance against amounts due to us and thereby
reduce the net receivable to the amount we reasonably believe is likely to be collected. For all
other customers, we recognize allowances for doubtful accounts based on the length of time the
receivables are outstanding, industry and geographic concentrations, the current business
environment and our historical experience. If the financial condition of our customers deteriorates
or if economic conditions worsen, additional allowances may be required. Inventories Inventories are stated at the lower of FIFO (first in, first out) cost or market but not in
excess of net realizable value. Inventory costs include all direct manufacturing costs and applied
overhead. Allowances are established based on managements estimate of inventory on hand that is
potentially obsolete or for which its market value is below cost. Impairment of Long-Lived Assets We review long-lived assets, including property, plant and equipment and definite lived
intangible assets, for impairment whenever events or changes in business circumstances indicate
that the carrying amount of the assets may not be fully recoverable. An impairment loss would be
recognized when estimated undiscounted future cash flows expected to result from the use of the
assets and its eventual disposition is less than its carrying amount. Impairment, if any, is
assessed using discounted cash flows. No impairments have occurred to date. Goodwill and Other Intangible Assets Goodwill represents the excess of the cost over the net of the fair value of the identifiable
tangible and intangible assets acquired and the fair value of
liabilities assumed in acquisitions. We adopted SFAS No. 142 effective upon the acquisition of IPC Information Systems on December
20, 2001. In accordance with SFAS No. 142, there is no amortization of goodwill and intangible
assets that have indefinite useful lives. However, such assets are tested for impairment annually
using the two-step process specifically provided in SFAS No. 142. Other intangible assets are
carried at cost. Technology assets are amortized over estimated useful lives of between 3 to 7
years, customer relationships are amortized over estimated useful lives of 8 to 20 years, and
proprietary software is amortized over its estimated useful life of 7 years. Trade name has been
deemed to have an indefinite life and will not be subject to amortization, but instead will be
subject to annual impairment tests in accordance with the provisions of SFAS No. 142. In
determining that the trade name has an indefinite life, we considered the following factors: the
on going active use of our trade name, which is directly associated with our market leading position
in the mission-critical voice communications business, the lack of any legal, regulatory or contractual provisions that may limit
the useful life of the trade name, the lack of any substantial costs to maintain the asset, the
positive impact on our trade name generated by our other ongoing business activities (including
marketing and development of new technology and new products) and our commitment to products
branded with our trade name over our 30 year history. We completed the required annual fair value test as of July 1, 2004 (the first day of the
fourth quarter of 2004), and concluded that there was no impairment to our recorded goodwill or
trade name. There have been no indicators of impairment during the first quarter of the 2005 fiscal
year. We believe the recorded values of goodwill of $92.3 million and trade name of $16.3 million
at December 31, 2004 are fully recoverable. Stock-Based Compensation As permitted by SFAS 123, we elected to follow APB Opinion No. 25, Accounting for Stock
Issued to Employees and related interpretations in accounting for our employee option plans. Under
APB 25, no compensation expense is recognized at the time of an option grant if the exercise price
of the employee stock option is fixed and equals or exceeds the fair market value of the underlying
common stock on the date of the grant and the number of shares to be issued pursuant to the
exercise of such options are fixed on the date of the grant. Due to the fact that our common stock
is not publicly traded, determining the fair value of our common stock involves significant
estimates and judgments. In considering the fair value of the underlying stock when we 25




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grant options, we consider several factors like third party valuations, the fair value of the
common stock of other companies comparable to ours, and fair values established by market
transactions. On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement
No. 123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123,
Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting
for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows.
Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123.
However, Statement 123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their fair values. Pro
forma disclosure is no longer an alternative. We will adopt Statement 123(R) on July 1,
2005. Statement 123(R) permits public companies to adopt its requirements using one of two methods: 1) A modified prospective method in which compensation cost is recognized beginning with the
effective date (a) based on the requirements of Statement 123(R) for all share-based payments
granted after the effective date and (b) based on the requirements of Statement 123 for all
awards granted to employees prior to the effective date of Statement 123(R) that remain unvested
on the effective date. 2) A modified retrospective method which includes the requirements of the modified
prospective method described above, but also permits entities to restate based on the amounts
previously recognized under Statement 123 for purposes of pro forma disclosures either (a) all
prior periods presented or (b) prior interim periods of the year of adoption. We
will adopt Statement 123(R) on July 1, 2005, however, we are still
evaluating which method to adopt. As
permitted by Statement 123, we currently account for share-based payments to
employees using Opinion 25s intrinsic value method and, as such, generally recognizes no
compensation cost for employee stock options. Accordingly, the
adoption of Statement 123(R)s fair
value method will have a significant impact on our result of operations, although it will have no
impact on our overall financial position. The impact of adoption of
Statement 123(R) cannot be
predicted at this time because it will depend on levels of share-based payments granted in the
future. However, had we adopted Statement 123(R) in prior periods, the impact of that standard
would have approximated the impact of Statement 123 as described in the disclosure of pro forma net
income and earnings per share in Note 1 to our consolidated
financial statements. Statement 123(R)
also requires the benefits of tax deductions in excess of recognized compensation cost to be
reported as a financing cash flow, rather than as an operating cash flow as required under current
literature. This requirement will reduce net operating cash flows and increase net financing cash
flows in periods after adoption. We cannot estimate what those amounts will be in the
future because they depend on, among other things, when employees exercise stock options. Income Taxes In accordance with SFAS No. 109, Accounting for Income Taxes, or SFAS 109, we recognize
deferred income taxes for the tax consequences in future years of differences between the tax basis
of assets and liabilities and their financial reporting amounts at each year end, based on enacted
tax laws and statutory tax rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established when necessary to reduce deferred tax
assets to the amount that is more likely than not to be realized. The provision for income taxes
is the tax payable for the period and the change during the period in deferred tax assets and
liabilities. Although realization is not assured, management believes it is more likely than not
that the recorded deferred tax assets will be realized. Additionally, deferred tax liabilities are
regularly reviewed to confirm that the amounts recorded are appropriately stated. All such
evaluations require significant management judgments. In determining whether it is more likely than not that we will realize the benefits of the net
deferred tax assets from US operations, we consider all available evidence, both positive and
negative, including:  
    US result of operations for subsequent fiscal years are expected to generate sufficient
taxable income to fully utilize tax loss carryforwards; and
    our conclusion that the net US deferred tax assets were generated by an event (our
purchase of the Company), rather than a continuing condition. Business Combinations Estimates and judgments related to the fair value of assets acquired and liabilities assumed
are required in connection with our acquisitions. Some of the liabilities are subjective in nature.
These liabilities are reflected in purchase accounting based upon 26




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the most recent information available, and principally related to federal, foreign, state and local
taxes based on income and other measures as well as estimates of costs to restructure the
operations of acquired companies. The ultimate settlement of such liabilities may be for amounts
that are different from the amounts presently recorded. Recent Accounting Pronouncements In November 2004, the FASB issued FAS 151, Inventory Costs  an amendment of ARB No. 43,
Chapter 4 (FAS 151). FAS 151 amends the guidance in Accounting Research Bulletin (ARB) No. 43,
Chapter 4, to clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage). FAS 151 requires that these costs be recognized as
current period charges regardless of whether they are abnormal. In addition, FAS 151 requires that
allocation of fixed production overheads to the costs of manufacturing be based on the normal
capacity of the production facilities. The provisions of FAS 151 are effective for inventory costs
incurred during fiscal years beginning after June 15, 2005. We do not expect this new standard to
have a material effect on our consolidated financial position or results of operations. Comparison of the Three Months Ended December 31, 2004 (Q1 2005) to the Three Months Ended
December 31, 2003 (Q1 2004). The following table sets forth, as a percentage of consolidated revenue, our consolidated
statements of operations for the periods indicated. The following table also presents, as a
percentage of segment revenue, our statements of operations for our two operating segments for the
periods indicated. December 31, 2004
    
    
    December 31, 2003Command
    
    
    
    
    
    
    
    
    
    
    CommandFinancial
    
    
    and
    
    
    
    
    
    
    Financial
    
    
    andConsolidated
    
    
    Services
    
    
    Control
    
    
    Consolidated
    
    
    Services
    
    
    ControlRevenue:Product sales and installations
    
    
    34
    %
    
    
    34
    %
    
    
    30
    %
    
    
    41
    %
    
    
    41
    %
    
    
    18
    %Service
    
    
    66
    %
    
    
    66
    %
    
    
    70
    %
    
    
    59
    %
    
    
    59
    %
    
    
    82
    %100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of goods sold (depreciation shown separately):Product sales and installations
    
    
    19
    %
    
    
    18
    %
    
    
    38
    %
    
    
    21
    %
    
    
    21
    %
    
    
    11
    %Service
    
    
    32
    %
    
    
    32
    %
    
    
    30
    %
    
    
    30
    %
    
    
    30
    %
    
    
    28
    %Depreciation and amortization
    
    
    2
    %
    
    
    2
    %
    
    
    0
    %
    
    
    1
    %
    
    
    1
    %
    
    
    0
    %53
    %
    
    
    52
    %
    
    
    68
    %
    
    
    52
    %
    
    
    52
    %
    
    
    39
    %Gross profit
    
    
    47
    %
    
    
    48
    %
    
    
    32
    %
    
    
    48
    %
    
    
    48
    %
    
    
    61
    %Research and development
    
    
    6
    %
    
    
    6
    %
    
    
    33
    %
    
    
    6
    %
    
    
    6
    %
    
    
    0
    %Selling, general and administrative expense
    
    
    26
    %
    
    
    25
    %
    
    
    121
    %
    
    
    25
    %
    
    
    25
    %
    
    
    0
    %Depreciation and amortization
    
    
    2
    %
    
    
    2
    %
    
    
    1
    %
    
    
    3
    %
    
    
    3
    %
    
    
    0
    %Amortization of intangibles
    
    
    6
    %
    
    
    6
    %
    
    
    0
    %
    
    
    7
    %
    
    
    7
    %
    
    
    0
    %Income (loss) from operations
    
    
    7
    %
    
    
    9
    %
    
    
    (123
    %)
    
    
    7
    %
    
    
    7
    %
    
    
    61
    %Other income (expense):Interest expense, net
    
    
    (9
    %)
    
    
    (9
    %)
    
    
    0
    %
    
    
    (10
    %)
    
    
    (11
    %)
    
    
    0
    %Other income (expense), net
    
    
    2
    %
    
    
    2
    %
    
    
    0
    %
    
    
    1
    %
    
    
    1
    %
    
    
    0
    %Income (loss) from continuing operations before income taxes
    
    
    0
    %
    
    
    2
    %
    
    
    (123
    %)
    
    
    (2
    %)
    
    
    (3
    %)
    
    
    61
    %Income tax expense (benefit)
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    1
    %
    
    
    1
    %
    
    
    0
    %Income (loss) from continuing operations
    
    
    0
    %
    
    
    2
    %
    
    
    (123
    %)
    
    
    (3
    %)
    
    
    (4
    %)
    
    
    61
    %Income (loss) from discontinued operations
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Net income (loss)
    
    
    0
    %
    
    
    2
    %
    
    
    (123
    %)
    
    
    (3
    %)
    
    
    (4
    %)
    
    
    61
    %
 A discussion of revenues and cost of goods sold on a consolidated basis
would be substantially the same as and duplicative of the discussion of
these items for the Financial Services segment, therefore we have
omitted it. We believe our customers are beginning to plan and
implement changes, expansions, and reconfigurations to their current trading floors. We expect this
activity to continue during 2005; however, there can be no certainty as to the degree or duration
that this will continue. Revenue The following table sets forth our revenue as reported for our two operating segments. Financial ServicesQ1
    
    
    Q1
    
    
    $
    
    
    %(dollars in thousands)
    
    2005
    
    
    2004
    
    
    Change
    
    
    ChangeProduct sales and installations
    
    $
    22,249
    
    
    $
    21,388
    
    
    $
    861
    
    
    
    4
    %Service
    
    
    42,944
    
    
    
    30,926
    
    
    
    12,018
    
    
    
    39
    %Total
    
    $
    65,193
    
    
    $
    52,314
    
    
    $
    12,879
    
    
    
    25
    %
 27




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##### Table of Contents



Command and ControlQ1
    
    
    Q1
    
    
    $
    
    
    %(dollars in thousands)
    
    2005
    
    
    2004
    
    
    Change
    
    
    ChangeProduct sales and installations
    
    $
    221
    
    
    $
    70
    
    
    $
    151
    
    
    
    216
    %Service
    
    
    511
    
    
    
    310
    
    
    
    201
    
    
    
    65
    %Total
    
    $
    732
    
    
    $
    380
    
    
    $
    352
    
    
    
    93
    %
 Financial Services Product sales and installations.Comparing Q1 2005 to Q1 2004, our product sales and install
revenue increased by $0.9 million, primarily due to higher revenue from medium installation
projects offset by lower revenue from one large installation project in Q1 2005 compared to Q1
2004. The number of large installations remained constant period over period; however, the
decrease in revenue was due to the smaller size of the installation completed in Q1 2005
compared to Q1 2004. For medium installations, revenue increased primarily due to an additional
installation in Q1 2005 compared to Q1 2004. Large and medium projects are primarily configured
based on the number of positions and telephone lines per position.
Also, sales in part result
from real estate planning, merger and acquisition activity in our customer base and changes in
our customers headcount or their technology needs and can vary from period to period. Number of
    
    
    Total amountinstallations
    
    
    (in millions)Product installation size:
    
    Q1 2005
    
    
    Q1 2004
    
    
    Q1 2005
    
    
    Q1 2004
    
    
    $ ChangeLarge (greater than $2.0 million)
    
    
    1
    
    
    
    1
    
    
    $
    2.0
    
    
    $
    2.4
    
    
    $
    (0.4
    )Medium (between $1.0 million and $2.0 million)
    
    
    3
    
    
    
    2
    
    
    
    4.0
    
    
    
    2.8
    
    
    
    1.2Small (less than $1.0 million)
    
    
    *
    
    
    
    *
    
    
    
    16.3
    
    
    
    16.2
    
    
    
    0.1$
    22.3
    
    
    $
    21.4
    
    
    $
    0.9
    Service.The increase in service revenue of $12.0 million in Q1 2005 from Q1 2004 was primarily
due to an increase of $7.9 million in network services and $4.1 million in equipment services.
The increase in network services is primarily due to a full quarter of revenue from the
acquisition of Gains Asia in January 2004 generating $4.3 million in revenue and an increase in
recurring circuit revenue and the expansion of our Advanced Fault Management and Total Circuit
Management services from our customer base in North America and Europe totaling $3.6 million.
Equipment services increased primarily due to a higher volume of contract maintenance revenue
totaling $1.5 million from the expiration of warranties for product sales and installation
contracts and additional on-site services at several customer sites. Also, non-contract MAC
revenue increased $2.6 million due to increased demand for trading floor re-configurations and
additional trading positions globally. Command and Control Product sales and installations.The increase in product sales and installation revenue of $0.1
million in Q1 2005 from Q1 2004 was primarily due to the acquisition of Orbacom Systems on
November 30, 2004. Number of
    
    Total amountinstallations
    
    (in millions)Product installation size:
    
    Q1 2005
    
    Q1 2004
    
    Q1 2005
    
    Q1 2004
    
    $ ChangeSmall (less than $1.0 million)
    
    *
    
    *
    
    $
    0.2
    
    
    $
    0.1
    
    
    $
    0.1
    Service.The increase in service revenue of $0.2 million in Q1 2005 from Q1 2004 was primarily
due the acquisition of Orbacom Systems on November 30, 2004, which increased non-contract MAC
revenue associated with upgrading existing customers systems. Cost of Goods Sold The following table sets forth our cost of goods sold as reported for our two operating
segments. Cost of goods sold for our Financial Services segment includes the costs of equipment
sold, the costs of parts used for service of the equipment, labor to install the equipment sold,
labor to provide service, warehouse and project management costs, the costs to lease local and long
distance circuits, the cost of our network provisioning and operations organizations and
depreciation of our network equipment as well as equipment in our manufacturing and assembly
facility. Cost of goods sold for our Command and Control segment includes the costs of equipment
sold, the costs of parts used for service of the equipment, labor to install the equipment sold and
labor to provide service. In addition, cost of goods sold for Q1 2005 includes a charge resulting
from the sale of inventory 28




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##### Table of Contents



reflecting a step-up in carrying value of $1.7 million (relating to purchase accounting fair value
adjustments from the acquisition of Orbacom), of which $0.2 million was recognized in Q1 2005 . This purchase
accounting inventory fair value step-up is a GAAP adjustment that is
recorded when a company is acquired. Financial Services% of
    
    
    
    
    
    
    % of
    
    
    %(dollars in thousands)
    
    Q1 2005
    
    
    Rev.
    
    
    Q1 2004
    
    
    Rev.
    
    
    ChangeProduct sales and installations
    
    $
    12,135
    
    
    
    54
    %
    
    $
    11,095
    
    
    
    52
    %
    
    
    2
    %Service
    
    
    21,024
    
    
    
    49
    %
    
    
    15,434
    
    
    
    50
    %
    
    
    (1
    %)Depreciation and amortization
    
    
    1,082
    
    
    
    2
    %
    
    
    742
    
    
    
    1
    %
    
    
    1
    %Total
    
    $
    34,241
    
    
    
    52
    %
    
    $
    27,271
    
    
    
    52
    %
    
    
    0
    %
 Command and Control% of
    
    
    
    
    
    
    % of
    
    
    %(dollars in thousands)
    
    Q1 2005
    
    
    Rev.
    
    
    Q1 2004
    
    
    Rev.
    
    
    ChangeProduct sales and installations
    
    $
    279
    
    
    
    126
    %
    
    $
    43
    
    
    
    61
    %
    
    
    65
    %Service
    
    
    216
    
    
    
    42
    %
    
    
    107
    
    
    
    35
    %
    
    
    7
    %Depreciation and amortization
    
    

    
    
    
    
    
    %
    
    
    
    
    
    
    
    %
    
    
    Total
    
    $
    495
    
    
    
    68
    %
    
    $
    150
    
    
    
    39
    %
    
    
    29
    %
 Financial Services Product sales and installations.The increase in product sales and installations cost of goods
sold of 2% as a percentage of product sales and installation revenue in Q1 2005 from Q1 2004 was
primarily due to a higher cost of sales realized on large and medium installation projects
offset by a decrease in cost of sales on small installation projects. Small installation
projects generally result in lower costs of sales. Service.The decrease in service cost of goods sold of 1% as a percentage of service revenue in
Q1 2005 from Q1 2004 was primarily due to a decrease in the cost of bandwidth expenses as a
percentage of revenue from better management and utilization of bandwidth, an increase in
contract maintenance service revenue, and higher material sales in MAC services. Command and Control Product sales and installations.The increase in product sales and installations cost of goods
sold of 65% as a percentage of product sales and installation revenues in Q1 2005 from Q1 2004
was primarily due to the inclusion of $0.2 million of inventory fair value adjustment. Service.The increase in service cost of goods sold of 7% as a percentage of service revenues in
Q1 2005 from Q1 2004 was primarily due to the higher cost of sales associated with MAC services when compared to contract maintenance services. Research and Development Expense Consolidated$
    
    
    %(dollars in thousands)
    
    Q1 2005
    
    
    Q1 2004
    
    
    Change
    
    
    ChangeResearch and development
    
    $
    4,031
    
    
    $
    3,409
    
    
    $
    622
    
    
    
    18
    %
 Research and development efforts for Financial Services are focused on the next
generation of Financial Services turret products, applications software, and enhancements to our
current product lines. Command and Control research and development efforts are focused on the next
generation of radio technology, radio telephony integration, and computer aided dispatch software. Research and development expenses increased by $0.6 million in Q1 2005 from Q1 2004 primarily
due to costs related to investment in the next generation of products. Selling, General and Administrative Expense Consolidated$
    
    
    %(dollars in thousands)
    
    Q1 2005
    
    
    Q1 2004
    
    
    Change
    
    
    ChangeSelling, general and administrative
    
    $
    17,133
    
    
    $
    12,924
    
    
    $
    4,209
    
    
    
    33
    %
 29




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##### Table of Contents



Selling, general and administrative expenses increased by $4.2 million in Q1 2005 from Q1
2004 due to the recognition of a full quarter of costs in Q1 2005 from the acquisition of Gains
Asia in January 2004 and the expansion of the Command and Control segment through the acquisition
of Orbacom Systems on November 30, 2004, and the increased
headcount and related costs in Q1 2005 for sales and marketing
programs and professionals. Depreciation and Amortization Consolidated$
    
    
    %(dollars in thousands)
    
    Q1 2005
    
    
    Q1 2004
    
    
    Change
    
    
    ChangeDepreciation and amortization
    
    $
    1,479
    
    
    $
    1,331
    
    
    $
    148
    
    
    
    11
    %
 The increase in depreciation and amortization of $0.1 million in Q1 2005 from Q1 2004 was
primarily due to increased capital expenditures as well as the addition of depreciable fixed assets
due to the acquisition of Gains Asia in January 2004. Amortization of Intangibles Consolidated$
    
    
    %(dollars in thousands)
    
    Q1 2005
    
    
    Q1 2004
    
    
    Change
    
    
    ChangeAmortization of intangibles
    
    $
    4,021
    
    
    $
    3,776
    
    
    $
    245
    
    
    
    6
    %
 The increase in amortization of intangibles of $0.2 million in Q1 2005 from Q1 2004 was
primarily due to the addition of intangible assets from the acquisition of Gains Asia. Interest Expense, net Consolidated$
    
    
    %(dollars in thousands)
    
    Q1 2005
    
    
    Q1 2004
    
    
    Change
    
    
    ChangeInterest expense, net
    
    $
    5,629
    
    
    $
    5,522
    
    
    $
    107
    
    
    
    2
    %
 Interest expense, net increased by $0.1 million in Q1 2005 from Q1 2004 due to an
increase in the LIBOR based interest rate on our senior secured credit facilities. Other Income (Expense), net Consolidated$
    
    
    %(dollars in thousands)
    
    Q1 2005
    
    
    Q1 2004
    
    
    Change
    
    
    ChangeOther income (expense), net
    
    $
    1,405
    
    
    $
    447
    
    
    $
    958
    
    
    
    214
    %
 Other income (expense), net increased by $1.0 million in Q1 2005 from Q1 2004 primarily
due to foreign exchange gains attributable to the weakness of the US dollar. Provision for Income Taxes Our effective tax rate on income from continuing operations was 42.1% for Q1 2005 and 29.9%
for Q1 2004. Our effective tax rate reflects our  foreign, federal and state taxes, the
non-deductibility of foreign losses for federal tax purposes, the non-deductibility of certain
expenses and, for the three months ended December 31, 2003, taxable income at several of our
foreign subsidiaries. We recognized deferred tax assets of $6.8 million at September 30, 2004 related to our US
federal and state net operating loss carryforwards. In determining whether it is more likely than
not that we will realize the benefits of the net deferred tax assets from US operations, we
considered all available evidence, both positive and negative. The principal factors that led us to
recognize these benefits were: (1) US results of operations for the period ended September 30,
2002, reported a loss before income taxes of $22.1 million, after reflecting charges of $34.3
million resulting from the fair-value inventory adjustments under the purchase price allocation
(which, as a result of the Internal Revenue Code Section 338(h)(10) tax election, jointly made by
us and Global Crossing, also generates deductions for income tax purposes); (2) US results of
operations for 2005 and subsequent years are expected to generate sufficient taxable income to
fully utilize these tax loss carryforwards; and (3) our conclusion that the net US deferred tax
assets were generated by an event (our purchase of IPC Information Systems in December 2001),
rather than a continuing condition. As of December 31, 2004, no circumstances have arisen that
would require us to change such conclusion. 30




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##### Table of Contents



Net Income (Loss) Consolidated$
    
    
    %(dollars in thousands)
    
    Q1 2005
    
    
    Q1 2004
    
    
    Change
    
    
    ChangeNet income (loss)
    
    $
    231
    
    
    $
    (1,764
    )
    
    $
    1,995
    
    
    
    113
    %
 We had net income of $0.2 million in Q1 2005 compared to a net loss of $1.8 million in Q1
2004. The $2.0 million increase was primarily due to a $5.9 million increase in our gross profit, a
$0.9 million increase in other income offset by increases in research and development expenses of
$0.6 million and an increase in selling, general and administrative expenses of $4.2 million. Liquidity and Capital Resources Historically, we have satisfied our operating cash requirements through cash provided by
operations, capital loans, financing and bank lines of credit. Our principal uses of cash were to
fund working capital requirements, operating losses, capital expenditures and repayment of
borrowings. During
Q1 2005, we utilized our cash for payments of $8.6 million interest payment due on our
senior subordinated notes, the $8 million cash purchase price of
Orbacom Systems, Inc., accrued expenses and the remaining payment due under our credit
agreement relating to excess cash flow. These disbursements were
offset by cash acquired in the Orbacom acquisition of $2.3 million as well as cash collections. The
result of this activity was that our cash balances decreased from $27.3 million at September 30,
2004 to $8.8 million at December 31, 2004. The Senior Secured Credit Facilities On December 20, 2001, we entered into the senior secured credit facilities comprised of a
$105.0 million term loan and a $15.0 million revolving credit facility. On September 2, 2003, we
amended and restated our senior secured credit facilities. The amended and restated senior secured
credit facilities consisted of a $25.0 million revolving credit facility and a $55.0 million term
loan. The term loan was borrowed in full at closing. On April 20, 2004, we completed an agreement
to increase the availability under our revolving credit facility by $10.0 million. As of December
31, 2004 the total amount available for borrowing and letters of credit under the revolving credit
facility is $35.0 million, of which $30.7 million was available as of December 31, 2004, after
taking into account $4.3 million of outstanding letters of credit. We can, however, increase the
committed amount under these facilities by up to $15.0 million so long as one or more lenders agree
to provide this incremental commitment and other customary conditions are satisfied. Our senior
secured credit facilities mature on September 2, 2008. The weighted average interest rate for
borrowings outstanding under the senior secured credit facilities for
Q1 2005 was 5.54% and 5.12%
for Q1 2004. We are also required to pay a commitment fee equal to 0.50% per annum of the average
daily unused amount of the committed amount of the revolving credit facility, a fronting fee in an
amount not to exceed 0.50% per annum of the average aggregate daily amount available to be drawn
under all letters of credit issued under our senior secured credit facilities and customary
administrative agent and letter of credit charges. Borrowings under our senior secured credit facilities bear interest, at our election, either
based on a prime rate index plus the applicable margin or a LIBOR rate index plus the applicable
margin. The applicable margin is: if our senior secured leverage ratio, as defined in the senior
secured credit facilities, is greater than 1.00:1.00, with respect to LIBOR rate loans, 4.00% per
annum and with respect to prime rate loans, 3.00% per annum, and if our senior secured leverage
ratio is less than 1.00:1.00, with respect to LIBOR rate loans, 3.50% per annum and with respect to
prime rate loans, 2.50% per annum. Mandatory prepayments of the senior secured credit facilities are required upon the occurrence
of certain events, including certain asset sales, equity issuances and debt issuances, as well as
50% of excess cash flow, as defined in our senior secured credit facilities in 2004 and thereafter.
Excess cash flow is defined in our credit facilities agreement, as: (1) the sum of net income,
interest expense, provisions for taxes, depreciation expense, amortization expense, other non-cash
items affecting net income and to the extent included in calculating net income, expenses incurred
by us in connection with an amendment of the then existing credit agreement, certain restructuring
expenses and prepayment premiums in connection with prepayment of loans under the then existing
credit agreement, plus (2) a working capital adjustment less (3) scheduled repayments of debt,
capital expenditures, cash acquisitions and certain investments, cash interest expense and
provisions for taxes based on income. As required under the terms of our senior secured credit facilities, our mandatory excess cash
flow repayment based upon 50% of our excess cash flow for the period ended September 30, 2004,
which must be paid within 90 days of our fiscal year end, was $6.6 million, of which $5.0 million
was paid on September 30, 2004 and $1.6 million was paid on December 29, 2004. 31




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##### Table of Contents



Obligations under the senior secured credit facilities are secured by a first priority
security interest in substantially all of our assets and the assets of our domestic subsidiaries
and by a pledge of 100% of the shares of domestic subsidiaries and 65% of the shares of direct
foreign subsidiaries. Our domestic subsidiaries have unconditionally guaranteed our obligations
under the senior secured credit facilities. The senior secured credit facilities contain customary affirmative covenants as well as
negative covenants that, among other things, restrict our and our subsidiaries ability to: incur
additional indebtedness (including guarantees of certain obligations); create liens; engage in
mergers, consolidations, liquidations and dissolutions; sell assets; enter into capital leases; pay
dividends or make other payments in respect of capital stock; make acquisitions; make investments,
loans and advances; enter into transactions with affiliates; make payments with respect to or
modify subordinated debt instruments; enter into sale and leaseback transactions; change the fiscal
year or lines of business; and enter into agreements with negative pledge clauses or clauses
restricting subsidiary distributions. The senior secured credit facilities also contain minimum interest coverage and fixed charge
coverage ratios and maximum senior secured and total leverage ratios as well as a restriction on
the amount of capital expenditures we can incur in a fiscal year. The Senior Subordinated Notes On December 20, 2001 we issued $150.0 million in aggregate principal amount of 11.50% senior
subordinated notes to fund a portion of the consideration for the acquisition of IPC Information
Systems. Under the terms of the indenture governing the notes, we may, subject to certain
restrictions, issue additional notes up to a maximum aggregate principal amount of $250.0 million.
The notes mature on December 15, 2009. The notes are general unsecured obligations, are
subordinated in right of payment to all existing and future senior debt, including the amended and
restated senior secured credit facilities, are pari passu in right of payment with any future
senior subordinated indebtedness, and are unconditionally guaranteed by certain of our domestic
restricted subsidiaries. Interest on the notes accrues at the rate of 11.50% per annum and is
payable semi-annually in arrears on June 15 and December 15. The indenture governing the notes contains covenants that impose significant restrictions on
us. These restrictions include limitations on our ability to: incur indebtedness or issue preferred
shares; pay dividends or make distributions in respect of capital stock or to make other restricted
payments; create liens; agree to payment restrictions affecting restricted subsidiaries;
consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; enter into
transactions with affiliates; and designate subsidiaries as unrestricted subsidiaries. Comparison of Q1 2005 to Q1 2004 Cash used in operating activities from continuing operations was $11.2 million for Q1 2005 as
compared to cash provided by operating activities from continuing operations of $7.9 million for Q1
2004. The decrease of $19.1 million was primarily due to $18.4 million of cash used for payment of
accounts payable and accrued liabilities balances that had increased leading up to our September
30, 2004 fiscal year end. The fluctuation in the accounts payable and accrued liabilities reflects the cashflow requirements for the purchase price of Orbacom due on closing. In addition,
inventory balances increased by $5.8 million due to the increase in our backlog when compared to
the same period last year. Increased backlog results in a requirement of more working capital as
the costs of jobs that have not been completed are held in inventory until completion in accordance
with our revenue recognition policy. These cash decreases were partially offset by $2.5 million of
cash received from our former I.T.S. division as well as a $1.9 million shift from a net loss to a
net income position during the comparative periods. Cash used in investing activities was $7.8 million for Q1 2005 as compared to $14.0 million
for Q1 2004. Cash used in investing activities for Q1 2005 was primarily comprised of $1.9 million
of capital expenditures and $5.9 million for the acquisition of Orbacom net of cash acquired. Cash
used in investing activities for Q1 2004 related to $1.7 million for capital expenditures, $6.8
million for the deferred purchase price and earnout commitment for the acquisition of Gains
International US and Gains International UK, Ltd. and a $5.5 million advance payment for the
acquisition of Gains Asia. Cash used in financing activities was $1.8 million for Q1 2005 as compared to $18.0 million
for Q1 2004. Cash used in financing activities in Q1 2005 was primarily for repayment of bank debt
of $1.7 million. Cash used in financing activities in Q1 2004 was almost entirely comprised of the
special cash dividend in the amount of $17.8 million. The effect of exchange rate changes on cash represents increases and decreases in various
currencies when translated into US dollars. As an international company, we are subjected to
currency fluctuation risk, which resulted in a net decrease of cash of approximately $0.1 million
in Q1 2005 as compared to an increase of $16,000 in Q1 2004. Currently our largest currency 32




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##### Table of Contents



exposure is to the British Pound, although we have additional exposure, to a lesser extent, to the
Euro, Canadian Dollar, Australian Dollar, Japanese Yen and the Hong Kong Dollar. Capital Resources and Expenditures We are limited in our capital expenditures in any fiscal year by the capital expenditure
covenant in our credit agreement. The limits imposed by our credit agreement are $12.0 million per
fiscal year plus 50% of the unused portion of the prior years availability under the covenant. We have no off balance sheet arrangements or other relationships with unconsolidated
affiliates. Our primary future uses of cash will be to fund interest expense and principal
repayments on our debt, capital expenditures, research and development efforts, working capital as
needed for potential strategic acquisitions and/or alliances and payment of dividends to our
shareholders, including the special cash dividend of
approximately $20 million that we expect to
pay by February 14, 2005 to all stockholders of record of our outstanding common stock. Our primary
future sources of cash will be cash flows from operations, and, if necessary, borrowings under the
revolving credit facility. Our ability to make payments on our indebtedness, including the senior subordinated notes, and
to fund planned capital expenditures, research and development efforts and payment of dividends to
our shareholders will depend on our ability to generate cash in the future, which is subject, in
part, to general economic, financial, competitive, legislative, regulatory and other factors that
are beyond our control. During the course of the year, our short-term liquidity is impacted by our mandatory payment
obligations of principal and interest under our senior secured credit facilities and interest
payments on our senior subordinated notes. The mandatory interest and principal payments under our
senior secured credit facilities are due at the end of each quarter. The interest payments required
by the senior subordinated notes of $8.6 million due in June and December of each year negatively
impact our liquidity during those particular months. Additionally, in any year that we generate
excess cash flow, the mandatory prepayment required under our senior secured credit facilities must
be made within 90 days of our fiscal year end. For 2004, we were required to make a mandatory
excess cash flow payment of $6.6 million of which $5.0 million was paid at September 30, 2004 and
the remaining $1.6 million was paid at December 29, 2004. We did not make a mandatory excess cash
flow payment for 2003 due to our voluntary prepayment of $14.0 million in March 2003. Since the acquisition of IPC Information Systems, our cash generated from the operations of
the business has been sufficient to meet our cash needs. Based on our forecasts, we believe that
this trend will continue and our cash flow from operations, available cash and available borrowings
under our revolving credit facility will be adequate to meet our current and long-term liquidity
needs for at least the next few years. We cannot assure you, however, that our business will
generate sufficient cash flow from operations or that future borrowings will be available to us
under the revolving credit facility in an amount sufficient to enable us to pay our indebtedness,
including the notes, or to fund our other liquidity needs. We may need to refinance all or a
portion of our indebtedness, including the notes, on or before maturity. We cannot assure you that
we will be able to refinance any of our indebtedness, including the notes, on commercially
reasonable terms, or at all. Contractual Obligations and Other Commercial Commitments The following summarizes our contractual obligations at December 31, 2004, and the effect
such obligations are expected to have on our liquidity and cash flow in future periods (in
millions). Payments Due by PeriodLess than
    
    
    1-3
    
    
    3-5
    
    
    After 5Contractual Obligations:
    
    Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    yearsDeferred Compensation Agreements
    
    $
    4.8
    
    
    $
    0.9
    
    
    $
    1.0
    
    
    $
    0.9
    
    
    $
    2.0Network Carrier Commitments
    
    
    9.3
    
    
    
    9.3
    
    
    
    
    
    
    
    
    
    
    
    Long-Term Debt
    
    
    197.7
    
    
    
    0.5
    
    
    
    12.4
    
    
    
    184.8
    
    
    
    Operating Leases
    
    
    31.2
    
    
    
    5.4
    
    
    
    10.2
    
    
    
    8.4
    
    
    
    7.2Total Contractual Cash Obligations
    
    $
    243.0
    
    
    $
    16.1
    
    
    $
    23.6
    
    
    $
    194.1
    
    
    $
    9.2
 Amount of Commitment Expiration Per PeriodTotalAmounts
    
    
    Less than
    
    
    1-3
    
    
    3-5
    
    
    Over 5Other Commercial Commitments:
    
    Committed
    
    
    1 year
    
    
    years
    
    
    years
    
    
    yearsLine of Credit
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Standby Letters of Credit
    
    
    4.3
    
    
    
    4.3
    
    
    
    
    
    
    
    
    
    
    
    Guarantees for Global Crossing Affiliates
    
    
    0.3
    
    
    
    
    
    
    
    0.3
    
    
    
    
    
    
    
    Total Commercial Commitments
    
    $
    4.6
    
    
    $
    4.3
    
    

    $
    0.3
    
    
    $
    
    
    
    $
    
 33




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Off Balance Sheet Arrangements We do not have any off balance sheet financial arrangements. 
 Item 3. Quantitative and Qualitative Disclosure About Market Risk Market risks relating to our operations result primarily from changes in interest rates
and changes in foreign exchange rates. We monitor our interest rate and foreign exchange rate
exposures on an ongoing basis. We have not entered into any interest rate hedging contracts. As an international company, we are exposed to foreign currency risk because part of our
revenues and operating expenses are earned and paid primarily in British Pounds and to a lesser
extent Australian Dollars, Canadian Dollars, Euros, Japanese Yen, Hong Kong Dollars and Singapore
Dollars. In the past, we entered into foreign currency hedging contracts, commonly known as
collars. For Q1 2005 and Q1 2004, we did not enter into any foreign currency hedging instruments or
other derivatives. The following table provides information about our financial instruments that are sensitive to
changes in interest rates. For debt obligations, the table presents principal cash flows and
related weighted average interest rates by expected maturity dates. The fair market value of our
long-term debt at December 31, 2004 is shown in the table below. Fair Value onDecember 31,
    
    
    Future Principal Payments(dollars in millions)
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Thereafter
    
    
    TotalLong-Term Debt:Fixed Rate Senior
Subordinated
Notes, interest
payable at 11.5%,
maturing 2009
    
    $
    166.5
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    150.0
    
    
    $
    150.0Variable Rate
Senior Secured
Credit Facilities
 Term Loan
(interest payable
at 5.54% at
December 31, 2004)
    
    $
    48.1
    
    
    $
    0.5
    
    
    $
    0.5
    
    
    $
    11.9
    
    
    $
    34.8
    
    
    $
    
    
    
    $
    
    
    
    $
    47.7
 
 Item 4. Controls and Procedures The Company maintains disclosure controls and procedures designed to ensure that information
required to be disclosed in the Companys Exchange Act reports is recorded, processed, summarized
and reported within the time periods specified by the SEC and that such information is accumulated
and communicated to the Companys management, including its Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. As of the end of the period covered by this report, the Company performed an evaluation of the
effectiveness of the design and operation of its disclosure controls and procedures as defined in
Exchange Act Rule 13a-15(e) and 15d-15(e). The evaluation was performed under the supervision and
with the participation of the Companys management, including the Companys Chief Executive Officer
and Chief Financial Officer. Based upon the evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Companys disclosure controls and procedures were effective in
ensuring that material information relating to the Company (including its consolidated
subsidiaries) was made known to them by others within the Companys consolidated group during the
period in which this report was being prepared and that the information required to be included in
the report has been recorded, processed, summarized and reported on a timely basis. During the Companys most recent fiscal quarter, there have been no significant changes in the
Companys internal controls that have materially affected, or are reasonably likely to materially
affect, the Companys internal controls over financial reporting. 34




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##### Table of Contents



Part II  Other Information: 
 Item 1. Legal Proceedings Except
for the lawsuits described below, of which the first two involves our former I.T.S.
segment, we are not a party to any pending legal proceedings other than claims and lawsuits arising
in the normal course of business. Under the terms of the sale agreement, we remain liable for all
pre-closing liabilities relating to the I.T.S. segment, including the two lawsuits described below.
Management believes the proceedings will not have a material adverse effect on our consolidated
financial condition or results of operations. On June 27, 2000, an action was brought against several defendants, including our subsidiary,
IPC Communications, Inc., in the United States District Court for the Southern District of New York
by two telecommunications cabling contractors alleging that IPC Communications, Inc. violated
federal antitrust and New York state law by conspiring with the International Brotherhood of
Electrical Workers Local Union Number 3, AFL-CIO, and five electrical contractors to exclude
plaintiffs from telecommunications wiring and systems installation jobs in the New York City
metropolitan area. Subsequently, the complaint was amended to add an additional plaintiff and an
additional defendant contractor. We believe the suit is without merit. However, there can be no
assurance that the resolution of this lawsuit will ultimately be favorable. Plaintiffs are seeking
injunctive relief and damages from the defendants, jointly and severally, in excess of an aggregate
of $75.0 million. On September 8, 2003, an action was brought against several defendants, including our
subsidiary, IPC Information Systems, Inc. and its President, in the United States District Court
for the Eastern District of New York by Advance Relocation & Storage Co., Inc., a moving company.
The complaint alleges that IPC Information Systems, Inc. and 23 other defendants violated the
Racketeer Influenced and Corrupt Organizations Act and engaged in tortious interference with
prospective business advantage by preventing the plaintiff from obtaining work as a mover in jobs
performed in large commercial buildings in New York City. We believe the suit is without merit and
intends to vigorously defend against all claims alleged against it in the complaint. Plaintiffs are
seeking injunctive relief and damages from the defendants, jointly and severally, in an aggregate

amount of approximately $7.0 million. On December 3, 2003, Hamilton County Emergency Communications District sued a former affiliate
of Orbacom in the United States Court for the Eastern District of Tennessee at Chattanooga. The
complaint asserts claims for breach of contract in connection with the installation of public
safety communications systems and the provision of services to Hamilton County. The complaint
seeks damages of approximately $600,000. We acquired Orbacom on November 30, 2004. On January 6, 2005, Hamilton amended its complaint
to add IPC Information Systems, LLC as a defendant. The amended complaint alleges new claims
against IPC Information Systems, LLC for violations of the Uniform Fraudulent Transfer Act by
entering into a concerted plan to take actions to place the assets of an affiliate of Orbacom
beyond the reach of the court. We are fully indemnified by the selling Orbacom shareholders for all costs incurred by us in
the action and have held back $3 million of the purchase price
payable to the former Orbacom shareholders. On January 7, 2005, we served the Orbacom shareholder
representative notice of our request for indemnification under the Stock Purchase Agreement, dated
as of October 1, 2004, among us, IPC Information Systems Holdings, Inc. and Orbacom and each of the
sellers listed therein. On December 15, 2004, IPC Information Systems, LLC commenced two lawsuits arising out of the
unauthorized copying of our proprietary software. The first action was filed in the Southern
District of New York against The Odyssey Group, Inc. doing business as The O&R Group, Inc. The
complaint alleges that the Odyssey Group infringed our copyrights by soliciting and obtaining an
unauthorized copy of our proprietary software from Advanced Business
Communications Ltd., a Canadian
company which we refer to as ABC. Our complaint seeks recovery of the software, injunctive relief
and unspecified damages from the defendants. The Odyssey Group has asserted counterclaims against
us seeking aggregate damages of approximately $3 million for injurious falsehood, slander per se
and interference with prospective economic advantage. We believe the
counterclaims are without merit and intend to vigorously defend
against them. The second action was filed in the Alberta Court of Queens Bench against ABC and its two
principals. The statement of claim against ABC alleges misappropriation of our software, breach of
contract, breach of fiduciary and common law duties and conversion and seeks injunctive relief and
monetary damages. ABC has asserted counterclaims against us seeking aggregate damages of
approximately $450,000 for breach of contract. We believe the
counterclaims are without merit and intend to vigorously defend
against them. 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds None 35




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##### Table of Contents



Item 3. Defaults Upon Senior Securities None 
 Item 4. Submission of Matters to a Vote of Security Holders None 
 Item 5. Other Information None 
 Item 6. Exhibits (A) EXHIBITS  31.1
    Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    Certificate of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    Certificate of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 36




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SIGNATURE 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 Acquisition Corp.Dated:
February 11, 2005
    
    By:
    
    /s/ TIMOTHY WHELANTimothy WhelanChief Financial Officer(Principal Financial and AccountingOfficer and Duly Authorized Officer)
 37