##### Table of Contents



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 March 31, 2005 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 April 30, 2005Common Stock, par value $0.01
    
    14,718,592 shares




---



IPC ACQUISITION CORP. INDEX PagePart I. Financial Information:Item 1. Financial StatementsA) Consolidated Balance Sheets as of March 31, 2005 (Unaudited) and September 30,
2004
    
    
    1B) Unaudited Consolidated Statements of Income for the Three and Six Months Ended
March 31, 2005 and 2004
    
    
    2C) Unaudited Consolidated Statements of Cash Flows for the Six Months Ended March
31, 2005 and 2004
    
    
    3D) Notes to Unaudited Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

    
    
    23Item 3. Quantitative and Qualitative Disclosure About Market Risk
    
    
    41Item 4. Controls and Procedures
    
    
    41Part II. Other Information:Item 1. Legal Proceedings
    
    
    42Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    43Item 3. Defaults Upon Senior Securities
    
    
    43Item 4. Submission of Matters to a Vote of Security Holders
    
    
    43Item 5. Other Information
    
    
    43Item 6. Exhibits
    
    
    43Signature
    
    
    44EX-4.1: THIRD SUPPLEMENTAL INDENTUREEX-31.1: CERTIFICATIONEX-31.2: CERTIFICATIONEX-32.1: CERTIFICATIONEX-32.2: CERTIFICATION




---



##### Table of Contents



Part I  Financial Information: 
 Item 1. Financial Statements IPC ACQUISITION CORP. 
 CONSOLIDATED BALANCE SHEETS
 (In Thousands Except Share Amounts)
 March 31,
    
    
    September 30,2005
    
    
    2004(Unaudited)AssetsAssets:Cash and cash equivalents
    
    $
    14,476
    
    
    $
    27,270Trade accounts receivable, net of allowance of $1,471 and $1,264, respectively
    
    
    71,655
    
    
    
    57,259Inventories, net
    
    
    46,357
    
    
    
    31,176Due from former affiliate
    
    
    2,493
    
    
    
    7,117Prepaid and other current assets
    
    
    6,081
    
    
    
    4,041Deferred taxes
    
    
    14,626
    
    
    
    13,132Current assets of discontinued operations
    
    
    50
    
    
    
    2,548Total current assets
    
    
    155,738
    
    
    
    142,543Property, plant and equipment, net
    
    
    25,418
    
    
    
    24,846Customer relationships, net
    
    
    145,588
    
    
    
    147,939Technology
and software, net
    
    
    29,123
    
    
    
    28,089Trade name
    
    
    16,300
    
    
    
    16,300Goodwill
    
    
    85,253
    
    
    
    82,621Deferred financing costs, net
    
    
    11,363
    
    
    
    12,283Other assets
    
    
    1,509
    
    
    
    638Non-current assets of discontinued operations
    
    
    
    
    
    
    40Total assets
    
    $
    470,292
    
    
    $
    455,299Liabilities and Stockholders EquityLiabilities:Current portion of long-term debt
    
    $
    483
    
    
    $
    2,157Accounts payable
    
    
    13,665
    
    
    
    14,594Accrued expenses and other current liabilities
    
    
    32,578
    
    
    
    35,984Income taxes payable
    
    
    8,929
    
    
    
    9,147Customer advances and deferred revenue on installation contracts
    
    
    44,649
    
    
    
    21,984Deferred revenue on maintenance contracts
    
    
    16,951
    
    
    
    14,007Current portion of guarantees on former parent obligations
    
    
    
    
    
    
    155Revolving credit facility
    
    
    8,000
    
    
    
    Current liabilities of discontinued operations
    
    
    513
    
    
    
    639Total current liabilities
    
    
    125,768
    
    
    
    98,667Term loan
    
    
    47,118
    
    
    
    47,293Senior subordinated notes
    
    
    150,000
    
    
    
    150,000Deferred purchase consideration
    
    
    3,000
    
    
    
    Deferred taxes
    
    
    24,559
    
    
    
    23,150Deferred compensation
    
    
    2,616
    
    
    
    2,686Guarantees on former parent obligations and other long-term liabilities
    
    
    260
    
    
    
    260Total liabilities
    
    
    353,321
    
    
    
    322,056Commitments and ContingenciesStockholders equity:Common stock, $0.01 par value, (25,000,000 shares authorized; 14,718,592 shares
issued and outstanding)
    
    
    147
    
    
    
    147Paid in capital
    
    
    146,759
    
    
    
    146,479Notes receivable for purchases of common stock
    
    
    (213
    )
    
    
    (276
    )Deferred stock compensation
    
    
    (811
    )
    
    
    (645
    )Accumulated deficit
    
    
    (39,727
    )
    
    
    (21,672
    )Accumulated other comprehensive income
    
    
    10,816
    
    
    
    9,210Total stockholders equity
    
    
    116,971
    
    
    
    133,243Total liabilities and stockholders equity
    
    $
    470,292
    
    
    $
    455,299
 The accompanying notes are an integral part of the consolidated financial statements. 1




---



##### Table of Contents



IPC ACQUISITION CORP. 
 CONSOLIDATED STATEMENTS OF INCOME
 (In Thousands) (Unaudited)
 Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenue:Product sales and installations
    
    $
    32,459
    
    
    $
    32,243
    
    
    $
    54,929
    
    
    $
    53,701Service
    
    
    43,801
    
    
    
    37,581
    
    
    
    87,256
    
    
    
    68,81776,260
    
    
    
    69,824
    
    
    
    142,185
    
    
    
    122,518Cost of goods sold (depreciation and amortization shown separately):Product sales and installations
    
    
    16,075
    
    
    
    14,034
    
    
    
    28,489
    
    
    
    25,172Service
    
    
    20,959
    
    
    
    18,440
    
    
    
    42,199
    
    
    
    33,981Depreciation and amortization
    
    
    1,087
    
    
    
    968
    
    
    
    2,169
    
    
    
    1,71038,121
    
    
    
    33,442
    
    
    
    72,857
    
    
    
    60,863Gross profit
    
    
    38,139
    
    
    
    36,382
    
    
    
    69,328
    
    
    
    61,655Research and development
    
    
    5,267
    
    
    
    3,599
    
    
    
    9,298
    
    
    
    7,008Selling, general and administrative
    
    
    18,602
    
    
    
    14,749
    
    
    
    35,735
    
    
    
    27,673Depreciation and amortization
    
    
    1,726
    
    
    
    1,403
    
    
    
    3,205
    
    
    
    2,734Amortization of intangibles
    
    
    4,479
    
    
    
    3,925
    
    
    
    8,500
    
    
    
    7,701Income from operations
    
    
    8,065
    
    
    
    12,706
    
    
    
    12,590
    
    
    
    16,539Other income (expense):Interest expense, net
    
    
    (5,912
    )
    
    
    (5,814
    )
    
    
    (11,541
    )
    
    
    (11,336
    )Other income (expense), net
    
    
    448
    
    
    
    (140
    )
    
    
    1,853
    
    
    
    307Income from continuing operations before income taxes
    
    
    2,601
    
    
    
    6,752
    
    
    
    2,902
    
    
    
    5,510Income tax expense
    
    
    1,105
    
    
    
    3,939
    
    
    
    1,232
    
    
    
    4,311Income from continuing operations
    
    
    1,496
    
    
    
    2,813
    
    
    
    1,670
    
    
    
    1,199Discontinued operations (Note 3):Income (loss) from discontinued operations
    
    
    438
    
    
    
    (15
    )
    
    
    538
    
    
    
    (280
    )Income tax expense (benefit)
    
    
    203
    
    
    
    (7
    )
    
    
    246
    
    
    
    (122
    )Income (loss) from discontinued operations, net of tax
    
    
    235
    
    
    
    (8
    )
    
    
    292
    
    
    
    (158
    )Net income
    
    $
    1,731
    
    
    $
    2,805
    
    
    $
    1,962
    
    
    $
    1,041
 The accompanying notes are an integral part of the consolidated financial statements. 2




---



##### Table of Contents



IPC ACQUISITION CORP. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In Thousands) (Unaudited)
 Six Months EndedMarch 31,2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    1,962
    
    
    $
    1,041Income (loss) from discontinued operations
    
    
    292
    
    
    
    (158
    )Income from continuing operations
    
    
    1,670
    
    
    
    1,199Adjustments to reconcile income from continuing operations to net cash provided by
operating activities:Depreciation and amortization
    
    
    5,374
    
    
    
    4,444Amortization
of intangibles
    
    
    8,500
    
    
    
    7,701Amortization of deferred financing costs
    
    
    1,090
    
    
    
    955Provision for doubtful accounts
    
    
    221
    
    
    
    220Deferred income taxes
    
    
    (769
    )
    
    
    2,445Amortization of guarantees on former parent obligations
    
    
    (155
    )
    
    
    (677
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (12,512
    )
    
    
    1,631Due from former affiliate
    
    
    4,624
    
    
    
    Inventories
    
    
    (11,451
    )
    
    
    3,020Prepaids and other current assets
    
    
    (1,998
    )
    
    
    106Other assets
    
    
    (354
    )
    
    
    165Accounts payable, accrued expenses and other liabilities
    
    
    (7,969
    )
    
    
    1,696Income taxes payable
    
    
    (680
    )
    
    
    (1,083
    )Customer advances and deferred revenue
    
    
    23,573
    
    
    
    (3,517
    )Net cash provided by continuing operations
    
    
    9,164
    
    
    
    18,305Net cash provided by discontinued operations
    
    
    2,704
    
    
    
    11,039Net cash provided by operating activities
    
    
    11,868
    
    
    
    29,344Cash flows from investing activities:Capital expenditures
    
    
    (4,761
    )
    
    
    (4,221
    )Payment of Gains US and UK earn-out consideration and deferred purchase price
    
    
    
    
    
    
    (6,756
    )Acquisitions, net of cash acquired
    
    
    (6,055
    )
    
    
    (15,182
    )Net cash used in investing activities
    
    
    (10,816
    )
    
    
    (26,159
    )Cash flows from financing activities:Borrowings under revolving credit facility
    
    
    19,000
    
    
    
    Principal
payments on revolving credit facility
    
    
    (11,000
    )
    
    
    Principal payments on term loan
    
    
    (1,849
    )
    
    
    (275
    )Issuance costs for term loan amendment
    
    
    (170
    )
    
    
    Deferred compensation payments
    
    
    (70
    )
    
    
    (51
    )Payment of special cash dividend
    
    
    (19,951
    )
    
    
    (17,964
    )Net cash used in financing activities
    
    
    (14,040
    )
    
    
    (18,290
    )Effect of exchange rate changes on cash
    
    
    194
    
    
    
    277Net decrease in cash
    
    
    (12,794
    )
    
    
    (14,828
    )Cash and cash equivalents, beginning of period
    
    
    27,270
    
    
    
    25,800Cash and cash equivalents, end of period
    
    $
    14,476
    
    
    $
    10,972Supplemental disclosures of cash flow information:Cash paid during the periods for:Income taxes
    
    $
    3,192
    
    
    $
    2,493Interest
    
    $
    10,567
    
    
    $
    10,674
 The accompanying notes are an integral part of the consolidated financial statements. 3




---



##### Table of Contents



IPC ACQUISITION CORP. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2005 (Unaudited)
 1. Basis of Presentation The
accompanying unaudited consolidated financial statements for the
three and six months ended March 31, 2005 and 2004 include the accounts of IPC
Acquisition Corp. (the Company) and its 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 results of operations
of any acquired businesses have been included in the Companys financial statements from their
respective acquisition dates through March 31, 2005. Intercompany balances and transactions have
been eliminated. 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 and fixed-fee
contracts for consulting services for the Companys total circuit management, or TCM services, are
recognized ratably as the services are performed over the period of time contracted or agreed as
the customer receives value when each part of the services is performed. Revenue from network
services is generally billed at the beginning of the month and recognized in the same month and
revenue for TCM services are generally billed in accordance with the contract or agreed upon terms
and conditions and deferred and recognized ratably as the services are performed. 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. 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 where 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. 4




---



##### Table of Contents



IPC ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued
March 31, 2005 (Unaudited) 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. Trade Accounts 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. Accounts receivable recorded
in deferred revenue amounted to $21.8 million at March 31, 2005 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 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 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, fixtures 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 determined 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 5




---



##### Table of Contents



IPC ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued
March 31, 2005 (Unaudited) Standards (SFAS) No.142 Goodwill and Other Intangible Assets (SFAS No.142), effective
upon the acquisition of IPC Information Systems, Inc. (the
predecessor of IPC Information Systems, LLC) and, 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 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 is not subject to amortization, but
instead is 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 turret 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 half of the 2005 fiscal
year. Deferred Financing Costs As part of the acquisition of IPC Information Systems, Inc., 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 $0.2 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 income and
aggregated approximately $0.6 million for the three months ended March 31, 2005, $1.1 million for
the six months ended March 31, 2005, $0.5 million for the three months ended March 31, 2004 and
$1.0 million for the six months ended March 31, 2004. 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 U.S. 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. Foreign Currency Translation Adjustment The balance sheets and statements of income 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 6




---



##### Table of Contents



IPC ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued
March 31, 2005 (Unaudited) 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 $0.6 million and $1.9 million for the three and six
months ended March 31, 2005, respectively, and $0.5 million and $0.4 million for the three and six
months ended March 31, 2004, respectively. Fair Value of Financial Instruments The Companys financial instruments at March 31, 2005 consist of accounts receivable, accounts
payable and debt. As of
March 31, 2005, 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 $47.8 million at March 31, 2005 as it bears interest at a
floating rate. The fair value of the senior subordinated notes was $159.0 million at March 31,
2005, based upon quoted trading prices at such date. Special Cash Dividend In February 2005, the Company paid a special cash dividend of approximately $20 million, or
$1.36 per share, to all shareholders of record of its outstanding common stock as of that date. As
a result of the dividend paid in February 2005, the fair value of the Companys common stock was
reduced by $1.36 per share. In connection with the dividend, the Company adjusted the exercise
price of all stock option grants and the number of shares subject to stock options so that the
dividend did not affect (1) the aggregate spread of the option or (2) on a share-by-share basis,
the ratio of exercise price to fair market value. 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. In December 2004, the FASB issued SFAS No. 123 (revised 2004), Shared-Based Payment, (FAS
123R) which is an amendment of FAS No.123, Accounting for Stock-Based Compensation, and
supersedes APB 25 and its related implementation guidance. For further discussion see Recent
Accounting Pronouncements. 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. There were no option
grants for the three months ended March 31, 2005 and 2004. 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 Companys pro forma net income 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 February 2005, the fair value of the Companys common
stock was reduced by $1.36 per share. In connection with the dividend, the Company adjusted the
exercise price of all stock option grants and the number of
shares subject to stock options so that the dividend did not affect (1) the aggregate spread of the
option or (2) on a share-by-share basis, the ratio of exercise price to fair market value.
Additional compensation expense has been included in the pro forma 7




---



##### Table of Contents



IPC ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued
March 31, 2005 (Unaudited) disclosure to account for the incremental fair 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 at grant date, as prescribed by SFAS 123, net income would have been adjusted to the
pro forma amounts indicated in the table below: Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004(dollars in thousands)Reported net income
    
    $
    1,731
    
    
    $
    2,805
    
    
    $
    1,962
    
    
    $
    1,041Add back total
stock-based employee
compensation determined
under APB 25 intrinsic
value method, net of
tax
    
    
    35
    
    
    
    
    
    
    
    63
    
    
    
    Deduct total
stock-based employee
compensation expense
determined under fair
value based method for
all awards, net of tax
effect
    
    
    (825
    )
    
    
    (410
    )
    
    
    (1,238
    )
    
    
    (848
    )Pro forma net income
    
    $
    941
    
    
    $
    2,395
    
    
    $
    787
    
    
    $
    193
 Reclassifications The March 31, 2004 consolidated financial statements include amounts that have been
reclassified for discontinued operations (see Note 3) from amounts previously reported to conform
to the presentation of the March 31, 2005 consolidated financial statements. Comprehensive Income (Loss) The balance sheets and statements of income 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. Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004(dollars in thousands)Reported net income
    
    $
    1,731
    
    
    $
    2,805
    
    
    $
    1,962
    
    
    $
    1,041Translation adjustment, net of tax
    
    
    (1,072
    )
    
    
    374
    
    
    
    1,606
    
    
    
    3,488Total comprehensive income
    
    $
    659
    
    
    $
    3,179
    
    
    $
    3,568
    
    
    $
    4,529
 Recent Accounting Pronouncements In December 2004, the FASB approved FAS 123R which has changed accounting requirements for
share-based compensation to employees, including employee stock purchase plans, and requires
companies to recognize in the income statement the grant date fair value of stock options and other
equity-based compensation. The Company currently accounts for its stock-based compensation using
the intrinsic method as defined in APB 25. Currently, the Company provides disclosure about the pro
forma compensation expense from stock based awards, which is based upon a Black-Scholes option
pricing model. Although FAS 123R does not express a preference for a type of valuation model, the
Company intends to reexamine its valuation methodology and the corresponding support for the
assumptions that underlie the valuation of stock-based awards prior to the adoption of FAS 123R.
The Company is required to adopt this statement on October 1, 2006. The Company is currently in the
process of further analyzing this new pronouncement and has not yet determined the impact on its
consolidated financial statements. In December 2004, the FASB issued Staff Position No. SFAS 109-2, Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of
2004 (FAS 109-2). The American Jobs Creation Act of 2004 introduces a special one-time
dividends-received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer,
provided certain criteria are met. FAS 109-2 provides accounting and disclosure guidance for the
repatriation provision, and was effective immediately upon issuance. The Company does not expect
this new standard to have a material effect on its consolidated financial statements. 8




---



##### Table of Contents



IPC ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued
March 31, 2005 (Unaudited) In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary AssetsAn Amendment
of APB No. 29 (FAS 153). The provisions of this statement are effective for non-monetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. This statement eliminates the
exception to fair value for exchanges of similar productive assets and replaces it with a general
exception for exchange transactions that do not have commercial substancethat is, transactions
that are not expected to result in significant changes in the cash flows of the reporting entity.
The Company does not expect this new standard to have a material effect on its consolidated
financial statements. In November 2004, the FASB issued SFAS 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 statements. 2. 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 reports 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 on the basis of these preliminary estimates exceeded the fair market value of the net
assets acquired by approximately $8.1 million, of which $1.9 million was preliminarily recorded as
goodwill on the consolidated balance sheet. Based on a preliminary draft of the third-party
valuation, $6.2 million of the excess purchase price was recorded as intangible assets. 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. Condensed Balance Sheet (dollars in thousands)Current assets
    
    $
    7,898Property, plant and equipment, net
    
    
    258Intangible assets
    
    
    6,200Goodwill
    
    
    1,928Total assets acquired
    
    
    16,284Current liabilities
    
    
    4,363Deferred purchase price
    
    
    3,000Other liabilities
    
    
    667Total liabilities assumed
    
    
    8,030Consideration at closing
    
    $
    8,254
 The acquisition of Orbacom was accounted for using the purchase method of accounting in
accordance with FASB Statement No.141, Business Combinations (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 and six months ended March 31, 2005 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): 9




---



##### Table of Contents



IPC ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued
March 31, 2005 (Unaudited) Cash paid at closing
    
    
    
    
    
    $
    8,000Deferred purchase price
    
    
    
    
    
    
    3,000Transaction costs
    
    
    
    
    
    
    354Total consideration
    
    
    
    
    
    
    11,354Historical cost of net tangible assets acquired
    
    
    
    
    
    
    (1,805
    )Excess of purchase price over net tangible assets acquired
    
    
    
    
    
    $
    9,549Preliminary allocation of excess purchase price:Step-up inventory to fair value
    
    
    
    
    
    $
    1,667Deferred taxes
    
    
    
    
    
    
    (246
    )Residual goodwill (indefinite life)
    
    
    
    
    
    
    1,928Identified intangible assets:Customer relationships (10 year life)
    
    $
    1,000Software (7 year life)
    
    
    1,100Technology (7 year life)
    
    
    3,500Backlog (1 year life)
    
    
    600Total identified intangible assets
    
    
    
    
    
    
    6,200Total allocation of excess purchase price
    
    
    
    
    
    $
    9,549
 The Company is in the process of finalizing its plans for the integration of the Orbacom
purchase into the rest of the business. Through March 31, 2005, the Company has accrued, in
purchase accounting, approximately $0.1 million for a reduction in workforce. 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 pro forma basis, the Orbacom acquisition did not have a material impact on the Companys
consolidated results of operations for the three and six months ended March 31, 2005 and 2004. 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 March 31, 2005, the amount outstanding due to the Company from Newco and collectible by
the right of offset through Newcos billings and collections is $2.5 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 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. 10




---



##### Table of Contents



IPC ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued
March 31, 2005 (Unaudited) The assets and liabilities of discontinued operations as of March 31, 2005 and September 30, 2004
are as follows: March 31,
    
    
    September 30,2005
    
    
    2004(dollars in thousands)Assets of discontinued operations:Accounts receivable, net
    
    $
    50
    
    
    $
    2,518Other current assets
    
    
    
    
    
    
    30Other assets
    
    
    
    
    
    
    40$
    50
    
    
    $
    2,588Liabilities of discontinued operations:Accounts payable, accrued expenses and other current liabilities
    
    $
    513
    
    
    $
    639
 The results of operations related to discontinued operations for the three and six months
ended March 31, 2005 and 2004 are as follows: Three Months Ended
    
    
    Six Months EndedMarch 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004(dollars in thousands)Revenue
    
    $
    
    
    
    $
    9,215
    
    
    $
    
    
    
    $
    16,688Costs of goods sold
    
    
    
    
    
    
    8,781
    
    
    
    
    
    
    
    16,095Gross profit
    
    
    
    
    
    
    434
    
    
    
    
    
    
    
    593Operating expenses (income)
    
    
    (438
    )
    
    
    449
    
    
    
    (538
    )
    
    
    873Operating income (loss) before income taxes
    
    
    438
    
    
    
    (15
    )
    
    
    538
    
    
    
    (280
    )Income tax expense (benefit)
    
    
    203
    
    
    
    (7
    )
    
    
    246
    
    
    
    (122
    )Income (loss) from discontinued operations
    
    $
    235
    
    
    $
    (8
    )
    
    $
    292
    
    
    $
    (158
    )
 4. Inventories March 31,
    
    
    September 30,2005
    
    
    2004(dollars in thousands)Components and manufacturing work in process
    
    $
    14,620
    
    
    $
    13,450Inventory on customer sites awaiting installation
    
    
    28,437
    
    
    
    15,401Parts and maintenance supplies
    
    
    3,300
    
    
    
    2,325$
    46,357
    
    
    $
    31,176
 5. Goodwill and Intangible Assets 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 six months ended March 31, 2005: Financial
    
    
    CommandServices
    
    
    and Control
    
    
    Consolidated(dollars in thousands)Balance at October 1, 2004
    
    $
    82,621
    
    
    $
    
    
    
    $
    82,621Additions (related to the acquisition of Orbacom)
    
    
    
    
    
    
    1,928
    
    
    
    1,928Reductions
    
    
    (500
    )
    
    
    
    
    
    
    (500
    )Effect of currency translation adjustments
    
    
    1,204
    
    
    
    
    
    
    
    1,204Balance at March 31, 2005
    
    $
    83,325
    
    
    $
    1,928
    
    
    $
    85,253
 11




---



##### Table of Contents



IPC ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued
March 31, 2005 (Unaudited) 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: March 31, 2005
    
    
    September 30, 2004Financial
    
    
    Command
    
    
    
    
    
    
    
    
    
    
    CommandServices
    
    
    and Control
    
    
    Total
    
    
    Financial Services
    
    
    and Control
    
    
    Total(dollars in thousands)Intangible assets:Amortized intangible assets:Technology
and software
    
    $
    46,561
    
    
    $
    4,600
    
    
    $
    51,161
    
    
    $
    46,508
    
    
    $
    
    
    
    $
    46,508Customer relationships
    
    
    163,123
    
    
    
    1,000
    
    
    
    164,123
    
    
    
    163,123
    
    
    
    
    
    
    
    163,123Effect of currency translation adjustments
    
    
    9,079
    
    
    
    
    
    
    
    9,079
    
    
    
    7,750
    
    
    
    
    
    
    
    7,750Accumulated
amortization-technology and software
    
    
    (21,856
    )
    
    
    (219
    )
    
    
    (22,075
    )
    
    
    (18,448
    )
    
    
    
    
    
    
    (18,448
    )Accumulated amortization- customer
relationships
    
    
    (27,544
    )
    
    
    (33
    )
    
    
    (27,577
    )
    
    
    (22,905
    )
    
    
    
    
    
    
    (22,905
    )Net carrying amount
    
    
    169,363
    
    
    
    5,348
    
    
    
    174,711
    
    
    
    176,028
    
    
    
    
    
    
    
    176,028Non-amortized intangible assets:Trade name
    
    
    16,300
    
    
    
    
    
    
    
    16,300
    
    
    
    16,300
    
    
    
    
    
    
    
    16,300Net carrying amount
    
    $
    185,663
    
    
    $
    5,348
    
    
    $
    191,011
    
    
    $
    192,328
    
    
    $
    
    
    
    $
    192,328
 Gross
backlog of $0.6 million and related amortization of $0.2 million are
shown in other assets on the consolidated balance sheets. Amortization expense for those intangible assets required to be amortized under SFAS 142 was
$4.5 million and $3.9 million for the three months ended March 31, 2005 and 2004, respectively, and
$8.5 million and $7.7 million for the six months ended March 31, 2005 and 2004, respectively. 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
    
    
    2009(dollars in thousands)Estimated annual amortization expense
    
    $
    17,209
    
    
    $
    16,606
    
    
    $
    16,461
    
    
    $
    14,881
    
    
    $
    10,066
 6. Accrued Expenses and Other Current Liabilities March 31,
    
    
    September 30,2005
    
    
    2004(dollars in thousands)Accrued compensation and benefits
    
    $
    7,912
    
    
    $
    12,851Warranty reserves
    
    
    1,675
    
    
    
    1,577Sales tax payable
    
    
    3,469
    
    
    
    2,698Job accruals
    
    
    1,602
    
    
    
    1,093Accrued
lease termination costs
    
    
    1,926
    
    
    
    1,885Accrued carrier costs
    
    
    5,444
    
    
    
    5,621Current portion of deferred compensation
    
    
    856
    
    
    
    856Accrued interest
    
    
    5,550
    
    
    
    5,232Other accruals
    
    
    4,144
    
    
    
    4,171$
    32,578
    
    
    $
    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 March 31, 2005, the total amount available 12




---



##### Table of Contents



IPC ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued
March 31, 2005 (Unaudited) for borrowing and letters of credit under the revolving credit facility is $35.0 million, of which
$23.3 million was available as of March 31, 2005, after taking into account $8.0 million in
borrowings and $3.7 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. The weighted
average interest rate for borrowings outstanding under the senior secured credit facilities was
6.06% for the three months ended March 31, 2005, 5.80% for the six months ended March 31, 2005 and
5.11% for both the three and six months ended March 31, 2004. 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. 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. At March 31, 2005, the senior secured
leverage ratio was less than 1.00:1.00. 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 based on income, 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 current taxes based on income
payable in cash. 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 March 31, 2005, the
Company was in compliance with all the covenants of the senior secured credit facilities. As of March 31, 2005, remaining annual principal repayments required under the term loan are
as follows (in thousands): 2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Total$
    483
    
    
    $
    483
    
    
    $
    23,438
    
    
    $
    23,197
    
    
    
    
    
    
    $
    47,601
 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 13




---



##### Table of Contents



IPC ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued
March 31, 2005 (Unaudited) 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 all 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
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. At March 31, 2005, the Company
was in compliance with all the covenants of the senior subordinated notes. 8. Commitments and Contingencies Warranties The Company records a reserve for future warranty costs based on current unit sales,
historical experience and managements judgment regarding anticipated rates of warranty claims and
cost per claim. The adequacy of the recorded warranty reserve 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 reserve during the periods presented are as follows: Six Months EndedMarch 31,2005
    
    
    2004(dollars in thousands)Balance at beginning of period
    
    $
    1,577
    
    
    $
    1,889Provision for current period
    
    
    703
    
    
    
    949Liability assumed with purchase of Orbacom
    
    
    584
    
    
    
    Material and labor usage
    
    
    (1,189
    )
    
    
    (887
    )Balance at end of period
    
    $
    1,675
    
    
    $
    1,951
 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 relating
to its former I.T.S. segment, the Company remains liable for all pre-closing liabilities relating
to the I.T.S. segment, including the two lawsuits described below. The Companys litigation is
subject to many uncertainties and it is possible that the results of operations or the cash flow of
the Company in a particular quarterly or annual period could be materially affected by an ultimate
unfavorable resolution depending, in part, upon the results of operations or cash flow for such
period. Management believes, however, that the ultimate outcome of all pending litigation should
not have a material adverse effect on the Companys consolidated financial condition, results of
operations or cash flows. 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 14




---



##### Table of Contents



IPC ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued
March 31, 2005 (Unaudited) is without merit. However, there can be no assurance that
the resolution of this lawsuit will ultimately be favorable to the Company. Plaintiffs are seeking
injunctive relief and damages from the defendants, jointly and severally, in an amount the
plaintiffs claim exceeds an aggregate of $75.0 million. On September 8, 2003, an action was brought against the Companys subsidiary, IPC Information
Systems, Inc., its President and 23 other unrelated defendants 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 the defendants violated the Racketeer Influenced and Corrupt
Organizations Act (RICO) and engaged in tortious interference with prospective business advantage
by preventing the plaintiff from obtaining work as a mover on jobs performed in large commercial
buildings in New York City. The Court has dismissed the RICO claims against IPC Information
Systems, Inc. and its President. The remaining claim against IPC Information Systems, Inc. relates
to a single moving job, and the plaintiff alleges that it suffered damages in an amount slightly
less than $1 million in connection with that move. The Company believes that the remaining claim is
without merit and intends to vigorously defend against that claim. However, there can be no
assurance that the resolution of this lawsuit will ultimately be favorable to the Company. 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. 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 IPC Information Systems, LLC 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 six months ended March 31, 2005 was 42.5% and was
78.2% for the six months ended March 31, 2004. 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 six months ended March 31, 2004,
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 15




---



##### Table of Contents



IPC ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued
March 31, 2005 (Unaudited) 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) The Company has deferred tax liabilities in excess of deferred tax assets and these
deferred tax liabilities are expected to reverse prior to the point any deferred tax assets would
be lost; (3) US results of operations for subsequent fiscal years are expected to generate
sufficient taxable income to fully utilize these tax loss carryforwards; and (4) the Companys
conclusion that the net US deferred tax assets were generated by an event (the Companys purchase
of IPC Information Systems, Inc.), rather than a continuing condition. As of March 31, 2005, 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 related to its acquisition of IPC Information Systems, Inc.
in 2001 is approximately $6.5 million and, as of March 31, 2005, 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 its acquisition of IPC Information Systems, Inc. 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 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. 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
July 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 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, MACs
to existing equipment installations, sales of network voice and data services as Service. The Companys primary measure to evaluate performance is 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 and six months ended March 31,
2005 and 2004: 16




---



##### Table of Contents



IPC ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued
March 31, 2005 (Unaudited) For the Three Months Ended March 31, 2005 Financial
    
    
    CommandServices
    
    
    and Control
    
    
    Consolidated(dollars in thousands)Revenue:Product sales and installations
    
    $
    30,553
    
    
    $
    1,906
    
    
    $
    32,459Service
    
    
    42,698
    
    
    
    1,103
    
    
    
    43,801Total revenue
    
    
    73,251
    
    
    
    3,009
    
    
    
    76,260Direct costs
    
    
    28,941
    
    
    
    2,180
    
    
    
    31,121Direct margin
    
    
    44,310
    
    
    
    829
    
    
    
    45,139Research and development
    
    
    4,224
    
    
    
    427
    
    
    
    4,651Selling, general and administrative
    
    
    9,242
    
    
    
    1,698
    
    
    
    10,940Segment profit (loss)
    
    
    30,844
    
    
    
    (1,296
    )
    
    
    29,548Other segment data:Corporate research and development
    
    
    616
    
    
    
    
    
    
    
    616Corporate selling, general and administrative
    
    
    7,662
    
    
    
    
    
    
    
    7,662Depreciation and amortization
    
    
    2,800
    
    
    
    13
    
    
    
    2,813Intangibles amortization
    
    
    4,027
    
    
    
    452
    
    
    
    4,479Indirect cost (fixed and variable)
    
    
    5,574
    
    
    
    339
    
    
    
    5,913Interest expense, net
    
    
    5,912
    
    
    
    
    
    
    
    5,912Other income, net
    
    
    448
    
    
    
    
    
    
    
    448Income from continuing operations before income taxes
    
    $
    4,701
    
    
    $
    (2,100
    )
    
    $
    2,601Goodwill as of March 31, 2005
    
    $
    83,325
    
    
    $
    1,928
    
    
    $
    85,253Total assets as of March 31, 2005 (1)
    
    $
    456,600
    
    
    $
    13,642
    
    
    $
    470,292Capital expenditures
    
    $
    2,801
    
    
    $
    67
    
    
    $
    2,868
   (1)
    
    Total consolidated assets includes the assets of discontinued operations of the I.T.S. segment
of $ 50 For the Three Months Ended March 31, 2004 Financial
    
    
    CommandServices
    
    
    and Control
    
    
    Consolidated(dollars in thousands)Revenue:Product sales and installations
    
    $
    31,640
    
    
    $
    603
    
    
    $
    32,243Service
    
    
    37,271
    
    
    
    310
    
    
    
    37,581Total revenue
    
    
    68,911
    
    
    
    913
    
    
    
    69,824Direct costs
    
    
    25,601
    
    
    
    355
    
    
    
    25,956Direct margin
    
    
    43,310
    
    
    
    558
    
    
    
    43,868Research and development
    
    
    2,688
    
    
    
    
    
    
    
    2,688Selling, general and administrative
    
    
    8,757
    
    
    
    
    
    
    
    8,757Segment profit
    
    
    31,865
    
    
    
    558
    
    
    
    32,423Other segment data:Corporate research and development
    
    
    911
    
    
    
    
    
    
    
    911Corporate selling, general and administrative
    
    
    5,992
    
    
    
    
    
    
    
    5,992Depreciation and amortization
    
    
    2,371
    
    
    
    
    
    
    
    2,371Intangibles amortization
    
    
    3,925
    
    
    
    
    
    
    
    3,925Indirect cost (fixed and variable)
    
    
    6,518
    
    
    
    
    
    
    
    6,518Interest expense, net
    
    
    5,814
    
    
    
    
    
    
    
    5,814Other income/(expense), net
    
    
    (140
    )
    
    
    
    
    
    
    (140
    )Income from
continuing operations before income taxes
    
    $
    6,194
    
    
    $
    558
    
    
    $
    6,752Goodwill as of March 31, 2004
    
    $
    94,280
    
    
    $
    
    
    
    $
    94,280Total assets as of March 31, 2004 (1)
    
    $
    409,377
    
    
    $
    
    
    
    $
    430,597Capital expenditures
    
    $
    2,480
    
    
    $
    
    
    
    $
    2,480
   (1)
    
    Total consolidated assets includes the assets of discontinued operations of the I.T.S. segment
of $ 21,220 17




---



##### Table of Contents



IPC ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued
March 31, 2005 (Unaudited) For the Six Months Ended March 31, 2005 Financial
    
    
    CommandServices
    
    
    and Control
    
    
    Consolidated(dollars in thousands)Revenue:Product sales and installations
    
    $
    52,802
    
    
    $
    2,127
    
    
    $
    54,929Service
    
    
    85,642
    
    
    
    1,614
    
    
    
    87,256Total revenue
    
    
    138,444
    
    
    
    3,741
    
    
    
    142,185Direct costs
    
    
    54,648
    
    
    
    2,540
    
    
    
    57,188Direct margin
    
    
    83,796
    
    
    
    1,201
    
    
    
    84,997Research and development
    
    
    7,405
    
    
    
    666
    
    
    
    8,071Selling, general and administrative
    
    
    18,630
    
    
    
    2,586
    
    
    
    21,216Segment profit (loss)
    
    
    57,761
    
    
    
    (2,051
    )
    
    
    55,710Other segment data:Corporate research and development
    
    
    1,227
    
    
    
    
    
    
    
    1,227Corporate selling, general and administrative
    
    
    14,519
    
    
    
    
    
    
    
    14,519Depreciation and amortization
    
    
    5,353
    
    
    
    21
    
    
    
    5,374Intangibles amortization
    
    
    8,048
    
    
    
    452
    
    
    
    8,500Indirect cost (fixed and variable)
    
    
    13,026
    
    
    
    474
    
    
    
    13,500Interest expense, net
    
    
    11,541
    
    
    
    
    
    
    
    11,541Other income, net
    
    
    1,853
    
    
    
    
    
    
    
    1,853Income from
continuing operations before income taxes
    
    $
    5,900
    
    
    $
    (2,998
    )
    
    $
    2,902Capital expenditures
    
    $
    4,694
    
    
    $
    67
    
    
    $
    4,761
 For the Six Months Ended March 31, 2004 Financial
    
    
    CommandServices
    
    
    and Control
    
    
    Consolidated(dollars in thousands)Revenue:Product sales and installations
    
    $
    53,028
    
    
    $
    673
    
    
    $
    53,701Service
    
    
    68,197
    
    
    
    620
    
    
    
    68,817Total revenue
    
    
    121,225
    
    
    
    1,293
    
    
    
    122,518Direct costs
    
    
    46,992
    
    
    
    505
    
    
    
    47,497Direct margin
    
    
    74,233
    
    
    
    788
    
    
    
    75,021Research and development
    
    
    5,356
    
    
    
    
    
    
    
    5,356Selling, general and administrative
    
    
    15,923
    
    
    
    
    
    
    
    15,923Segment profit
    
    
    52,954
    
    
    
    788
    
    
    
    53,742Other segment data:Corporate research and development
    
    
    1,652
    
    
    
    
    
    
    
    1,652Corporate selling, general and administrative
    
    
    11,750
    
    
    
    
    
    
    
    11,750Depreciation and amortization
    
    
    4,444
    
    
    
    
    
    
    
    4,444Intangibles amortization
    
    
    7,701
    
    
    
    
    
    
    
    7,701Indirect cost (fixed and variable)
    
    
    11,656
    
    
    
    
    
    
    
    11,656Interest expense, net
    
    
    11,336
    
    
    
    
    
    
    
    11,336Other income, net
    
    
    307
    
    
    
    
    
    
    
    307Income from
continuing operations before income taxes
    
    $
    4,722
    
    
    $
    788

    
    
    $
    5,510Capital expenditures
    
    $
    4,221
    
    
    $
    
    
    
    $
    4,221
 11. Guarantor Subsidiaries Financial Information All 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): 18




---



##### Table of Contents



IPC ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued
March 31, 2005 (Unaudited) Condensed Consolidated Balance Sheet at March 31, 2005 IPC
    
    
    Guarantor
    
    
    Non-GuarantorAcquisition
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedAssets:Cash and cash equivalents
    
    $
    43
    
    
    $
    1,867
    
    
    $
    12,566
    
    
    $
    
    
    
    $
    14,476Trade accounts receivable, net
    
    
    
    
    
    
    31,760
    
    
    
    39,895
    
    
    
    
    
    
    
    71,655Inventories, net
    
    
    
    
    
    
    26,749
    
    
    
    36,084
    
    
    
    (16,476
    )
    
    
    46,357Prepaid and other current assets
    
    
    13,132
    
    
    
    6,293
    
    
    
    3,897
    
    
    
    (122
    )
    
    
    23,200Due from (to) affiliate
    
    
    156,504
    
    
    
    (123,942
    )
    
    
    (32,562
    )
    
    
    
    
    
    
    Current assets of discontinued operations
    
    
    
    
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    50Total current assets
    
    
    169,679
    
    
    
    (57,223
    )
    
    
    59,880
    
    
    
    (16,598
    )
    
    
    155,738Investment in subsidiaries
    
    
    165,549
    
    
    
    10,524
    
    
    
    12,632
    
    
    
    (188,705
    )
    
    
    Property, plant and equipment, net
    
    
    
    
    
    
    19,573
    
    
    
    5,845
    
    
    
    
    
    
    
    25,418Goodwill and intangibles, net
    
    
    
    
    
    
    186,302
    
    
    
    89,962
    
    
    
    
    
    
    
    276,264Deferred financing costs, net
    
    
    11,363
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,363Other assets
    
    
    
    
    
    
    719
    
    
    
    790
    
    
    
    
    
    
    
    1,509Non-current assets of discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total assets
    
    $
    346,591
    
    
    $
    159,895
    
    
    $
    169,109
    
    
    $
    (205,303
    )
    
    $
    470,292Liabilities and stockholders equity:Current portion of long-term debt
    
    $
    483
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    483Accounts payable, accrued expenses and other current liabilities
    
    
    13,550
    
    
    
    29,351
    
    
    
    20,271
    
    
    
    
    
    
    
    63,172Customer advances and deferred revenue
    
    
    
    
    
    
    26,956
    
    
    
    34,644
    
    
    
    
    
    
    
    61,600Current liabilities of discontinued operations
    
    
    
    
    
    
    513
    
    
    
    
    
    
    
    
    
    
    
    513Total current liabilities
    
    
    14,033
    
    
    
    56,820
    
    
    
    54,915
    
    
    
    
    
    
    
    125,768Long-term debt
    
    
    197,118
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    197,118Other long-term liabilities
    
    
    18,469
    
    
    
    6,543
    
    
    
    5,423
    
    
    
    
    
    
    
    30,435Total liabilities
    
    
    229,620
    
    
    
    63,363
    
    
    
    60,338
    
    
    
    
    
    
    
    353,321Total stockholders equity
    
    
    116,971
    
    
    
    96,532
    
    
    
    108,771
    
    
    
    (205,303
    )
    
    
    116,971Total liabilities and stockholders equity
    
    $
    346,591
    
    
    $
    159,895
    
    
    $
    169,109
    
    
    $
    (205,303
    )
    
    $
    470,292
 Condensed Consolidated Balance Sheet at September 30, 2004 IPC
    
    
    Guarantor
    
    
    Non-GuarantorAcquisition
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedAssets:Cash and cash equivalents
    
    $
    3,028
    
    
    $
    13,057
    
    
    $
    11,185
    
    
    $
    
    
    
    $
    27,270Trade accounts 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
    
    
    
    
    
    
    185,526
    
    
    
    89,423
    
    
    
    
    
    
    
    274,949Deferred financing costs, net
    
    
    12,283
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,283Other assets
    
    
    
    
    
    
    150
    
    
    
    488
    
    
    
    
    
    
    
    638Non-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
 19




---



##### Table of Contents



IPC ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued
March 31, 2005 (Unaudited) Condensed Consolidated Statement of Income
For the Three Months Ended March 31, 2005 IPC
    
    
    Guarantor
    
    
    Non-GuarantorAcquisition
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenue
    
    $
    
    
    
    $
    60,370
    
    
    $
    30,566
    
    
    $
    (14,676
    )
    
    $
    76,260Cost of goods sold
    
    
    
    
    
    
    29,175
    
    
    
    21,041
    
    
    
    (12,095
    )
    
    
    38,121Gross profit
    
    
    
    
    
    
    31,195
    
    
    
    9,525
    
    
    
    (2,581
    )
    
    
    38,139Other operating expenses
    
    
    (55
    )
    
    
    22,467
    
    
    
    7,662
    
    
    
    
    
    
    
    30,074Income from operations
    
    
    55
    
    
    
    8,728
    
    
    
    1,863
    
    
    
    (2,581
    )
    
    
    8,065Interest income (expense) and other income (expense), net
    
    
    (5,901
    )
    
    
    (217
    )
    
    
    654
    
    
    
    
    
    
    
    (5,464
    )Income tax provision
    
    
    
    
    
    
    323
    
    
    
    782
    
    
    
    
    
    
    
    1,105Equity in earnings (losses) from investees
    
    
    7,577
    
    
    
    1,836
    
    
    
    
    
    
    
    (9,413
    )
    
    
    Income (loss) from continuing operations
    
    
    1,731
    
    
    
    10,024
    
    
    
    1,735
    
    
    
    (11,994
    )
    
    
    1,496Income (loss) from discontinued operations, net of tax
    
    
    
    
    
    
    235
    
    
    
    
    
    
    
    
    
    
    
    235Net income (loss)
    
    $
    1,731
    
    
    $
    10,259
    
    
    $
    1,735
    
    
    $
    (11,994
    )
    
    $
    1,731
 Condensed Consolidated Statement of Income
For the Three Months Ended March 31, 2004 IPC
    
    
    Guarantor
    
    
    Non-GuarantorAcquisition
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenue
    
    $
    
    
    
    $
    51,779
    
    
    $
    22,701
    
    
    $
    (4,656
    )
    
    $
    69,824Cost of goods sold
    
    
    
    
    
    
    24,537
    
    
    
    12,051
    
    
    
    (3,146
    )
    
    
    33,442Gross profit
    
    
    
    
    
    
    27,242
    
    
    
    10,650
    
    
    
    (1,510
    )
    
    
    36,382Other operating expenses
    
    
    
    
    
    
    16,780
    
    
    
    6,896
    
    
    
    
    
    
    
    23,676Income from operations
    
    
    
    
    
    
    10,462
    
    
    
    3,754
    
    
    
    (1,510
    )
    
    
    12,706Interest income (expense) and other income (expense), net
    
    
    (5,692
    )
    
    
    275
    
    
    
    (537
    )
    
    
    
    
    
    
    (5,954
    )Income tax provision
    
    
    
    
    
    
    4,487
    
    
    
    (548
    )
    
    
    
    
    
    
    3,939Equity in earnings (losses) from investees
    
    
    8,497
    
    
    
    762
    
    
    
    
    
    
    
    (9,259
    )
    
    
    Income (loss) from continuing operations
    
    
    2,805
    
    
    
    7,012
    
    
    
    3,765
    
    
    
    (10,769
    )
    
    
    2,813Income (loss) from discontinued operations, net of tax
    
    
    
    
    
    
    (8
    )
    
    
    
    
    
    
    
    
    
    
    (8
    )Net income (loss)
    
    $
    2,805
    
    
    $
    7,004
    
    
    $
    3,765
    
    
    $
    (10,769
    )
    
    $
    2,805
 Condensed Consolidated Statement of Income
For the Six Months Ended March 31, 2005 IPC
    
    
    Guarantor
    
    
    Non-GuarantorAcquisition
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenue
    
    $
    
    
    
    $
    113,682
    
    
    $
    58,340
    
    
    $
    (29,837
    )
    
    $
    142,185Cost of goods sold
    
    
    
    
    
    
    57,135
    
    
    
    37,459
    
    
    
    (21,737
    )
    
    
    72,857Gross profit
    
    
    
    
    
    
    56,547
    
    
    
    20,881
    
    
    
    (8,100
    )
    
    
    69,328Other operating expenses
    
    
    
    
    
    
    41,088
    
    
    
    15,650
    
    
    
    
    
    
    
    56,738Income from operations
    
    
    
    
    
    
    15,459
    
    
    
    5,231
    
    
    
    (8,100
    )
    
    
    12,590Interest income (expense) and other income (expense), net
    
    
    (11,496
    )
    
    
    (111
    )
    
    
    1,919
    
    
    
    
    
    
    
    (9,688
    )Income tax provision
    
    
    
    
    
    
    410
    
    
    
    822
    
    
    
    
    
    
    
    1,232Equity in earnings (losses) from investees
    
    
    13,458
    
    
    
    3,791
    
    
    
    
    
    
    
    (17,249
    )
    
    
    Income (loss) from continuing operations
    
    
    1,962
    
    
    
    18,729
    
    
    
    6,328
    
    
    
    (25,349
    )
    
    
    1,670Income (loss) from discontinued operations, net of tax
    
    
    
    
    
    
    292
    
    
    
    
    
    
    
    
    
    
    
    292Net income (loss)
    
    $
    1,962
    
    
    $
    19,021
    
    
    $
    6,328
    
    
    $
    (25,349
    )
    
    $
    1,962
 20




---



##### Table of Contents



IPC ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued
March 31, 2005 (Unaudited) Condensed Consolidated Statement of Income
For the Six Months Ended March 31, 2004 IPC
    
    
    Guarantor
    
    
    Non-GuarantorAcquisition
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenue
    
    $
    
    
    
    $
    89,149
    
    
    $
    39,799
    
    
    $
    (6,430
    )
    
    $
    122,518Cost of goods sold
    
    
    
    
    
    
    44,354
    
    
    
    21,710
    
    
    
    (5,201
    )
    
    
    60,863Gross profit
    
    
    
    
    
    
    44,795
    
    
    
    18,089
    
    
    
    (1,229
    )
    
    
    61,655Other operating expenses
    
    
    
    
    
    
    32,643
    
    
    
    12,473
    
    
    
    
    
    
    
    45,116Income from operations
    
    
    
    
    
    
    12,152
    
    
    
    5,616
    
    
    
    (1,229
    )
    
    
    16,539Interest income (expense) and other income (expense), net
    
    
    (11,160
    )
    
    
    553
    
    
    
    (422
    )
    
    
    
    
    
    
    (11,029
    )Income tax provision
    
    
    
    
    
    
    4,282
    
    
    
    29
    
    
    
    
    
    
    
    4,311Equity in earnings (losses) from investees
    
    
    12,201
    
    
    
    860
    
    
    
    
    
    
    
    (13,061
    )
    
    
    Income (loss) from continuing operations
    
    
    1,041
    
    
    
    9,283
    
    
    
    5,165
    
    
    
    (14,290
    )
    
    
    1,199Income (loss) from discontinued operations, net of tax
    
    
    
    
    
    
    (158
    )
    
    
    
    
    
    
    
    
    
    
    (158
    )Net income (loss)
    
    $
    1,041
    
    
    $
    9,125
    
    
    $
    5,165
    
    
    $
    (14,290
    )
    
    $
    1,041
 Condensed Consolidated Statement of Cash Flows
For the Six Months Ended March 31, 2005 IPC
    
    
    Guarantor
    
    
    Non-GuarantorAcquisition
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet cash provided by (used in) continuing operations
    
    $
    (13,799
    )
    
    $
    27,238
    
    
    $
    (4,275
    )
    
    $
    
    
    
    $
    9,164Net cash provided by discontinued operations
    
    
    
    
    
    
    2,704
    
    
    
    
    
    
    
    
    
    
    
    2,704Net cash provided by (used in) operating activities
    
    
    (13,799
    )
    
    
    29,942
    
    
    
    (4,275
    )
    
    
    
    
    
    
    11,868Capital expenditures
    
    
    
    
    
    
    (2,409
    )
    
    
    (2,352
    )
    
    
    
    
    
    
    (4,761
    )Intercompany borrowings
    
    
    24,784
    
    
    
    (32,651
    )
    
    
    7,867
    
    
    
    
    
    
    
    Acquisitions, net of cash
    
    
    
    
    
    
    (6,002
    )
    
    
    (53
    )
    
    
    
    
    
    
    (6,055
    )Net cash provided by (used in) investing activities
    
    
    24,784
    
    
    
    (41,062
    )
    
    
    5,462
    
    
    
    
    
    
    
    (10,816
    )Borrowings under revolving credit facility
    
    
    19,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,000Principal
payments on revolving credit facility
    
    
    (11,000
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,000
    )Principal payments on term loan
    
    
    (1,849
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,849
    )Issuance costs for term loan amendment
    
    
    (170
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (170
    )Deferred compensation payments
    
    
    
    
    
    
    (70
    )
    
    
    
    
    
    
    
    
    
    
    (70
    )Payment of special cash dividend
    
    
    (19,951
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,951
    )Net cash used in financing activities
    
    
    (13,970
    )
    
    
    (70
    )
    
    
    
    
    
    
    
    
    
    
    (14,040
    )Effect of exchange rate changes on cash
    
    
    
    
    
    
    
    
    
    
    194
    
    
    
    
    
    
    
    194Net increase (decrease) in cash
    
    
    (2,985
    )
    
    
    (11,190
    )
    
    
    1,381
    
    
    
    
    
    
    
    (12,794
    )Cash and cash equivalents, beginning of period
    
    
    3,028
    
    
    
    13,057
    
    
    
    11,185
    
    
    
    
    
    
    
    27,270Cash and cash equivalents, end of period
    
    $
    43
    
    
    $
    1,867
    
    
    $
    12,566
    
    
    $
    
    
    
    $
    14,476
 21




---



##### Table of Contents



IPC ACQUISITION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSContinued
March 31, 2005 (Unaudited) Condensed Consolidated Statement of Cash Flows
For the Six Months Ended March 31, 2004 IPC
    
    
    Guarantor
    
    
    Non-GuarantorAcquisition
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet cash provided by (used in) continuing operations
    
    $
    (7,885
    )
    
    $
    21,029
    
    
    $
    5,161
    
    
    $
    
    
    
    $
    18,305Net cash provided by (used in) discontinued operations
    
    
    
    
    
    
    11,039
    
    
    
    
    
    
    
    
    
    
    
    11,039Net cash provided by (used in) operating activities
    
    
    (7,885
    )
    
    
    32,068
    
    
    
    5,161
    
    
    
    
    
    
    
    29,344Capital expenditures
    
    
    
    
    
    
    (3,032
    )
    
    
    (1,189
    )
    
    
    
    
    
    
    (4,221
    )Intercompany borrowings
    
    
    28,785
    
    
    
    (15,832
    )
    
    
    (12,953
    )
    
    
    
    
    
    
    Acquisitions, net of cash
    
    
    (11,722
    )
    
    
    (12,284
    )
    
    
    2,068
    
    
    
    
    
    
    
    (21,938
    )Net cash provided by (used in) investing activities
    
    
    17,063
    
    
    
    (31,148
    )
    
    
    (12,074
    )
    
    
    
    
    
    
    (26,159
    )Principal payments on term loan
    
    
    (275
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (275
    )Issuance costs for term loan amendment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deferred compensation payments
    
    
    
    
    
    
    (51
    )
    
    
    
    
    
    
    
    
    
    
    (51
    )Payment of special cash dividend
    
    
    (17,964
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,964
    )Net cash used in financing activities
    
    
    (18,239
    )
    
    
    (51
    )
    
    
    
    
    
    
    
    
    
    
    (18,290
    )Effect of exchange rate changes on cash
    
    
    
    
    
    
    
    
    
    
    277
    
    
    
    
    
    
    
    277Net increase (decrease) in cash
    
    
    (9,061
    )
    
    
    869
    
    
    
    (6,636
    )
    
    
    
    
    
    
    (14,828
    )Cash and cash equivalents, beginning of period
    
    
    9,088
    
    
    
    3,135
    
    
    
    13,577
    
    
    
    
    
    
    
    25,800Cash and cash equivalents, end of period
    
    $
    27
    
    
    $
    4,004
    
    
    $
    6,941
    
    
    $
    
    
    
    $
    10,972
 22




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Unless otherwise indicated, all references to years refer to our fiscal year which ends
on September 30. 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 such as 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:  
    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;
    risks associated with substantial indebtedness, leverage and debt service; 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 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 have built additional lines of business upon our core offering of
turrets, 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 within select industries. We believe that
command and control operations represent a large and growing market opportunity for us. Command and
control operations include control rooms and operation 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., or Orbacom. 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. 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 23




---



##### Table of Contents



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, Inc., the
predecessor to IPC Information Systems, LLC, to a group of investors led by GS Capital Partners
2000, L.P. Since that time, we have operated as an independent company and focused our efforts on
five key initiatives to improve our operating performance. These initiatives include:  
    Upgrade our portfolio of businesses and quality of financial results.Since 2001, we
made changes to our portfolio of businesses in order to focus on businesses we believe have
the most attractive operating margins and growth profiles, to add complementary products or
distribution channels, and to increase the percentage of services revenues relative to the
more cyclical equipment sales revenues.  
    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, or Gains US, and Gains International (Europe) Limited, or Gains
UK.
    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 voting control
of Purple Voice, and subsequently completed the acquisition in September 2004.
    In January 2004, we purchased Gains International Asia Holdings Limited, or
Gains Asia, 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. For the six months ended March 31, 2005, our service revenues represented 61%
of our total revenues, or $87.3 million, as compared to 56%, or $68.8 million, for the
six months ended March 31, 2004. We believe our services businesses are less subject to
industry capital spending cycles than our equipment sales businesses.  
    Enhance Our Technical Leadership and Market Penetration of Our VoIP Platform. We
introduced the first VoIP trading floor communications systems in 2001. We succeeded in
building adoption of this technology as customers migrated to VoIP platforms due to
increased functionality, flexibility and overall operating efficiency. We have enhanced our
VoIP platform through continuous research and development efforts. As of March 31, 2005, we
shipped over 25,600 positions of our VoIP platform with the percentage of positions shipped
increasing over time to over 75% of our turret shipments in the first half of the 2005
fiscal year. As of March 31, 2005, only approximately 21% of our installed equipment base
had a VoIP trading floor solution which we believe highlights a significant growth
opportunity.
    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. 24




---



##### Table of Contents




    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 brokerage.
    Command and Control Offerings. With the acquisition of Orbacom 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.  
    Increase Our Geographic Reach and Penetration. Over the past three years we have opened
direct sales and services offices in Japan, Germany, Italy and France. We have also
acquired operations and offices in the EMEA and Asia Pacific regions. Our penetration in
the EMEA and Asia Pacific regions has increased by 29% since 2001 based on the number of
turret positions as a result of these activities. We intend to continue to invest in
selected markets globally to serve new customers and enable existing customers to
standardize their systems and support globally.
    Extend Our Offerings into Growth Markets with Comparable Demand Profiles. We intend to
capitalize further on our expertise with complex mission-critical communications systems by
expanding our existing offerings to command and control operations and specifically to the
needs of the public safety, government and military, power, energy and utility, and
transportation industries. In addition to our own direct expansion in these markets, we
recently acquired Orbacom to expand the product offerings and distribution
channels of our newly formed Command and Control segment. Current market environment The financial services industry experienced a market downturn in calendar years 2001, 2002 and
2003, resulting in substantial reductions in capital expenditures for trading floor communications
equipment purchases. Our shipments of turret positions reached what we believe are cyclical lows
with shipments of 13,882 positions in 2002, 10,275 in 2003, and 12,641 in 2004 compared to 17,007
positions shipped in 2001. Based on our experience and historical data, we believe that the
normalized level of turret shipments, adjusted to exclude the effects of the cycle, would have been
approximately 15,000 positions per year during an average replacement cycle of our installed base
of turrets. We believe that as a result of the recent lag in purchasing, our installed base of
equipment has aged beyond cyclical norms and that this lag is one of several factors that we expect
will impact the volume of equipment purchased in the next several years. We believe our 2004
bookings and the year-over-year increase in our backlog of equipment orders are consistent with our
expectations. Our bookings for the first two quarters of 2004 were $40 million, compared to $110
million for the second two quarters of 2004. Our backlog at September 30, 2004 was $70.8 million, a
91% increase over our backlog of $37.0 million at September 30, 2003. Our backlog at March 31, 2005
was $92.8 million, a 283% increase over our backlog of
$24.2 million at March 31, 2004. Summary of Critical 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 our 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 and fixed-fee
contracts for consulting services for our total circuit management, or TCM services, are recognized
ratably as the services are performed over the period of time contracted or agreed as the customer
receives value when each part of the services is performed. Revenue from network services is
generally billed at the beginning of the month and recognized in the same month and revenue for TCM
services are generally billed in accordance with the contract or agreed upon terms and conditions
and deferred and recognized ratably as the services are performed. 25




---



##### Table of Contents



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 where 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. Trade Accounts Receivables Trade accounts receivable potentially expose us 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, our customers
are progress-billed prior to the completion of the contract. We perform periodic credit evaluations of its customers financial condition and although we
do not generally require collateral, we do require cash payments in advance when the assessment of
credit risk associated with a customer is substantially higher than normal. Credit losses have been
within managements expectations and are provided for in the consolidated financial statements. 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 it and thereby
reduces 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 its 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 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 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 determined 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, Inc. 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 26




---



##### Table of Contents



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 turret 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 half of the 2005 fiscal
year. 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 U.S. operations, we consider all available evidence, both positive
and negative, including:  U.S. 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 U.S. deferred tax assets were generated by an event (our
purchase of the Company), rather than a continuing condition. Special Cash Dividend In February 2005, we paid a special cash dividend of approximately $20 million, or $1.36 per
share, to all shareholders of record of our outstanding common stock as of that date. As a result
of the dividend paid in February 2005, the fair value of our common stock was reduced by $1.36 per
share. In connection with the dividend, we adjusted the exercise price of all stock option grants
and the number of shares subject to stock options so that the dividend did not affect (1) the
aggregate spread of the option or (2) on a share-by-share basis, the ratio of exercise price to
fair market value. StockBased Compensation As permitted by SFAS 123, the Company has elected to follow 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. On December 16, 2004, the FASB issued FAS 123R which is a revision of FASB Statement No. 123,
Accounting for Stock-Based Compensation. FAS 123R supersedes APB 25, and amends FASB Statement No.
95, Statement of Cash Flows. Generally, the approach in FAS 123R is similar to the approach
described in Statement 123. However, FAS 123R 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. Recent Accounting Pronouncements In December 2004, the FASB approved FAS 123R which sets accounting requirements for
share-based compensation to employees, including employee stock purchase plans, and requires
companies to recognize in the income statement the grant date fair value of stock options and other
equity-based compensation. We currently account for our stock-based compensation using the
intrinsic method as defined in APB 25. Currently, we provide disclosure about the pro forma
compensation expense from stock based awards, which is based upon the Black-Scholes option pricing
model. Although FAS 123R does not express a preference for a type of valuation model, we intend to reexamine our valuation methodology and the
corresponding support for 27




---



##### Table of Contents



the assumptions that underlie the valuation of stock-based awards prior
to the adoption of FAS 123R. We are required to adopt this statement on October 1, 2006 and are
currently in the process of further analyzing this new pronouncement and have not yet determined
the impact on our consolidated financial statements. In December of 2004, the FASB issued Staff Position No. SFAS 109-2, Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of
2004 (FAS 109-2). The American Jobs Creation Act of 2004 introduces a special one-time
dividends-received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer,
provided certain criteria are met. FAS 109-2 provides accounting and disclosure guidance for the
repatriation provision, and was effective immediately upon issuance. We do not expect this new
standard to have a material effect on our consolidated financial statements. In December 2004, the FASB issued SFAS No. 153, Exchanges of Non-monetary AssetsAn Amendment
of APB No. 29 (FAS 153). The provisions of this statement are effective for non-monetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. This statement eliminates the
exception to fair value for exchanges of similar productive assets and replaces it with a general
exception for exchange transactions that do not have commercial substancethat is, transactions
that are not expected to result in significant changes in the cash flows of the reporting entity.
We do not expect this new standard to have a material effect on our consolidated financial
statements. In November 2004, the FASB issued SFAS No. 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 statements. Comparison of the Three Months (Q2 2005) and Six Months (YTD 2005) Ended March 31, 2005 to the
Three Months (Q2 2004) and Six Months (YTD 2004) Ended March 31, 2004. The following tables set forth, as a percentage of consolidated revenue, our condensed
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. Three Months ended March 31, 2005
    
    
    Three Months ended March 31, 2004Financial
    
    
    Command
    
    
    
    
    
    
    Financial
    
    
    CommandConsolidated
    
    
    Services
    
    
    and Control
    
    
    Consolidated
    
    
    Services
    
    
    and ControlRevenue:Product sales and installations
    
    
    43
    %
    
    
    42
    %
    
    
    63
    %
    
    
    46
    %
    
    
    46
    %
    
    
    66
    %Service
    
    
    57
    %
    
    
    58
    %
    
    
    37
    %
    
    
    54
    %
    
    
    54
    %
    
    
    34
    %100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of goods sold (depreciation shown separately):Product sales and installations
    
    
    21
    %
    
    
    19
    %
    
    
    72
    %
    
    
    20
    %
    
    
    20
    %
    
    
    27
    %Service
    
    
    27
    %
    
    
    28
    %
    
    
    12
    %
    
    
    26
    %
    
    
    27
    %
    
    
    12
    %Depreciation and amortization
    
    
    1
    %
    
    
    1
    %
    
    
    0
    %
    
    
    1
    %
    
    
    1
    %
    
    
    0
    %50
    %
    
    
    49
    %
    
    
    84
    %
    
    
    48
    %
    
    
    48
    %
    
    
    39
    %Gross profit
    
    
    50
    %
    
    
    51
    %
    
    
    16
    %
    
    
    52
    %
    
    
    52
    %
    
    
    61
    %Research and development
    
    
    7
    %
    
    
    7
    %
    
    
    14
    %
    
    
    5
    %
    
    
    5
    %
    
    
    0
    %Selling, general and administrative
    
    
    24
    %
    
    
    23
    %
    
    
    56
    %
    
    
    21
    %
    
    
    21
    %
    
    
    0
    %Depreciation and amortization
    
    
    2
    %
    
    
    2
    %
    
    
    0
    %
    
    
    2
    %
    
    
    2
    %

    
    
    0
    %Amortization of intangibles
    
    
    6
    %
    
    
    6
    %
    
    
    15
    %
    
    
    6
    %
    
    
    6
    %
    
    
    0
    %Income from operations
    
    
    11
    %
    
    
    14
    %
    
    
    -70
    %
    
    
    18
    %
    
    
    18
    %
    
    
    61
    %Other income (expense):Interest expense, net
    
    
    -8
    %
    
    
    -8
    %
    
    
    0
    %
    
    
    -8
    %
    
    
    -8
    %
    
    
    0
    %Other income (expense), net
    
    
    1
    %
    
    
    1
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Income (loss) from continuing operations before
income taxes
    
    
    3
    %
    
    
    6
    %
    
    
    -70
    %
    
    
    10
    %
    
    
    9
    %
    
    
    61
    %Income tax expense (benefit)
    
    
    1
    %
    
    
    2
    %
    
    
    0
    %
    
    
    6
    %
    
    
    6
    %
    
    
    0
    %Income (loss) from continuing operations
    
    
    2
    %
    
    
    5
    %
    
    
    -70
    %
    
    
    4
    %
    
    
    3
    %
    
    
    61
    %Discontinued operations (Note 3):Income (loss) from discontinued operations
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Loss on disposal of operations
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Income (loss) from discontinued operations, net of tax
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Net income (loss)
    
    
    2
    %
    
    
    5
    %
    
    
    -70
    %
    
    
    4
    %
    
    
    3
    %
    
    
    61
    %
 28




---



##### Table of Contents



Six Months ended March 31, 2005
    
    
    Six Months ended March 31, 2004Financial
    
    
    Command
    
    
    
    
    
    
    Financial
    
    
    CommandConsolidated
    
    
    Services
    
    
    and Control
    
    
    Consolidated
    
    
    Services
    
    
    and ControlRevenue:Product sales and installations
    
    
    39
    %
    
    
    38
    %
    
    
    57
    %
    
    
    44
    %
    
    
    44
    %
    
    
    52
    %Service
    
    
    61
    %
    
    
    62
    %
    
    
    43
    %
    
    
    56
    %
    
    
    56
    %
    
    
    48
    %100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of goods sold (depreciation shown separately):Product sales and installations
    
    
    20
    %
    
    
    19
    %
    
    
    66
    %
    
    
    21
    %
    
    
    21
    %
    
    
    23
    %Service
    
    
    30
    %
    
    
    30
    %
    
    
    15
    %
    
    
    28
    %
    
    
    28
    %
    
    
    17
    %Depreciation and amortization
    
    
    2
    %
    
    
    2
    %
    
    
    0
    %
    
    
    1
    %
    
    
    1
    %
    
    
    0
    %51
    %
    
    
    50
    %
    
    
    81
    %
    
    
    50
    %
    
    
    50
    %
    
    
    39
    %Gross profit
    
    
    49
    %
    
    
    50
    %
    
    
    19
    %
    
    
    50
    %
    
    
    50
    %
    
    
    61
    %Research and development
    
    
    7
    %
    
    
    6
    %
    
    
    18
    %
    
    
    6
    %
    
    
    6
    %
    
    
    0
    %Selling, general and administrative
    
    
    25
    %
    
    
    24
    %
    
    
    69
    %
    
    
    23
    %
    
    
    23
    %
    
    
    0
    %Depreciation and amortization
    
    
    2
    %
    
    
    2
    %
    
    
    1
    %
    
    
    2
    %
    
    
    2
    %
    
    
    0
    %Amortization of intangibles
    
    
    6
    %
    
    
    6
    %
    
    
    12
    %
    
    
    6
    %
    
    
    6
    %
    
    
    0
    %Income from operations
    
    
    9
    %
    
    
    11
    %
    
    
    -80
    %
    
    
    13
    %
    
    
    13
    %
    
    
    61
    %Other income (expense):Interest expense, net
    
    
    -8
    %
    
    
    -8
    %
    
    
    0
    %
    
    
    -9
    %
    
    
    -9
    %
    
    
    0
    %Other income (expense), net
    
    
    1
    %
    
    
    1
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Income (loss) from continuing operations before
income taxes
    
    
    2
    %
    
    
    4
    %
    
    
    -80
    %
    
    
    4
    %
    
    
    4
    %
    
    
    61
    %Income tax expense (benefit)
    
    
    1
    %
    
    
    1
    %
    
    
    0
    %
    
    
    4
    %
    
    
    4
    %
    
    
    0
    %Income (loss) from continuing operations
    
    
    1
    %
    
    
    3
    %
    
    
    -80
    %
    
    
    1
    %
    
    
    0
    %
    
    
    61
    %Discontinued operations (Note 3):Income (loss) from discontinued operations
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Loss on disposal of operations
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Income (loss) from discontinued operations, net of tax
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Net income (loss)
    
    
    1
    %
    
    
    3
    %
    
    
    -80
    %
    
    
    1
    %
    
    
    0
    %
    
    
    61
    %
 Comparison of Q2 2005 to Q2 2004 Revenue The following table sets forth our consolidated revenue and revenue as reported for our two
operating segments. ConsolidatedQ2
    
    
    Q2
    
    
    $
    
    
    %2005
    
    
    2004
    
    
    Change
    
    
    Change(dollars in thousands)Product sales and installations
    
    $
    32,459
    
    
    $
    32,243
    
    
    $
    216
    
    
    
    1
    %Service
    
    
    43,801
    
    
    
    37,581
    
    
    
    6,220
    
    
    
    17
    %Total
    
    $
    76,260
    
    
    $
    69,824
    
    
    $
    6,436
    
    
    
    9
    %
 Financial ServicesQ2
    
    
    Q2
    
    
    $
    
    
    %2005
    
    
    2004
    
    
    Change
    
    
    Change(dollars in thousands)Product sales and installations
    
    $
    30,553
    
    
    $
    31,640
    
    
    $
    (1,087
    )
    
    
    -3
    %Service
    
    
    42,698
    
    
    
    37,271
    
    
    
    5,427
    
    
    
    15
    %Total
    
    $
    73,251
    
    
    $
    68,911
    
    
    $
    4,340
    
    
    
    6
    %
 Command and ControlQ2
    
    
    Q2
    
    
    $
    
    
    %2005
    
    
    2004
    
    
    Change
    
    
    Change(dollars in thousands)Product sales and installations
    
    $
    1,906
    
    
    $
    603
    
    
    $
    1,303
    
    
    
    216
    %Service
    
    
    1,103
    
    
    
    310
    
    
    
    793
    
    
    
    256
    %Total
    
    $
    3,009
    
    
    $
    913
    
    
    $
    2,096
    
    
    
    230
    %
 29




---



##### Table of Contents



Consolidated Product Sales and Installations.Quarter over quarter, there was an increase in product
sales and installation revenue of $0.2 million in Q2 2005 from Q2 2004 due to a $1.3 million
increase from our Command and Control segment related to our acquisition of Orbacom in
November 2004 offset by a $1.1 million decrease from our Financial Services segment. Service.Our service revenue increased by $6.2 million in Q2 2005 from Q2 2004, primarily
due to an increase of $5.4 million from our Financial Services segment, of which $3.7 million was
from organic growth in network services and $1.7 million from revenue recognized from sales of
equipment maintenance agreements subsequent to expiration of warranties on trading system equipment
installations as well as trading floor reconfigurations. Also, there was an increase of $0.8
million from our Command and Control segment. Financial Services Product Sales and Installations.Our Financial Services segment experienced a decrease in
product sales and installation revenue of $1.1 million in Q2 2005 compared to Q2 2004 primarily due
to lower revenue from large installation projects offset by higher revenue from small and medium
installation projects. The number of large installation projects remained constant period over
period; however, the decrease in revenue was due to the smaller size of the installation projects
completed in Q2 2005 compared to Q2 2004. For medium installation projects, revenue increased due
to an additional installation in Q2 2005 compared to Q2 2004. For small installation projects,
revenue increased primarily due to higher volume of installation projects in Q2 2005 compared to Q2
2004. Installation 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 can vary from period to period. Number of
    
    
    Total amountinstallations
    
    
    (in millions)Q2 2005
    
    
    Q2 2004
    
    
    Q2 2005
    
    
    Q2 2004
    
    
    $ ChangeProduct installation size:Large (greater than $2.0 million)
    
    
    3
    
    
    
    3
    
    
    $
    8.7
    
    
    $
    15.7
    
    
    $
    (7.0
    )Medium (between $1.0 million and $2.0 million)
    
    
    1
    
    
    
    0
    
    
    
    1.2
    
    
    
    0.0
    
    
    
    1.2Small (less than $1.0 million)
    
    
    *
    
    
    
    *
    
    
    
    20.6
    
    
    
    15.9
    
    
    
    4.7$
    30.5
    
    
    $
    31.6
    
    
    $
    (1.1
    )
   *
    
    due to the variance in deal size of small installations this number is not a useful statistic Service.The increase in service revenue of $5.4 million in Q2 2005 from Q2 2004 was
primarily due to an increase of $3.7 million in network services and $1.7 million in equipment
services. The increase in network services is primarily due to organic growth 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. Equipment services increased primarily due to
a higher volume of contract maintenance revenue totaling $1.0 million from the revenue recognized
from sales of equipment maintenance agreements subsequent to expiration of warranties for product
sales and installation contracts and additional on-site services at several customer sites. Also,
non-contract MAC revenue increased $0.7 million due to increase in 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
$1.3 million in Q2 2005 from Q2 2004 was primarily due to the acquisition of Orbacom in
November 2004. Number of
    
    
    Total amountinstallations
    
    
    (in millions)Q2 2005
    
    
    Q2 2004
    
    
    Q2 2005
    
    
    Q2 2004
    
    
    $ ChangeProduct installation size:Small (less than $1.0 million)
    
    
    *
    
    
    
    *
    
    
    $
    1.9
    
    
    $
    0.6
    
    
    $
    1.3
   *
    
    due to the variance in deal size of small installations this number is not a useful statistic Service.The increase in service revenue of $0.8 million in Q2 2005 from Q2 2004 was
primarily due to the acquisition of Orbacom in November 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 30




---



##### Table of Contents



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 Q2 2005 includes a charge resulting
from the sale of inventory 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 $1.1 million
was recognized in Q2 2005. This purchase accounting inventory fair value step-up is a GAAP
adjustment that is recorded when a company is acquired. ConsolidatedQ2
    
    
    % of
    
    
    Q2
    
    
    % of
    
    
    %2005
    
    
    Rev
    
    
    2004
    
    
    Rev
    
    
    Change(dollars in thousands)Product sales and installations
    
    $
    16,075
    
    
    
    50
    %
    
    $
    14,034
    
    
    
    44
    %
    
    
    6
    %Service
    
    
    20,959
    
    
    
    48
    %
    
    
    18,440
    
    
    
    49
    %
    
    
    -1
    %Depreciation and amortization
    
    
    1,087
    
    
    
    1
    %
    
    
    968
    
    
    
    1
    %
    
    
    0
    %Total
    
    $
    38,121
    
    
    
    50
    %
    
    $
    33,442
    
    
    
    48
    %
    
    
    2
    %
 Financial ServicesQ2
    
    
    % of
    
    
    Q2
    
    
    % of
    
    
    %2005
    
    
    Rev
    
    
    2004
    
    
    Rev
    
    
    Change(dollars in thousands)Product sales and installations
    
    $
    13,902
    
    
    
    46
    %
    
    $
    13,786
    
    
    
    44
    %
    
    
    2
    %Service
    
    
    20,613
    
    
    
    48
    %
    
    
    18,333
    
    
    
    49
    %
    
    
    -1
    %Depreciation and amortization
    
    
    1,087
    
    
    
    1
    %
    
    
    968
    
    
    
    1
    %
    
    
    0
    %Total
    
    $
    35,602
    
    
    
    49
    %
    
    $
    33,087
    
    
    
    48
    %
    
    
    1
    %
 Command and ControlQ2
    
    
    % of
    
    
    Q2
    
    
    % of
    
    
    %2005
    
    
    Rev
    
    
    2004
    
    
    Rev
    
    
    Change(dollars in thousands)Product sales and installations
    
    $
    2,173
    
    
    
    114
    %
    
    $
    248
    
    
    
    41
    %
    
    
    73
    %Service
    
    
    346
    
    
    
    31
    %
    
    
    107
    
    
    
    35
    %
    
    
    -4
    %Depreciation and amortization
    
    
    
    
    
    
    0
    %
    
    
    
    
    
    
    0
    %
    
    
    0
    %Total
    
    $
    2,519
    
    
    
    84
    %
    
    $
    355
    
    
    
    39
    %
    
    
    45
    %
 Consolidated Product Sales and Installations.The increase in product sales and installations cost of
goods sold of 6% as a percentage of product sales and installation revenue in Q2 2005 from Q2 2004
was primarily due an increase of 2% in financial services products and an increase of 73% on
command and control products. Service.The decrease in service cost of goods sold of 1% as a percentage of service revenue
in Q2 2005 from Q2 2004 was primarily due to a decrease of 1% in our Financial Services segment and
a decrease of 4% in our Command and Control segment. 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 Q2 2005 from Q2 2004
was primarily due to higher cost of sales realized on large installation projects. Service.The decrease in service cost of goods sold of 1% as a percentage of service revenue
in Q2 2005 from Q2 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 and lower cost of sales
associated with contract maintenance services offset by higher cost of sales associated with MAC
services related to the expansion of existing customer trading floors. 31




---



##### Table of Contents



Command and Control Product Sales and Installations.The increase in product sales and installations cost of
goods sold of 73% as a percentage of product sales and installation revenue in Q2 2005 from Q2 2004
was primarily due to the inclusion of a $1.1 million of inventory fair value adjustment described
above. Service.The decrease in service cost of goods sold of 4% as a percentage of service revenue
in Q2 2005 from Q2 2004 was primarily due to lower cost of sales associated with MAC services
related to products manufactured by Orbacom, which was acquired in November 2004. Research and Development Expense ConsolidatedQ2
    
    
    Q2
    
    
    $
    
    
    %2005
    
    
    2004
    
    
    Change
    
    
    Change(dollars in thousands)Research and development
    
    $
    5,267
    
    
    $
    3,599
    
    
    $
    1,668
    
    
    
    46
    %
 Research and development efforts for our Financial Services segment are principally
focused on the next generation of the trading systems equipment products, applications, and
enhancements of our current product lines. For our Command and Control segment, research and
development efforts are focused on the next generation of radio technology, radio telephony
integration and computer aided dispatch software. These activities resulted in an increase of
$1.7 million in Q2 2005 compared to Q2 2004. Selling, General and Administrative Expense ConsolidatedQ2
    
    
    Q2
    
    
    $
    
    
    %2005
    
    
    2004
    
    
    Change
    
    
    Change(dollars in thousands)Selling, general and administrative
    
    $
    18,602
    
    
    $
    14,749
    
    
    $
    3,853
    
    
    
    26
    %
 Selling, general and administrative expenses increased by $3.9 million for Q2 2005 from
Q2 2004, of which $2.2 million is due to the increased headcount and related costs in Q2 2005 for
sales and marketing programs and professionals and $1.7 million for the expansion of the Command
and Control segment through the acquisition of Orbacom in November 2004. Depreciation and Amortization ConsolidatedQ2
    
    
    Q2
    
    
    $
    
    
    %2005
    
    
    2004
    
    
    Change
    
    
    Change(dollars in thousands)Depreciation and amortization
    
    $
    1,726
    
    
    $
    1,403
    
    
    $
    323
    
    
    
    23
    %
 Depreciation and amortization expense increased by $0.3 million in Q2 2005 from Q2 2004
primarily due to an increase in capital expenditures as well as the addition of depreciable fixed
assets due to the acquisition of Orbacom in November 2004. Amortization of Intangibles ConsolidatedQ2
    
    
    Q2
    
    
    $
    
    %2005
    
    
    2004
    
    
    Change
    
    
    Change(dollars in thousands)Amortization of intangibles
    
    $
    4,479
    
    
    $
    3,925
    
    
    $
    554
    
    
    
    14
    %
 Amortization of intangibles increased by $0.6 million in Q2 2005 from Q2 2004 primarily
due to an increase in intangible assets from the acquisition of Orbacom in November 2004. 32




---



##### Table of Contents



Interest Expense, net ConsolidatedQ2
    
    
    Q2
    
    
    $
    
    
    %2005
    
    
    2004
    
    
    Change
    
    
    Change(dollars in thousands)Interest expense, net
    
    $
    5,912
    
    
    $
    5,814
    
    
    $
    98
    
    
    
    2
    %
 Interest expense, net increased by $0.1 million in Q2 2005 from Q2 2004 primarily due to
interest expense for increased borrowings under the revolving credit facility of our senior secured
credit facility. There was no outstanding balance under the revolving credit facilities at March
31, 2004. Other Income, (Expense), net ConsolidatedQ2
    
    
    Q2
    
    
    $
    
    
    %2005
    
    
    2004
    
    
    Change
    
    
    Change(dollars in thousands)Other income (expense), net
    
    $
    448
    
    
    $
    (140
    )
    
    $
    588
    
    
    
    420
    %
 Other income (expense), net increased by $0.6 million in Q2 2005 from Q2 2004 primarily
due to foreign exchange gains attributable to the weakness of the US dollar in our Financial
Services segment. Provision for Income Taxes Our effective tax rate on income from continuing operations was 42.5% for Q2 2005 and 58.3%
for Q2 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 six months ended March 31, 2004, 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) We have deferred
tax liabilities in excess of deferred tax assets and these deferred tax liabilities are expected to
reverse prior to the point any deferred tax assets would be lost; (3) US results of operations for
2005 and subsequent years are expected to generate sufficient taxable income to fully utilize these
tax loss carryforwards; and (4) 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 March 31, 2005, no circumstances have arisen that would require us to change such
conclusion. Net Income ConsolidatedQ2
    
    
    Q2
    
    
    $
    
    
    %2005
    
    
    2004
    
    
    Change
    
    
    Change(dollars in thousands)Net income
    
    $
    1,731
    
    
    $
    2,805
    
    
    $
    (1,074
    )
    
    
    -38
    %
 We had net income of $1.7 million in Q2 2005 compared to $2.8 million in Q2 2004. The
$1.1 million decrease was primarily due to a $1.8 million increase in our gross profit, a $0.6
million increase in other income and a decrease in our income tax expense of $2.8 million offset by
increases in research and development expenses of $1.7 million, increases in selling, general and
administrative expenses of $3.9 million, and increases in depreciation and amortization and
amortization of intangibles of $0.9 million. 33




---



##### Table of Contents



Comparison of YTD 2005 to YTD 2004 Revenue The following table sets forth our consolidated revenue and revenue as reported for our two
operating segments. ConsolidatedYTD
    
    
    YTD
    
    
    $
    
    
    %2005
    
    
    2004
    
    
    Change
    
    
    Change(dollars in thousands)Product sales and installations
    
    $
    54,929
    
    
    $
    53,701
    
    
    $
    1,228
    
    
    
    2
    %Service
    
    
    87,256
    
    
    
    68,817
    
    
    
    18,439
    
    
    
    27
    %Total
    
    $
    142,185
    
    
    $
    122,518
    
    
    $
    19,667
    
    
    
    16
    %
 Financial ServicesYTD
    
    
    YTD
    
    
    $
    
    
    %2005
    
    
    2004
    
    
    Change
    
    
    Change(dollars in thousands)Product sales and installations
    
    $
    52,802
    
    
    $
    53,028
    
    
    $
    (226
    )
    
    
    0
    %Service
    
    
    85,642
    
    
    
    68,197
    
    
    
    17,445
    
    
    
    26
    %Total
    
    $
    138,444
    
    
    $
    121,225
    
    
    $
    17,219
    
    
    
    14
    %
 Command and ControlYTD
    
    
    YTD
    
    
    $
    
    
    %2005
    
    
    2004
    
    
    Change
    
    
    Change(dollars in thousands)Product sales and installations
    
    $
    2,127
    
    
    $
    673
    
    
    $
    1,454
    
    
    
    216
    %Service
    
    
    1,614
    
    
    
    620
    
    
    
    994
    
    
    
    160
    %Total
    
    $
    3,741
    
    
    $
    1,293
    
    
    $
    2,448
    
    
    
    189
    %
 Consolidated Product Sales and Installations.The increase in product sales and installation revenue of
$1.2 million in YTD 2005 from YTD 2004 was due to an increase in our Command and Control segment of
$1.5 million related to the acquisition of Orbacom Systems, Inc. in November 2004 offset by a
decrease in our Financial Services segment of $0.2 million. Service.The increase in service revenue of $18.4 million in YTD 2005 from YTD 2004 was
primarily due to an increase of $17.4 million from our Financial Services segment and an increase
of $1.0 million from our Command and Control segment. Financial Services Product Sales and Installations.The decrease in product sales and installation revenue of
$0.2 million in YTD 2005 from YTD 2004 was primarily due to lower revenue from large installation
projects offset by higher revenue from small and medium installation projects. The number of large
installation projects remained constant period over period; however, the decrease in revenue was
due to the smaller size of the installation projects completed in YTD 2005 compared to YTD 2004.
For medium installation projects, revenue increased due to additional installation projects in YTD
2005 compared to YTD 2004. For small installation projects, revenue increased primarily due to a
higher volume of installation projects in YTD 2005 compared to YTD 2005. Installation 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 customer headcount or their technology needs can vary from period to
period. Number of
    
    
    
    
    
    
    Total amountinstallations
    
    
    
    
    
    
    (in millions)YTD 2005
    
    
    YTD 2004
    
    
    YTD 2005
    
    
    YTD 2004
    
    
    $ ChangeProduct installation size:Large (greater than $2.0 million)
    
    
    4
    
    
    
    4
    
    
    $
    10.8
    
    
    $
    18.1
    
    
    $
    (7.3
    )Medium (between $1.0 million and $2.0 million)
    
    
    4
    
    
    
    2
    
    
    
    5.2
    
    
    
    2.8
    
    
    
    2.4Small (less than $1.0 million)
    
    
    *
    
    
    
    *
    
    
    
    36.8
    
    
    
    32.1
    
    
    
    4.7$
    52.8
    
    
    $
    53.0
    
    
    $
    (0.2
    )
   *
    
    due to the variance in deal size of small installations this number is not a useful statistic Service.The increase in service revenue of $17.4 million in YTD 2005 from YTD 2004 was
primarily due to an increase of $11.6 million in network services and $5.8 million in equipment
services. The increase in network services is 34




---



##### Table of Contents



primarily due to a full six months 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 $7.3 million. Equipment services increased primarily due to a higher volume of contract
maintenance revenue totaling $2.5 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 $3.3 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
$1.5 million in YTD 2005 from YTD 2004 was primarily due to the acquisition of Orbacom in
November 2004. Number of
    
    
    
    
    
    
    Total amountinstallations
    
    
    
    
    
    
    (in millions)YTD 2005
    
    
    YTD 2004
    
    
    YTD 2005
    
    
    YTD 2004
    
    
    $ ChangeProduct installation size:Small (less than $1.0 million)
    
    
    *
    
    
    
    *
    
    
    $
    2.1
    
    
    $
    0.6
    
    
    $
    1.5
   *
    
    due to the variance in deal size of small installations this number is not a useful statistic Service.The increase in service revenue of $1.0 million in YTD 2005 from YTD 2004 was
primarily due to acquisition of Orbacom in November 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 YTD 2005 includes a charge resulting
from the sale of inventory 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 $1.3 million
was recognized in YTD 2005. This purchase accounting inventory fair value step-up is a GAAP
adjustment that is recorded when a company is acquired. ConsolidatedYTD
    
    
    % of
    
    
    YTD
    
    
    % of
    
    
    %2005
    
    
    Rev
    
    
    2004
    
    
    Rev
    
    
    Change(dollars in thousands)Product sales and installations
    
    $
    28,489
    
    
    
    52
    %
    
    $
    25,172
    
    
    
    47
    %
    
    
    5
    %Service
    
    
    42,199
    
    
    
    48
    %
    
    
    33,981
    
    
    
    49
    %
    
    
    -1
    %Depreciation and amortization
    
    
    2,169
    
    
    
    2
    %
    
    
    1,710
    
    
    
    1
    %
    
    
    1
    %Total
    
    $
    72,857
    
    
    
    51
    %
    
    $
    60,863
    
    
    
    50
    %
    
    
    1
    %
 Financial ServicesYTD
    
    
    % of
    
    
    YTD
    
    
    % of
    
    
    %2005
    
    
    Rev
    
    
    2004
    
    
    Rev
    
    
    Change(dollars in thousands)Product sales and installations
    
    $
    26,037
    
    
    
    49
    %
    
    $
    24,881
    
    
    
    47
    %
    
    
    2
    %Service
    
    
    41,637
    
    
    
    49
    %
    
    
    33,767
    
    
    
    50
    %
    
    
    -1
    %Depreciation and amortization
    
    
    2,169
    
    
    
    2
    %
    
    
    1,710
    
    
    
    1
    %
    
    
    1
    %Total
    
    $
    69,843
    
    
    
    50
    %
    
    $
    60,358
    
    
    
    50
    %
    
    
    1
    %
 Command and ControlYTD
    
    
    % of
    
    
    YTD
    
    
    % of
    
    
    %2005
    
    
    Rev
    
    
    2004
    
    
    Rev
    
    
    Change(dollars in thousands)Product sales and installations
    
    $
    2,452
    
    
    
    115
    %
    
    $
    291
    
    
    
    43
    %
    
    
    72
    %Service
    
    
    562
    
    
    
    35
    %
    
    
    214
    
    
    
    35
    %
    
    
    0
    %Depreciation and amortization
    
    
    
    
    
    
    0
    %
    
    
    
    
    
    
    0
    %
    
    
    0
    %Total
    
    $
    3,014
    
    
    
    81
    %
    
    $
    505
    
    
    
    39
    %
    
    
    42
    %
 35




---



##### Table of Contents



Consolidated Product Sales and Installations.The increase in product sales and installations cost of
goods sold of 5% as a percentage of product sales and installation revenue in YTD 2005 from YTD
2004 was primarily due an increase of 2% in our Financial Services segment and an increase of 72%
in our Command and Control segment. Service.The decrease in service cost of goods sold of 1% as a percentage of service revenue
in YTD 2005 from YTD 2004 was primarily due to a decrease of 1% in our Financial Services segment. 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 YTD 2005 from YTD
2004 was primarily due to higher cost of sales realized on large installation projects. Service.The decrease in service cost of goods sold of 1% as a percentage of service revenue
in YTD 2005 from YTD 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 and lower cost of sales
associated with contract maintenance services offset by higher cost of sales associated with MAC
services related to the expansion of existing customer trading floors. Command and Control Product Sales and Installations.The increase in product sales and installations cost of
goods sold of 72% as a percentage of product sales and installation revenue in YTD 2005 from YTD
2004 was primarily due to the inclusion of a $1.3 million of inventory fair value adjustment as a
result of the Orbacom acquisition. Service.Service cost of goods sold as a percentage of service revenue in YTD 2005 remained
consistent with YTD 2004. Research and Development Expense ConsolidatedYTD
    
    
    YTD
    
    
    $
    
    
    %2005
    
    
    2004
    
    
    Change
    
    
    Change(dollars in thousands)Research and development
    
    $
    9,298
    
    
    $
    7,008
    
    
    $
    2,290
    
    
    
    33
    %
 Research and development efforts for our Financial Services segment are principally
focused on the next generation of the trading systems equipment products, applications, and
enhancements of our current product lines. For our Command and Control segment, research and
development efforts are focused on the next generation of radio technology, radio telephony
integration and computer aided dispatch software. These activities resulted in an increase of $2.3
million in YTD 2005 compared to YTD 2004. Selling, General and Administrative Expense ConsolidatedYTD
    
    
    YTD
    
    
    $
    
    
    %2005
    
    
    2004
    
    
    Change
    
    
    Change(dollars in thousands)Selling, general and administrative
    
    $
    35,735
    
    
    $
    27,673
    
    
    $
    8,062
    
    
    
    29
    %
 Selling, general and administrative expenses increased by $8.1 million for YTD 2005 from
YTD 2004, of which $4.9 million was due to an increase in headcount and related costs in YTD 2005
for sales and marketing programs and professionals and $2.6 million for the expansion of the
Command and Control segment through the acquisition of Orbacom in November 2004.
Also, there was an increase of $0.6 million for the recognition of a full quarter of costs in YTD
2005 from the acquisition of Gains Asia in January 2004 compared to YTD 2004. Depreciation and Amortization YTD
    
    
    YTD
    
    
    $
    
    
    %2005
    
    
    2004
    
    
    Change
    
    
    Change(dollars in thousands)Depreciation and amortization
    
    $
    3,205
    
    
    $
    2,734
    
    
    $
    471
    
    
    
    17
    %
 36




---



##### Table of Contents



Depreciation and amortization expense increased by $0.5 million in YTD 2005 from YTD 2004
primarily due to an increase in capital expenditures as well as the addition of depreciable fixed
assets due to the acquisition of Gains Asia in January 2004 and Orbacom in November 2004. Amortization of Intangibles ConsolidatedYTD
    
    
    YTD
    
    
    $
    
    
    %2005
    
    
    2004
    
    
    Change
    
    
    Change(dollars in thousands)Amortization of intangibles
    
    $
    8,500
    
    
    $
    7,701
    
    
    $
    799
    
    
    
    10
    %
 Amortization of intangibles increased by $0.8 million in YTD 2005 from YTD 2004 due to
the addition of intangible assets from the acquisition of Gains Asia in January 2004 and Orbacom in
November 2004. Interest Expense, net ConsolidatedYTD
    
    
    YTD
    
    
    $
    
    
    %2005
    
    
    2004
    
    
    Change
    
    
    Change(dollars in thousands)Interest expense, net
    
    $
    11,541
    
    
    $
    11,336
    
    
    $
    205
    
    
    
    2
    %
 Interest expense, net increased by $0.2 million in YTD 2005 from YTD 2004 primarily due
to interest for increased borrowings under the revolving credit facility of our senior secured
credit facilities and an increase in the LIBOR based interest rate on our senior secured credit
facilities. There was no outstanding balance under the revolving credit facility at March 31, 2004. Other Income, (Expense), net ConsolidatedYTD
    
    
    YTD
    
    
    $
    
    
    %2005
    
    
    2004
    
    
    Change
    
    
    Change(dollars in thousands)Other income (expense), net
    
    $
    1,853
    
    
    $
    307
    
    
    $
    1,546
    
    
    
    504
    %
 Other income (expense), net increased by $1.5 million in YTD 2005 from YTD 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 42.5% for YTD 2005 and 78.3%
for YTD 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 six months ended March 31, 2004, 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) We have deferred
tax liabilities in excess of deferred tax assets and these deferred tax liabilities are expected to
reverse prior to the point any deferred tax assets would be lost; (3) US results of operations for
2005 and subsequent years are expected to generate sufficient taxable income to fully utilize these
tax loss carryforwards; and (4) 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 March 31, 2005, no circumstances have arisen that would require us to change such
conclusion. 37




---



##### Table of Contents



Net Income ConsolidatedYTD
    
    
    YTD
    
    
    $
    
    
    %2005
    
    
    2004
    
    
    Change
    
    
    Change(dollars in thousands)Net income
    
    $
    1,962
    
    
    $
    1,041
    
    
    $
    921
    
    
    
    88
    %
 We had net income of $2.0 million in YTD 2005 compared to $1.0 million in YTD 2004. The
$0.9 million increase was primarily due to a $7.7 million increase in our gross profit, a $1.5
million increase in other income and a decrease in our income tax expense of $3.1 million offset by
increases in research and development expenses of $2.3 million and an increase in selling, general
and administrative expenses of $8.1 million, and increases in depreciation and amortization and
amortization of intangibles of $1.3 million. Liquidity and Capital Resources Historically, we have satisfied our operating cash requirements through cash provided by
operations, 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 YTD 2005, we utilized our cash for payments of a special cash dividend of approximately
$20.0 million, $8.6 million for an interest payment due on our senior subordinated notes, $8.0
million for the cash purchase price of Orbacom Systems, Inc., accrued expenses and the remaining
payment due under our credit agreement relating to excess cash flow for 2004. These disbursements
were offset by borrowings from our revolving credit facility of our senior secured credit
facilities which had an outstanding balance of $8.0 million at March 31, 2005, cash acquired in the
Orbacom acquisition of $2.3 million as well as cash flow from operations. The result of this
activity was that our cash balances decreased from $27.3 million at September 30, 2004 to $14.5
million at March 31, 2005. 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. The total amount
available for borrowing and letters of credit under the revolving credit facility is $35.0 million,
of which $23.3 million was available as of March 31, 2005; after taking into account $3.7 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 was 6.06% for Q2 2005, 5.80% for YTD 2005, 5.11% for Q2 2004
and YTD 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. At March 31, 2005 our senior secured leverage ratio was less
than 1.00:1.00. 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 based on income, 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 current taxes based on income payable in cash. 38




---



##### 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. At March 31, 2005, we were in
compliance with all the financial covenants of the senior secured credit facilities. 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 all 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. At March 31,
2005, the Company was in compliance with all the covenants of the senior subordinated notes. Comparison of YTD 2005 to YTD 2004 Cash provided by operating activities from continuing operations was $9.2 million for YTD 2005
compared to $18.3 million for YTD 2004. The decrease of $9.1 million was primarily due cash
outflows relating to increases in accounts receivable, inventory and accounts payable balances
compared to the prior year offset by cash inflows relating to collections reflected in customer
advances and deferred revenue. Increases in accounts receivable, inventory and customer advances
are a result of our increased 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 completed contract method
of revenue recognition. Cash outflows in accounts payable and accrued liabilities reflects the cash
flow requirements for the purchase price of Orbacom due on closing. The remaining cash inflows
represent cash receipts relating to our former I.T.S. division. Cash receipts from our I.T.S.
division stem from two sources, cash collected from third parties in the form of accounts
receivable and cash received on amounts owed from our former division. Cash used in investing activities was $10.8 million for YTD 2005 as compared to $26.2 million
for YTD 2004. Cash used in investing activities for YTD 2005 was primarily comprised of $4.8
million of capital expenditures and $6.0 million for the acquisition of Orbacom, net of cash
acquired. Cash used in investing activities for YTD 2004 related to $4.2 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 $15.2 million related to
the acquisition of Gains Asia. Cash used in financing activities was $14.0 million for YTD 2005 as compared to $18.3 million
for YTD 2004. Cash used in financing activities in YTD 2005 was primarily from the special cash
dividend of approximately $20.0 million and principal repayments of our term loan of $1.8 million
offset by net borrowings from our revolving credit facility of $8.0 million. Cash used in financing
activities in YTD 2004 was almost entirely comprised of the special cash dividend in the amount of
$18.0 million. 39




---



##### Table of Contents



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 increase of cash of approximately $0.2 million
in YTD 2005 as compared to an increase of $0.3 million in YTD 2004. Currently our largest currency
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 the agreement related to our senior secured credit facilities. The limits imposed by
this 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, repayments on our
revolving credit facility, principal repayments on our long-term indebtedness, capital
expenditures, research and development efforts, working capital as needed for potential strategic
acquisitions and/or alliances. 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 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 the term loan of our senior secured credit facilities,
interest payments on our senior subordinated notes and repayments on our revolving credit facility
of our senior secured credit facilities. The mandatory interest and principal payments under the
term loan of 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 the term loan of 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. Since the acquisition of IPC Information Systems, our cash generated from the operations of
the business and borrowings from our revolving credit facility 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 of our
senior secured credit facilities 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 of our senior secured credit facilities in an amount sufficient to enable
us to pay our indebtedness or to fund our other liquidity needs. We may need to refinance all or a
portion of our indebtedness on or before maturity. We cannot provide assurance that we will be able
to refinance any of our indebtedness on commercially reasonable terms, or at all. Contractual Obligations and Other Commercial Commitments The following summarizes our contractual obligations at March 31, 2005, and the effect such
obligations are expected to have on our liquidity and cash flow in future periods. Payments Due by PeriodLess than
    
    
    1-3
    
    
    4-5
    
    
    After 5(dollars in millions)
    
    Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    yearsContractual Obligations:Deferred Compensation Agreements
    
    $
    4.7
    
    
    $
    0.9
    
    
    $
    1.0
    
    
    $
    0.9
    
    
    $
    1.9Network Carrier Commitments
    
    
    8.3
    
    
    
    8.3
    
    
    
    
    
    
    
    
    
    
    
    Long-Term Debt  Senior Subordinated Notes
    
    
    150.0
    
    
    
    
    
    
    
    
    
    
    
    150.0
    
    
    
    Long-Term Debt  Senior Secured Credit Facilities
    
    
    47.6
    
    
    
    0.5
    
    
    
    23.9
    
    
    
    23.2
    
    
    
    Interest Expense  Senior Subordinated Notes
    
    
    86.0
    
    
    
    17.2
    
    
    
    34.4
    
    
    
    34.4
    
    
    
    Interest Expense  Senior Secured Credit Facilities (1)
    
    
    9.2
    
    
    
    3.0
    
    
    
    5.7
    
    
    
    0.5
    
    
    
    Operating Leases
    
    
    30.3
    
    
    
    5.4
    
    
    
    10.1
    
    
    
    8.1
    
    
    
    6.7Total Contractual Cash Obligations
    
    $
    336.1
    
    
    $
    35.3
    
    
    $
    75.1
    
    
    $
    217.1
    
    
    $
    8.6
 40




---



##### Table of Contents



Amount of Commitment Expiration per PeriodTotalAmounts
    
    
    Less than
    
    
    1-3
    
    
    4-5
    
    
    Over 5Committed
    
    
    1 year
    
    
    years
    
    
    years
    
    
    yearsOther Commercial Commitments:Revolving Credit FacilitySenior Secured Credit Facilities
    
    $
    8.0
    
    
    $
    8.0
    
    
    $
    
    
    
    $
    
    
    
    $
    Standby Letters of Credit
    
    
    3.7
    
    
    
    3.7
    
    
    
    
    
    
    
    
    
    
    
    Total Commercial Commitments
    
    $
    11.7
    
    
    $
    11.7
    
    
    $
    
    
    
    $
    
    
    
    $
    
   (1)
    
    Interest is calculated on the Senior Secured Credit Facilities using the interest rate at
March 31, 2005 of 6.19% 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 Q2 2005 and Q2 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 March 31, 2005 is shown in the table below. Fair Value onMarch 31,
    
    
    Future Principal Payments(dollars in millions)
    
    2005
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Thereafter
    
    
    TotalLong-Term Debt:Fixed Rate Senior
Subordinated
Notes, interest
payable at 11.5%,
maturing 2009
    
    $
    159.0
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    150.0
    
    
    $
    150.0Variable Rate
Senior Secured
Credit Facilities
 Term Loan
(interest payable
at 6.06% for Q2
2005 and 5.8% for
YTD 2005)
    
    $
    47.8
    
    
    $
    0.5
    
    
    $
    0.5
    
    
    $
    23.4
    
    
    $
    23.2
    
    
    $
    
    
    
    $
    
    
    
    $
    47.6
 
 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. 41




---



##### Table of Contents



Part II  Other Information: 
 Item 1. Legal Proceedings Except for the lawsuits described below, of which the first two involve 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 relating to our former
I.T.S. segment, we remain liable for all pre-closing liabilities relating to the I.T.S. segment,
including the two lawsuits described below. Our litigation is subject to many uncertainties and it
is possible that the results of operations or the cash flow of the company in a particular
quarterly or annual period could be materially affected by an ultimate unfavorable resolution
depending, in part, upon the results of operations or cash flow for such period. Management
believes, however, that the ultimate outcome of all pending litigation should not have a material
adverse effect on our consolidated financial condition, results of operations or cash flows. 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. We believe the suit is without merit. However, there can be no
assurance that the resolution of this lawsuit will ultimately be favorable to us. Plaintiffs are
seeking injunctive relief and damages from the defendants, jointly and severally, in an amount the
plaintiffs claim exceeds an aggregate of $75.0 million. On September 8, 2003, an action was brought against our subsidiary, IPC Information Systems,
Inc., its President and 23 other unrelated defendants 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 the defendants violated the Racketeer Influenced and Corrupt Organizations
Act (RICO) and engaged in tortious interference with prospective business advantage by preventing
the plaintiff from obtaining work as a mover on jobs performed in large commercial buildings in New
York City. The remaining claim against IPC Information Systems, Inc. relates to a single moving
job, and the plaintiff alleges that it suffered damages in an amount slightly less than $1 million
in connection with that move. The Court has dismissed the RICO claims against IPC Information
Systems, Inc. and its President. We believe that the remaining claim is without merit and intend to
vigorously defend against that claim. However, there can be no assurance that the resolution of
this lawsuit will ultimately be favorable to us. 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 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 our copyrights by soliciting and obtaining an
unauthorized copy of our proprietary software from Advanced Business Communications Ltd. (ABC), a
Canadian company. Our complaint seeks recovery of the software, injunctive relief and unspecified
damages from the defendants. The Odyssey Group has asserted counterclaims against IPC Information
Systems, LLC 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 42




---



##### Table of Contents



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 
 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 4.1
    
    Third Supplemental Indenture, dated as of December 9, 2004, among the company, the subsidiary
guarantors parties thereto and the Bank of New York, as trustee.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.
 43




---



##### Table of Contents



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:
May 13, 2005
    
    By:
    
    /s/ TIMOTHY WHELANTimothy WhelanChief Financial Officer(Principal Financial and AccountingOfficer and Duly Authorized Officer)
 44