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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 10-Q x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended March 31, 2004 or o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Transition
Period From
 to   Commission File Number 333-82540 IPC ACQUISITION CORP.  Delaware
    
    74-3022102(State or other jurisdiction of incorporation or organization)
    
    (IRS Employer Identification No.)88 Pine Street, Wall Street Plaza, New York, NY
    
    10005(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (212) 825-9060 Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x 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 x 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, 2004Common Stock, par value $0.01
    
    14,724,380 shares




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IPC ACQUISITION CORP. INDEX  
 PagePart I. Financial Information:Item 1. Financial StatementsA) Condensed Consolidated Balance Sheets as of March 31, 2004 and September 30, 2003
    
    
    1B) Condensed Consolidated Statements of Operations for the Three and Six Months
Ended March 31, 2004 and 2003
    
    
    2C) Condensed Consolidated Statements of Cash Flows for the Six Months Ended March
31, 2004 and 2003
    
    
    3D) Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 3. Quantitative and Qualitative Disclosure About Market Risk
    
    
    34Item 4. Controls and Procedures
    
    
    35Part II. Other Information:Item 1. Legal Proceedings
    
    
    36Item 2. Changes in Securities and Use of Proceeds
    
    
    36Item 3. Defaults Upon Senior Securities
    
    
    36Item 4. Submission of Matters to a Vote of Security Holders
    
    
    36Item 5. Other Information
    
    
    36Item 6. Exhibits and Reports on Form 8-K
    
    
    36Signature
    
    
    37Exhibit 31.1-CEO CERTIFICATIONExhibit 31.2-CFO CERTIFICATIONExhibit 32.1-CEO CERTIFICATIONExhibit 32.2-CFO CERTIFICATION




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Part I  Financial Information: 
 Item 1. Financial Statements IPC ACQUISITION CORP. 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In Thousands Except Share Amounts)
 (Unaudited)
 March 31,
    
    September 30,2004
    
    2003AssetsAssets:Cash
    
    $
    10,972
    
    
    $
    25,800Accounts receivable, net of allowance of $2,170 and $1,103, respectively
    
    
    53,987
    
    
    
    60,201Inventories, net
    
    
    25,786
    
    
    
    30,396Prepaid and other current assets
    
    
    6,031
    
    
    
    5,523Total current assets
    
    
    96,776
    
    
    
    121,920Property, plant and equipment, net
    
    
    25,290
    
    
    
    24,419Goodwill
    
    
    95,251
    
    
    
    83,079Intangible assets, net
    
    
    198,917
    
    
    
    200,085Deferred financing costs, net
    
    
    13,191
    
    
    
    14,146Other assets
    
    
    1,172
    
    
    
    1,261Total assets
    
    $
    430,597
    
    
    $
    444,910Liabilities and Stockholders EquityLiabilities:Current portion of long term debt
    
    $
    550
    
    
    $
    550Accounts payable
    
    
    5,294
    
    
    
    2,787Accrued expenses and other current liabilities
    
    
    29,995
    
    
    
    28,541Income taxes payable
    
    
    3,975
    
    
    
    4,208Customer advances on installation contracts
    
    
    11,595
    
    
    
    18,989Deferred revenue on maintenance contracts
    
    
    19,134
    
    
    
    13,128Current portion of guarantees on former parent obligations
    
    
    1,353
    
    
    
    1,353Deferred purchase consideration
    
    
    
    
    
    
    6,722Total current liabilities
    
    
    71,896
    
    
    
    76,278Term loan
    
    
    54,175
    
    
    
    54,450Senior subordinated notes
    
    
    150,000
    
    
    
    150,000Deferred taxes, net
    
    
    16,490
    
    
    
    12,182Deferred compensation
    
    
    2,885
    
    
    
    2,936Guarantees on former parent obligations and other long-term liabilities
    
    
    1,339
    
    
    
    1,885Total liabilities
    
    
    296,785
    
    
    
    297,731Commitments and ContingenciesStockholders equity:Common stock, $0.01 par value, 25,000,000 shares authorized; 14,724,380
shares issued and outstanding at March 31, 2004 and September 30, 2003,
respectively
    
    
    147
    
    
    
    147Paid in capital
    
    
    145,846
    
    
    
    145,846Notes receivable for purchases of common stock
    
    
    (325
    )
    
    
    (393
    )Accumulated deficit
    
    
    (22,084
    )
    
    
    (5,161
    )Accumulated other comprehensive income
    
    
    10,228
    
    
    
    6,740Total stockholders equity
    
    
    133,812
    
    
    
    147,179Total liabilities and stockholders equity
    
    $
    430,597
    
    
    $
    444,910
 The accompanying notes are an integral part of the condensed consolidated financial statements. 1




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IPC ACQUISITION CORP. 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 (In Thousands)
 Three Months Ended
    
    Six Months EndedMarch 31,
    
    March 31,2004
    
    2003
    
    2004
    
    2003Revenue:Product sales and installations
    
    $
    41,002
    
    
    $
    32,819
    
    
    $
    69,106
    
    
    $
    56,570Service
    
    
    38,037
    
    
    
    23,486
    
    
    
    70,100
    
    
    
    48,11879,039
    
    
    
    56,305
    
    
    
    139,206
    
    
    
    104,688Cost of goods sold (depreciation shown separately):Product sales and installations
    
    
    22,196
    
    
    
    19,680
    
    
    
    39,463
    
    
    
    31,934Service
    
    
    19,059
    
    
    
    11,894
    
    
    
    35,785
    
    
    
    24,929Depreciation and amortization
    
    
    968
    
    
    
    299
    
    
    
    1,710
    
    
    
    59642,223
    
    
    
    31,873
    
    
    
    76,958
    
    
    
    57,459Gross profit
    
    
    36,816
    
    
    
    24,432
    
    
    
    62,248
    
    
    
    47,229Research and development
    
    
    3,599
    
    
    
    2,928
    
    
    
    7,008
    
    
    
    5,663Selling, general and administrative
    
    
    15,138
    
    
    
    10,742
    
    
    
    28,426
    
    
    
    19,472Depreciation and amortization
    
    
    5,388
    
    
    
    4,798
    
    
    
    10,555
    
    
    
    9,529Income from operations
    
    
    12,691
    
    
    
    5,964
    
    
    
    16,259
    
    
    
    12,565Other income (expense):Interest expense, net
    
    
    (5,814
    )
    
    
    (6,477
    )
    
    
    (11,336
    )
    
    
    (12,682
    )Other income (expense), net
    
    
    (140
    )
    
    
    802
    
    
    
    307
    
    
    
    1,327Income before income taxes
    
    
    6,737
    
    
    
    289
    
    
    
    5,230
    
    
    
    1,210Income tax expense
    
    
    3,932
    
    
    
    900
    
    
    
    4,189
    
    
    
    2,023Net income (loss)
    
    $
    2,805
    
    
    $
    (611
    )
    
    $
    1,041
    
    
    $
    (813
    )
 The accompanying notes are an integral part of the condensed consolidated financial statements. 2




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IPC ACQUISITION CORP. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 (In Thousands)
 Six Months EndedMarch 31,2004
    
    2003Cash flows from operating activities:Net income (loss)
    
    $
    1,041
    
    
    $
    (813
    )Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation and amortization
    
    
    4,552
    
    
    
    2,975Amortization of intangibles
    
    
    7,713
    
    
    
    7,150Amortization of deferred financing costs
    
    
    955
    
    
    
    1,463Provision for doubtful accounts
    
    
    299
    
    
    
    (54
    )Deferred income taxes
    
    
    2,445
    
    
    
    (1,447
    )Amortization of guarantees on former parent obligations
    
    
    (677
    )
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    9,634
    
    
    
    5,292Inventories
    
    
    5,020
    
    
    
    (13,626
    )Prepaids and other current assets
    
    
    (27
    )
    
    
    (1,296
    )Other assets
    
    
    165
    
    
    
    1Accounts payable, accrued expenses and other liabilities
    
    
    1,290
    
    
    
    (4,656
    )Income taxes payable
    
    
    (1,083
    )
    
    
    1,162Customer advances and deferred revenue
    
    
    (1,983
    )
    
    
    17,196Net cash provided by operating activities
    
    
    29,344
    
    
    
    13,347Cash flows from investing activities:Capital expenditures
    
    
    (4,221
    )
    
    
    (2,284
    )Global Crossing Settlement:Proceeds from restricted cash account and other amounts
    
    
    
    
    
    
    9,419Cash payments
    
    
    
    
    
    
    (5,200
    )Payment of Gains US and UK earn-out consideration and deferred purchase price
    
    
    (6,756
    )
    
    
    Acquisition of Gains Asia, net of cash acquired
    
    
    (15,182
    )
    
    
    Net cash provided by (used in) investing activities
    
    
    (26,159
    )
    
    
    1,935Cash flows from financing activities:Principal payments on term loan
    
    
    (275
    )
    
    
    (17,160
    )Issuance costs for term loan amendment
    
    
    
    
    
    
    (310
    )Deferred compensation payments
    
    
    (51
    )
    
    
    (46
    )Payment of special cash dividend
    
    
    (17,964
    )
    
    
    Net cash used in financing activities
    
    
    (18,290
    )
    
    
    (17,516
    )Effect of exchange rate changes on cash
    
    
    277
    
    
    
    (651
    )Net decrease in cash
    
    
    (14,828
    )
    
    
    (2,885
    )Cash, beginning of period
    
    
    25,800
    
    
    
    25,294Cash, end of period
    
    $
    10,972
    
    
    $
    22,409Supplemental disclosures of cash flow information:Cash paid during the periods for:Income taxes
    
    $
    2,493
    
    
    $
    2,524Interest
    
    $
    10,674
    
    
    $
    11,575
 The accompanying notes are an integral part of the condensed consolidated financial statements. 3




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IPC ACQUISITION CORP. 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 March 31, 2004
 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements
include the accounts of IPC Acquisition Corp. (the Company) and its wholly
and partially owned subsidiaries. The unaudited condensed consolidated
financial statements have been prepared in accordance with accounting
principles generally accepted in the United States 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 accounting principles generally accepted in the United States 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, 2003, as filed with the Securities and Exchange
Commission. These unaudited condensed consolidated financial statements reflect all
adjustments, consisting only of normal recurring adjustments, that are, in the
opinion of management, necessary for a fair presentation of the results of
operations for the interim periods presented. Interim period operating results
may not be indicative of the operating results to be expected for the full year
or any other interim period. The unaudited condensed consolidated financial statements for the three
and six months ended March 31, 2004 and 2003 include the accounts of the
Company and its wholly and partially owned subsidiaries. The Company
had no operations prior to the December 20, 2001 acquisition of IPC
Information Systems, Inc. and Asia Global Crossing IPC Trading Systems
Australia Pty. Ltd. (the IPC Information Systems
Acquisition). On April 30,
2003, the Company purchased Gains International (US) Inc. and Gains International (Europe)
Limited and on January 6, 2004 purchased Gains International Asia Holdings
Limited. The results of operations of the acquired businesses have been
included in the Companys financial statements from their respective acquisition dates
through March 31, 2004. Intercompany balances and transactions have been
eliminated. 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. In addition, contracts for annual recurring turret and
Information Transport Systems, or I.T.S., services are generally billed in
advance, and are recorded as revenue ratably (on a monthly basis) over the
contractual periods. Revenue from moves, additions and changes, 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 the Companys Network Services division, which provides voice and data
services to the financial community, is generally billed at the
beginning of the month and recognized in the same month. Goodwill and Other Intangible Assets Goodwill represents the excess of the cost over the net of the fair value
of the identifiable tangible and intangible assets acquired and the fair value
of liabilities assumed in acquisitions. The Company adopted Statement of
Financial Accounting Standards (SFAS) No. 142 Goodwill and Other Intangible
Assets (SFAS 142) in December 2001 and, in accordance with SFAS 142, there
is no amortization of goodwill and intangible assets that have indefinite
useful lives. However, goodwill is tested for impairment annually using the
two-step process specifically provided in SFAS 142. Other intangible assets are
carried at cost. Technology is amortized over its estimated useful life of
between 3 to 7 years, customer relationships are amortized over their 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 expense, but instead is
subject to annual impairment tests in accordance with the provisions of SFAS
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 a leading
position in turret solutions, 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 asset beyond the
foreseeable future. 4




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IPC ACQUISITION CORP. NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTSContinued
 (Unaudited)
 March 31, 2004
 The Company most recently completed the required annual impairment test as of July 1, 2003
(the first day of the fourth quarter of the 2003 fiscal year), and concluded
that there was no impairment to its recorded goodwill or trade name. There have
been no indicators of impairment during the six months ended March 31, 2004
that would require the Company to perform an impairment test for this period.
The Company believes the recorded values of goodwill and trade name in the
amounts of $95.3 million and $18.0 million, respectively, at March 31, 2004 are
fully recoverable. Special Cash Dividend On December 31, 2003, the Company declared a special cash dividend of
approximately $18.0 million, or $1.22 per share, to stockholders of record on
December 31, 2003, of which approximately $17.9 million was paid on December
31, 2003. The remaining $0.1 million was paid in January 2004. Stock-Based Compensation As permitted by Financial Accounting Standards Board (FASB) Statement
No. 123, Accounting for Stock-Based Compensation (SFAS 123), the Company
has elected to follow Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees (APB 25) and related interpretations in
accounting for its employee option plans. Under APB 25, no compensation expense
is recognized at the time of an option grant if the exercise price of the
employee stock option is fixed and equals or exceeds the fair market value of
the underlying common stock on the date of the grant and the number of shares
to be issued pursuant to the exercise of such options are fixed on the date of
the grant. Pro forma information regarding net income (loss) 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
these options was estimated at the date of the grant using a Black-Scholes
option pricing model with the following assumptions for the three months ended
March 31, 2004 and 2003: weighted-average risk-free interest rate of 2.1%;
weighted-average volatility factor of the expected market price of the
Companys common stock of 90%; dividend yield of 14.2% for 2004 only and a
weighted-average expected life of the options of 4 years. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Companys employee stock options have characteristics
significantly different from those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
managements opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of options
granted is amortized to expense over their vesting periods. The
weighted-average grant date fair value of options granted during the three
months ended March 31, 2004 was $2.44. The Companys pro forma net income
(loss) for all periods is shown below. These amounts may not necessarily be
indicative of the pro forma effect of SFAS 123 for future periods in which
ptions may be granted. The Company recorded no compensation expense under APB 25 for the periods
presented. If the Company elected to recognize compensation expense based on
the fair value of the options granted at grant date, as prescribed by SFAS 123,
net income (loss) would have been adjusted to the pro forma amounts indicated
in the table below: Three Months Ended
    
    Six Months EndedMarch 31,
    
    March 31,(dollars in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Reported
net income (loss)
    
    $
    2,805
    
    
    $
    (611
    )
    
    $
    1,041
    
    
    $
    (813
    )Add back total stock-based
employee compensation
determined under APB 25
intrinsic value method, net
of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deduct total stock-based
employee compensation
expense determined under
SFAS 123 fair value based
method for all awards, net
of tax
    
    
    (383
    )
    
    
    (186
    )
    
    
    (751
    )
    
    
    (371
    )Net income (loss), pro forma
    
    $
    2,422
    
    
    $
    (797
    )
    
    $
    290
    
    
    $
    (1,184
    )
 The special cash dividend that was declared by the Company on December 31,
2003 reduced the market value per share of the Companys common stock. As a
result, in order to provide equitable treatment to holders of stock options to
purchase the 5




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IPC ACQUISITION CORP. NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTSContinued
 (Unaudited)
 March 31, 2004
 Companys common stock, the Company repriced the exercise price of
all of its outstanding stock options from $10.00 per share to $8.78 per share
on December 31, 2003. This repricing does not require variable accounting
treatment for such options (recording future compensation expense based upon
changes in the fair value of the options). The reduction in the exercise price
of $1.22 per share is equivalent to the per share amount of the special cash
dividend to stockholders at that date and to the reduction in market value per
share of the Companys common stock. Effects of Recently Issued Accounting Standards In December 2003, the FASB issued FASB Interpretation No. 46R,
Consolidation of Variable Interest Entities an Interpretation of ARB No. 51
(FIN 46R). This Interpretation, which replaces FASB Interpretation No. 46
Consolidation of Variable Interest Entities, clarifies the application of
Accounting Research Bulletin No. 51, Consolidated Financial Statements (ARB
51), to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support. Application of FIN 46R was required for the
Company for the second quarter of its 2004 fiscal year. The Company has
determined that its investment in Purple Voice Holdings Limited (Purple
Voice) meets the criteria of a variable interest entity requiring
consolidation under FIN 46R. However, because the Company has voting control
over Purple Voice, it has been consolidating Purple Voice in accordance with
the requirements of ARB 51. Accordingly, there was no further impact upon the
consolidated financial statements resulting from the adoption of FIN 46R. Comprehensive Income (Loss) The balance sheets and statements of operations of the Companys foreign
operations are measured using the local currency as the functional currency.
Assets and liabilities of these foreign operations are translated at the
period-end exchange rate and revenue and expense amounts are translated at the
average rates of exchange prevailing during the period. The resulting foreign
currency translation adjustments are accumulated as a component of other
comprehensive income (loss). Three Months Ended
    
    Six Months EndedMarch 31,
    
    March 31,(dollars in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Reported net income (loss)
    
    $
    2,805
    
    
    $
    (611
    )
    
    $
    1,041
    
    
    $
    (813
    )Translation adjustment, net of tax
    
    
    374
    
    
    
    (949
    )
    
    
    3,488
    
    
    
    161Total comprehensive income (loss)
    
    $
    3,179
    
    
    $
    (1,560
    )
    
    $
    4,529
    
    
    $
    (652
    )
 2. Acquisitions IPC Information Systems Acquisition The Company was formed in November 2001 by a group led by GS Capital
Partners 2000, L.P. (GSCP 2000), and other private equity funds affiliated
with Goldman, Sachs & Co., to acquire IPC Information Systems, Inc. and Asia
Global Crossing IPC Trading Systems Australia Pty. Ltd (collectively, IPC
Information Systems). The Company did not have any assets or operations prior
to the IPC Information Systems Acquisition. On December 20, 2001, the Company
purchased IPC Information Systems from Global Crossing and Asia Global
Crossing, Ltd. and various of their affiliates. The Company and various of its
subsidiaries also entered into a network services, channel sales and transition
services agreement with Global Crossing and various other parties that
obligated the Company to market or resell Global Crossings channel network
services to its customers and restricted its ability to supply
telecommunications services to any third party or to own a network capable of
providing these services to any third party. Under the purchase agreement, the
total purchase price for the shares and assets was $360.0 million,
subject to various adjustments for working capital and customer advances.
As a result of the IPC Information Systems Acquisition, the Company owns a
leader in turret solutions, based on its base of approximately 110,000 turrets
and related equipment installed in trading positions worldwide. On January 28, 2002, Global Crossing and 54 of its subsidiaries filed
petitions for relief under Chapter 11 of Title 11 of the United States Code. On
March 13, 2003, the Company entered into a settlement and rejection agreement
with Global Crossing. Pursuant to the settlement and rejection agreement, all
of the remaining obligations under the purchase agreement relating to the IPC
Information Systems Acquisition were terminated, including Global Crossings
obligation to pay any portion of the deferred purchase price and Global
Crossings obligation to indemnify the Company for specific tax liabilities. In
addition, the Company and Global Crossing mutually released each other for all
prior claims. The bankruptcy court entered an order on March 14, 2003 approving
the settlement and rejection agreement. 6




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IPC ACQUISITION CORP. NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTSContinued
 (Unaudited)
 March 31, 2004
 Prior
to the completion of the IPC Information Systems Acquisition, a
subsidiary of IPC Information Systems leased six floors at 67-73 Worship Street, London, England at an annual
rate of approximately £565,000, or $1.0 million, assuming an exchange rate of
£1 to $1.8262. Of these six floors, the Company uses one floor for office space
and an affiliate of Global Crossing uses five floors for telecommunications and
networking equipment. Under the lease, which expires in 2010, the Company
remains liable to the landlord for all six floors. Pursuant to the purchase
agreement with Global Crossing, the Company entered into a sublease for a
portion of these premises with an affiliate of Global Crossing and the landlord
has consented to that sublease. Through March 31, 2004, Global Crossings
affiliate has made all of its required sublease payments. Under the terms of the settlement and rejection agreement, the Company
deposited $5.2 million in an escrow account. Global Crossing received $3.2
million from the escrow account upon the filing of certain tax returns. Global
Crossing will receive the remaining $2.0 million from the escrow account after
a $2.0 million irrevocable letter of credit is issued on behalf of the Company.
The Company will have the right to draw on that letter of credit in the event
Global Crossings affiliate fails to make any payments due to the Company
pursuant to the sublease for office space at 67-73 Worship Street in London,
England. The Company believes that all tax returns required to be filed in respect
of IPC Information Systems, Inc. and its subsidiaries for periods prior to and
including the date of the IPC Information Systems Acquisition have now been
filed. These returns consist of consolidated tax returns with Global Crossing,
and, where required by law, separate tax returns for IPC Information Systems,
Inc. and/or its subsidiaries. As a result of the termination of the purchase agreement, Global Crossing
has been relieved of all of its obligations under the purchase agreement,
including, among other things, indemnifying the Company for tax liabilities
that may be imposed upon IPC Information Systems, Inc. and its subsidiaries for
periods prior to and including the date of the IPC Information Systems
Acquisition. Therefore, in the event that any tax liabilities are imposed, as a
result of an audit or otherwise, on IPC Information Systems, Inc. and/or its
subsidiaries for periods prior to and including the date of the IPC Information
Systems Acquisition, the Company may be required to pay those taxes and is no
longer able to seek indemnification from Global Crossing. As of
March 31, 2004, the aggregate amount of taxes for which the Company has received
notices of taxes due from various jurisdictions and recognized as tax
liabilities under purchase accounting is approximately $6.5 million and, as of
March 31, 2004, the Company has made settlement payments aggregating $0.8
million. The Company estimates that the range of its exposure for additional
tax liabilities is from $0.0 to $36.0 million. In computing its estimated range
of potential tax liabilities, the Company took into account tax returns in
certain jurisdictions where the statutes of limitations have not yet expired.
Under those tax returns as filed, the remaining liability is zero. Although the
Company believes that all those tax returns have been filed correctly, such
returns may be audited and additional taxes may be assessed (or refunds may be
granted). Payment by the Company of a significant amount of these potential tax
liabilities could have a material adverse effect on the Companys financial
condition and results of operations, requiring the Company to seek additional
financing. In that event, the Company cannot make assurances that it will be
able to obtain additional financing on commercially reasonable terms, or at
all. Pursuant to the settlement and rejection agreement, Global Crossing has
also paid over to the Company approximately $2.2 million for payroll and
federal tax refunds received by it for periods prior to and including the date
of the IPC Information
Systems Acquisition. Global Crossing is also required to pay the Company any
future tax refunds or credits it receives that are applicable to IPC
Information Systems, Inc. and its subsidiaries for these periods. As part of the settlement and rejection agreement, the Company also
entered into an amendment to the network services, channel sales and transition
services agreement. Under the amendment, the Company no longer has any
obligation to market or resell Global Crossings channel network services to
its customers. Additionally, pursuant to the amendment, the Company is
permitted to use any other provider of network services for its own internal
purposes so long as the Companys aggregate annual payments to Global Crossing
and its subsidiaries are at least $48,000. Gains US and UK Acquisition On April 30, 2003, the Company exercised its option to purchase Gains
International (US) Inc. and Gains International (Europe) Limited (collectively
Gains US and UK) from GSCP 2000 and other private equity funds affiliated
with Goldman, Sachs & Co., who own substantially all of the Companys common
stock, for 664,380 shares of common stock valued at approximately $5.7 million,
deferred purchase consideration of $3.1 million and earn-out consideration of
approximately $3.6 million. There is no further contingent consideration in
connection with this acquisition. With the acquisition of Gains US and UK, the
Company now offers voice and data services primarily to the financial services
community under the name Network 7




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IPC ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSContinued
(Unaudited)
March 31, 2004 Services. This transaction followed the
completion of a transaction involving the sale of Gains International (US)
Inc., Gains International (Europe) Limited and Gains International Asia
Holdings Limited to entities formed by GSCP 2000 and other private equity funds
affiliated with Goldman, Sachs & Co. The following table summarizes the fair value of the assets acquired and
the liabilities assumed at the date of the acquisition. The purchase price on
the date of the acquisition exceeded the fair market value of the net assets
acquired by approximately $11.3 million and was recorded as goodwill on the
consolidated balance sheet. The primary factor that contributed to a purchase
price that resulted in the recognition of goodwill is the potential ability of
the Network Services division to generate income from operations and cash flows
from operating activities in the future. The goodwill and intangible assets are
not amortizable for income tax purposes. Condensed Balance Sheet (dollars in thousands)Current assets
    
    $
    6,115Property, plant and equipment, net
    
    
    2,645Goodwill
    
    
    11,324Intangible assets
    
    
    1,664Other long-term assets
    
    
    12Total assets acquired
    
    
    21,760Current liabilities
    
    
    9,345Deferred purchase consideration
    
    
    3,128Earn-out consideration
    
    
    3,594Total liabilities assumed
    
    
    16,067Acquisition
consideration at closing
    
    $
    5,693
 The acquisition of Gains US and UK was accounted for using the purchase
method of accounting in accordance with FASB Statement No. 141, Business
Combinations (SFAS 141) and accordingly, the Companys consolidated results
of operations for the six months ended March 31, 2004 include the operating
results of Gains US and UK from the date of purchase. The following table
represents the allocation of the excess of the purchase price over the
historical cost of the net tangible assets acquired at the date of the
purchase: (dollars in thousands)Common stock issued at closing
    
    
    
    
    
    
    
    
    $
    5,693Deferred purchase price payment
    
    
    
    
    
    
    
    
    
    3,128Earn-out consideration
    
    
    
    
    
    
    
    
    
    3,594Transaction costs
    
    
    
    
    
    
    
    
    
    1,703Total consideration
    
    
    
    
    
    
    
    
    
    14,118Historical cost of net tangible assets acquired
    
    
    
    
    
    
    
    
    
    (1,130
    )Excess of purchase price over net tangible assets acquired
    
    
    
    
    
    
    
    
    $
    12,988Allocation of excess purchase price:Residual goodwill (indefinite life)
    
    
    
    
    
    
    
    
    $
    11,324Identified intangibles:Customer relationships (8 year life)
    
    
    
    
    
    $
    1,200Proprietary software (7 year life)
    
    
    
    
    
    
    464Total identified intangibles
    
    
    
    
    
    
    
    
    
    1,664Total allocation of excess purchase price
    
    
    
    
    
    
    
    
    $
    12,988
 8




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IPC ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSContinued
(Unaudited)
March 31, 2004 Gains Asia Acquisition On January 6, 2004, the Company purchased Gains International Asia
Holdings Limited (Gains Asia) from GSCP 2000 and other private equity funds
affiliated with Goldman, Sachs & Co. for approximately $17.4 million in cash
consideration, including an $11.9 million payment at closing and an advance
payment of $5.5 million made in October 2003. This transaction followed the
acquisition of Gains US and UK in April 2003 and completes the purchase of all
the Gains related entities. With the acquisition of Gains Asia, along with the
acquisition of Gains US and UK, the Company now owns and operates its own
private global voice and data network under the name Network Services. The following table summarizes the fair value of the assets acquired and
the liabilities assumed at the date of the acquisition. The purchase price on
the date of the acquisition exceeded the fair market value of the net assets
acquired by approximately $9.6 million and was recorded as goodwill on the
consolidated balance sheet. The primary factor that contributed to a purchase
price that resulted in the recognition of goodwill is the ability of Gains
Asia, along with Gains US and UK, to generate income from operations and cash
flows from operating activities in the future. The goodwill and intangible
assets are not amortizable for income tax purposes. Condensed Balance Sheet (dollars in thousands)Current assets
    
    $
    5,010Property, plant and equipment, net
    
    
    991Goodwill
    
    
    9,616Intangible assets
    
    
    4,400Total assets acquired
    
    
    20,017Current liabilities
    
    
    2,252Advance payment and other liabilities
    
    
    5,848Total liabilities assumed
    
    
    8,100Acquisition
consideration at closing
    
    $
    11,917
 The acquisition of Gains Asia was accounted for using the purchase method
of accounting in accordance with SFAS 141 and accordingly, the Companys
consolidated results of operations for the three and six months ended March 31,
2004 include the operating results of Gains Asia from the date of purchase. The
following table represents the preliminary allocation of the excess of the
purchase price over the historical cost of the net tangible assets acquired at
the date of the purchase: (dollars in thousands)Cash paid at closing
    
    $
    11,917Advance payment
    
    
    5,528Transaction costs
    
    
    425Total consideration
    
    
    17,870Historical cost of net tangible assets acquired
    
    
    (3,854
    )Excess of purchase price over net tangible assets acquired
    
    $
    14,016Allocation of excess purchase price:Residual goodwill (indefinite life)
    
    $
    9,616Identified intangibles:Customer relationships (8 year life)
    
    
    4,400Total allocation of excess purchase price
    
    $
    14,016
 9




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IPC ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSContinued
(Unaudited)
March 31, 2004 Proforma Financial
Information for Gains US and UK and Gains Asia Acquisitions Set forth below is the unaudited pro forma consolidated results of
operations of the Company for the three and six months ended March 31, 2004 and
2003, assuming the Gains US and UK and Gains Asia acquisitions occurred as of the beginning of the
period. The unaudited pro forma condensed financial information is presented for
informational purposes only and does not purport to represent the results of
operations of the Company for the periods described above had the
Gains US and UK and Gains Asia
acquisitions occurred as of the beginning of the period, or to project the
results for any future period. Three Months Ended
    
    Six Months EndedMarch 31,
    
    March 31,(dollars in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Revenue
    
    $
    79,039
    
    
    $
    64,802
    
    
    $
    142,733
    
    
    $
    120,971Net income (loss)
    
    $
    2,805
    
    
    $
    (417
    )
    
    $
    1,780
    
    
    $
    (1,434
    )
 Investment in Purple Voice IPC UK Holdings Limited (IPC UK), a subsidiary of the Company, entered
into a series of transactions with Purple Voice, a business-to-business
Internet Protocol (IP) software company that provides Voice over IP (VoIP)
solutions to the financial community. VoIP is the method by which voice
communication is delivered from one computer to another over a network. As a
result of these transactions, which closed on August 1, 2003:  
    
    IPC UK acquired approximately 40% of the currently outstanding common
shares (calculated on a non-diluted basis) of Purple Voice together with
a warrant for additional shares from certain minority shareholders of
Purple Voice for approximately $120,000;
    
    IPC UK invested $1.0 million in a 7% secured convertible note, due
September 2007, issued by Purple Voice, which is convertible into 49% of
Purple Voices share capital on a fully diluted basis;
    
    The remaining shareholders of Purple Voice granted a call option to
IPC UK, which permits IPC UK to acquire the remaining issued share
capital of Purple Voice for an aggregate amount of $0.8 million, plus an
earn-out of up to $9.0 million, dependent on certain revenue targets
being met; and
    
    IPC Information Systems, Inc. and Purple Voice entered into an
agreement under which IPC Information Systems, Inc. has been appointed
Purple Voices exclusive reseller worldwide. On a pro forma basis, this acquisition did not have a material impact on
the Companys results of operations for the three and six months ended March
31, 2003. In April and May 2004, IPC UK acquired additional shares and share
warrants in Purple Voice from Scipher PLC and certain individual shareholders
for a total consideration of approximately $355,000. Following those
acquisitions, IPC UK now holds approximately 83% of the currently outstanding
common shares (calculated on a non-diluted basis) of Purple Voice together with
warrants to subscribe for additional shares. 3. Inventories March 31,
    
    September 30,(dollars in thousands)
    
    2004
    
    2003Components and manufacturing work in process
    
    $
    6,150
    
    
    $
    5,980Inventory on customer sites awaiting installation
    
    
    14,268
    
    
    
    17,874Parts and maintenance supplies
    
    
    5,368
    
    
    
    6,542$
    25,786
    
    
    $
    30,396
 4. 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. 10




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IPC ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSContinued
(Unaudited)
March 31, 2004 The following table reflects the changes in goodwill for the six months
ended March 31, 2004: (dollars in thousands)Balance at September 30, 2003
    
    $
    83,079Gains
Asia acquisition
    
    
    9,616Write-offs
    
    
    Effects of currency translation adjustments
    
    
    2,556Balance at March 31, 2004
    
    $
    95,251
 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,
    
    September 30,(dollars in thousands)
    
    2004
    
    2003Intangible assets:Amortized intangible assets:Technology
    
    $
    46,346
    
    
    $
    46,346Customer relationships
    
    
    159,630
    
    
    
    155,230Effect of currency translation adjustments
    
    
    8,192
    
    
    
    6,081Accumulated amortization-technology
    
    
    (14,958
    )
    
    
    (11,517
    )Accumulated amortization-customer relationships
    
    
    (18,293
    )
    
    
    (14,055
    )Net carrying amount
    
    
    180,917
    
    
    
    182,085Non-amortized intangible assets:Trade name
    
    
    18,000
    
    
    
    18,000Net carrying amount
    
    $
    198,917
    
    
    $
    200,085
 Amortization expense for those intangible assets required to be amortized
under SFAS 142 was $3.9 million and $7.7 million for the three and six months
ended March 31, 2004 and $3.6 million and $7.2 million for the three and six
months ended March 31, 2003. Estimated annual amortization expense for fiscal year 2004 and each of the
four succeeding fiscal years for identifiable intangible assets required to be
amortized under SFAS 142 are as follows: (dollars in thousands)
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008Estimated annual amortization expense
    
    $
    15,470
    
    
    $
    15,470
    
    
    $
    15,470
    
    
    $
    15,022
    
    
    $
    15,022
 5. Accrued Expenses and Other Current Liabilities March 31,
    
    September 30,(dollars in thousands)
    
    2004
    
    2003Accrued compensation and benefits
    
    $
    8,754
    
    
    $
    7,433Warranty reserves
    
    
    1,951
    
    
    
    1,889Sales taxes payable
    
    
    1,043
    
    
    
    891Accrued job costs
    
    
    1,352
    
    
    
    2,536Accrued transaction costs
    
    
    2,193
    
    
    
    2,124Accrued carrier costs
    
    
    4,769
    
    
    
    3,650Current portion of deferred compensation
    
    
    692
    
    
    
    692Accrued interest
    
    
    5,106
    
    
    
    5,299Other accruals
    
    
    4,135
    
    
    
    4,027$
    29,995
    
    
    $
    28,541
 11




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##### Table of Contents



IPC ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSContinued
(Unaudited)
March 31, 2004 6. Long Term Debt Senior Secured Credit Facilities On December 20, 2001, the Company entered into 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 consist of a $25.0 million revolving credit facility
and a $55.0 million term loan; provided, however, that the Company can increase
the committed amount under these facilities by up to $25.0 million so long as
one or more lenders agrees to provide this incremental commitment and other
customary conditions are satisfied. The term loan was borrowed in full at
closing. As of March 31, 2004, the amount available for borrowing under the
revolving credit facility was $20.7 million, as availability of $25.0 million
was reduced by outstanding letters of credit of $4.3 million. For the three
months ended March 31, 2004, the weighted average interest rate for borrowings
outstanding under the amended and restated senior secured credit facilities was
5.11%. On April 20, 2004, the Company completed an agreement to increase the
availability under the revolving credit facility by $10.0 million under the
provisions mentioned above. The total amount available for borrowing under the
revolving credit facility after this increase is $30.7 million ($35.0 million
reduced by outstanding letters of credit of $4.3 million). Mandatory prepayments of the amended and restated 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 in the 2004 fiscal year and thereafter.
Excess cash flow is defined in the Companys amended and restated credit
agreement as: (1) the sum of net income, interest expense, provisions for
taxes, depreciation expense, amortization expense, other non-cash items
affecting net income and to the extent included in calculating net income,
expenses incurred by the Company in connection with an amendment of the then
existing credit agreement, certain restructuring expenses and prepayment
premiums in connection with prepayment of loans under the then existing credit
agreement, plus (2) a working capital adjustment less (3) scheduled repayments
of debt, capital expenditures, cash interest expense and provisions for taxes
based on income. As required under the terms of the Companys senior secured credit
facilities, the Company made mandatory excess cash flow repayments of $30.0
million and $0.8 million on September 30, 2002 and December 29, 2002,
respectively, based upon 75% of its excess cash flow for the period ended
September 30, 2002. On March 3, 2003, the Company also voluntarily prepaid
$14.0 million in debt on its then existing senior secured credit facilities.
For the year ended September 30, 2003, the Company was not required to make a
mandatory excess cash flow repayment under the terms of the amended and
restated senior secured credit facilities. Obligations under the amended and restated 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 amended and restated
senior secured credit facilities. The amended and restated 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 amended and restated 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. As of March 31, 2004, annual principal repayments required under the $55.0
million term loan, (excluding any future excess free cash flow amounts), by
fiscal year, are as follows (in thousands): 2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Total$275
    
    
    $
    550
    
    
    $
    550
    
    
    $
    550
    
    
    $
    52,800
    
    
    $
    54,725
 12




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IPC ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSContinued
(Unaudited)
March 31, 2004 Senior Subordinated Notes The Company issued $150.0 million in aggregate principal amount of 11.50%
senior subordinated notes on December 20, 2001 to fund a portion of the
consideration for the acquisition of IPC Information Systems. Under the terms
of the indenture governing the senior subordinated notes, the Company may,
subject to certain restrictions, issue additional notes up to a maximum
aggregate principal amount of $250.0 million. The senior subordinated notes
mature on December 15, 2009 and are callable, at the Companys option,
beginning in December 2005. The senior subordinated notes are general unsecured
obligations of the Company, are subordinated in right of payment to all
existing and future senior debt, including the senior secured credit
facilities, are pari passu in right of payment with any future senior
subordinated indebtedness of the Company, and are unconditionally guaranteed by
certain of the Companys domestic restricted subsidiaries. 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,
commencing on June 15, 2002. 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 indebtness 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. 7. 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 liabilities is assessed each quarter and adjustments are made
as necessary. The specific terms and conditions of the warranties vary
depending on the products sold and the countries in which the Company does
business. Changes in the warranty liability during the periods presented are as
follows: Six Months EndedMarch 31,(dollars in thousands)
    
    2004
    
    2003Balance at beginning of period
    
    $
    1,889
    
    
    $
    2,159Warranty accrual
    
    
    949
    
    
    
    647Material and labor usage
    
    
    (887
    )
    
    
    (1,377
    )Balance at end of period
    
    $
    1,951
    
    
    $
    1,429
 Guarantees The Company, through its subsidiaries, guaranteed certain equipment lease,
real estate and other obligations of its former affiliate, Global
Crossing. A subsidiary of the Company remains a guarantor of certain real estate lease obligations on behalf
of Global Crossing including a sublease for office space at 67-73 Worship
Street in London, England. The terms of these guarantees will expire in
November 2004 and December 2005. These obligations were entered as a result of
Global Crossings ownership of the Company and the Company is responsible for
any payments if Global Crossing fails to make the required payments under the
lease agreements. However, under the settlement and rejection agreement (as
discussed in Note 2), $2.0 million has been placed in an escrow account pending
the issuance of an irrevocable letter of credit from Global Crossing to the
Company as beneficiary in the event that Global Crossing fails to make the
required payments under the Worship Street sublease. The
maximum potential future payments the Company could be required to make under
these obligations is $3.5 million. The carrying value of
these guarantees as of March 31, 2004 is $1.9 million, and such amount has been
recorded on the Companys consolidated balance sheet in accordance with FASB
Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN
45). Such amount has been reduced by the $2.0 million escrow account. Through March 31, 2004, Global Crossings
affiliate has made all of the required Worship Street sublease payments. 13




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IPC ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSContinued
(Unaudited)
March 31, 2004 Litigation Except as described below, the Company is not a party to any pending legal
proceedings other than claims and lawsuits arising in the normal course of
business. Management believes these proceedings will not have a material
adverse effect on the Companys consolidated financial condition or results of
operations. On June 27, 2000, an action was brought against several defendants,
including the Companys subsidiary, IPC Communications, Inc., in the United
States District Court for the Southern District of New York by two
telecommunications cabling contractors alleging that IPC Communications, Inc.
violated federal antitrust and New York state law by conspiring with the
International Brotherhood of Electrical Workers Local Union Number 3, AFL-CIO,
and five electrical contractors to exclude plaintiffs from telecommunications
wiring and systems installation jobs in the New York City metropolitan area.
Subsequently, the complaint was amended to add an additional plaintiff and an
additional defendant contractor. The Company believes the suit is without
merit. However, there can be no assurance that the resolution of this lawsuit
will ultimately be favorable. Plaintiffs are seeking injunctive relief and
damages from the defendants, jointly and severally, in excess of an aggregate
of $75.0 million. On September 8, 2003, an action was brought against several defendants,
including the Companys subsidiary, IPC Information Systems, Inc. and its
President, in the United States District Court for the Eastern District of New
York by Advance Relocation & Storage Co., Inc., a moving company. The complaint
alleges that IPC Information Systems, Inc. and 23 other defendants violated the
Racketeer Influenced and Corrupt Organizations Act and engaged in tortious
interference with prospective business advantage by preventing the plaintiff
from obtaining work as a mover in jobs performed in large commercial buildings
in New York City. The Company believes the suit is without merit and intends to
vigorously defend against all claims alleged against it in the complaint.
Plaintiffs are seeking injunctive relief and damages from the defendants,
jointly and severally, in an aggregate amount of approximately $7.0 million. 8. Income Taxes The Companys effective tax rate for the six months ended March 31, 2004
was 80.1% and 167.2% for the six months ended March 31, 2003. The Companys
effective tax rates reflect 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 taxable income at several of the
Companys foreign subsidiaries, which, as compared to the absolute amount of
pre-tax earnings (or loss), has a significant impact on the Companys effective
tax rates. As of September 30, 2003, the Company has recognized deferred tax assets
related to its US federal and state net operating loss carryforwards of
approximately $5.4 million. In determining whether it is more likely than not
that the Company will realize the benefits of the net deferred tax assets from
US operations, the Company considered all available evidence, both positive and
negative. The principal factors that led the Company to recognize these
benefits were: (1) US results of operations for the period ended September 30,
2002 reported a loss before income taxes of $22.1 million, after reflecting
charges of $34.3 million resulting from the fair-value inventory adjustments
under the purchase price allocation of the IPC Information Systems Acquisition
(which, as a result of the Internal Revenue Code Section 338(h)(10) tax
election, jointly made by the Company and Global Crossing, also generate
deductions for income tax purposes); (2) US results of operations for
subsequent fiscal years are expected to generate sufficient taxable income to
fully utilize these tax loss carryforwards; and (3) the Companys conclusion
that the net US deferred tax assets were generated by an event (the Companys
purchase of the business), rather than a continuing condition. As of March 31,
2004, no circumstances have arisen that would require the Company to change
such conclusion. As a result of the termination of the purchase agreement, Global Crossing
has been relieved of all of its obligations under the purchase agreement,
including, among other things, indemnifying the Company for tax liabilities
that may be imposed upon IPC Information Systems, Inc. and its subsidiaries for
periods prior to and including the date of the IPC Information Systems
Acquisition. Therefore, in the event that any tax liabilities are imposed, as a
result of an audit or otherwise, on IPC Information Systems, Inc. and/or its
subsidiaries for periods prior to and including the date of the IPC Information
Systems Acquisition, the Company may be required to pay those taxes and is no
longer able to seek indemnification from Global Crossing.
As of March 31, 2004, the aggregate amount of taxes for which the Company has received
notices of taxes due from various jurisdictions and recognized as tax
liabilities under purchase accounting is approximately $6.5 million and, as of
March 31, 2004, the Company has made settlement payments aggregating $0.8
million. The Company estimates that the range of its exposure for additional
tax liabilities is from $0.0 to $36.0 million. In computing its estimated range
of potential tax liabilities, the Company
took into account tax returns in certain jurisdictions where the statutes of
limitations have not yet expired. Under those tax returns as filed, the
remaining liability is zero. Although the Company believes that all those tax
returns have been filed correctly, such 14




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##### Table of Contents



IPC ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSContinued
(Unaudited)
March 31, 2004 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 could have a material adverse effect on the Companys financial
condition and results of operations, requiring the Company to seek additional
financing. In that event, the Company cannot assure you that it will be able to
obtain additional financing on commercially reasonable terms, or at all. 9. Business Segment Information The Companys operations include the Trading Systems, Information
Transport Systems, or I.T.S., and the Network Services divisions. Trading
Systems reports sales of turret systems to distributors and direct sales and
installations of turret systems as Product sales and installations. It
reports revenue from turret system maintenance, including annual and multi-year
service contracts, and from MACs to existing turret system installations as
Service. I.T.S. reports revenue from the design, integration and
implementation of cabling infrastructure projects, including local and wide
area networks, and from the sales of intelligent network products, such as
hubs, bridges and routers, as Product sales and installations. It reports
revenue from on-site maintenance of customer cable infrastructure, including
annual and multi-year contracts, and from the provision of outsourcing services
for the support, expansion and upgrading of existing customer networks, as
Service. Revenue from the Network Services division, which provides voice and
data services to the financial community, is generally billed at the
beginning of the month and recognized in the same month, as Service. The
Companys primary measures to evaluate performance are direct margin (revenue
less cost of goods sold, excluding indirect costs and depreciation and
amortization) and income from operations. Trading
    
    
    
    
    
    NetworkFor the Three Months Ended March 31, 2004
    
    Systems
    
    I.T.S.
    
    Services
    
    Consolidated(dollars in thousands)Revenue:Product sales and installations
    
    $
    32,243
    
    
    $
    8,759
    
    
    $
    
    
    
    $
    41,002Service
    
    
    25,672
    
    
    
    456
    
    
    
    11,909
    
    
    
    38,037Total revenue
    
    
    57,915
    
    
    
    9,215
    
    
    
    11,909
    
    
    
    79,039Direct margin
    
    
    37,657
    
    
    
    1,297
    
    
    
    6,211
    
    
    
    45,165Depreciation and amortization
    
    
    5,379
    
    
    
    60
    
    
    
    917
    
    
    
    6,356Income (loss) from operations
    
    
    11,764
    
    
    
    (15
    )
    
    
    942
    
    
    
    12,691Interest expense, net
    
    
    (5,785
    )
    
    
    
    
    
    
    (29
    )
    
    
    (5,814
    )Other income (expense), net
    
    
    (219
    )
    
    
    
    
    
    
    79
    
    
    
    (140
    )Income (loss) before income taxes
    
    
    5,760
    
    
    
    (15
    )
    
    
    992
    
    
    
    6,737Income tax provision
    
    
    3,382
    
    
    
    
    
    
    
    550
    
    
    
    3,932Goodwill
    
    $
    72,581
    
    
    $
    971
    
    
    $
    21,699
    
    
    $
    95,251Total assets
    
    $
    368,022
    
    
    $
    21,220
    
    
    $
    41,355
    
    
    $
    430,597Capital expenditures
    
    $
    1,626
    
    
    $
    
    
    
    $
    854
    
    
    $
    2,480
 TradingFor the Three Months Ended March 31, 2003
    
    Systems
    
    I.T.S.
    
    Consolidated(dollars in thousands)Revenue:Product sales and installations
    
    $
    23,902
    
    
    $
    8,917
    
    
    $
    32,819Service
    
    
    21,191
    
    
    
    2,295
    
    
    
    23,486Total revenue
    
    
    45,093
    
    
    
    11,212
    
    
    
    56,305Direct margin
    
    
    28,620
    
    
    
    1,249
    
    
    
    29,869Depreciation and amortization
    
    
    5,037
    
    
    
    60
    
    
    
    5,097Income (loss) from operations
    
    
    6,410
    
    
    
    (446
    )
    
    
    5,964Interest expense, net
    
    
    (6,477
    )
    
    
    
    
    
    
    (6,477
    )Other income (expense), net
    
    
    802
    
    
    
    
    
    
    
    802Income (loss) before income taxes
    
    
    735
    
    
    
    (446
    )
    
    
    289Income tax provision
    
    
    900
    
    
    
    
    
    
    
    900Goodwill
    
    $
    69,242
    
    
    $
    971
    
    
    $
    70,213Total assets
    
    $
    390,189
    
    
    $
    28,686
    
    
    $
    418,875Capital expenditures
    
    $
    1,289
    
    
    $
    1
    
    
    $
    1,290
 15




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##### Table of Contents



IPC ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSContinued
(Unaudited)
March 31, 2004 Trading
    
    
    
    
    
    NetworkFor the Six Months Ended March 31, 2004
    
    Systems
    
    I.T.S.
    
    Services
    
    Consolidated(dollars in thousands)Revenue:Product sales and installations
    
    $
    53,701
    
    
    $
    15,405
    
    
    $
    
    
    
    $
    69,106Service
    
    
    49,664
    
    
    
    1,283
    
    
    
    19,153
    
    
    
    70,100Total revenue
    
    
    103,365
    
    
    
    16,688
    
    
    
    19,153
    
    
    
    139,206Direct margin
    
    
    65,526
    
    
    
    2,310
    
    
    
    9,495
    
    
    
    77,331Depreciation and amortization
    
    
    10,668
    
    
    
    120
    
    
    
    1,477
    
    
    
    12,265Income (loss) from operations
    
    
    15,578
    
    
    
    (280
    )
    
    
    961
    
    
    
    16,259Interest expense, net
    
    
    (11,307
    )
    
    
    
    
    
    
    (29
    )
    
    
    (11,336
    )Other income (expense), net
    
    
    319
    
    
    
    
    
    
    
    (12
    )
    
    
    307Income (loss) before income taxes
    
    
    4,590
    
    
    
    (280
    )
    
    
    920
    
    
    
    5,230Income tax provision
    
    
    3,499
    
    
    
    
    
    
    
    690
    
    
    
    4,189Goodwill
    
    $
    72,581
    
    
    $
    971
    
    
    $
    21,699
    
    
    $
    95,251Total assets
    
    $
    368,022
    
    
    $
    21,220
    
    
    $
    41,355
    
    
    $
    430,597Capital expenditures
    
    $
    2,715
    
    
    $
    
    
    
    $
    1,506
    
    
    $
    4,221
 TradingFor the Six Months Ended March 31, 2003
    
    Systems
    
    I.T.S.
    
    Consolidated(dollars in thousands)Revenue:Product sales and installations
    
    $
    44,911
    
    
    $
    11,659
    
    
    $
    56,570Service
    
    
    42,707
    
    
    
    5,411
    
    
    
    48,118Total revenue
    
    
    87,618
    
    
    
    17,070
    
    
    
    104,688Direct margin
    
    
    55,809
    
    
    
    2,461
    
    
    
    58,270Depreciation and amortization
    
    
    10,005
    
    
    
    120
    
    
    
    10,125Income (loss) from operations
    
    
    13,311
    
    
    
    (746
    )
    
    
    12,565Interest expense, net
    
    
    (12,682
    )
    
    
    
    
    
    
    (12,682
    )Other income (expense), net
    
    
    1,327
    
    
    
    
    
    
    
    1,327Income (loss) before income taxes
    
    
    1,956
    
    
    
    (746
    )
    
    
    1,210Income tax provision
    
    
    2,023
    
    
    
    
    
    
    
    2,023Goodwill
    
    $
    69,242
    
    
    $
    971
    
    
    $
    70,213Total assets
    
    $
    390,189
    
    
    $
    28,686
    
    
    $
    418,875Capital expenditures
    
    $
    2,275
    
    
    $
    9
    
    
    $
    2,284
 10. Guarantor Subsidiaries Financial Information Certain of the Companys domestic restricted subsidiaries guarantee the
senior secured credit facilities and the senior subordinated notes. These
subsidiary guarantees are both full and unconditional, as well as joint and
several. Information regarding the guarantors is as follows (in thousands): 16




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##### Table of Contents



IPC ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSContinued
(Unaudited)
March 31, 2004 Condensed Consolidating Balance Sheet at March 31, 2004 Non-IPC
    
    Guarantor
    
    GuarantorAcquisition
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedAssets:Cash
    
    $
    27
    
    
    $
    4,004
    
    
    $
    6,941
    
    
    $
    
    
    
    $
    10,972Accounts receivable, net
    
    
    
    
    
    
    34,866
    
    
    
    19,121
    
    
    
    
    
    
    
    53,987Inventories, net
    
    
    
    
    
    
    21,548
    
    
    
    8,321
    
    
    
    (4,083
    )
    
    
    25,786Prepaid and other current assets
    
    
    
    
    
    
    1,980
    
    
    
    4,051
    
    
    
    
    
    
    
    6,031Due from (to) affiliate
    
    
    190,063
    
    
    
    (174,388
    )
    
    
    (15,675
    )
    
    
    
    
    
    
    Total current assets
    
    
    190,090
    
    
    
    (111,990
    )
    
    
    22,759
    
    
    
    (4,083
    )
    
    
    96,776Investment in subsidiaries
    
    
    151,722
    
    
    
    10,524
    
    
    
    19,138
    
    
    
    (181,384
    )
    
    
    Property, plant and equipment, net
    
    
    
    
    
    
    20,280
    
    
    
    5,010
    
    
    
    
    
    
    
    25,290Goodwill and intangibles, net
    
    
    
    
    
    
    195,646
    
    
    
    98,522
    
    
    
    
    
    
    
    294,168Deferred financing costs, net
    
    
    13,191
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,191Other assets
    
    
    
    
    
    
    419
    
    
    
    753
    
    
    
    
    
    
    
    1,172Total assets
    
    $
    355,003
    
    
    $
    114,879
    
    
    $
    146,182
    
    
    $
    (185,467
    )
    
    $
    430,597Liabilities and stockholders equity:Current portion of long-term debt
    
    $
    550
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    550Accounts payable, accrued expenses and other current liabilities
    
    
    5,301
    
    
    
    17,233
    
    
    
    18,083
    
    
    
    
    
    
    
    40,617Customer advances and deferred revenue
    
    
    
    
    
    
    19,735
    
    
    
    10,994
    
    
    
    
    
    
    
    30,729Total current liabilities
    
    
    5,851
    
    
    
    36,968
    
    
    
    29,077
    
    
    
    
    
    
    
    71,896Long-term debt
    
    
    204,175
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    204,175Other long-term liabilities
    
    
    11,165
    
    
    
    3,431
    
    
    
    7,118
    
    
    
    (1,000
    )
    
    
    20,714Total liabilities
    
    
    221,191
    
    
    
    40,399
    
    
    
    36,195
    
    
    
    (1,000
    )
    
    
    296,785Total stockholders equity
    
    
    133,812
    
    
    
    74,480
    
    
    
    109,987
    
    
    
    (184,467
    )
    
    
    133,812Total liabilities and stockholders equity
    
    $
    355,003
    
    
    $
    114,879
    
    
    $
    146,182
    
    
    $
    (185,467
    )
    
    $
    430,597
 Condensed Consolidating Balance Sheet at September 30, 2003 Non-IPC
    
    Guarantor
    
    GuarantorAcquisition
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedAssets:Cash
    
    $
    9,088
    
    
    $
    3,135
    
    
    $
    13,577
    
    
    $
    
    
    
    $
    25,800Accounts receivable, net
    
    
    
    
    
    
    47,025
    
    
    
    13,176
    
    
    
    
    
    
    
    60,201Inventories, net
    
    
    
    
    
    
    28,584
    
    
    
    4,666
    
    
    
    (2,854
    )
    
    
    30,396Prepaid and other current assets
    
    
    
    
    
    
    2,110
    
    
    
    3,413
    
    
    
    
    
    
    
    5,523Due from (to) affiliate
    
    
    213,600
    
    
    
    (190,517
    )
    
    
    (23,083
    )
    
    
    
    
    
    
    Total current assets
    
    
    222,688
    
    
    
    (109,663
    )
    
    
    11,749
    
    
    
    (2,854
    )
    
    
    121,920Investment in subsidiaries
    
    
    129,364
    
    
    
    10,524
    
    
    
    1,375
    
    
    
    (141,263
    )
    
    
    Property, plant and equipment, net
    
    
    
    
    
    
    20,433
    
    
    
    3,986
    
    
    
    
    
    
    
    24,419Goodwill and intangibles, net
    
    
    
    
    
    
    195,802
    
    
    
    87,362
    
    
    
    
    
    
    
    283,164Deferred financing costs, net
    
    
    14,146
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,146Other assets
    
    
    
    
    
    
    855
    
    
    
    406
    
    
    
    
    
    
    
    1,261Total assets
    
    $
    366,198
    
    
    $
    117,951
    
    
    $
    104,878
    
    
    $
    (144,117
    )
    
    $
    444,910Liabilities and stockholders equity:Current portion of long-term debt
    
    $
    550
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    550Accounts payable, accrued expenses and other current
liabilities
    
    
    5,299
    
    
    
    15,384
    
    
    
    16,206
    
    
    
    
    
    
    
    36,889Customer advances and deferred revenue
    
    
    
    
    
    
    26,043
    
    
    
    6,074
    
    
    
    
    
    
    
    32,117Deferred purchase price consideration
    
    
    
    
    
    
    6,722
    
    
    
    
    
    
    
    
    
    
    
    6,722Total current liabilities
    
    
    5,849
    
    
    
    48,149
    
    
    
    22,280
    
    
    
    
    
    
    
    76,278Long-term debt
    
    
    204,450
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    204,450Other long-term liabilities
    
    
    8,720
    
    
    
    4,159
    
    
    
    5,124
    
    
    
    (1,000
    )
    
    
    17,003Total liabilities
    
    
    219,019
    
    
    
    52,308
    
    
    
    27,404
    
    
    
    (1,000
    )
    
    
    297,731Total stockholders equity
    
    
    147,179
    
    
    
    65,643
    
    
    
    77,474
    
    
    
    (143,117
    )
    
    
    147,179Total liabilities and stockholders equity
    
    $
    366,198
    
    
    $
    117,951
    
    
    $
    104,878
    
    
    $
    (144,117
    )
    
    $
    444,910
 17




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##### Table of Contents



IPC ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSContinued
(Unaudited)
March 31, 2004 Condensed Consolidated
Statement of OperationsFor the Six Months Ended March 31, 2004 Non-IPC
    
    Guarantor
    
    GuarantorAcquisition
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedRevenue
    
    $
    
    
    
    $
    105,837
    
    
    $
    39,799
    
    
    $
    (6,430
    )
    
    $
    139,206Cost of goods sold
    
    
    
    
    
    
    60,449
    
    
    
    21,710
    
    
    
    (5,201
    )
    
    
    76,958Gross profit
    
    
    
    
    
    
    45,388
    
    
    
    18,089
    
    
    
    (1,229
    )
    
    
    62,248Other operating expenses
    
    
    
    
    
    
    33,516
    
    
    
    12,473
    
    
    
    
    
    
    
    45,989Income (loss) from operations
    
    
    
    
    
    
    11,872
    
    
    
    5,616
    
    
    
    (1,229
    )
    
    
    16,259Interest income (expense) and other, net
    
    
    (11,160
    )
    
    
    553
    
    
    
    (422
    )
    
    
    
    
    
    
    (11,029
    )Income tax provision
    
    
    
    
    
    
    4,160
    
    
    
    29
    
    
    
    
    
    
    
    4,189Net income (loss)
    
    $
    (11,160
    )
    
    $
    8,265
    
    
    $
    5,165
    
    
    $
    (1,229
    )
    
    $
    1,041
 Condensed Consolidated
Statement of OperationsFor the Six Months Ended March 31, 2003 Non-IPC
    
    Guarantor
    
    GuarantorAcquisition
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedRevenue
    
    $
    
    
    
    $
    87,003
    
    
    $
    24,470
    
    
    $
    (6,785
    )
    
    $
    104,688Cost of goods sold
    
    
    
    
    
    
    49,694
    
    
    
    14,336
    
    
    
    (6,571
    )
    
    
    57,459Gross profit
    
    
    
    
    
    
    37,309
    
    
    
    10,134
    
    
    
    (214
    )
    
    
    47,229Other operating expenses
    
    
    
    
    
    
    27,242
    
    
    
    7,422
    
    
    
    
    
    
    
    34,664Income (loss) from operations
    
    
    
    
    
    
    10,067
    
    
    
    2,712
    
    
    
    (214
    )
    
    
    12,565Interest income (expense) and other, net
    
    
    (12,768
    )
    
    
    (142
    )
    
    
    1,555
    
    
    
    
    
    
    
    (11,355
    )Income tax provision (benefit)
    
    
    
    
    
    
    (459
    )
    
    
    2,482
    
    
    
    
    
    
    
    2,023Net income (loss)
    
    $
    (12,768
    )
    
    $
    10,384
    
    
    $
    1,785
    
    
    $
    (214
    )
    
    $
    (813
    )
 Condensed Consolidated
Statement of Cash FlowsFor the Six Months Ended March 31, 2004 Non-IPC
    
    Guarantor
    
    GuarantorAcquisition
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet cash provided by (used in) operating activities
    
    $
    (7,885
    )
    
    $
    32,068
    
    
    $
    5,161
    
    
    $
    
    
    
    $
    29,344Capital expenditures
    
    
    
    
    
    
    (3,032
    )
    
    
    (1,189
    )
    
    
    
    
    
    
    (4,221
    )Payment of Gains US and UK earn-out and deferred purchase price
    
    
    
    
    
    
    (6,756
    )
    
    
    
    
    
    
    
    
    
    
    (6,756
    )Intercompany borrowings
    
    
    28,785
    
    
    
    (15,832
    )
    
    
    (12,953
    )
    
    
    
    
    
    
    Acquisition of Gains Asia, net of cash acquired
    
    
    (11,722
    )
    
    
    (5,528
    )
    
    
    2,068
    
    
    
    
    
    
    
    (15,182
    )Net cash provided by (used in) investing activities
    
    
    17,063
    
    
    
    (31,148
    )
    
    
    (12,074
    )
    
    
    
    
    
    
    (26,159
    )Principal payments on term loan
    
    
    (275
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (275
    )Deferred compensation payments
    
    
    
    
    
    
    (51
    )
    
    
    
    
    
    
    
    
    
    
    (51
    )Special cash dividend paid
    
    
    (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 at beginning of period
    
    
    9,088
    
    
    
    3,135
    
    
    
    13,577
    
    
    
    
    
    
    
    25,800Cash at end of period
    
    $
    27
    
    
    $
    4,004
    
    
    $
    6,941
    
    
    $
    
    
    
    $
    10,972
 18




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##### Table of Contents



IPC ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSContinued
(Unaudited)
March 31, 2004 Condensed Consolidated
Statement of Cash FlowsFor the Six Months Ended March 31, 2003 Non-IPC
    
    Guarantor
    
    GuarantorAcquisition
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet cash provided by (used in) operating activities
    
    $
    (12,845
    )
    
    $
    13,272
    
    
    $
    12,920
    
    
    $
    
    
    
    $
    13,347Capital expenditures
    
    
    
    
    
    
    (1,947
    )
    
    
    (337
    )
    
    
    
    
    
    
    (2,284
    )Intercompany borrowings
    
    
    31,659
    
    
    
    (7,020
    )
    
    
    (24,639
    )
    
    
    
    
    
    
    Proceeds from restricted cash account and other amounts in
connection with Global Crossing settlement
    
    
    
    
    
    
    9,419
    
    
    
    
    
    
    
    
    
    
    
    9,419Cash payments in connection with Global Crossing settlement
    
    
    
    
    
    
    (5,200
    )
    
    
    
    
    
    
    
    
    
    
    (5,200
    )Net cash provided by (used in) investing activities
    
    
    31,659
    
    
    
    (4,748
    )
    
    
    (24,976
    )
    
    
    
    
    
    
    1,935Debt issue costs
    
    
    (310
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (310
    )Deferred compensation payments
    
    
    
    
    
    
    (46
    )
    
    
    
    
    
    
    
    
    
    
    (46
    )Principal payments on term loan
    
    
    (17,160
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,160
    )Net cash used in financing activities
    
    
    (17,470
    )
    
    
    (46
    )
    
    
    
    
    
    
    
    
    
    
    (17,516
    )Effect of exchange rate changes on cash
    
    
    
    
    
    
    (651
    )
    
    
    
    
    
    
    
    
    
    
    (651
    )Net increase (decrease) in cash
    
    
    1,344
    
    
    
    7,827
    
    
    
    (12,056
    )
    
    
    
    
    
    
    (2,885
    )Cash at beginning of period
    
    
    6,123
    
    
    
    (1,610
    )
    
    
    20,781
    
    
    
    
    
    
    
    25,294Cash at end of period
    
    $
    7,467
    
    
    $
    6,217
    
    
    $
    8,725
    
    
    $
    
    
    
    $
    22,409
 11. Subsequent Events In April and May 2004, IPC UK acquired additional shares and share
warrants in Purple Voice from Scipher PLC and certain individual shareholders
for a total consideration of approximately $355,000. Following those
acquisitions, IPC UK now holds approximately 83% of the currently outstanding
common shares (calculated on a non-diluted basis) of Purple Voice together with
warrants to subscribe for additional shares. On April 20, 2004, the Company entered into a joinder agreement to the amended
and restated senior secured credit facilities which increased the amount the
Company can borrow under the revolving credit facility by $10.0 million from
$25.0 million to $35.0 million. No other terms or conditions were changed. 19




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion of our financial condition and
results of operations with our condensed 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:  
    
    risks associated with substantial indebtedness, leverage and debt service;  
    
    performance of our business and future operating results;  
    
    risks of competition in our existing and future markets;  
    
    loss or retirement of any key executives;  
    
    general business and economic conditions;  
    
    market acceptance issues, including the failure of products or services to generate anticipated sales levels; and  
    
    other risks described in our Registration Statement on Form S-1 (333-103264). 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. Overview Our primary business is the design, manufacture, installation and service
of turret systems for the trading operations of the financial community, which
includes investment and commercial banks, foreign exchange and commodity
brokers and dealers, market exchanges, mutual and hedge fund companies, asset
managers and insurance companies. Turrets are specialized telephone systems
that are designed for high reliability and provide users instant access to
hundreds of dedicated telephone lines that are directly connected to other
trading partners and customers. Traders, brokers and salespersons occupy desks
known as trading positions from which they trade various financial instruments
including stocks, bonds, currencies and futures using turrets. We are a leader
in turret solutions, based on our base of approximately 110,000 turrets and
related equipment installed in trading positions worldwide. We also install and
service the cabling infrastructure and networks within buildings that connect
voice and data communications devices for traders and others in the global
financial, trading and exchange trading industries, as well as sell network
voice and data services to customers primarily in the financial community. Our major operating divisions are Trading Systems, I.T.S., and Network
Services. Trading Systems reports (1) sales of turret systems to distributors
and direct sales and installations of turret systems as Product sales and
installations, and (2) revenue from turret system maintenance, including
annual and multi-year service contracts, and from MACs to existing turret
system installations as Service. I.T.S. reports (1) revenue from the design,
integration and implementation of cabling infrastructure projects, including
local and wide area networks, and from sales of intelligent network products,
such as hubs, bridges and routers, as Product sales and installations and (2)
revenue from on-site maintenance of customer cable infrastructures and from the
provision of outsourcing services for the support, expansion and upgrading of
existing customer networks as Service. Network Services records the sale of
voice and data services such as ring down connection, T1 high speed digital
connections and hoot and holler broadcasts, which is a dedicated line used to
link different locations together, as Service. Revenue from product sales and installations is recognized upon completion
of the installation or, for contracts that are completed in stages and include
contract specified milestones, upon achieving such contract milestones, and
delivery and customer acceptance of a fully functional system. Revenue from
sales to distributors is recognized upon shipment. Customers are generally
progress-billed prior to the completion of the installations. The revenue
related to these advance payments is deferred until the system installations
are completed or specified milestones are attained. Costs incurred on
uncompleted contracts and stages are accumulated and recorded as inventory
awaiting installation. In addition, contracts for annual recurring turret and
I.T.S. services are generally billed in advance, and are recorded as revenue
ratably (on a monthly basis) over the contractual periods. Revenue from 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 our
Network Services division is generally billed at the beginning of the
month and recognized in the same month. Cost of revenue for our Trading Systems and I.T.S. divisions 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 20




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##### Table of Contents



and the depreciation of the equipment in our manufacturing and assembly
facility. Cost of revenue for our Network Services division includes the costs
to lease local and long distance circuits, the cost of our network
provisioning and operations organizations and depreciation of the equipment. Our revenues and operating results fluctuate significantly from period to
period for our Trading Systems and ITS divisions. Given the relatively large
sales price of our trading systems and our recognition of revenue only upon
completion of installations or specified contract milestones, a limited number
of system installations may account for a substantial portion of revenues in
any particular period. As a result of these and other factors, we could
experience significant fluctuations in revenues and operating results in future
periods. In addition, our customers are concentrated in the global financial,
trading and exchange trading industries and our revenues will likely decline
during periods of economic downturn that impact those sectors. Our Strategy The key elements of our strategy are to:  
    
    Generate revenue growth through replacement sales, technology
upgrades and trading floor expansions.Regular turnover of our installed
base is driven primarily by customers facility moves, mergers or
consolidations and the development of new trading markets and products.
Additionally, other factors, such as customer business initiatives,
including global trading platform standardization, regulatory
developments, and customer expansion affect turnover, as customers
require more flexible, efficient and technologically advanced turret
systems. By developing new systems, such as our
IQMX turret system,
that address these factors in a timely, proactive fashion, we believe we
can increase overall turnover rates, as customers are motivated to
replace older, less-advanced equipment with our latest most-advanced
product offerings.  
    
    Expand by developing new products and services and capitalizing on
new trends.We believe there is an opportunity to increase our revenues
by strategically broadening our product portfolio, enhancing our
technology architecture and addressing new developments in the
marketplace. Examples of our efforts include:  
    
    Providing voice, data and video communications.The
introduction of our IQMX product with expansion modules provides the
ability to communicate by exchanging text (such as Chat and Instant
Messaging programs) and video (such as popular desktop video
conferencing systems) as quickly and easily as the communications
systems currently allow traders to do so with voice. By creating a
communications system that utilizes IP to deliver communications, and
by combining this delivery methodology with the expansion modules
that support exchanging text and video in addition to voice, we
eliminate the need for our customers to purchase stand-alone
equipment to deliver these solutions and leverage opportunities to
sell additional solutions to our established customers.
    
    Developing applications.Application integration and
development is driven by the need to create a seamless and efficient
work environment in much the same way that increasingly sophisticated
call centers were developed in the mid-1990s. We have demonstrated
our capability in this market through sales of our Computer Telephony
Integration, or CTI, products which allow telephony devices to
communicate with computers.
    
    Increasing our penetration of disaster recovery and contingency
planning sales.We intend to further penetrate the growing demand for
disaster recovery and business continuity solutions. We believe we
can effectively capitalize on our strong track record and customer
relationships to drive future business in this area from both
existing customers and emerging third-party providers.
    
    Penetrating middle office support positions.In June 2002, we
released the ICMX, a VoIP intercom module, and a member of our IQMX
family of turret products. The ICMX extends intercom functionality by
providing hands-free communication between sites, a unified numbering
plan, group calls and all calls and support for hoot and holler
applications, an open broadcast system that allows a trader to
communicate with a large group of traders located around the world.
Compact in size and with features designed specifically for support
functions of a trading floor, we believe the ICMX positions us to
penetrate a large number of trading support positions.
    
    Increase our product offerings.With the acquisition of Gains
US and UK, and Gains Asia, we created a new business division called
Network Services. Our Network Services division provides network
voice and data services that connect traders across six continents.
In addition, in June 2003, we launched a suite of services under the
name Managed Services. Managed Services are a set of premium,
specialized services that deliver fully managed connectivity to
trading floors worldwide. We believe we can provide these services to
customers in combination with sales of our turrets. In February 2004,
we launched Advanced Fault Management, or AFM, which is a
proactive, real-time monitoring service designed to optimize trader
voice system availability from the trading desk to the carrier
network and Total Circuit Management, or TCM, which is for customers
that seek a partner to manage their entire circuit provisioning and
maintenance process. With several different service products being
offered, we 21




---



##### Table of Contents



believe we can be successful in marketing these services
to customers of our turrets. Also, with our investment in
Purple Voice in August 2003, we can provide users such as researchers,
analysts, and retail brokers who are based off the main trading floor
with seamless access to audio broadcasts, intercom calls, group calls
and hoot and holler broadcasts regardless of the users location.  
    
    Increase our sales through organic growth and opportunistic
acquisitions.We intend to continue to enhance our competitive position
by (1) converting customers from competitors systems to our own, (2)
further expanding into currently under-penetrated business
opportunities, (3) winning competitive bids for new installation
opportunities, and (4) expanding geographically. We plan to achieve
these objectives through a combination of expanding our direct presence,
continuing our new product development efforts and making strategic
acquisitions and/or alliances.  
    
    Continue our track record of customer service excellence.We believe
our high level of customer service differentiates us from our
competition, positions us to capture more revenue from our existing
client base by providing value-added services, and allows us to maintain
our pricing and profitability. Recent Events In April and May 2004, IPC UK acquired additional shares and share
warrants in Purple Voice from Scipher PLC and certain individual shareholders
for a total consideration of approximately $355,000. Following those
acquisitions, IPC UK now holds approximately 83% of the currently outstanding
common shares (calculated on a non-diluted basis) of Purple Voice together with
warrants to subscribe for additional shares. On April 20, 2004, We entered into a joinder agreement to the amended and
restated senior secured credit facilities which increased the amount
we can borrow under the revolving credit facility by $10.0 million from
$25.0 million to $35.0 million. No other terms or conditions were changed. Comparison of the Three Months (Q2 2004) and Six Months (YTD 2004) Ended
March 31, 2004 to the Three Months (Q2 2003) and Six Months (YTD 2003)
Ended March 31, 2003. The following tables sets 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 division revenue, our
statements of operations for our three major operating divisions for the
periods indicated. Q2 2004
    
    Q2 2003Trading
    
    
    
    
    
    Network
    
    
    
    
    
    Trading
    
    
    
    
    
    NetworkConsolidated
    
    Systems
    
    I.T.S.
    
    Services
    
    Consolidated
    
    Systems
    
    I.T.S.
    
    ServicesRevenue:Product sales and installations
    
    
    52
    %
    
    
    56
    %
    
    
    95
    %
    
    
    0
    %
    
    
    58
    %
    
    
    53
    %
    
    
    79
    %
    
    
    Service
    
    
    48
    %
    
    
    44
    %
    
    
    5
    %
    
    
    100
    %
    
    
    42
    %
    
    
    47
    %
    
    
    21
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    Cost of goods sold (depreciation shown
separately):Product sales and installations
    
    
    28
    %
    
    
    24
    %
    
    
    88
    %
    
    
    0
    %
    
    
    35
    %
    
    
    25
    %
    
    
    76
    %
    
    
    Service
    
    
    24
    %
    
    
    20
    %
    
    
    7
    %
    
    
    59
    %
    
    
    21
    %
    
    
    21
    %
    
    
    22
    %
    
    
    Depreciation and amortization
    
    
    1
    %
    
    
    1
    %
    
    
    0
    %
    
    
    6
    %
    
    
    1
    %
    
    
    1
    %
    
    
    0
    %
    
    
    53
    %
    
    
    45
    %
    
    
    95
    %
    
    
    65
    %
    
    
    57
    %
    
    
    47
    %
    
    
    98
    %
    
    
    Gross profit
    
    
    47
    %
    
    
    55
    %
    
    
    5
    %
    
    
    35
    %
    
    
    43
    %
    
    
    53
    %
    
    
    2
    %
    
    
    Research and development
    
    
    5
    %
    
    
    6
    %
    
    
    0
    %
    
    
    0
    %
    
    
    5
    %
    
    
    6
    %
    
    
    0
    %
    
    
    Selling, general and administrative expense
    
    
    19
    %
    
    
    20
    %
    
    
    4
    %
    
    
    25
    %
    
    
    19
    %
    
    
    23
    %
    
    
    5
    %
    
    
    Depreciation and amortization
    
    
    7
    %
    
    
    9
    %
    
    
    1
    %
    
    
    2
    %
    
    
    8
    %
    
    
    10
    %
    
    
    1
    %
    
    
    Income (loss) from operations
    
    
    16
    %
    
    
    20
    %
    
    
    0
    %
    
    
    8
    %
    
    
    11
    %
    
    
    14
    %
    
    
    (4
    %)
    
    
    Other income (expense):Interest expense, net
    
    
    (7
    %)
    
    
    (10
    %)
    
    
    0
    %
    
    
    0
    %
    
    
    (11
    %)
    
    
    (14
    %)
    
    
    0
    %
    
    
    Other income (expense), net
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    1
    %
    
    
    1
    %
    
    
    2
    %
    
    
    0
    %
    
    
    Income (loss) before income taxes
    
    
    9
    %
    
    
    10
    %
    
    
    0
    %
    
    
    9
    %
    
    
    1
    %
    
    
    2
    %
    
    
    (4
    %)
    
    
    Income tax expense
    
    
    5
    %
    
    
    6
    %
    
    
    0
    %
    
    
    5
    %
    
    
    2
    %
    
    
    2
    %
    
    
    0
    %
    
    
    Net income (loss)
    
    
    4
    %
    
    
    4
    %
    
    
    0
    %
    
    
    4
    %
    
    
    (1
    %)
    
    
    0
    %
    
    
    (4
    %)
    
    
    
 22




---



##### Table of Contents



YTD 2004
    
    YTD 2003Trading
    
    
    
    
    
    Network
    
    
    
    
    
    Trading
    
    
    
    
    
    NetworkConsolidated
    
    Systems
    
    I.T.S.
    
    Services
    
    Consolidated
    
    Systems
    
    I.T.S.
    
    ServicesRevenue:Product sales and installations
    
    
    50
    %
    
    
    52
    %
    
    
    92
    %
    
    
    0
    %
    
    
    54
    %
    
    
    51
    %
    
    
    68
    %
    
    
    Service
    
    
    50
    %
    
    
    48
    %
    
    
    8
    %
    
    
    100
    %
    
    
    46
    %
    
    
    49
    %
    
    
    32
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    Cost of goods sold (depreciation shown
separately):Product sales and installations
    
    
    28
    %
    
    
    24
    %
    
    
    85
    %
    
    
    0
    %
    
    
    31
    %
    
    
    24
    %
    
    
    65
    %
    
    
    Service
    
    
    26
    %
    
    
    21
    %
    
    
    11
    %
    
    
    61
    %
    
    
    23
    %
    
    
    22
    %
    
    
    32
    %
    
    
    Depreciation and amortization
    
    
    1
    %
    
    
    1
    %
    
    
    0
    %
    
    
    6
    %
    
    
    1
    %
    
    
    1
    %
    
    
    0
    %
    
    
    55
    %
    
    
    46
    %
    
    
    96
    %
    
    
    67
    %
    
    
    55
    %
    
    
    47
    %
    
    
    97
    %
    
    
    Gross profit
    
    
    45
    %
    
    
    54
    %
    
    
    4
    %
    
    
    33
    %
    
    
    45
    %
    
    
    53
    %
    
    
    3
    %
    
    
    Research and development
    
    
    5
    %
    
    
    7
    %
    
    
    0
    %
    
    
    0
    %
    
    
    5
    %
    
    
    6
    %
    
    
    0
    %
    
    
    Selling, general and administrative expense
    
    
    20
    %
    
    
    22
    %
    
    
    5
    %
    
    
    26
    %
    
    
    19
    %
    
    
    21
    %
    
    
    6
    %
    
    
    Depreciation and amortization
    
    
    8
    %
    
    
    10
    %
    
    
    1
    %
    
    
    2
    %
    
    
    9
    %
    
    
    11
    %
    
    
    1
    %
    
    
    Income (loss) from operations
    
    
    12
    %
    
    
    15
    %
    
    
    (2
    %)
    
    
    5
    %
    
    
    12
    %
    
    
    15
    %
    
    
    (4
    %)
    
    
    Other income (expense):Interest expense, net
    
    
    (8
    %)
    
    
    (11
    %)
    
    
    0
    %
    
    
    0
    %
    
    
    (12
    %)
    
    
    (14
    %)
    
    
    0
    %
    
    
    Other income (expense), net
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    1
    %
    
    
    1
    %
    
    
    0
    %
    
    
    Income (loss) before income taxes
    
    
    4
    %
    
    
    4
    %
    
    
    (2
    %)
    
    
    5
    %
    
    
    1
    %
    
    
    2
    %
    
    
    (4
    %)
    
    
    Income tax expense
    
    
    3
    %
    
    
    3
    %
    
    
    0
    %
    
    
    4
    %
    
    
    2
    %
    
    
    2
    %
    
    
    0
    %
    
    
    Net income (loss)
    
    
    1
    %
    
    
    1
    %
    
    
    (2
    %)
    
    
    1
    %
    
    
    (1
    %)
    
    
    0
    %
    
    
    (4
    %)
    
    
    
 Revenue The following table sets forth our consolidated revenue and revenue as
reported for our three major operating divisions. ConsolidatedQ2
    
    Q2
    
    $
    
    %
    
    YTD
    
    YTD
    
    $
    
    %(dollars in thousands)
    
    2004
    
    2003
    
    Change
    
    Change
    
    2004
    
    2003
    
    Change
    
    ChangeProduct sales and installations
    
    $
    41,002
    
    
    $
    32,819
    
    
    $
    8,183
    
    
    
    25
    %
    
    $
    69,106
    
    
    $
    56,570
    
    
    $
    12,536
    
    
    
    22
    %Service
    
    
    38,037
    
    
    
    23,486
    
    
    
    14,551
    
    
    
    62
    %
    
    
    70,100
    
    
    
    48,118
    
    
    
    21,982
    
    
    
    46
    %Total
    
    $
    79,039
    
    
    $
    56,305
    
    
    $
    22,734
    
    
    
    40
    %
    
    $
    139,206
    
    
    $
    104,688
    
    
    $
    34,518
    
    
    
    33
    %Trading SystemsQ2
    
    Q2
    
    $
    
    %
    
    YTD
    
    YTD
    
    $
    
    %(dollars in thousands)
    
    2004
    
    2003
    
    Change
    
    Change
    
    2004
    
    2003
    
    Change
    
    ChangeProduct sales and installations
    
    $
    32,243
    
    
    $
    23,902
    
    
    $
    8,341
    
    
    
    35
    %
    
    $
    53,701
    
    
    $
    44,911
    
    
    $
    8,790
    
    
    
    20
    %Service
    
    
    25,672
    
    
    
    21,191
    
    
    
    4,481
    
    
    
    21
    %
    
    
    49,664
    
    
    
    42,707
    
    
    
    6,957
    
    
    
    16
    %Total
    
    $
    57,915
    
    
    $
    45,093
    
    
    $
    12,822
    
    
    
    28
    %
    
    $
    103,365
    
    
    $
    87,618
    
    
    $
    15,747
    
    
    
    18
    %I.T.S.Q2
    
    Q2
    
    $
    
    %
    
    YTD
    
    YTD
    
    $
    
    %(dollars in thousands)
    
    2004
    
    2003
    
    Change
    
    Change
    
    2004
    
    2003
    
    Change
    
    ChangeProduct sales and installations
    
    $
    8,759
    
    
    $
    8,917
    
    
    $
    (158
    )
    
    
    (2
    %)
    
    $
    15,405
    
    
    $
    11,659
    
    
    $
    3,746
    
    
    
    32
    %Service
    
    
    456
    
    
    
    2,295
    
    
    
    (1,839
    )
    
    
    (80
    %)
    
    
    1,283
    
    
    
    5,411
    
    
    
    (4,128
    )
    
    
    (76
    %)Total
    
    $
    9,215
    
    
    $
    11,212
    
    
    $
    (1,997
    )
    
    
    (18
    %)
    
    $
    16,688
    
    
    $
    17,070
    
    
    $
    (382
    )
    
    
    (2
    %)Network ServicesQ2
    
    Q2
    
    $
    
    %
    
    YTD
    
    YTD
    
    $
    
    %(dollars in thousands)
    
    2004
    
    2003
    
    Change
    
    Change
    
    2004
    
    2003
    
    Change
    
    ChangeProduct sales and installations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    
    %Service
    
    
    11,909
    
    
    
    
    
    
    
    11,909
    
    
    
    
    %
    
    
    19,153
    
    
    
    
    
    
    
    19,153
    
    
    
    
    %Total
    
    $
    11,909
    
    
    $
    
    
    
    $
    11,909
    
    
    
    
    %
    
    $
    19,153
    
    
    $
    
    
    
    $
    19,153
    
    
    
    
    %
 Comparison of Q2 2004 to Q2 2003 Consolidated We believe the overall decline in the global economy has caused our
customers to extend their planning and implementation cycles. While we expect
this downward trend to continue for the remainder of the 2004 fiscal year,
there can be no certainty as to 23




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##### Table of Contents



the degree or duration of this trend. We expect our fiscal year 2004 total
consolidated revenues to be approximately $290 million to
$300 million, which has been revised since the three months
ended December 31, 2003 (Q1 2004); however, the actual total consolidated revenues could be lower. Product Sales and Installations.The increase in product sales and
installation revenue of $8.2 million in Q2 2004 from Q2 2003 was primarily due
to three large (greater than $2.0 million) projects totaling $15.7 million
completed in Q2 2004 compared to four large and medium (between $1.0 million
and $2.0 million) projects totaling $7.5 million completed in Q2 2003 in our
Trading Systems division. I.T.S. product sales and installation revenue has
remained relatively consistent from Q2 2004 to Q2 2003. We expect our fiscal year 2004 product sales and installation revenue to
be approximately $150 million to $155 million which has
been revised since Q1 2004. However, customer commitments
could be delayed due to budgetary constraints, changes to real estate planning,
merger and acquisitions activity in our customer base, a decrease in our
customers headcount or changes in our customers technology needs. As a
result, actual product sales and installation revenue in the 2004 fiscal year
could be lower. Service.The increase in service revenue of $14.6 million in Q2 2004 from
Q2 2003 was primarily due to the addition of our Network Services division,
which was created following the acquisition of the Gains US and UK entities in
April 2003 and the acquisition of Gains Asia in January 2004. We generated
$11.9 million of service revenue from our Network Services division in Q2 2004
as compared to no revenue in Q2 2003. In addition, there was a higher volume of
contract maintenance revenue totaling $3.3 million and non-contract MAC revenue
totaling $1.2 million in our Trading Systems division, partially offset by a
$1.8 million decrease in Q2 2004 due to the loss of a large service customer in
our I.T.S. division in Q1 2004. We expect our fiscal year 2004 consolidated service revenue to be
approximately $140 million to $145 million which has
been revised since Q1 2004. However, customer commitments could
be delayed due to budgetary constraints, changes to real estate planning,
merger and acquisition activity in our customer base, a decrease in our
customers headcount or technology needs. As a result, the actual service
revenue in the 2004 fiscal year could be lower. Trading Systems Product Sales and Installations.The increase in product sales and
installation revenue of $8.3 million in Q2 2004 from Q2 2003 was primarily due
to three large installation projects totaling $15.7 million completed in Q2
2004 compared to four large and medium installation projects totaling $7.5
million completed in Q2 2003. There were a similar number of small (less than
$1.0 million) installation projects completed in Q2 2004 aggregating $16.5
million, as compared to $16.4 million of small projects completed in Q2 2003. Service.The increase in service revenue of $4.5 million in Q2 2004 from
Q2 2003 was primarily due to a higher volume of contract maintenance revenue
totaling $3.3 million and non-contract MAC revenue totaling $1.2 million in Q2
2004. The increase in contract maintenance revenue in Q2 2004 was primarily due
to the expiration of warranties for installation contracts. The increase in
non-contract MAC revenue was primarily due to increased requests for trading
floor re-configurations globally. I.T.S. Product Sales and Installations.Product sales and installation revenue in
Q2 2004 remained relatively consistent compared to Q2 2003. There were three
large and medium projects completed totaling $7.3 million and small projects
totaling $1.5 million in Q2 2004 compared to one large project totaling $6.5
million and small projects totaling $2.4 million completed in Q2 2003. Service.The decrease in service revenue of $1.8 million in Q2 2004 from
Q2 2003 was primarily due to the loss of a large service customer in Q1 2004,
resulting in a $1.8 million decrease in revenue when compared to Q2 2003. Network Services Service.Service revenue for our Network Services division was $11.9
million in Q2 2004. We generated no revenue from our Network Services division
in Q2 2003 as it was created following the acquisition of the Gains US and UK
entities in April 2003 and expanded by the acquisition of Gains Asia in January
2004. Comparison of YTD 2004 to YTD 2003 Consolidated Product Sales and Installations.The increase in product sales and
installation revenue of $12.5 million in YTD 2004 from YTD 2003 was primarily
due to six large installation projects totaling $24.1 million and medium and
small projects totaling $45.0 million completed in YTD 2004 compared to four
large installation projects totaling $15.7 million and medium and small
projects totaling $40.9 million completed in YTD 2003. 24




---



##### Table of Contents



Service.The increase in service revenue of $22.0 million in YTD 2004 from
YTD 2003 was primarily due to $19.2 million generated by the addition of our
Network Services division, which was created following the acquisition of the
Gains US and UK entities in April 2003 and expanded by the acquisition of Gains
Asia in January 2004. We generated no revenue from our Network Services
division in YTD 2003. In addition, there was a higher volume of contract
maintenance revenue totaling $5.4 million and non-contract MAC revenue totaling
$1.5 million in our Trading systems division, partially offset by the loss of a
large service customer in Q1 2004, resulting in a decrease of $3.8 million of
revenue in our I.T.S. division. Trading Systems Product Sales and Installations.The increase in product sales and
installation revenue of $8.8 million in YTD 2004 from YTD 2003 was primarily
due to four large installation projects totaling $18.1 million completed in YTD
2004 compared to three large installation projects totaling $9.1 million
completed in YTD 2003. There were a similar number of medium and small
installation projects completed totaling $35.6 million in YTD 2004, as compared
to $35.8 million of medium and small projects completed in YTD 2003. Service.The increase in service revenue of $7.0 million in YTD 2004 from
YTD 2003 was primarily due to a higher volume of contract maintenance revenue
totaling $5.4 million and non-contract MAC revenue totaling $1.5 million in YTD
2004 when compared to YTD 2003. The increase in contract maintenance revenue in
YTD 2004 was primarily due to the expiration of warranties for installation
contracts. The increase in non-contract MAC revenue was primarily due to
increased requests for trading floor re-configurations globally. I.T.S. Product Sales and Installations.The increase in product sales and
installation revenue of $3.7 million in YTD 2004 from YTD 2003 was primarily
due to a greater amount of medium and small projects completed in YTD 2004 when
compared to YTD 2003. There were two large installation projects totaling $6.1
million and medium and small projects totaling $9.4 million in YTD 2004
compared to one large installation project totaling $6.5 million and small
installation projects totaling $5.2 million completed in YTD 2003. Service.The decrease in service revenue of $4.1 million in YTD 2004 from
YTD 2003 was primarily due to the loss of a large service customer in Q1 2004,
resulting in a $3.8 million decrease in revenue when compared to Q2 2003, as
well as a decrease in service revenue from our customer base. Network Services Service.Service revenue for our Network Services division was $19.2
million in YTD 2004. We generated no revenue from our Network Services division
in YTD 2003 as it was created following the acquisition of the Gains US and UK
entities in April 2003 and expanded by the acquisition of Gains Asia in January
2004. Cost of Revenue The following table sets forth our consolidated cost of revenue and our
cost of revenue as reported for our three major operating divisions. Cost of
revenue for our Trading Systems and I.T.S. divisions 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 and the depreciation of the equipment in our manufacturing and
assembly facility. Cost of revenue for our Network Services division includes
the costs to lease local and long distance circuits, the cost of our
network provisioning and operations organizations and depreciation of
equipment. ConsolidatedQ2
    
    % of
    
    Q2
    
    % of
    
    %
    
    YTD
    
    % of
    
    YTD
    
    % of
    
    %(dollars in thousands)
    
    2004
    
    Rev.
    
    2003
    
    Rev.
    
    Change
    
    2004
    
    Rev.
    
    2003
    
    Rev.
    
    ChangeProduct sales and installations
    
    $
    22,196
    
    
    
    54
    %
    
    $
    19,680
    
    
    
    60
    %
    
    
    (6
    %)
    
    $
    39,463
    
    
    
    57
    %
    
    $
    31,934
    
    
    
    56
    %
    
    
    1
    %Service
    
    
    19,059
    
    
    
    50
    %
    
    
    11,894
    
    
    
    51
    %
    
    
    (1
    %)
    
    
    35,785
    
    
    
    51
    %
    
    
    24,929
    
    
    
    52
    %
    
    
    (1
    %)Depreciation and amortization
    
    
    968
    
    
    
    1
    %
    
    
    299
    
    
    
    1
    %
    
    
    0
    %
    
    
    1,710
    
    
    
    1
    %
    
    
    596
    
    
    
    1
    %
    
    
    0
    %Total
    
    $
    42,223
    
    
    
    53
    %
    
    $
    31,873
    
    
    
    57
    %
    
    
    (4
    %)
    
    $
    76,958
    
    
    
    55
    %
    
    $
    57,459
    
    
    
    55
    %
    
    
    0
    %
 Trading SystemsQ2
    
    % of
    
    Q2
    
    % of
    
    %
    
    YTD
    
    % of
    
    YTD
    
    % of
    
    %(dollars in thousands)
    
    2004
    
    Rev.
    
    2003
    
    Rev.
    
    Change
    
    2004
    
    Rev.
    
    2003
    
    Rev.
    
    ChangeProduct sales and installations
    
    $
    14,034
    
    
    
    44
    %
    
    $
    11,135
    
    
    
    47
    %
    
    
    (3
    %)
    
    $
    25,172
    
    
    
    47
    %
    
    $
    20,814
    
    
    
    46
    %
    
    
    1
    %Service
    
    
    11,367
    
    
    
    44
    %
    
    
    9,418
    
    
    
    44
    %
    
    
    0
    %
    
    
    22,219
    
    
    
    45
    %
    
    
    19,483
    
    
    
    46
    %
    
    
    (1
    %)Depreciation and amortization
    
    
    287
    
    
    
    1
    %
    
    
    299
    
    
    
    1
    %
    
    
    0
    %
    
    
    572
    
    
    
    1
    %
    
    
    596
    
    
    
    1
    %
    
    
    0
    %Total
    
    $
    25,688
    
    
    
    44
    %
    
    $
    20,852
    
    
    
    46
    %
    
    
    (2
    %)
    
    $
    47,963
    
    
    
    46
    %
    
    $
    40,893
    
    
    
    47
    %
    
    
    (1
    %)
 25




---



##### Table of Contents



I.T.S.Q2
    
    % of
    
    Q2
    
    % of
    
    %
    
    YTD
    
    % of
    
    YTD
    
    % of
    
    %(dollars in thousands)
    
    2004
    
    Rev.
    
    2003
    
    Rev.
    
    Change
    
    2004
    
    Rev.
    
    2003
    
    Rev.
    
    ChangeProduct sales and installations
    
    $
    8,162
    
    
    
    93
    %
    
    $
    8,545
    
    
    
    96
    %
    
    
    (3
    %)
    
    $
    14,291
    
    
    
    92
    %
    
    $
    11,120
    
    
    
    95
    %
    
    
    (3
    %)Service
    
    
    619
    
    
    
    136
    %
    
    
    2,476
    
    
    
    108
    %
    
    
    28
    %
    
    
    1,804
    
    
    
    141
    %
    
    
    5,446
    
    
    
    101
    %
    
    
    40
    %Depreciation and amortization
    
    
    
    
    
    
    0
    %
    
    
    
    
    
    
    0
    %
    
    
    0
    %
    
    
    
    
    
    
    0
    %
    
    
    
    
    
    
    0
    %
    
    
    0
    %Total
    
    $
    8,781
    
    
    
    95
    %
    
    $
    11,021
    
    
    
    98
    %
    
    
    (3
    %)
    
    $
    16,095
    
    
    
    96
    %
    
    $
    16,566
    
    
    
    97
    %
    
    
    (1
    %)Network ServicesQ2
    
    % of
    
    Q2
    
    % of
    
    %
    
    YTD
    
    % of
    
    YTD
    
    % of
    
    %(dollars in thousands)
    
    2004
    
    Rev.
    
    2003
    
    Rev.
    
    Change
    
    2004
    
    Rev.
    
    2003
    
    Rev.
    
    ChangeProduct sales and installations
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    
    
    %
    
    
    
    %
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    
    
    %
    
    
    
    %Service
    
    
    7,073
    
    
    
    59
    %
    
    
    
    
    
    
    
    %
    
    
    
    %
    
    
    11,762
    
    
    
    61
    %
    
    
    
    
    
    
    
    %
    
    
    
    %Depreciation and amortization
    
    
    681
    
    
    
    6
    %
    
    
    
    
    
    
    
    %
    
    
    
    %
    
    
    1,138
    
    
    
    6
    %
    
    
    
    
    
    
    
    %
    
    
    
    %Total
    
    $
    7,754
    
    
    
    65
    %
    
    $
    
    
    
    
    
    %
    
    
    
    %
    
    $
    12,900
    
    
    
    67
    %
    
    $
    
    
    
    
    
    %
    
    
    
    %
 Comparison of Q2 2004 to Q2 2003 Consolidated We expect our fiscal year 2004 total consolidated cost of revenue to be
approximately $167 million to $175 million, which has been
revised since Q1 2004; however, pricing changes and more
competitive bidding for our customers could cause the actual total consolidated
cost of revenue to be higher. Product Sales and Installations.The decrease in product sales and
installations cost of revenue of 6% as a percentage of product sales and
installation revenue in Q2 2004 from Q2 2003 was primarily due to higher
percentage of Trading System installations sold compared to I.T.S. products
sold in Q2 2004. Trading Systems products have a lower cost of revenue than
I.T.S. products. Service.The decrease in service cost of revenue of 1% as a percentage of
service revenue in Q2 2004 from Q2 2003 was primarily due to a higher volume of
Trading Systems services compared to I.T.S. services. Trading Systems services
have a lower cost of revenue than I.T.S. services. Trading Systems Product Sales and Installations.The decrease in product sales and
installations cost of revenue of 3% as a percentage of product sales and
installation revenue in Q2 2004 from Q2 2003 was primarily due to a higher
volume of Trading Systems manufactured products sold in Q2 2004 when compared
to Q2 2003. Trading Systems manufactured products generally have a lower cost
of revenue than products manufactured by third parties. In addition, we
realized higher profit margins realized on small installation projects
completed in Q2 2004 as compared to Q2 2003. Service.Service cost of revenue as a percentage of service revenue
remained flat in Q2 2004 compared to Q2 2003 primarily due to higher costs of
revenue in non-contract MAC services which have greater labor service
requirements as opposed to material requirements when re-configuring a trading
floor. Labor has a higher cost of revenue than material. This was offset by
lower costs of revenue for our contract maintenance services. I.T.S. Product Sales and Installations.The decrease in product sales and
installations cost of revenue of 3% as a percentage of product sales and
installation revenue in Q2 2004 from Q2 2003 was primarily due to a higher
profit margin recognized for one large installation project as a result of
changes from the original contract order. Service.The increase in service cost of revenue of 28% as a percentage of
service revenue in Q2 2004 from Q2 2003 was primarily due to the loss of a
larger service customer in Q1 2004. In addition, competitive market conditions
have increased the cost of revenues associated with this offering. Network Services Service.Service cost of revenue for our Network Services division as a
percentage of service revenue was 59% in Q2 2004. We incurred no cost of
revenue from our Network Services division in Q2 2003 as it was created
following the acquisition of the Gains US and UK entities in April 2003 and
expanded by the acquisition of Gains Asia in January 2004. 26




---



##### Table of Contents



Comparison of YTD 2004 to YTD 2003 Consolidated Product Sales and Installations.The increase in product sales and
installations cost of revenue of 1% as a percentage of product sales and
installation revenue in YTD 2004 from YTD 2003 was primarily due to a higher
percentage of I.T.S. installations and third party products sold compared to
Trading System products sold in YTD 2004. I.T.S. and third party products have
a higher cost of revenue than Trading Systems products. Service.The decrease in service cost of revenue of 1% as a percentage of
service revenue in YTD 2004 from YTD 2003 was primarily due to increase in
contract maintenance services in YTD 2004, which have a lower cost of revenue
than non-contract MAC services and I.T.S. services. Trading Systems Product Sales and Installations.Product sales and installations cost of
revenue as a percentage of product sales and installation revenue remained flat
in YTD 2004 compared to YTD 2003 due to consistent costs of revenues for our
manufactured products in both periods. Service.The decrease in service cost of revenue of 1% as a percentage of
service revenue in YTD 2004 from YTD 2003 was primarily due to an increase in
contract maintenance services in YTD 2004, which have a lower cost of revenue
than non-contract MAC services. I.T.S. Product Sales and Installations.The decrease in product sales and
installations cost of revenue of 3% as a percentage of product sales and
installation revenue in YTD 2004 from YTD 2003 was primarily due to higher
profit margin recognized for one large installation project as a result of
changes from the original contract order. Service.The increase in service cost of revenue of 40% as a percentage of
service revenue in YTD 2004 from YTD 2003 was primarily due to the loss of a
large service customer in YTD 2004. In addition, competitive market conditions
have increased the cost of revenues associated with this offering. Network Services Service.Service cost of revenue for our Network Services division as a
percentage of service revenue was 61% in YTD 2004. We incurred no cost of
revenue from our Network Services division in YTD 2003 as it was created
following the acquisition of the Gains US and UK entities in April 2003 and
expanded by the acquisition of Gains Asia in January 2004. Research and Development Expense ConsolidatedQ2
    
    Q2
    
    $
    
    %
    
    YTD
    
    YTD
    
    $
    
    %(dollars in thousands)
    
    2004
    
    2003
    
    Change
    
    Change
    
    2004
    
    2003
    
    Change
    
    ChangeResearch and development
    
    $
    3,599
    
    
    $
    2,928
    
    
    $
    671
    
    
    
    23
    %
    
    $
    7,008
    
    
    $
    5,663
    
    
    $
    1,345
    
    
    
    24
    %
 Research and development efforts are principally focused on the next
generation of the Trading Systems products, applications, and enhancements of
our current product lines. We expect our research and development expenses in
fiscal year 2004 to be approximately $14 million to
$15 million, which has been revised since Q1 2004; however, the
actual research and development expenses could be higher. Comparison of Q2 2004 to Q2 2003 and YTD 2004 to YTD 2003 Research and development expenses increased by $0.7 million in Q2 2004
from Q2 2003 and increased by $1.3 million in YTD 2004 from YTD 2003,
reflecting additional resources added to our product development group and
development and integration of the Purple Voice product line. Selling, General and Administrative Expense ConsolidatedQ2
    
    Q2
    
    $
    
    %
    
    YTD
    
    YTD
    
    $
    
    %(dollars in thousands)
    
    2004
    
    2003
    
    Change
    
    Change
    
    2004
    
    2003
    
    Change
    
    ChangeSelling, general and administrative
    
    $
    15,138
    
    
    $
    10,742
    
    
    $
    4,396
    
    
    
    41
    %
    
    $
    28,426
    
    
    $
    19,472
    
    
    $
    8,954
    
    
    
    46
    %
 We
expect our selling, general and administrative expenses in fiscal year
2004 to be approximately $56 million to $58 million, which
has been revised since Q1 2004; however the actual
selling, general and administrative expenses could be higher. We believe the
anticipated increase in 27




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selling, general and
administrative expenses for the 2004 fiscal year compared to the 2003
fiscal year will
primarily result from the inclusion of our Network Services division for the
full fiscal year. Comparison of Q2 2004 to Q2 2003 and YTD 2004 to YTD 2003 Selling, general and administrative expenses increased by $4.4 million for
Q2 2004 from Q2 2003 and increased by $9.0 million for YTD 2004 from YTD 2003,
primarily due to increased professional fees, employee related costs
(compensation, severance, bonuses and benefits) and for new foreign office
locations totaling $1.4 million in Q2 2004 compared to Q2 2003 and $4.1 million
in YTD 2004 compared to YTD 2003, as well as the inclusion of expenses for our
Network Services division, which totaled $3.0 million in Q2 2004 and $4.9
million in YTD 2004. Depreciation and Amortization ConsolidatedQ2
    
    Q2
    
    $
    
    %
    
    YTD
    
    YTD
    
    $
    
    %(dollars in thousands)
    
    2004
    
    2003
    
    Change
    
    Change
    
    2004
    
    2003
    
    Change
    
    ChangeDepreciation and amortization
    
    $
    5,388
    
    
    $
    4,798
    
    
    $
    590
    
    
    
    12
    %
    
    $
    10,555
    
    
    $
    9,529
    
    
    $
    1,026
    
    
    
    11
    %
 Comparison of Q2 2004 to Q2 2003 and YTD 2004 to YTD 2003 Depreciation and amortization expense increased by $0.6 million in Q2 2004
from Q2 2003 and increased by $1.0 million in YTD 2004 from YTD 2003, primarily
due to increased capital expenditures in our Trading Systems division as well
as the addition of depreciable fixed assets and amortizable assets from our
Network Services division in Q2 2004 and YTD 2004. Interest Expense, net ConsolidatedQ2
    
    Q2
    
    $
    
    %
    
    YTD
    
    YTD
    
    $
    
    %(dollars in thousands)
    
    2004
    
    2003
    
    Change
    
    Change
    
    2004
    
    2003
    
    Change
    
    ChangeInterest expense, net
    
    $
    5,814
    
    
    $
    6,477
    
    
    $
    (663
    )
    
    
    (10
    %)
    
    $
    11,336
    
    
    $
    12,682
    
    
    $
    (1,346
    )
    
    
    (11
    %)
 Comparison of Q1 2004 to Q1 2003 and YTD 2004 to YTD 2003 Interest expense, net decreased by $0.7 million in Q2 2004 from Q2 2003
and decreased by $1.3 million in YTD 2004 from YTD 2003, primarily due to the
reduction of principal and a reduction of the interest rate on our outstanding
senior secured credit facilities. A voluntary prepayment of $14.0 million was
made in March 2003 on our senior secured credit facilities and the interest
rate was reduced by approximately 2.4% (from 7.5% to 5.1%) when the senior
secured credit facilities were amended and restated in September 2003. Provision for Income Taxes Our effective tax rates for YTD 2004 was 80.1% compared to 167.2% for YTD
2003. Our effective tax rates reflect our foreign, federal and state taxes, the
non-deductibility of foreign losses for federal tax purposes, the
non-deductibility of certain expenses and taxable income at several of our
foreign subsidiaries, which, as compared to the absolute amount of pre-tax
earnings (or loss), has a significant impact on our effective tax rates. Net Income (Loss) ConsolidatedQ2
    
    Q2
    
    $
    
    %
    
    YTD
    
    YTD
    
    $
    
    %(dollars in thousands)
    
    2004
    
    2003
    
    Change
    
    Change
    
    2004
    
    2003
    
    Change
    
    ChangeNet income (loss)
    
    $
    2,805
    
    
    $
    (611
    )
    
    $
    3,416
    
    
    
    559
    %
    
    $
    1,041
    
    
    $
    (813
    )
    
    $
    1,854
    
    
    
    228
    %
 We
expect to have net income for the entire 2004 fiscal year of
approximately $2 million to $4 million, which has been
revised since Q1 2004. However, the
actual amount may be lower. Comparison of Q2 2004 to Q2 2003 For Q2 2004, we had net income of $2.8 million compared to a net loss in
Q2 2003 of $0.6 million. This was principally due to the increase in gross
profit of $12.4 million offset by the increase in research and development
expense of $0.7 million, the increase in selling, general and administrative
expense of $4.4 million, the increase in depreciation and amortization of $0.6
million, and the increase in income taxes of $3.0 million. The increase in net
income from our Trading Systems division of $2.5 million in Q2 2004 compared to
Q2 2003 was the primary reason for the increase in consolidated net income. Comparison of YTD 2004 to YTD 2003 For YTD 2004, we had net income of $1.0 million compared to a net loss in
YTD 2003 of $0.8 million. This was due to the increase in gross profit of $15.0
million offset by the increase in research and development expense of $1.3
million, the increase in selling, general and administrative expense of $9.0
million, the increase in depreciation and amortization of $1.0 million, and 28




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the increase in income taxes of $2.2 million. Liquidity and Capital Resources Historically, we have satisfied our operating cash requirements through
cash provided by operations, capital loans, financing and bank lines of credit.
Our principal uses of cash were to fund working capital requirements, operating
losses, capital expenditures and repayment of borrowings. During YTD 2004, we made three large non-recurring cash payments: (1) a
settlement payment totaling $12.3 million in October 2003 which was comprised
of the deferred purchase price and earn-out consideration totaling $6.8 million
related to the April 2003 acquisition of Gains International (US) and Gains
International (Europe) and a $5.5 million advance payment for the acquisition
of Gains Asia; (2) a dividend payment of $1.22 per share, or approximately
$18.0 million, of which $17.9 million was paid on December 31, 2003; and (3) a
payment of $11.7 million for the acquisition of Gains Asia. The acquisition of
Gains Asia was partially funded by a $7.0 million draw on our revolving credit
facility, which was fully repaid in February 2004. The YTD 2004 cash uses for the non-recurring Gains related payments and
the payment of the special cash dividend, combined with our mandatory interest
payment due under our senior subordinated notes of $8.6 million paid on
December 15, 2003, which were partially funded by our cash provided by
operating activities, reduced the amount of cash on our balance sheet from
$25.8 million at September 30, 2003 to $10.9 million at March 31, 2004. The Senior Secured Credit Facilities On December 20, 2001, we entered into 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
consist of a $25.0 million revolving credit facility and a $55.0 million term
loan; provided, however, that we can increase the committed amount under these
facilities by up to $25.0 million so long as one or more lenders agrees to
provide this incremental commitment and other customary conditions are
satisfied. The term loan was borrowed in full at closing. As of March 31, 2004,
the amount available for borrowing under the revolving credit facility was
$20.7 million, as availability of $25 million was reduced by outstanding
letters of credit of $4.3 million. For the three months ended March 31, 2004,
the weighted average interest rate for borrowings outstanding under the amended
and restated senior secured credit facilities was 5.11%. On April 20, 2004, we
completed an agreement to increase the availability under the revolving credit
facility by $10.0 million under the increase provisions mentioned above. The
total amount available for borrowing under the revolving credit facility after
this increase is $30.7 million ($35.0 million reduced by outstanding letters of
credit of $4.3 million). Mandatory prepayments of the amended and restated 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 in FY 2004 and thereafter. Excess cash flow is defined in our
amended and restated credit agreement, as: (1) the sum of net income, interest
expense, provisions for taxes, depreciation expense, amortization expense,
other non-cash items affecting net income and to the extent included in
calculating net income, expenses incurred by 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 interest expense and
provisions for taxes based on income. As required under the terms of our senior secured credit facilities, we
made mandatory excess cash flow repayments of $30.0 million and $0.8 million on
September 30, 2002 and December 29, 2002, respectively, based upon 75% of our
excess cash flow for the period ended September 30, 2002. On March 3, 2003, we
also voluntarily prepaid $14.0 million in debt on our then existing senior
secured credit facilities. For the year ended September 30, 2003, we were not
required to make a mandatory excess cash flow repayment under the terms of the
amended and restated senior secured credit facilities. Obligations under the amended and restated 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 amended and restated senior secured credit
facilities. The amended and restated 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 29




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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 amended and restated senior secured credit facilities also contain
minimum interest coverage and fixed charge coverage ratios and maximum senior
secured and total leverage ratios as well as a restriction on the amount of
capital expenditures we can incur in a fiscal year. The Senior Subordinated Notes On December 20, 2001, we issued $150.0 million in aggregate principal
amount of 11.50% senior subordinated notes to fund a portion of the
consideration for the acquisition of IPC Information Systems. Under the terms
of the indenture governing the notes, we may, subject to certain restrictions,
issue additional notes up to a maximum aggregate principal amount of $250.0
million. The notes mature on December 15, 2009 and are callable, at our option,
beginning in December 2005. The notes are general unsecured obligations, are
subordinated in right of payment to all existing and future senior debt,
including the amended and restated senior secured credit facilities, are pari
passu in right of payment with any future senior subordinated indebtedness, and
are unconditionally guaranteed by certain of our domestic restricted
subsidiaries. Interest on the notes accrue at the rate of 11.50% per annum and
is payable semi-annually in arrears on June 15 and December 15, the first of
which occurred on June 15, 2002. 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. Settlement and Rejection Agreement On March 13, 2003, we entered into a settlement and rejection agreement
with Global Crossing. Pursuant to the settlement and rejection agreement, all
of the remaining obligations under the purchase agreement relating to the
acquisition of IPC Information Systems were terminated. In addition, we and
Global Crossing mutually released each other for all prior claims. The bankruptcy court entered an order on March 14, 2003 approving the
settlement and rejection agreement. Under the terms of the settlement and
rejection agreement, we have deposited $5.2 million in an escrow account.
Global Crossing received $3.2 million from the escrow account upon the filing
of certain tax returns for periods prior to and including the date of the
acquisition of IPC Information Systems. Global Crossing will receive the
remaining $2.0 million from the escrow account after a $2.0 million irrevocable
letter of credit is issued on behalf of us. We will have the right to draw on
that letter of credit in the event Global Crossings affiliate fails to make
any payments due to us pursuant to a sublease for office space at 67-73 Worship
Street in London, England. We believe that all tax returns required to be filed in respect of IPC
Information Systems, Inc. and its subsidiaries for periods prior to and
including the date of the acquisition of IPC Information Systems have now been
filed. These returns consist of consolidated tax returns with Global Crossing,
and, where required by law, separate tax returns for IPC Information Systems,
Inc. and/or its subsidiaries. As a result of the termination of the purchase agreement, Global Crossing
has been relieved of all of its obligations under the purchase agreement,
including, among other things, indemnifying us for tax liabilities that may be
imposed upon IPC Information Systems, Inc. and its subsidiaries for periods
prior to and including the date of the acquisition of IPC Information Systems.
Therefore, in the event that any tax liabilities are imposed, as a result of an
audit or otherwise, on IPC Information Systems, Inc. and/or its subsidiaries
for these periods prior to and including the date of the acquisition of IPC
Information Systems, we may be required to pay those taxes and are no longer
able to recover indemnification from Global Crossing. As of March 31, 2004, the
aggregate amount of taxes for which we have received notices of taxes due from
various jurisdictions and recognized as tax liabilities under purchase
accounting is approximately $6.5 million and, as of March 31, 2004, we have
made settlement payments in the aggregate of $0.8 million. We estimate that the
range of our exposure for additional tax liabilities is from $0.0 to $36.0
million. In computing the estimated range of potential tax liabilities, we took
into account tax returns in certain jurisdictions where the statutes of
limitations have not yet expired. Under those tax returns as filed, the
remaining liability is zero. Although we believe 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 us of a significant amount
of these potential tax liabilities could have a material adverse 30




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effect on our financial condition and results of operations, requiring us
to seek additional financing. In that event, we cannot assure you we will be
able to obtain additional financing on commercially reasonable terms, or at
all. Pursuant to the settlement and rejection agreement, Global Crossing has
also paid to us approximately $2.2 million for payroll and federal tax refunds
received by it for periods prior to and including the date of the acquisition
of IPC Information Systems. Global Crossing is also required to pay us any
future tax refunds or credits it receives applicable to IPC Information
Systems, Inc. and its subsidiaries for these periods. Comparison of YTD 2004 to YTD 2003 Cash provided by operating activities was $29.3 million for YTD 2004
compared to $13.3 million for YTD 2003. This increase of $16.0 million is
primarily comprised of net income of $1.0 million in YTD 2004 compared to a net
loss of $0.8 million in YTD 2003, combined with a decrease in accounts
receivable of $4.3 million for YTD 2004 compared to YTD 2003 and an increase of
accounts payable and accrued expenses of $5.9 million for YTD 2004 compared to
YTD 2003. The decrease in accounts receivable during YTD 2004 was attributable
to the collection of amounts due from large jobs completed during our fourth
quarter of the 2003 fiscal year. The impact on cash related to changes in
inventory, customer advances and deferred revenue essentially offset each
other. Cash used in investing activities was $26.2 million for YTD 2004 compared
to cash provided by investing activities of $1.9 million for YTD 2003. YTD 2004
cash used for investing consisted of $4.2 million of capital expenditures and
payments of $21.9 million relating to the deferred purchase price and earn-out
consideration for Gains US and UK and the cash purchase price of Gains Asia net
of cash received. Cash provided by investing activities for YTD 2003 consisted
of net proceeds from the Global Crossing settlement of $4.2 million partially
offset by capital expenditures of $2.3 million. Cash used in financing activities was $18.3 million for YTD 2004 compared
to $17.5 million for YTD 2003. Cash used in financing activities of $17.5
million for YTD 2003 was primarily for principal payments under our senior
secured credit facilities including a voluntary prepayment of $14.0 million in
Q2 2003. Principal payments under our credit agreement amounted to $0.3 million
for YTD 2004. The remainder of cash used in financing activities for YTD 2004
of $18.0 million related to the special cash dividend of $1.22 per share
declared and paid to holders of record on December 31, 2003. 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 an increase of $0.3 million in YTD 2004 compared to a decrease of
$0.7 million in YTD 2003. Currently our largest currency exposures are to the
British Pound and the Canadian Dollar, although we have additional exposures,
to a lesser extent, to the Euro, Australian Dollar, Japanese Yen, Hong Kong
Dollar and Singapore Dollar. Capital Resources and Expenditures We expect that our capital expenditures for fiscal year 2004 will be
approximately $10.0 million; however, actual capital expenditures for the 2004
fiscal year may be greater. We are limited in our capital expenditures in any
fiscal year by the capital expenditure covenant in our amended and restated
credit agreement. This limits us to capital expenditures in any fiscal year to
$12.0 million plus 50% of the unused amount from the immediately preceding
fiscal year. For fiscal year 2004, the amount of capital expenditures permitted
by this covenant is approximately $12.2 million. We have no off-balance sheet
financing arrangements or other relationships with unconsolidated affiliates. Our primary future uses of cash will be to fund interest expense and
principal repayments on our debt, capital expenditures, research and
development efforts, working capital and as needed for potential strategic
acquisitions and/or alliances. Our primary future sources of cash will be cash
flows from operations, primarily the design, manufacture, installation and
service of turret systems for the trading operations of investment and
commercial banks, foreign exchange and commodity brokers and dealers, market
exchanges, mutual and hedge fund companies, asset managers and insurance
companies, as well as and voice and data services to the financial community
and, if necessary, borrowings under the revolving credit facility. During the course of the year, our short-term liquidity is impacted by our
mandatory payment obligations of principal and interest under both our amended
and restated senior secured credit facilities and our senior subordinated
notes. The mandatory interest and principal payments under the amended and
restated 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 such year that we generate excess
cash flow, the mandatory prepayment required under our amended and restated
senior secured credit facilities must be made within 90 days of our fiscal year
end. For the year ended September 30, 2003, we were not required to make a
mandatory excess cash flow repayment under the terms of the amended and
restated senior secured credit facilities. 31




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As
of March 31, 2004, the amount available for borrowing under the revolving credit
facility was $20.7 million as availability of $25.0 million was reduced by
outstanding letters of credit of $4.3 million. On April 20, 2004, we completed
an agreement to increase our availability under the revolving credit facility
by $10.0 million under the increase provisions mentioned in Note 6. The total
amount available for borrowing under the revolving credit facility after this
increase is $30.7 million ($35.0 million reduced by outstanding letters of
credit of $4.3 million). Our ability to make payments on our indebtedness, including the senior
subordinated notes, and to fund planned capital expenditures, research and
development efforts and payment of dividends to our shareholders will depend on
our ability to generate cash in the future, which is subject, in part, to
general economic, financial, competitive, legislative, regulatory and other
factors that are beyond our control. Since the acquisition of IPC Information Systems, our cash generated from
the operations of the business and borrowings under our revolving credit
facility have been sufficient to meet substantially all of our cash needs.
Based on our forecasts, we believe that this trend will continue and our cash
flow from operations, available cash and available borrowings under our
revolving credit facility will be adequate to meet our current and long-term
liquidity needs for at least the next few years. We cannot assure you, however,
that our business will generate sufficient cash flow from operations or that
future borrowings will be available to us under the revolving credit facility
in an amount sufficient to enable us to pay our indebtedness, including the
notes, or to fund our other liquidity needs. We may need to refinance all or a
portion of our indebtedness, including the notes, on or before maturity. We
cannot assure you that we will be able to refinance any of our indebtedness,
including the notes, on commercially reasonable terms, or at all. Contractual Obligations and Other Commercial Commitments The following summarizes our contractual obligations at March 31, 2004,
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 thousands)
    
    Total
    
    1 year
    
    years
    
    years
    
    yearsContractual Obligations:Deferred Compensation Agreements
    
    $
    5,044
    
    
    $
    746
    
    
    $
    1,024
    
    
    $
    918
    
    
    $
    2,356Network Carrier Commitments
    
    
    9,333
    
    
    
    6,633
    
    
    
    2,700
    
    
    
    
    
    
    
    Long-Term Debt
    
    
    204,725
    
    
    
    550
    
    
    
    1,100
    
    
    
    53,075
    
    
    
    150,000Operating Leases
    
    
    35,740
    
    
    
    6,596
    
    
    
    11,627
    
    
    
    9,310
    
    
    
    8,207Total Contractual Cash Obligations
    
    $
    254,842
    
    
    $
    14,525
    
    
    $
    16,451
    
    
    $
    63,303
    
    
    $
    160,563
 Amount of Commitment Expiration Per PeriodTotalAmountsCommitted
    
    Less than1 year
    
    1-3years
    
    4-5years
    
    After 5yearsOther Commercial Commitments:Line of Credit
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Standby Letters of Credit
    
    
    4,250
    
    
    
    4,250
    
    
    
    
    
    
    
    
    
    
    
    Guaranties for Global Crossing Affiliates
    
    
    3,537
    
    
    
    1,930
    
    
    
    1,607
    
    
    
    
    
    
    
    Total Commercial Commitments
    
    $
    7,787
    
    
    $
    6,180
    
    
    $
    1,607
    
    
    $
    
    
    
    $
    
 Recent Accounting Pronouncements In December 2003, the FASB issued FASB Interpretation No. 46R,
Consolidation of Variable Interest Entities an Interpretation of ARB No. 51
(FIN 46R). This Interpretation, which replaces FASB Interpretation No. 46
Consolidation of Variable Interest Entities, clarifies the application of
Accounting Research Bulletin No. 51, Consolidated Financial Statements (ARB
51), to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support. Application of FIN 46R was required for us for
the second quarter of our 2004 fiscal year. We have determined that our
investment in Purple Voice meets the criteria of a variable interest entity
requiring consolidation under FIN 46R. However, because we have voting control
over Purple Voice, we have been consolidating Purple Voice in accordance with
the requirements of ARB 51. Accordingly, there was no further impact upon the
consolidated financial statements resulting from the adoption of FIN 46R. Summary of Critical Accounting Policies The discussion and analysis of our financial condition and results of
operations are based upon our condensed consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. 32




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The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an ongoing basis, we continually evaluate our estimates. We
base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates. We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our condensed
consolidated financial statements. Revenue Recognition Revenue from product sales and installations is recognized upon completion
of the installation or, for contracts that are completed in stages and include
contract specified milestones, upon achieving such contract milestones, and
delivery and customer acceptance of a fully functional system. Revenue from
sales to distributors is recognized upon shipment. Customers are generally
progress-billed prior to the completion of the installations. The revenue
related to these advance payments is deferred until the system installations
are completed or specified milestones are attained. Costs incurred on
uncompleted contracts and stages are accumulated and recorded as inventory
awaiting installation. In addition, contracts for annual recurring turret and
I.T.S. services are generally billed in advance, and are recorded as revenue
ratably (on a monthly basis) over the contractual periods. Revenue from 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 our
Network Services division is generally billed at the beginning of the
month and recognized in the same month. Allowance for Doubtful Accounts We evaluate the collectibility of our accounts receivable based on a
combination of factors. Where we are aware of circumstances that may impair a
specific customers ability to meet its financial obligations to us, we record
a specific allowance against amounts due to us and thereby reduce the net
receivable to the amount we reasonably believe is likely to be collected. For
all other customers, we recognize allowances for doubtful accounts based on the
length of time the receivables are outstanding, industry and geographic
concentrations, the current business environment and our historical experience.
If the financial condition of our customers deteriorates or if economic
conditions worsen, additional allowances may be required. Inventories Inventories are stated at the lower of FIFO (first in, first out) cost or
market but not in excess of net realizable value. Inventory costs include all
direct manufacturing costs and applied overhead. Allowances are established
based on managements estimate of inventory on hand that is potentially
obsolete or for which its market value is below cost. Impairment of Long-Lived Assets We review long-lived assets, including property, plant and equipment and
definite lived intangible assets, for impairment whenever events or changes in
business circumstances indicate that the carrying amount of the assets may not
be fully recoverable. An impairment loss would be recognized when estimated
undiscounted future cash flows expected to result from the use of the assets
and its eventual disposition is less than its carrying amount. Impairment, if
any, is assessed using discounted cash flows. No impairments have occurred to
date. Goodwill and Other Intangible Assets Goodwill represents the excess of the cost over the net of the fair value
of the identifiable tangible and intangible assets acquired and the fair value
of liabilities assumed in acquisitions. We adopted SFAS 142 effective upon the acquisition of IPC Information
Systems and, in accordance with SFAS 142, there is no amortization of goodwill
and intangible assets that have indefinite useful lives. However,
goodwill is tested for impairment annually using the two-step process specifically
provided in SFAS 142. Other intangible assets are carried at cost. Technology
is amortized over its estimated useful life of between 3 to 7 years, customer
relationships are amortized over their 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 expense, but instead will be subject to annual impairment tests
in accordance with the provisions of SFAS 142. In determining that the trade
name has an indefinite life, we considered the following factors: the ongoing
active use of our trade name, which is directly associated with our leading
position in turret solutions, 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. 33




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We completed the required annual impairment test as of July 1, 2003 (the
first day of the fourth quarter of the 2003 fiscal year), and concluded that
there was no impairment to our recorded goodwill or trade name. There have been
no indicators of impairment during the six months ended March 31, 2004 that
would require us to perform an impairment test for this period. We believe the
recorded values of goodwill and trade name in the amounts of $95.3 million and
$18.0 million, respectively, at March 31, 2004 are fully recoverable. StockBased Compensation As permitted by SFAS 123, we have elected to follow APB Opinion 25 and
related interpretations in accounting for our employee option plans. Under APB
25, no compensation expense is recognized at the time of an option grant if the
exercise price of the employee stock option is fixed and equals or exceeds the
fair market value of the underlying common stock on the date of the grant and
the number of shares to be issued pursuant to the exercise of such options are
fixed on the date of the grant. 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. Business Combinations During the 2004 and 2003 fiscal years, the acquisition of Gains Asia,
Gains US and UK and our investment in Purple Voice required certain estimates
and judgments related to the fair value of assets acquired and liabilities
assumed. Certain of the liabilities are subjective in nature. These liabilities
have been reflected in the purchase accounting based upon the most recent
information available, and principally include Federal and state payroll taxes,
state sales taxes, state income taxes, value added tax, or VAT, and income
taxes in several foreign countries. The ultimate settlement of such liabilities
may be for amounts which are different from the amounts presently recorded. 
 Item 3. Quantitative and Qualitative Disclosure About Market Risk We do not have any off balance sheet financial arrangements. 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 or foreign currency hedging contracts. 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. Future Principal PaymentsFair Value on(Dollars in millions)
    
    March 31, 2004
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    TotalLong-Term Debt:Fixed RateSenior
Subordinated
Notes,
interest
payable at
11.5%, maturing 2009
    
    $
    159.0
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    150.0
    
    
    $
    150.0Variable RateSenior Secured
Credit
Facilities 
Term Loan
(interest
payable at
5.1% at March
31, 2004)
    
    $
    55.3
    
    
    $
    0.3
    
    
    $
    0.5
    
    
    $
    0.5
    
    
    $
    0.6
    
    
    $
    52.8
    
    
    $
    
    
    
    $
    54.7
 34




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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 is reasonably likely to materially affect, the Companys internal
controls over financial reporting. 35




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Part II  Other Information: 
 Item 1. Legal Proceedings Except as described below, the Company is not a party to any pending legal
proceedings other than claims and lawsuits arising in the normal course of
business. Management believes these proceedings will not have a material
adverse effect on the Companys consolidated financial condition or results of
operations. On June 27, 2000, an action was brought against several defendants,
including the Companys subsidiary, IPC Communications, Inc., in the United
States District Court for the Southern District of New York by two
telecommunications cabling contractors alleging that IPC Communications, Inc.
violated federal antitrust and New York state law by conspiring with the
International Brotherhood of Electrical Workers Local Union Number 3, AFL-CIO,
and five electrical contractors to exclude plaintiffs from telecommunications
wiring and systems installation jobs in the New York City metropolitan area.
Subsequently, the complaint was amended to add an additional plaintiff and an
additional defendant contractor. The Company believes the suit is without
merit. However, there can be no assurance that the resolution of this lawsuit
will ultimately be favorable. Plaintiffs are seeking injunctive relief and
damages from the defendants, jointly and severally, in excess of an aggregate
of $75.0 million. On September 8, 2003, an action was brought against several defendants,
including the Companys subsidiary, IPC Information Systems, Inc. and its
President, in the United States District Court for the Eastern District of New
York by Advance Relocation & Storage Co., Inc., a moving company. The complaint
alleges that IPC Information Systems, Inc. and 23 other defendants violated the
Racketeer Influenced and Corrupt Organizations Act and engaged in tortious
interference with prospective business advantage by preventing the plaintiff
from obtaining work as a mover in jobs performed in large commercial buildings
in New York City. The Company believes the suit is without merit and intends to
vigorously defend against all claims alleged against it in the complaint.
Plaintiffs are seeking injunctive relief and damages from the defendants,
jointly and severally, in an aggregate amount of approximately $7.0 million. 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities. None 
 Item 3. Defaults Upon Senior Securities None 
 Item 4. Submission of Matters to a Vote of Security Holders None 
 Item 5. Other Information None 
 Item 6. Exhibits and Reports on Form 8-K  (A)
    
    EXHIBITS  31.1
    
    Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certificate of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certificate of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  (B)
    
    REPORTS ON FORM 8-KThe Company filed a report on Form 8-K on January 7, 2004. The Form 8-K
was for the purpose of announcing that on January 6, 2004, IPC
Acquisition Corp., through its subsidiary IPC Information Systems, LLC,
announced it acquired Gains International Asia Holdings Limited from GS
Capital Partners 2000, L.P. and other private equity funds affiliated
with Goldman, Sachs & Co. for a total purchase price of $15.5 million
in cash and debt assumption.The Company filed a report on Form 8-K on January 5, 2004. The Form 8-K
was for the purpose of announcing that on December 31, 2003, IPC
Acquisition Corp. announced that its Board of Directors declared a
special cash dividend totaling approximately $18 million, or $1.22 per
share. 36




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SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. IPC Acquisition Corp.Dated: May 12, 2004
    
    By:
    
    /s/ TIMOTHY WHELANTimothy WhelanChief Financial Officer(Principal Financial and AccountingOfficer and Duly Authorized Officer)
 37