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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 SECURITIESEXCHANGE ACT OF 1934
 For the Quarterly Period Ended June 30, 2004 or [  ]
    

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 July 31, 2004Common Stock, par value $0.01
    
    14,718,592 shares




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IPC ACQUISITION CORP. INDEX PagePart I. Financial Information:Item 1. Financial StatementsA) Condensed Consolidated Balance Sheets as of June 30, 2004 and September 30, 2003
    
    
    1B) Condensed Consolidated Statements of Operations for the Three and Nine Months
Ended June 30, 2004 and 2003
    
    
    2C) Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June
30, 2004 and 2003
    
    
    3D) Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21Item 3. Quantitative and Qualitative Disclosure About Market Risk
    
    
    35Item 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
    
    
    38EX 10.18: AMENDED & RESTATED LABOR POOLING AGREEMENTEX 10.19: AMENDED & RESTATED LABOR POOLING AGREEMENTEX 10.20: EMPLOYMENT AGREEMENTEX 31.1: CERTIFICATEEX 31.2: CERTIFICATEEX 32.1: CERTIFICATEEX 32.2: CERTIFICATE




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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)
 June 30,
    
    September 30,2004
    
    2003AssetsAssets:Cash
    
    $
    17,403
    
    
    $
    25,800Accounts receivable, net of allowance of $1,400 and $732, respectively
    
    
    42,180
    
    
    
    40,409Inventories, net
    
    
    25,054
    
    
    
    22,728Prepaid and other current assets
    
    
    4,029
    
    
    
    5,427Current assets of discontinued operations
    
    
    9,918
    
    
    
    27,556Total current assets
    
    
    98,584
    
    
    
    121,920Property, plant and equipment, net
    
    
    24,142
    
    
    
    23,851Goodwill
    
    
    89,746
    
    
    
    82,108Intangible assets, net
    
    
    196,394
    
    
    
    197,930Deferred financing costs, net
    
    
    12,909
    
    
    
    14,146Other assets
    
    
    1,095
    
    
    
    1,221Non-current assets of discontinued operations
    
    
    287
    
    
    
    3,734Total assets
    
    $
    423,157
    
    
    $
    444,910Liabilities and Stockholders EquityLiabilities:Current portion of long term debt
    
    $
    550
    
    
    $
    550Accounts payable
    
    
    6,169
    
    
    
    2,753Accrued expenses and other current liabilities
    
    
    25,286
    
    
    
    27,023Income taxes payable
    
    
    2,538
    
    
    
    4,208Customer advances on installation contracts
    
    
    18,453
    
    
    
    16,754Deferred revenue on maintenance contracts
    
    
    14,248
    
    
    
    13,095Current portion of guarantees on former parent obligations
    
    
    1,353
    
    
    
    1,353Deferred purchase consideration
    
    
    
    
    
    
    6,722Current liabilities of discontinued operations
    
    
    1,794
    
    
    
    3,820Total current liabilities
    
    
    70,391
    
    
    
    76,278Term loan
    
    
    54,175
    
    
    
    54,450Senior subordinated notes
    
    
    150,000
    
    
    
    150,000Deferred taxes, net
    
    
    13,324
    
    
    
    12,182Deferred compensation
    
    
    2,874
    
    
    
    2,936Guarantees on former parent obligations and other long-term liabilities
    
    
    208
    
    
    
    1,885Total liabilities
    
    
    290,972
    
    
    
    297,731Commitments and ContingenciesStockholders equity:Common stock, $0.01 par value, (25,000,000 shares authorized;
14,718,592 shares issued and outstanding at June 30, 2004; 14,724,380
shares issued and outstanding at September 30, 2003)
    
    
    147
    
    
    
    147Paid in capital
    
    
    145,796
    
    
    
    145,846Notes receivable for purchases of common stock
    
    
    (275
    )
    
    
    (393
    )Accumulated deficit
    
    
    (23,358
    )
    
    
    (5,161
    )Accumulated other comprehensive income
    
    
    9,875
    
    
    
    6,740Total stockholders equity
    
    
    132,185
    
    
    
    147,179Total liabilities and stockholders equity
    
    $
    423,157
    
    
    $
    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
    
    Nine Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Revenue:Product sales and installations
    
    $
    21,527
    
    
    $
    18,157
    
    
    $
    75,228
    
    
    $
    63,068Service
    
    
    38,786
    
    
    
    26,349
    
    
    
    107,603
    
    
    
    69,05660,313
    
    
    
    44,506
    
    
    
    182,831
    
    
    
    132,124Cost of goods sold (depreciation shown separately):Product sales and installations
    
    
    10,423
    
    
    
    10,123
    
    
    
    35,595
    
    
    
    30,937Service
    
    
    19,101
    
    
    
    12,577
    
    
    
    53,082
    
    
    
    32,060Depreciation and amortization
    
    
    1,029
    
    
    
    556
    
    
    
    2,739
    
    
    
    1,15230,553
    
    
    
    23,256
    
    
    
    91,416
    
    
    
    64,149Gross profit
    
    
    29,760
    
    
    
    21,250
    
    
    
    91,415
    
    
    
    67,975Research and development
    
    
    3,809
    
    
    
    2,784
    
    
    
    10,817
    
    
    
    8,447Selling, general and administrative
    
    
    13,556
    
    
    
    10,883
    
    
    
    41,229
    
    
    
    29,225Depreciation and amortization
    
    
    5,535
    
    
    
    4,678
    
    
    
    15,970
    
    
    
    14,087Income from operations
    
    
    6,860
    
    
    
    2,905
    
    
    
    23,399
    
    
    
    16,216Other income (expense):Interest expense, net
    
    
    (5,391
    )
    
    
    (6,008
    )
    
    
    (16,727
    )
    
    
    (18,690
    )Other income, net
    
    
    223
    
    
    
    2,012
    
    
    
    530
    
    
    
    3,339Income (loss) from continuing operations
before income taxes
    
    
    1,692
    
    
    
    (1,091
    )
    
    
    7,202
    
    
    
    865Income tax (benefit) expense
    
    
    (368
    )
    
    
    303
    
    
    
    3,821
    
    
    
    2,655Income (loss) from continuing operations
    
    
    2,060
    
    
    
    (1,394
    )
    
    
    3,381
    
    
    
    (1,790
    )Discontinued operations (Note 3):Income
(loss) from operations of I.T.S. division (including loss on
disposal of $4,110 for the 2004 periods)
    
    
    (6,095
    )
    
    
    763
    
    
    
    (6,375
    )
    
    
    17Income tax
(benefit) expense
    
    
    (2,761
    )
    
    
    336
    
    
    
    (2,761
    )
    
    
    7Income (loss) on
discontinued operations
    
    
    (3,334
    )
    
    
    427
    
    
    
    (3,614
    )
    
    
    10Net loss
    
    $
    (1,274
    )
    
    $
    (967
    )
    
    $
    (233
    )
    
    $
    (1,780
    )
 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)
 Nine Months EndedJune 30,2004
    
    2003Cash flows from operating activities:Net loss
    
    $
    (233
    )
    
    $
    (1,780
    )Income (loss) from discontinued operations
    
    
    (3,614
    )
    
    
    10Income (loss) from continuing operations
    
    
    3,381
    
    
    
    (1,790
    )Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities:Depreciation and amortization
    
    
    6,859
    
    
    
    4,521Amortization of intangibles
    
    
    11,850
    
    
    
    10,718Amortization of deferred financing costs
    
    
    1,462
    
    
    
    2,016Provision for (reversal of) doubtful accounts
    
    
    (231
    )
    
    
    118Deferred income taxes
    
    
    (530
    )
    
    
    (2,533
    )Amortization of guarantees on former parent obligations
    
    
    (1,015
    )
    
    
    (338
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    2,878
    
    
    
    6,331Inventories
    
    
    (2,042
    )
    
    
    (10,525
    )Prepaids and other current assets
    
    
    1,830
    
    
    
    (1,598
    )Other assets
    
    
    145
    
    
    
    36Accounts payable, accrued expenses and other liabilities
    
    
    (556
    )
    
    
    (9,719
    )Income taxes payable
    
    
    (2,513
    )
    
    
    1,305Customer advances and deferred revenue
    
    
    2,302
    
    
    
    20,362Net cash provided by continuing operations
    
    
    23,820
    
    
    
    18,904Net cash provided by (used in) discontinued operations
    
    
    15,445
    
    
    
    (7,791
    )Net cash provided by operating activities
    
    
    39,265
    
    
    
    11,113Cash flows from investing activities:Capital expenditures
    
    
    (5,955
    )
    
    
    (3,832
    )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
    )
    
    
    Cash acquired as a result of the acquisition of Gains US and UK
    
    
    
    
    
    
    4,087Acquisition of Purple Voice
    
    
    (517
    )
    
    
    Acquisition of Gains Asia, net of cash acquired
    
    
    (15,197
    )
    
    
    Net cash provided by (used in) continuing operations
    
    
    (28,425
    )
    
    
    4,474Net cash provided by (used in) discontinued operations
    
    
    
    
    
    
    (19
    )Net cash provided by (used in) investing activities
    
    
    (28,425
    )
    
    
    4,455Cash flows from financing activities:Principal payments on term loan
    
    
    (275
    )
    
    
    (18,616
    )Issuance costs for term loan amendment
    
    
    (225
    )
    
    
    (310
    )Deferred compensation payments
    
    
    (62
    )
    
    
    (70
    )Payment of special cash dividend
    
    
    (17,964
    )
    
    
    Net cash used in financing activities
    
    
    (18,526
    )
    
    
    (18,996
    )Effect of exchange rate changes on cash
    
    
    (711
    )
    
    
    (850
    )Net decrease in cash
    
    
    (8,397
    )
    
    
    (4,278
    )Cash, beginning of period
    
    
    25,800
    
    
    
    25,294Cash, end of period
    
    $
    17,403
    
    
    $
    21,016Supplemental disclosures of cash flow information:Cash paid during the periods for:Income taxes
    
    $
    3,077
    
    
    $
    4,320Interest
    
    $
    20,094
    
    
    $
    21,403Supplemental disclosures of non-cash investing activities:Value of common stock issued for the acquisition of Gains US and UK:
    
    
    
    
    
    $
    5,693
 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)
June 30, 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 nine months ended June 30, 2004 and 2003 include the accounts of the
Company and its wholly owned subsidiaries. The Companys operations primarily
consist of 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), the April 30, 2003 purchase of Gains
International (US) Inc. and Gains International (Europe) Limited and the
January 6, 2004 purchase of 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
June 30, 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
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 an annual fair value test 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. The Company most recently completed the required annual impairment and
fair value tests 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
nine months ended June 30, 2004 that would require the Company to 4




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IPC ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSContinued
(Unaudited)
June 30, 2004 perform an impairment test for this period. The Company believes the recorded
values of goodwill and trade name in the amounts of $89.7 million and $16.3
million, respectively, at June 30, 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 periods ended June
30, 2004 and 2003: weighted-average risk-free interest rate of 3.5% and 2.1%,
respectively; weighted-average volatility factor of the expected market price
of the Companys common stock of 90% for both periods; dividend yield of 14.2%
for 2004 only and a weighted-average expected life of the options of 4 years
for both periods. 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 June 30, 2004 was $2.44. The Companys pro forma net 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 options 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 loss would have been adjusted to the pro forma amounts indicated in the
table below: Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,(dollars in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Reported net loss
    
    $
    (1,274
    )
    
    $
    (967
    )
    
    $
    (233
    )
    
    $
    (1,780
    )Add back total
stock-based employee
compensation
reported, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deduct total
stock-based employee
compensation expense
determined under SFAS
123 fair value based
method for all
awards, net of tax
    
    
    (364
    )
    
    
    (165
    )
    
    
    (1,115
    )
    
    
    (536
    )Net loss, pro forma
    
    $
    (1,638
    )
    
    $
    (1,132
    )
    
    $
    (1,348
    )
    
    $
    (2,316
    )
 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 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. 5




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IPC ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSContinued
(Unaudited)
June 30, 2004 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
    
    Nine Months EndedJune 30,
    
    June 30,(dollars in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Reported net loss
    
    $
    (1,274
    )
    
    $
    (967
    )
    
    $
    (233
    )
    
    $
    (1,780
    )Translation adjustment, net of tax
    
    
    (353
    )
    
    
    1,916
    
    
    
    3,135
    
    
    
    2,077Total comprehensive income (loss)
    
    $
    (1,627
    )
    
    $
    949
    
    
    $
    2,902
    
    
    $
    297
  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. 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
Bankruptcy 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. 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 $1.8195. 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 June 30, 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 6




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IPC ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSContinued
(Unaudited)
June 30, 2004 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 the date of
this filing, 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
June 30, 2004, the Company has made settlement payments aggregating $1.9
million, including a $1.1 million payment made to one jurisdiction in May 2004.
The Company estimates that the range of its exposure for additional tax
liabilities is from $0.0 to $18.0 million, which has been
reduced from $36.0 million as a result of the Companys settlement
negotiations. 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 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 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
 7




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##### Table of Contents



IPC ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSContinued
(Unaudited)
June 30, 2004 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 nine months ended June 30, 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: (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
 Gains Asia Acquisition On January 6, 2004, the Company purchased Gains International Asia
Holdings Limited (Gains Asia) from GSCP 2000 and other private equity funds
affiliated with Goldman, Sachs & Co. for approximately $17.4 million in cash
consideration, including an advance payment of $5.5 million made in October
2003, a $11.7 payment million at closing, and a $0.2 million payment in April
2004. This transaction followed the acquisition of Gains US and UK in April
2003 and completes the purchase of all the Gains related entities. With the
acquisition of Gains Asia, the Company expanded its private global voice and
data network, which it operates under the name Network Services, into the Asia
Pacific region. 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 $5.3 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 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
    
    
    5,316Intangible assets
    
    
    8,700Total 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 nine months ended June 30,
2004 include the operating results of Gains Asia 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: 8




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##### Table of Contents



IPC ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSContinued
(Unaudited)
June 30, 2004 (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)
    
    $
    5,316Identified intangibles:Customer
relationships (9 year life)
    
    
    8,700Total allocation of excess purchase price
    
    $
    14,016
 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 nine months ended June 30, 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 Asia
acquisition occurred as of the beginning of the period, or to project the
results for any future period. Three Months Ended
    
    Nine Months EndedJune 30 ,
    
    June 30,(dollars in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Revenue
    
    $
    60,313
    
    
    $
    49,579
    
    
    $
    186,358
    
    
    $
    153,480Net income (loss)
    
    $
    (1,274
    )
    
    $
    (985
    )
    
    $
    386
    
    
    $
    (2,669
    )
 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 over an electronic network. As a result of these
transactions, which closed on August 1, 2003:  
    
    IPC UK acquired approximately 40% of the 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; 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 nine months ended June
30, 2003. During the three months ended June 30, 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 $517,000.
Following those acquisitions, IPC UK holds approximately 99% of the currently
outstanding common shares (calculated on a non-diluted basis) of Purple Voice. 9




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IPC ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSContinued
(Unaudited)
June 30, 2004  3.
    
    Discontinued Operations In May 2004, the Board of Directors of the Company approved a formal plan
to sell certain assets related to its Information Transport Systems (I.T.S.)
division to a group of private investors. The I.T.S. division was a low margin
business that no longer fit into the Companys long-term growth plans. The sale
closed in July 2004. For the nine months ended June 30, 2004, the Company
recorded a $3.6 million loss from discontinued operations, net of tax which
included a cash requirement of $0.8 million, primarily for existing equipment
and property leases and other expenses, operating losses of $2.3 million,
and non-cash charges of $3.3 million for the write down of goodwill, other
intangibles and owned equipment, partially offset by a tax benefit of $2.8
million. In accordance with FASB Statement No. 144 Accounting for the Impairment
or Disposal of Long-Lived Assets, the Company has reported the results of
operations of this business as income (loss) from discontinued operations. All
prior periods have been restated to conform to this presentation. As a result,
the assets and liabilities of this discontinued operation have been
reclassified on the balance sheet from the historical classifications and
presented under the captions assets of discontinued operations and
liabilities of discontinued operations, respectively. The assets and liabilities of discontinued operations as of June 30, 2004 and
September 30, 2003 are as follows: June 30,
    
    September 30,(dollars in thousands)
    
    2004
    
    2003Assets of discontinued operations:Accounts receivable, net
    
    $
    9,563
    
    
    $
    19,792Inventories, net
    
    
    
    
    
    
    7,668Intangibles and other assets
    
    
    642
    
    
    
    3,830$
    10,205
    
    
    $
    31,290Liabilities of discontinued operations:Accounts payable and accrued expenses
    
    $
    1,787
    
    
    $
    1,552Customer advances
    
    
    
    
    
    
    2,235Other liabilities
    
    
    7
    
    
    
    33$
    1,794
    
    
    $
    3,820
 The results of operations related to discontinued operations for the three and
nine months ended June 30, 2004 and 2003 are as follows: Three Months Ended
    
    Nine Months EndedJune 30,
    
    June 30,(dollars in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Revenue
    
    $
    4,794
    
    
    $
    16,486
    
    
    $
    21,482
    
    
    $
    33,556Costs of goods sold
    
    
    6,317
    
    
    
    15,162
    
    
    
    22,412
    
    
    
    31,728Gross profit
    
    
    (1,523
    )
    
    
    1,324
    
    
    
    (930
    )
    
    
    1,828Operating expenses
    
    
    462
    
    
    
    561
    
    
    
    1,335
    
    
    
    1,811Operating income (loss) before loss on disposal and income taxes
    
    
    (1,985
    )
    
    
    763
    
    
    
    (2,265
    )
    
    
    17Loss on disposal of operations
    
    
    (4,110
    )
    
    
    
    
    
    
    (4,110
    )
    
    
    Income tax expense (benefit)
    
    
    (2,761
    )
    
    
    336
    
    
    
    (2,761
    )
    
    
    7Income (loss) from discontinued operations
    
    $
    (3,334
    )
    
    $
    427
    
    
    $
    (3,614
    )
    
    $
    10
  4.
    
    Inventories June 30,
    
    September 30,(dollars in thousands)
    
    2004
    
    2003Components and manufacturing work in process
    
    $
    8,046
    
    
    $
    5,980Inventory on customer sites awaiting installation
    
    
    9,050
    
    
    
    10,196Parts and maintenance supplies
    
    
    7,958
    
    
    
    6,552$
    25,054
    
    
    $
    22,728
 10




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##### Table of Contents



IPC ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSContinued
(Unaudited)
June 30, 2004  5.
    
    Goodwill and Intangible Assets The Company adopted SFAS 142 in December 2001. Under SFAS 142, goodwill
and intangible assets that have indefinite useful lives are no longer
amortized. Rather, they are reviewed for impairment annually or more frequently
if certain indicators arise. The following table reflects the changes in
goodwill for the nine months ended June 30, 2004: (dollars in thousands)Balance at September 30, 2003
    
    $
    82,108Gains Asia acquisition
    
    
    5,316Write-offs
    
    
    Effects of currency translation adjustments
    
    
    2,322Balance at June 30, 2004
    
    $
    89,746
 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: June 30,
    
    September 30,(dollars in thousands)
    
    2004
    
    2003Intangible assets:Amortized intangible assets:Technology
    
    $
    46,044
    
    
    $
    46,346Customer relationships
    
    
    163,430
    
    
    
    154,730Effect of currency translation adjustments
    
    
    7,946
    
    
    
    6,081Accumulated amortization-technology
    
    
    (16,667
    )
    
    
    (11,517
    )Accumulated amortization-customer relationships
    
    
    (20,659
    )
    
    
    (14,010
    )Net carrying amount
    
    
    180,094
    
    
    
    181,630Non-amortized intangible assets:Trade name
    
    
    16,300
    
    
    
    16,300Net carrying amount
    
    $
    196,394
    
    
    $
    197,930
 Amortization expense for those intangible assets required to be amortized
under SFAS 142 was $4.1 million and $11.9 million for the three and nine months
ended June 30, 2004 and $3.6 million and $10.7 million for the three and nine
months ended June 30, 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
    
    $
    15,842
    
    
    $
    15,842
    
    
    $
    15,842
    
    
    $
    15,495
    
    
    $
    15,495
  6.
    
    Accrued Expenses and Other Current Liabilities June 30,
    
    September 30,(dollars in thousands)
    
    2004
    
    2003Accrued compensation and benefits
    
    $
    8,703
    
    
    $
    7,469Warranty reserves
    
    
    2,118
    
    
    
    1,889Sales taxes payable
    
    
    542
    
    
    
    137Accrued job costs
    
    
    1,009
    
    
    
    1,758Accrued transaction costs
    
    
    2,163
    
    
    
    2,124Accrued carrier costs
    
    
    5,317
    
    
    
    3,650Current portion of deferred compensation
    
    
    692
    
    
    
    692Accrued interest
    
    
    835
    
    
    
    5,299Other accruals
    
    
    3,907
    
    
    
    4,005$
    25,286
    
    
    $
    27,023
 11




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IPC ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSContinued
(Unaudited)
June 30, 2004  7.
    
    Long Term Debt Senior Secured Credit Facilities On December 20, 2001, the Company entered into the senior secured credit
facilities comprised of a $105.0 million term loan and a $15.0 million
revolving credit facility. On September 2, 2003, the Company amended and
restated its senior secured credit facilities. The amended and restated senior
secured credit facilities consisted of a $25.0 million revolving credit
facility and a $55.0 million term loan. The term loan was borrowed in full at
closing. On April 20, 2004, the Company completed an agreement to increase the
availability under the revolving credit facility by $10.0 million. As of June
30, 2004 the total amount available for borrowing under the revolving credit
facility is $30.7 million ($35.0 million reduced by outstanding letters of
credit of $4.3 million) provided, however, that the Company can increase the
committed amount under these facilities by up to $15.0 million so long as one
or more lenders agrees to provide this incremental commitment and other
customary conditions are satisfied. For the three months ended June 30, 2004,
the weighted average interest rate for borrowings outstanding under the amended
and restated senior secured credit facilities was 4.94%. 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 June 30, 2004, remaining 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
 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 12




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##### Table of Contents



IPC ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSContinued
(Unaudited)
June 30, 2004 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.  8.
    
    Commitments and Contingencies Warranties The Company records a reserve for future warranty costs based on current
unit sales, historical experience and managements judgment regarding
anticipated rates of warranty claims and cost per claim. The adequacy of the
recorded warranty 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: Nine Months EndedJune 30,(dollars in thousands)
    
    2004
    
    2003Balance at beginning of period
    
    $
    1,889
    
    
    $
    2,159Warranty accrual
    
    
    1,300
    
    
    
    1,186Material and labor usage
    
    
    (1,071
    )
    
    
    (1,945
    )Balance at end of period
    
    $
    2,118
    
    
    $
    1,400
 Guarantees The Company, through its subsidiaries, guaranteed certain equipment lease,
real estate and other obligations of its former affiliate, Global Crossing. 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 carrying value of
these guarantees as of June 30, 2004 is $1.6 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. The
maximum potential future payments the Company could be required to make under
these obligations is $3.0 million. Through June 30, 2004, Global Crossings
affiliate has made all of the required Worship Street sublease payments. Litigation Except for the two lawsuits described below which involve the Companys
former I.T.S. division, the Company is not a party to any pending legal
proceedings other than claims and lawsuits arising in the normal course of
business. Under the terms of the sale agreement, the Company remains liable for
pre-closing liabilities relating to the I.T.S. division, including the two
lawsuits described below. Management believes the proceedings will not have a
material adverse effect on the Companys consolidated financial condition or
results of operations. 13




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##### Table of Contents



IPC ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSContinued
(Unaudited)
June 30, 2004 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.  9.
    
    Income Taxes The Companys effective tax rate for the nine months ended June 30, 2004
was 53.1% and 307.0% for the nine months ended June 30, 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 $8.5 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 June 30, 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 the date of
this filing, 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
June 30, 2004, the Company has made settlement payments aggregating $1.9
million, including a $1.1 million payment made to one jurisdiction in May 2004.
The Company estimates that the range of its exposure for additional tax
liabilities is from $0.0 to $18.0 million, which has been reduced from $36.0
million as a result of the Companys settlement negotiations. 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. 14




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##### Table of Contents



IPC ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSContinued
(Unaudited)
June 30, 2004  10.
    
    Business Segment Information The Companys operations include the Trading Systems and 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. 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, is reported 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. For the Three Months Ended June 30, 2004 NetworkTrading Systems
    
    Services
    
    Consolidated(dollars in thousands)Revenue:Product sales and installations
    
    $
    21,527
    
    
    $
    
    
    
    $
    21,527Service
    
    
    25,560
    
    
    
    13,226
    
    
    
    38,786Total revenue
    
    
    47,087
    
    
    
    13,226
    
    
    
    60,313Direct margin
    
    
    29,586
    
    
    
    6,912
    
    
    
    36,498Depreciation and amortization
    
    
    5,342
    
    
    
    1,222
    
    
    
    6,564Income from operations
    
    
    5,476
    
    
    
    1,384
    
    
    
    6,860Interest income (expense), net
    
    
    (5,394
    )
    
    
    3
    
    
    
    (5,391
    )Other income (expense), net
    
    
    266
    
    
    
    (43
    )
    
    
    223Income before income taxes
    
    
    348
    
    
    
    1,344
    
    
    
    1,692Income tax expense (benefit)
    
    
    30
    
    
    
    (398
    )
    
    
    (368
    )Goodwill as of June 30, 2004
    
    $
    72,377
    
    
    $
    17,369
    
    
    $
    89,746Total assets as of June 30, 2004 (1)
    
    $
    371,073
    
    
    $
    41,879
    
    
    $
    423,157Capital expenditures
    
    $
    883
    
    
    $
    851
    
    
    $
    1,734
  (1)
    
    Total consolidated assets includes the assets of discontinued
operations of the I.T.S. division of $10,205. For the Three Months Ended June 30, 2003 NetworkTrading Systems
    
    Services
    
    Consolidated(dollars in thousands)Revenue:Product sales and installations
    
    $
    18,157
    
    
    $
    
    
    
    $
    18,157Service
    
    
    22,349
    
    
    
    4,000
    
    
    
    26,349Total revenue
    
    
    40,506
    
    
    
    4,000
    
    
    
    44,506Direct margin
    
    
    24,287
    
    
    
    1,760
    
    
    
    26,047Depreciation and amortization
    
    
    4,980
    
    
    
    254
    
    
    
    5,234Income (loss) from operations
    
    
    3,246
    
    
    
    (341
    )
    
    
    2,905Interest income (expense), net
    
    
    (6,013
    )
    
    
    5
    
    
    
    (6,008
    )Other income, net
    
    
    2,004
    
    
    
    8
    
    
    
    2,012Loss before income taxes
    
    
    (763
    )
    
    
    (328
    )
    
    
    (1,091
    )Income tax expense
    
    
    245
    
    
    
    58
    
    
    
    303Goodwill as of June 30, 2003
    
    $
    70,362
    
    
    $
    8,859
    
    
    $
    79,221Total assets as of June 30, 2003 (1)
    
    $
    392,348
    
    
    $
    18,844
    
    
    $
    440,544Capital expenditures
    
    $
    1,199
    
    
    $
    357
    
    
    $
    1,556
  (1)
    
    Total consolidated assets includes the assets of discontinued
operations of the I.T.S. division of $29,352. 15




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##### Table of Contents



IPC ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSContinued
(Unaudited)
June 30, 2004 For the Nine Months Ended June 30, 2004 NetworkTrading Systems
    
    Services
    
    Consolidated(dollars in thousands)Revenue:Product sales and installations
    
    $
    75,228
    
    
    $
    
    
    
    $
    75,228Service
    
    
    75,224
    
    
    
    32,379
    
    
    
    107,603Total revenue
    
    
    150,452
    
    
    
    32,379
    
    
    
    182,831Direct margin
    
    
    95,115
    
    
    
    16,407
    
    
    
    111,522Depreciation and amortization
    
    
    16,010
    
    
    
    2,699
    
    
    
    18,709Income from operations
    
    
    21,054
    
    
    
    2,345
    
    
    
    23,399Interest
expense, net
    
    
    (16,701
    )
    
    
    (26
    )
    
    
    (16,727
    )Other income
(expense), net
    
    
    585
    
    
    
    (55
    )
    
    
    530Income before income taxes
    
    
    4,938
    
    
    
    2,264
    
    
    
    7,202Income tax expense
    
    
    3,529
    
    
    
    292
    
    
    
    3,821Capital expenditures
    
    $
    3,598
    
    
    $
    2,357
    
    
    $
    5,955
 For the Nine Months Ended June 30, 2003 NetworkTrading Systems
    
    Services
    
    Consolidated(dollars in thousands)Revenue:Product sales and installations
    
    $
    63,068
    
    
    $
    
    
    
    $
    63,068Service
    
    
    65,056
    
    
    
    4,000
    
    
    
    69,056Total revenue
    
    
    128,124
    
    
    
    4,000
    
    
    
    132,124Direct margin
    
    
    80,096
    
    
    
    1,760
    
    
    
    81,856Depreciation and amortization
    
    
    14,985
    
    
    
    254
    
    
    
    15,239Income (loss) from operations
    
    
    16,557
    
    
    
    (341
    )
    
    
    16,216Interest income (expense), net
    
    
    (18,695
    )
    
    
    5
    
    
    
    (18,690
    )Other income net
    
    
    3,331
    
    
    
    8
    
    
    
    3,339Income (loss) before income taxes
    
    
    1,193
    
    
    
    (328
    )
    
    
    865Income tax expense
    
    
    2,597
    
    
    
    58
    
    
    
    2,655Capital expenditures
    
    $
    3,475
    
    
    $
    357
    
    
    $
    3,832
 16




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IPC ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSContinued
(Unaudited)
June 30, 2004  11.
    
    Guarantor Subsidiaries Financial Information Certain of the Companys domestic restricted subsidiaries guarantee the
senior secured credit facilities and the senior subordinated notes. These
subsidiary guarantees are both full and unconditional, as well as joint and
several. Information regarding the guarantors is as follows (in thousands): Condensed Consolidating Balance Sheet at June 30, 2004 Non-IPC
    
    Guarantor
    
    GuarantorAcquisition
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedAssets:Cash
    
    $
    8,008
    
    
    $
    3,239
    
    
    $
    6,156
    
    
    $
    
    
    
    $
    17,403Accounts receivable, net
    
    
    
    
    
    
    20,568
    
    
    
    21,612
    
    
    
    
    
    
    
    42,180Inventories, net
    
    
    
    
    
    
    20,374
    
    
    
    8,794
    
    
    
    (4,114
    )
    
    
    25,054Prepaid and other current assets
    
    
    
    
    
    
    1,848
    
    
    
    2,303
    
    
    
    (122
    )
    
    
    4,029Due from (to) affiliate
    
    
    185,073
    
    
    
    (168,089
    )
    
    
    (16,984
    )
    
    
    
    
    
    
    Current assets of discontinued operations
    
    
    
    
    
    
    9,918
    
    
    
    
    
    
    
    
    
    
    
    9,918Total current assets
    
    
    193,081
    
    
    
    (112,142
    )
    
    
    21,881
    
    
    
    (4,236
    )
    
    
    98,584Investment in subsidiaries
    
    
    139,945
    
    
    
    10,524
    
    
    
    19,517
    
    
    
    (169,986
    )
    
    
    Property, plant and equipment, net
    
    
    
    
    
    
    19,360
    
    
    
    4,782
    
    
    
    
    
    
    
    24,142Goodwill and intangibles, net
    
    
    
    
    
    
    189,541
    
    
    
    96,599
    
    
    
    
    
    
    
    286,140Deferred financing costs, net
    
    
    12,909
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,909Other assets
    
    
    
    
    
    
    371
    
    
    
    724
    
    
    
    
    
    
    
    1,095Non-current assets of discontinued operations
    
    
    
    
    
    
    287
    
    
    
    
    
    
    
    
    
    
    
    287Total assets
    
    $
    345,935
    
    
    $
    107,941
    
    
    $
    143,503
    
    
    $
    (174,222
    )
    
    $
    423,157Liabilities and stockholders equity:Current portion of long-term debt
    
    $
    550
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    550Accounts payable, accrued expenses and other
current liabilities
    
    
    835
    
    
    
    16,204
    
    
    
    18,307
    
    
    
    
    
    
    
    35,346Customer advances and deferred revenue
    
    
    
    
    
    
    16,707
    
    
    
    15,994
    
    
    
    
    
    
    
    32,701Current liabilities of discontinued operations
    
    
    
    
    
    
    1,794
    
    
    
    
    
    
    
    
    
    
    
    1,794Total current liabilities
    
    
    1,385
    
    
    
    34,705
    
    
    
    34,301
    
    
    
    
    
    
    
    70,391Long-term debt
    
    
    204,175
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    204,175Other long-term liabilities
    
    
    8,190
    
    
    
    3,082
    
    
    
    6,134
    
    
    
    (1,000
    )
    
    
    16,406Total liabilities
    
    
    213,750
    
    
    
    37,787
    
    
    
    40,435
    
    
    
    (1,000
    )
    
    
    290,972Total stockholders equity
    
    
    132,185
    
    
    
    70,154
    
    
    
    103,068
    
    
    
    (173,222
    )
    
    
    132,185Total liabilities and stockholders equity
    
    $
    345,935
    
    
    $
    107,941
    
    
    $
    143,503
    
    
    $
    (174,222
    )
    
    $
    423,157
 17




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##### Table of Contents



IPC ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSContinued
(Unaudited)
June 30, 2004 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
    
    
    
    
    
    
    27,233
    
    
    
    13,176
    
    
    
    
    
    
    
    40,409Inventories, net
    
    
    
    
    
    
    20,916
    
    
    
    4,666
    
    
    
    (2,854
    )
    
    
    22,728Prepaid and other current assets
    
    
    
    
    
    
    2,014
    
    
    
    3,413
    
    
    
    
    
    
    
    5,427Due from (to) affiliate
    
    
    213,600
    
    
    
    (190,517
    )
    
    
    (23,083
    )
    
    
    
    
    
    
    Current assets of discontinued operations
    
    
    
    
    
    
    27,556
    
    
    
    
    
    
    
    
    
    
    
    27,556Total 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
    
    
    
    
    
    
    19,865
    
    
    
    3,986
    
    
    
    
    
    
    
    23,851Goodwill and intangibles, net
    
    
    
    
    
    
    192,676
    
    
    
    87,362
    
    
    
    
    
    
    
    280,038Deferred financing costs, net
    
    
    14,146
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,146Other assets
    
    
    
    
    
    
    815
    
    
    
    406
    
    
    
    
    
    
    
    1,221Non-current assets of discontinued operations
    
    
    
    
    
    
    3,734
    
    
    
    
    
    
    
    
    
    
    
    3,734Total 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
    
    
    
    13,832
    
    
    
    16,206
    
    
    
    
    
    
    
    35,337Customer advances and deferred revenue
    
    
    
    
    
    
    23,775
    
    
    
    6,074
    
    
    
    
    
    
    
    29,849Deferred purchase price consideration
    
    
    
    
    
    
    6,722
    
    
    
    
    
    
    
    
    
    
    
    6,722Current liabilities of discontinued operations
    
    
    
    
    
    
    3,820
    
    
    
    
    
    
    
    
    
    
    
    3,820Total 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
 Condensed Consolidated Statement of Operations
For the Three Months Ended June 30, 2004 Non-IPC
    
    Guarantor
    
    GuarantorAcquisition
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedRevenue
    
    $
    
    
    
    $
    37,895
    
    
    $
    26,416
    
    
    $
    (3,998
    )
    
    $
    60,313Cost of goods sold
    
    
    
    
    
    
    19,538
    
    
    
    14,860
    
    
    
    (3,845
    )
    
    
    30,553Gross profit
    
    
    
    
    
    
    18,357
    
    
    
    11,556
    
    
    
    (153
    )
    
    
    29,760Other operating expenses
    
    
    
    
    
    
    15,724
    
    
    
    7,176
    
    
    
    
    
    
    
    22,900Income (loss) from operations
    
    
    
    
    
    
    2,633
    
    
    
    4,380
    
    
    
    (153
    )
    
    
    6,860Interest income (expense) and other, net
    
    
    (5,560
    )
    
    
    275
    
    
    
    117
    
    
    
    
    
    
    
    (5,168
    )Income tax provision
    
    
    
    
    
    
    (628
    )
    
    
    260
    
    
    
    
    
    
    
    (368
    )Income (loss) from continuing operations
    
    
    (5,560
    )
    
    
    3,536
    
    
    
    4,237
    
    
    
    (153
    )
    
    
    2,060Income (loss) from discontinued operations, net of tax
    
    
    
    
    
    
    (3,334
    )
    
    
    
    
    
    
    
    
    
    
    (3,334
    )Net income (loss)
    
    $
    (5,560
    )
    
    $
    202
    
    
    $
    4,237
    
    
    $
    (153
    )
    
    $
    (1,274
    )
 18




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##### Table of Contents



IPC ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSContinued
(Unaudited)
June 30, 2004 Condensed Consolidated Statement of Operations
For the Three Months Ended June 30, 2003 Non-IPC
    
    Guarantor
    
    GuarantorAcquisition
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedRevenue
    
    $
    
    
    
    $
    34,330
    
    
    $
    14,783
    
    
    $
    (4,607
    )
    
    $
    44,506Cost of goods sold
    
    
    
    
    
    
    17,626
    
    
    
    9,368
    
    
    
    (3,738
    )
    
    
    23,256Gross profit
    
    
    
    
    
    
    16,704
    
    
    
    5,415
    
    
    
    (869
    )
    
    
    21,250Other operating expenses
    
    
    
    
    
    
    13,670
    
    
    
    4,675
    
    
    
    
    
    
    
    18,345Income (loss) from operations
    
    
    
    
    
    
    3,034
    
    
    
    740
    
    
    
    (869
    )
    
    
    2,905Interest income (expense) and other, net
    
    
    (5,982
    )
    
    
    265
    
    
    
    1,721
    
    
    
    
    
    
    
    (3,996
    )Income tax provision
    
    
    
    
    
    
    (1,038
    )
    
    
    1,341
    
    
    
    
    
    
    
    303Income (loss) from continuing operations
    
    
    (5,982
    )
    
    
    4,337
    
    
    
    1,120
    
    
    
    (869
    )
    
    
    (1,394
    )Income (loss) from discontinued operations, net of tax
    
    
    
    
    
    
    427
    
    
    
    
    
    
    
    
    
    
    
    427Net income (loss)
    
    $
    (5,982
    )
    
    $
    4,764
    
    
    $
    1,120
    
    
    $
    (869
    )
    
    $
    (967
    )Condensed Consolidated Statement of Operations
For the Nine Months Ended June 30, 2004Non-IPC
    
    Guarantor
    
    GuarantorAcquisition
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedRevenue
    
    $
    
    
    
    $
    127,044
    
    
    $
    66,215
    
    
    $
    (10,428
    )
    
    $
    182,831Cost of goods sold
    
    
    
    
    
    
    63,892
    
    
    
    36,570
    
    
    
    (9,046
    )
    
    
    91,416Gross profit
    
    
    
    
    
    
    63,152
    
    
    
    29,645
    
    
    
    (1,382
    )
    
    
    91,415Other operating expenses
    
    
    
    
    
    
    48,367
    
    
    
    19,649
    
    
    
    
    
    
    
    68,016Income (loss) from operations
    
    
    
    
    
    
    14,785
    
    
    
    9,996
    
    
    
    (1,382
    )
    
    
    23,399Interest income (expense) and other, net
    
    
    (16,720
    )
    
    
    828
    
    
    
    (305
    )
    
    
    
    
    
    
    (16,197
    )Income tax provision
    
    
    
    
    
    
    3,532
    
    
    
    289
    
    
    
    
    
    
    
    3,821Income (loss) from continuing operations
    
    
    (16,720
    )
    
    
    12,081
    
    
    
    9,402
    
    
    
    (1,382
    )
    
    
    3,381Income (loss) from discontinued operations, net of tax
    
    
    
    
    
    
    (3,614
    )
    
    
    
    
    
    
    
    
    
    
    (3,614
    )Net income (loss)
    
    $
    (16,720
    )
    
    $
    8,467
    
    
    $
    9,402
    
    
    $
    (1,382
    )
    
    $
    (233
    )Condensed Consolidated Statement of Operations
For the Nine Months Ended June 30, 2003Non-IPC
    
    Guarantor
    
    GuarantorAcquisition
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedRevenue
    
    $
    
    
    
    $
    104,263
    
    
    $
    39,253
    
    
    $
    (11,392
    )
    
    $
    132,124Cost of goods sold
    
    
    
    
    
    
    50,754
    
    
    
    23,704
    
    
    
    (10,309
    )
    
    
    64,149Gross profit
    
    
    
    
    
    
    53,509
    
    
    
    15,549
    
    
    
    (1,083
    )
    
    
    67,975Other operating expenses
    
    
    
    
    
    
    39,662
    
    
    
    12,097
    
    
    
    
    
    
    
    51,759Income (loss) from operations
    
    
    
    
    
    
    13,847
    
    
    
    3,452
    
    
    
    (1,083
    )
    
    
    16,216Interest income (expense) and other, net
    
    
    (18,750
    )
    
    
    123
    
    
    
    3,276
    
    
    
    
    
    
    
    (15,351
    )Income tax provision (benefit)
    
    
    
    
    
    
    (1,168
    )
    
    
    3,823
    
    
    
    
    
    
    
    2,655Income (loss) from continuing operations
    
    
    (18,750
    )
    
    
    15,138
    
    
    
    2,905
    
    
    
    (1,083
    )
    
    
    (1,790
    )Income (loss) from discontinued operations, net of tax
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    10Net income (loss)
    
    $
    (18,750
    )
    
    $
    15,148
    
    
    $
    2,905
    
    
    $
    (1,083
    )
    
    $
    (1,780
    )
 19




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##### Table of Contents



IPC ACQUISITION CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSContinued
(Unaudited)
June 30, 2004 Condensed Consolidated Statement of Cash Flows
For the Nine Months Ended June 30, 2004 Non-IPC
    
    Guarantor
    
    GuarantorAcquisition
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet cash provided by (used in) continuing operations
    
    $
    (20,379
    )
    
    $
    27,812
    
    
    $
    16,387
    
    
    $
    
    
    
    $
    23,820Net cash provided by discontinued operations
    
    
    
    
    
    
    15,445
    
    
    
    
    
    
    
    
    
    
    
    15,445Net cash provided by (used in) operating activities
    
    
    (20,379
    )
    
    
    43,257
    
    
    
    16,387
    
    
    
    
    
    
    
    39,265Capital expenditures
    
    
    
    
    
    
    (4,148
    )
    
    
    (1,807
    )
    
    
    
    
    
    
    (5,955
    )Payment of Gains US and UK earn-out and deferred purchase price
    
    
    
    
    
    
    (6,756
    )
    
    
    
    
    
    
    
    
    
    
    (6,756
    )Intercompany borrowings
    
    
    49,485
    
    
    
    (26,659
    )
    
    
    (22,826
    )
    
    
    
    
    
    
    Acquisition of Gains Asia, net of cash acquired and Purple Voice
    
    
    (11,722
    )
    
    
    (5,528
    )
    
    
    1,536
    
    
    
    
    
    
    
    (15,714
    )Net cash provided by (used in) investing activities
    
    
    37,763
    
    
    
    (43,091
    )
    
    
    (23,097
    )
    
    
    
    
    
    
    (28,425
    )Principal payments on term loan
    
    
    (275
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (275
    )Deferred compensation payments
    
    
    
    
    
    
    (62
    )
    
    
    
    
    
    
    
    
    
    
    (62
    )Issuance costs for term loan amendment
    
    
    (225
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (225
    )Special cash dividend paid
    
    
    (17,964
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,964
    )Net cash used in financing activities
    
    
    (18,464
    )
    
    
    (62
    )
    
    
    
    
    
    
    
    
    
    
    (18,526
    )Effect of exchange rate changes on cash
    
    
    
    
    
    
    
    
    
    
    (711
    )
    
    
    
    
    
    
    (711
    )Net increase (decrease) in cash
    
    
    (1,080
    )
    
    
    104
    
    
    
    (7,421
    )
    
    
    
    
    
    
    (8,397
    )Cash at beginning of period
    
    
    9,088
    
    
    
    3,135
    
    
    
    13,577
    
    
    
    
    
    
    
    25,800Cash at end of period
    
    $
    8,008
    
    
    $
    3,239
    
    
    $
    6,156
    
    
    $
    
    
    
    $
    17,403
 Condensed Consolidated Statement of Cash Flows
For the Nine Months Ended June 30, 2003 Non-IPC
    
    Guarantor
    
    GuarantorAcquisition
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet cash provided by continuing operations
    
    $
    (23,649
    )
    
    $
    32,362
    
    
    $
    10,191
    
    
    $
    
    
    
    $
    18,904Net cash used in discontinued operations
    
    
    
    
    
    
    (7,791
    )
    
    
    
    
    
    
    
    
    
    
    (7,791
    )Net cash provided by (used in) operating activities
    
    
    (23,649
    )
    
    
    24,571
    
    
    
    10,191
    
    
    
    
    
    
    
    11,113Capital expenditures
    
    
    
    
    
    
    (3,032
    )
    
    
    (800
    )
    
    
    
    
    
    
    (3,832
    )Intercompany borrowings
    
    
    40,436
    
    
    
    (22,447
    )
    
    
    (17,989
    )
    
    
    
    
    
    
    Proceeds from restricted cash account and other amounts in connection with Global Crossing settlement
    
    
    
    
    
    
    9,419
    
    
    
    
    
    
    
    
    
    
    
    9,419Cash acquired as a result of the acquisition of Gains US and UK
    
    
    
    
    
    
    1,135
    
    
    
    2,952
    
    
    
    
    
    
    
    4,087Cash payments in connection with Global Crossing settlement
    
    
    
    
    
    
    (5,200
    )
    
    
    
    
    
    
    
    
    
    
    (5,200
    )Net cash provided by (used in) continuing operations
    
    
    40,436
    
    
    
    (20,125
    )
    
    
    (15,837
    )
    
    
    
    
    
    
    4,474Net cash used in discontinued operations
    
    
    
    
    
    
    (19
    )
    
    
    
    
    
    
    
    
    
    
    (19
    )Net cash provided by (used in) investing activities
    
    
    40,436
    
    
    
    (20,144
    )
    
    
    (15,837
    )
    
    
    
    
    
    
    4,455Debt issue costs
    
    
    (310
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (310
    )Deferred compensation payments
    
    
    
    
    
    
    (70
    )
    
    
    
    
    
    
    
    
    
    
    (70
    )Principal payments on term loan
    
    
    (18,616
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (18,616
    )Net cash used in financing activities
    
    
    (18,926
    )
    
    
    (70
    )
    
    
    
    
    
    
    
    
    
    
    (18,996
    )Effect of exchange rate changes on cash
    
    
    
    
    
    
    
    
    
    
    (850
    )
    
    
    
    
    
    
    (850
    )Net increase (decrease) in cash
    
    
    (2,139
    )
    
    
    4,357
    
    
    
    (6,496
    )
    
    
    
    
    
    
    (4,278
    )Cash at beginning of period
    
    
    6,123
    
    
    
    (1,610
    )
    
    
    20,781
    
    
    
    
    
    
    
    25,294Cash at end of period
    
    $
    3,984
    
    
    $
    2,747
    
    
    $
    14,285
    
    
    $
    
    
    
    $
    21,016
 20




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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 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 sell
network voice and data services to customers primarily in the financial
community. Our major operating divisions are Trading Systems 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. 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. In May 2004, our Board of Directors approved a formal plan to sell assets
related to our I.T.S. division to a group of private investors. The sale was
completed in July 2004. The I.T.S. division provided cabling infrastructure
within buildings among both voice and data communications devices. The I.T.S.
division was a low margin business that no longer fit into our long-term growth
plans. 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
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, 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. Cost of goods sold for our Trading Systems division 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 21




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depreciation of the equipment in our manufacturing and assembly facility.
Cost of goods sold 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. Our revenues and operating results fluctuate significantly from period to
period for our Trading Systems division. 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
IQMXÔ 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 22




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their entire circuit provisioning and maintenance
process. With several different service products being offered, we
believe we can be successful in marketing these services to customers
of our turrets. Also, with our purchase of 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. Comparison of the Three Months (Q3 2004) and Nine Months (YTD 2004) Ended
June 30, 2004 to the Three Months (Q3 2003) and Nine Months (YTD 2003)
Ended June 30, 2003. The following tables set forth, as a percentage of consolidated revenue,
our condensed consolidated statements of operations for the periods indicated.
The following table also presents, as a percentage of division revenue, our
statements of operations for our two major operating divisions for the periods
indicated. Q3  2004
    
    Q3  2003Trading
    
    Network
    
    
    
    
    
    Trading
    
    NetworkConsolidated
    
    Systems
    
    Services
    
    Consolidated
    
    Systems
    
    ServicesRevenue:Product sales and installations
    
    
    36
    %
    
    
    46
    %
    
    
    0
    %
    
    
    41
    %
    
    
    45
    %
    
    
    0
    %Service
    
    
    64
    %
    
    
    54
    %
    
    
    100
    %
    
    
    59
    %
    
    
    55
    %
    
    
    100
    %100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of goods sold (depreciation shown separately):Product sales and installations
    
    
    17
    %
    
    
    22
    %
    
    
    0
    %
    
    
    23
    %
    
    
    25
    %
    
    
    0
    %Service
    
    
    32
    %
    
    
    24
    %
    
    
    58
    %
    
    
    28
    %
    
    
    25
    %
    
    
    56
    %Depreciation and amortization
    
    
    2
    %
    
    
    1
    %
    
    
    5
    %
    
    
    1
    %
    
    
    1
    %
    
    
    6
    %51
    %
    
    
    47
    %
    
    
    63
    %
    
    
    52
    %
    
    
    51
    %
    
    
    62
    %Gross profit
    
    
    49
    %
    
    
    53
    %
    
    
    37
    %
    
    
    48
    %
    
    
    49
    %
    
    
    38
    %Research and development
    
    
    6
    %
    
    
    8
    %
    
    
    0
    %
    
    
    6
    %
    
    
    7
    %
    
    
    0
    %Selling, general and administrative expense
    
    
    23
    %
    
    
    22
    %
    
    
    23
    %
    
    
    24
    %
    
    
    22
    %
    
    
    46
    %Depreciation and amortization
    
    
    9
    %
    
    
    11
    %
    
    
    4
    %
    
    
    11
    %
    
    
    12
    %
    
    
    0
    %Income (loss) from operations
    
    
    11
    %
    
    
    12
    %
    
    
    10
    %
    
    
    7
    %
    
    
    8
    %
    
    
    (8
    %)Other income (expense):Interest expense, net
    
    
    (9
    %)
    
    
    (11
    %)
    
    
    0
    %
    
    
    (14
    %)
    
    
    (15
    %)
    
    
    0
    %Other income (expense), net
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    5
    %
    
    
    5
    %
    
    
    0
    %Income (loss) before income taxes
    
    
    2
    %
    
    
    1
    %
    
    
    10
    %
    
    
    (2
    %)
    
    
    (2
    %)
    
    
    (8
    %)Income tax expense (benefit)
    
    
    (1
    %)
    
    
    0
    %
    
    
    (3
    %)
    
    
    1
    %
    
    
    1
    %
    
    
    1
    %Income (loss) from continuing operations
    
    
    3
    %
    
    
    1
    %
    
    
    13
    %
    
    
    (3
    %)
    
    
    (3
    %)
    
    
    (9
    %)Income (loss) from discontinued operations
    
    
    (5
    %)
    
    
    0
    %
    
    
    0
    %
    
    
    1
    %
    
    
    0
    %
    
    
    0
    %Net income (loss)
    
    
    (2
    %)
    
    
    1
    %
    
    
    13
    %
    
    
    (2
    %)
    
    
    (3
    %)
    
    
    (9
    %)
 23




---



##### Table of Contents



YTD 2004
    
    YTD 2003Trading
    
    Network
    
    
    
    
    
    Trading
    
    NetworkConsolidated
    
    Systems
    
    Services
    
    Consolidated
    
    Systems
    
    ServicesRevenue:Product sales and installations
    
    
    41
    %
    
    
    50
    %
    
    
    0
    %
    
    
    48
    %
    
    
    49
    %
    
    
    0
    %Service
    
    
    59
    %
    
    
    50
    %
    
    
    100
    %
    
    
    52
    %
    
    
    51
    %
    
    
    100
    %100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of goods sold (depreciation shown separately):Product sales and installations
    
    
    20
    %
    
    
    24
    %
    
    
    0
    %
    
    
    24
    %
    
    
    24
    %
    
    
    0
    %Service
    
    
    29
    %
    
    
    22
    %
    
    
    60
    %
    
    
    24
    %
    
    
    23
    %
    
    
    56
    %Depreciation and amortization
    
    
    1
    %
    
    
    1
    %
    
    
    6
    %
    
    
    1
    %
    
    
    1
    %
    
    
    6
    %50
    %
    
    
    47
    %
    
    
    66
    %
    
    
    49
    %
    
    
    48
    %
    
    
    62
    %Gross profit
    
    
    50
    %
    
    
    53
    %
    
    
    34
    %
    
    
    51
    %
    
    
    52
    %
    
    
    38
    %Research and development
    
    
    6
    %
    
    
    7
    %
    
    
    0
    %
    
    
    6
    %
    
    
    7
    %
    
    
    0
    %Selling, general and administrative expense
    
    
    22
    %
    
    
    22
    %
    
    
    25
    %
    
    
    22
    %
    
    
    21
    %
    
    
    46
    %Depreciation and amortization
    
    
    9
    %
    
    
    10
    %
    
    
    2
    %
    
    
    11
    %
    
    
    11
    %
    
    
    0
    %Income (loss) from operations
    
    
    13
    %
    
    
    14
    %
    
    
    7
    %
    
    
    12
    %
    
    
    13
    %
    
    
    (8
    %)Other income (expense):Interest expense, net
    
    
    (9
    %)
    
    
    (11
    %)
    
    
    0
    %
    
    
    (14
    %)
    
    
    (15
    %)
    
    
    0
    %Other income (expense), net
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    3
    %
    
    
    3
    %
    
    
    0
    %Income (loss) before income taxes
    
    
    4
    %
    
    
    3
    %
    
    
    7
    %
    
    
    1
    %
    
    
    1
    %
    
    
    (8
    %)Income tax expense
    
    
    2
    %
    
    
    2
    %
    
    
    1
    %
    
    
    2
    %
    
    
    2
    %
    
    
    1
    %Income (loss) from continuing operations
    
    
    2
    %
    
    
    1
    %
    
    
    6
    %
    
    
    (1
    %)
    
    
    (1
    %)
    
    
    (9
    %)Income (loss) from discontinued operations
    
    
    (2
    %)
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Net income (loss)
    
    
    0
    %
    
    
    1
    %
    
    
    6
    %
    
    
    (1
    %)
    
    
    (1
    %)
    
    
    (9
    %)
 Revenue The following table sets forth our consolidated revenue and revenue as
reported for our two major operating divisions. ConsolidatedQ3
    
    Q3
    
    $
    
    %
    
    YTD
    
    YTD
    
    $
    
    %(dollars in thousands)
    
    2004
    
    2003
    
    Change
    
    Change
    
    2004
    
    2003
    
    Change
    
    ChangeProduct sales and installations
    
    $
    21,527
    
    
    $
    18,157
    
    
    $
    3,370
    
    
    
    19
    %
    
    $
    75,228
    
    
    $
    63,068
    
    
    $
    12,160
    
    
    
    19
    %Service
    
    
    38,786
    
    
    
    26,349
    
    
    
    12,437
    
    
    
    47
    %
    
    
    107,603
    
    
    
    69,056
    
    
    
    38,547
    
    
    
    56
    %Total
    
    $
    60,313
    
    
    $
    44,506
    
    
    $
    15,807
    
    
    
    36
    %
    
    $
    182,831
    
    
    $
    132,124
    
    
    $
    50,707
    
    
    
    38
    %
 Trading SystemsQ3
    
    Q3
    
    $
    
    %
    
    YTD
    
    YTD
    
    $
    
    %(dollars in thousands)
    
    2004
    
    2003
    
    Change
    
    Change
    
    2004
    
    2003
    
    Change
    
    ChangeProduct sales and installations
    
    $
    21,527
    
    
    $
    18,157
    
    
    $
    3,370
    
    
    
    19
    %
    
    $
    75,228
    
    
    $
    63,068
    
    
    $
    12,160
    
    
    
    19
    %Service
    
    
    25,560
    
    
    
    22,349
    
    
    
    3,211
    
    
    
    14
    %
    
    
    75,224
    
    
    
    65,056
    
    
    
    10,168
    
    
    
    16
    %Total
    
    $
    47,087
    
    
    $
    40,506
    
    
    $
    6,581
    
    
    
    16
    %
    
    $
    150,452
    
    
    $
    128,124
    
    
    $
    22,328
    
    
    
    17
    %
 Network ServicesQ3
    
    Q3
    
    $
    
    %
    
    YTD
    
    YTD
    
    $
    
    %(dollars in thousands)
    
    2004
    
    2003
    
    Change
    
    Change
    
    2004
    
    2003
    
    Change
    
    ChangeProduct sales and installations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    
    %Service
    
    
    13,226
    
    
    
    4,000
    
    
    
    9,226
    
    
    
    231
    %
    
    
    32,379
    
    
    
    4,000
    
    
    
    28,379
    
    
    
    709
    %Total
    
    $
    13,226
    
    
    $
    4,000
    
    
    $
    9,226
    
    
    
    231
    %
    
    $
    32,379
    
    
    $
    4,000
    
    
    $
    28,379
    
    
    
    709
    %
 Comparison of Q3 2004 to Q3 2003 Consolidated We believe our customers are beginning to plan and implement changes,
expansions, and re-configurations to their current trading floors. We expect
this activity to continue for the remainder of the fiscal year 2004 and into
our fiscal year 2005; however, there can be no certainty as to the degree or
duration that this will continue. We expect our fiscal year 2004 total
consolidated revenues to be approximately $255 million to $260 million, which
has been revised since the three months ended 24




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##### Table of Contents



March 31, 2004 (Q2 2004) due to
the sale of the I.T.S. division in Q3 2004; however, the actual total
consolidated revenues could be lower. Product Sales and Installations.The increase in product sales and
installation revenue of $3.4 million in Q3 2004 from Q3 2003 was primarily due
to a higher volume of small (less than $1.0 million) installation projects
offset by a lower volume of medium (between $1.0 million and $2.0 million)
installation projects in Q3 2004 compared to Q3 2003. There were no large
(greater than $2.0 million) installation projects in either Q3 2004 or Q3
2003. Number of
    
    Total amountinstallations
    
    (in millions)Product installation size:
    
    Q3  2004
    
    Q3  2003
    
    Q3  2004
    
    Q3  2003
    
    $ ChangeLarge (greater than $2.0 million)
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Medium (between $1.0 million and $2.0 million)
    
    
    1
    
    
    
    3
    
    
    $
    1.5
    
    
    $
    5.0
    
    
    $
    (3.5
    )Small (less than $1.0 million)
    
    
    *
    
    
    
    *
    
    
    $
    20.1
    
    
    $
    13.2
    
    
    $
    6.9
 * due
to the high volume and wide range of sales values of small
installations, this number is not meaningful. We expect our fiscal year 2004 product sales and installation revenue to
be approximately $115 million to $118 million, which has been revised since Q2
2004 due to the sale of the I.T.S. division in Q3 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 $12.4 million in Q3 2004 from
Q3 2003 was primarily due to a $9.2 million increase by 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, as well as an increase in our Network Services customer base. In
addition, there was a higher volume of contract maintenance revenue totaling
$1.6 million and non-contract MAC revenue totaling $1.6 million in our Trading
systems division for Q3 2004 compared to Q3 2003. We expect our fiscal year 2004 consolidated service revenue to be
approximately $140 million to $142 million which has been revised since Q2
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 $3.4 million in Q3 2004 from Q3 2003 was primarily due
to a higher volume of small installation projects offset by a lower volume of
medium installation projects in Q3 2004 compared to Q3 2003. There were no
large installation projects in either Q3 2004 or Q3 2003. Number of
    
    Total amountinstallations
    
    (in millions)Product installation size:
    
    Q3  2004
    
    Q3  2003
    
    Q3  2004
    
    Q3  2003
    
    $ ChangeLarge (greater than $2.0 million)
    
    
    
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Medium (between $1.0 million and $2.0 million)
    
    
    1
    
    
    
    3
    
    
    $
    1.5
    
    
    $
    5.0
    
    
    $
    (3.5
    )Small (less than $1.0 million)
    
    
    *
    
    
    
    *
    
    
    $
    20.1
    
    
    $
    13.2
    
    
    $
    6.9
 * due
to the high volume and wide range in sales values of small
installations, this number is not meaningful. Service.The increase in service revenue of $3.2 million in Q3 2004 from
Q3 2003 was primarily due to a higher volume of contract maintenance revenue
totaling $1.6 million and non-contract MAC revenue totaling $1.6 million in Q3
2004. The increase in contract maintenance revenue in Q3 2004 was primarily due
to the expiration of warranties for installation contracts. The increase in
non-contract MAC revenue was primarily due to increased demand for trading
floor re-configurations and additional trading positions globally. Network Services Service.The increase in service revenue of $9.2 million in Q3 2004 from
Q3 2003 was primarily due to our Network Services North America and Europe
regions, which increased by $5.3 million in Q3 2004 compared to Q3 2003
reflecting an increase in our customer base and a full quarter of operations in
Q3 2004 compared to Q3 2003, which had only 2 months of operations due to the
acquisition of Gains US and UK on April 30, 2003. Also, revenue from the
acquisition of Gains Asia in January 2004 contributed $3.9 million of service
revenue in Q3 2004. 25




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##### Table of Contents



Comparison of YTD 2004 to YTD 2003 Consolidated Product Sales and Installations.The increase in product sales and
installation revenue of $12.2 million in YTD 2004 from YTD 2003 was primarily
due to a higher volume of small installation projects completed in YTD 2004
compared to YTD 2003. Also, there was an increase in large installation
projects in YTD 2004 compared to YTD 2003 offset by a decrease in medium
installation projects in YTD 2004 compared to YTD 2003. Total amountNumber of installations
    
    (in millions)Product installation size:
    
    YTD 2004
    
    YTD 2003
    
    YTD 2004
    
    YTD 2003
    
    $ ChangeLarge (greater than $2.0 million)
    
    
    4
    
    
    
    3
    
    
    $
    18.1
    
    
    $
    9.1
    
    
    $
    9.0Medium (between $1.0 million and
$2.0 million)
    
    
    3
    
    
    
    7
    
    
    $
    4.3
    
    
    $
    9.7
    
    
    $
    (5.4
    )Small (less than $1.0 million)
    
    
    *
    
    
    
    *
    
    
    $
    52.9
    
    
    $
    44.3
    
    
    $
    8.6
 * due
to the high volume and wide range in sales values of small
installations, this number is not meaningful. Service.The increase in service revenue of $38.5 million in YTD 2004 from
YTD 2003 was primarily due to a $28.4 million increase generated by the
addition of our Network Services division 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, as well as, an increase in the customer base. In
addition, there was a higher volume of contract maintenance revenue totaling
$7.1 million and non-contract MAC revenue totaling $3.0 million in our Trading
systems division. Trading Systems Product Sales and Installations.The increase in product sales and
installation revenue of $12.2 million in YTD 2004 from YTD 2003 was primarily
due to a higher volume of small installation projects completed in YTD 2004
compared to YTD 2003. Also, there was an increase in large installation
projects in YTD 2004 compared to YTD 2003 offset by a decrease in medium
installation projects in YTD 2004 compared to YTD 2003. Total amountNumber of installations
    
    (in millions)Product installation size:
    
    YTD 2004
    
    YTD 2003
    
    YTD 2004
    
    YTD 2003
    
    $ ChangeLarge (greater than $2.0 million)
    
    
    4
    
    
    
    3
    
    
    $
    18.1
    
    
    $
    9.1
    
    
    $
    9.0Medium (between $1.0 million and
$2.0 million)
    
    
    3
    
    
    
    7
    
    
    $
    4.3
    
    
    $
    9.7
    
    
    $
    (5.4
    )Small (less than $1.0 million)
    
    
    *
    
    
    
    *
    
    
    $
    52.9
    
    
    $
    44.3
    
    
    $
    8.6
 * due
to the high volume and wide range in sales values of small
installations, this number is not meaningful. Service.The increase in service revenue of $10.2 million in YTD 2004 from
YTD 2003 was primarily due to a higher volume of contract maintenance revenue
totaling $7.1 million and non-contract MAC revenue totaling $3.0 million in YTD
2004. 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 and additional trading positions globally. Network Services Service.The increase in service revenue of $28.4 million in YTD 2004 from
YTD 2003 was primarily due to our Network Services North America and Europe
regions, which increased by $20.7 million in YTD 2004 compared to YTD 2003,
reflecting an increase in our customer base and a full nine months of
operations in YTD 2004 compared to YTD 2003, which had only 2 months of
operations due to the acquisition of Gains US and UK on April 30, 2003. Also,
revenue from the acquisition of Gains Asia in January 2004 contributed $7.7
million of service revenue in YTD 2004. Cost of Goods Sold The following table sets forth our consolidated cost of goods sold and our
cost of goods sold as reported for our two major operating divisions. Cost of
goods sold for our Trading Systems division 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 goods sold 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. 26




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##### Table of Contents



ConsolidatedQ3
    
    % of
    
    Q3
    
    % of
    
    %
    
    YTD
    
    % of
    
    YTD
    
    % of
    
    %(dollars in thousands)
    
    2004
    
    Rev.
    
    2003
    
    Rev.
    
    Change
    
    2004
    
    Rev.
    
    2003
    
    Rev.
    
    ChangeProduct sales and installations
    
    $
    10,423
    
    
    
    48
    %
    
    $
    10,123
    
    
    
    56
    %
    
    
    (8
    %)
    
    $
    35,595
    
    
    
    47
    %
    
    $
    30,937
    
    
    
    49
    %
    
    
    (2
    %)Service
    
    
    19,101
    
    
    
    49
    %
    
    
    12,577
    
    
    
    48
    %
    
    
    1
    %
    
    
    53,082
    
    
    
    49
    %
    
    
    32,060
    
    
    
    46
    %
    
    
    3
    %Depreciation and amortization
    
    
    1,029
    
    
    
    2
    %
    
    
    556
    
    
    
    1
    %
    
    
    1
    %
    
    
    2,739
    
    
    
    1
    %
    
    
    1,152
    
    
    
    1
    %
    
    
    0
    %Total
    
    $
    30,553
    
    
    
    50
    %
    
    $
    23,256
    
    
    
    52
    %
    
    
    (2
    %)
    
    $
    91,416
    
    
    
    50
    %
    
    $
    64,149
    
    
    
    49
    %
    
    
    1
    %
 Trading SystemsQ3
    
    % of
    
    Q3
    
    % of
    
    %
    
    YTD
    
    % of
    
    YTD
    
    % of
    
    %(dollars in thousands)
    
    2004
    
    Rev.
    
    2003
    
    Rev.
    
    Change
    
    2004
    
    Rev.
    
    2003
    
    Rev.
    
    ChangeProduct sales and installations
    
    $
    10,423
    
    
    
    48
    %
    
    $
    10,123
    
    
    
    56
    %
    
    
    (8
    %)
    
    $
    35,595
    
    
    
    47
    %
    
    $
    30,937
    
    
    
    49
    %
    
    
    (2
    %)Service
    
    
    11,483
    
    
    
    45
    %
    
    
    10,337
    
    
    
    46
    %
    
    
    (1
    %)
    
    
    33,702
    
    
    
    45
    %
    
    
    29,820
    
    
    
    46
    %
    
    
    (1
    %)Depreciation and amortization
    
    
    288
    
    
    
    1
    %
    
    
    302
    
    
    
    1
    %
    
    
    0
    %
    
    
    860
    
    
    
    1
    %
    
    
    898
    
    
    
    1
    %
    
    
    0
    %Total
    
    $
    22,194
    
    
    
    47
    %
    
    $
    20,762
    
    
    
    51
    %
    
    
    (3
    %)
    
    $
    70,157
    
    
    
    47
    %
    
    $
    61,655
    
    
    
    48
    %
    
    
    (1
    %)
 Network ServicesQ3
    
    % of
    
    Q3
    
    % of
    
    %
    
    YTD
    
    % of
    
    YTD
    
    % of
    
    %(dollars in thousands)
    
    2004
    
    Rev.
    
    2003
    
    Rev.
    
    Change
    
    2004
    
    Rev.
    
    2003
    
    Rev.
    
    ChangeProduct sales and installations
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    
    
    %
    
    
    
    %
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    
    
    %
    
    
    
    %Service
    
    
    7,618
    
    
    
    58
    %
    
    
    2,240
    
    
    
    56
    %
    
    
    2
    %
    
    
    19,380
    
    
    
    60
    %
    
    
    2,240
    
    
    
    56
    %
    
    
    4
    %Depreciation and amortization
    
    
    741
    
    
    
    5
    %
    
    
    254
    
    
    
    6
    %
    
    
    (1
    %)
    
    
    1,879
    
    
    
    6
    %
    
    
    254
    
    
    
    6
    %
    
    
    
    %Total
    
    $
    8,359
    
    
    
    63
    %
    
    $
    2,494
    
    
    
    62
    %
    
    
    1
    %
    
    $
    21,259
    
    
    
    66
    %
    
    $
    2,494
    
    
    
    62
    %
    
    
    4
    %
 Comparison of Q3 2004 to Q3 2003 Consolidated We expect our fiscal year 2004 total consolidated cost of goods sold to be
approximately $127 million to $130 million, which has been revised since Q2
2004 due to the sale of the I.T.S. division in Q3 2004; however, pricing
changes and more competitive bidding for our customers could cause the actual
total consolidated cost of goods sold to be higher. Product Sales and Installations.The decrease in product sales and
installations cost of goods sold of 8% as a percentage of product sales and
installation revenue in Q3 2004 from Q3 2003 was primarily due to a higher
volume of Trading Systems manufactured products sold in Q3 2004 when compared
to Q3 2003. Trading Systems manufactured products generally have a lower cost
of goods sold than products manufactured by third parties. In addition, we
realized higher profit margins on small installation projects completed in Q3
2004 as compared to Q3 2003. Service.The increase in service cost of goods sold of 1% as a percentage
of service revenue in Q3 2004 from Q3 2003 was primarily due to the expansion
and allocation of indirect costs of revenue in our Network Services division
offset by a consistent fixed cost of goods sold in our Trading Systems division
in Q3 2004 when compared to Q3 2003. Trading Systems Product Sales and Installations.The decrease in product sales and
installations cost of goods sold of 8% as a percentage of product sales and
installation revenue in Q3 2004 from Q3 2003 was primarily due to a higher
volume of Trading Systems manufactured products sold in Q3 2004 when compared
to Q3 2003. Trading Systems manufactured products generally have a lower cost
of goods sold than products manufactured by third parties. In addition, we
realized higher profit margins on small installation projects completed in Q3
2004 as compared to Q3 2003. Service.The decrease in service cost of goods sold of 1% as a percentage
of service revenue in Q3 2004 from Q3 2003 was primarily due to a higher
percentage increase in contract maintenance services in Q3 2004, which
generally have a lower cost of goods sold than non-contract MAC services. Network Services Service.The increase in service cost of goods sold of 2% as a percentage
of service revenue in Q3 2004 from Q3 2003 was primarily due to the expansion
and allocation of indirect costs (labor, network provisioning and
engineering) of revenue in Q3 2004 when compared to Q3
2003. Comparison of YTD 2004 to YTD 2003 Consolidated 27




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##### Table of Contents



Product Sales and Installations.The decrease in product sales and
installations cost of goods sold of 2% as a percentage of product sales and
installation revenue in YTD 2004 from YTD 2003 was primarily due to higher
margin realization from component cost reductions in our manufactured product
sales. Service.The increase in service cost of goods sold of 3% as a percentage
of service revenue in YTD 2004 from YTD 2003 was primarily due to the expansion
and allocation of indirect costs of revenue in our Network Services division
offset by a higher percentage increase in contract maintenance services in our
Trading Systems Division in YTD 2004 when compared to YTD 2003. Trading Systems Product Sales and Installations.The decrease in product sales and
installations cost of goods sold of 2% as a percentage of product sales and
installation revenue in YTD 2004 from YTD 2003 was primarily due to
higher margin realization from component cost reductions in our manufactured
product sales. Service.The decrease in service cost of goods sold of 1% as a percentage
of service revenue in YTD 2004 from YTD 2003 was primarily due to a higher
percentage increase in contract maintenance services in YTD 2004, which have a
lower cost of goods sold than non-contract MAC services. Network Services Service.The increase in service cost of goods sold of 4% as a percentage
of service revenue in YTD 2004 from YTD 2003 was primarily due to the expansion
and allocation of indirect costs (labor, network provisioning and engineering)
in YTD 2004 when compared to YTD 2003. Research and Development Expense ConsolidatedQ3
    
    Q3
    
    $
    
    %
    
    YTD
    
    YTD
    
    $
    
    %(dollars in thousands)
    
    2004
    
    2003
    
    Change
    
    Change
    
    2004
    
    2003
    
    Change
    
    ChangeResearch and development
    
    $
    3,809
    
    
    $
    2,784
    
    
    $
    1,025
    
    
    
    37
    %
    
    $
    10,817
    
    
    $
    8,447
    
    
    $
    2,370
    
    
    
    28
    %
 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; however, the
actual research and development expenses could be higher. Comparison of Q3 2004 to Q3 2003 and YTD 2004 to YTD 2003 Research and development expenses increased by $1.0 million in Q3 2004
from Q3 2003 and increased by $2.4 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 ConsolidatedQ3
    
    Q3
    
    $
    
    %
    
    YTD
    
    YTD
    
    $
    
    %(dollars in thousands)
    
    2004
    
    2003
    
    Change
    
    Change
    
    2004
    
    2003
    
    Change
    
    ChangeSelling, general and administrative
    
    $
    13,556
    
    
    $
    10,883
    
    
    $
    2,673
    
    
    
    25
    %
    
    $
    41,229
    
    
    $
    29,225
    
    
    $
    12,004
    
    
    
    41
    %
 We expect our selling, general and administrative expenses in fiscal year
2004 to be approximately $50 million to $60 million, which has been revised
since Q2 2004 due to the sale of the I.T.S. division in Q3 2004; however the
actual selling, general and administrative expenses could be higher. We believe
the anticipated increase in selling, general and administrative expenses for
the 2004 fiscal year will primarily result from the inclusion of our Network
Services division for the full fiscal year. Comparison of Q3 2004 to Q3 2003 and YTD 2004 to YTD 2003 Selling, general and administrative expenses increased by $2.7 million for
Q3 2004 from Q3 2003 and increased by $12.0 million for YTD 2004 from YTD 2003,
primarily due to increased employee related costs (compensation, commissions,
severance, bonuses and benefits), new business ventures and new foreign office
locations as well as the inclusion of expenses for our Network Services
division, which increased by $1.2 million in Q3 2004 and $6.1 million in YTD
2004. Depreciation and Amortization ConsolidatedQ3
    
    Q3
    
    $
    
    %
    
    YTD
    
    YTD
    
    $
    
    %(dollars in thousands)
    
    2004
    
    2003
    
    Change
    
    Change
    
    2004
    
    2003
    
    Change
    
    ChangeDepreciation and amortization
    
    $
    5,535
    
    
    $
    4,678
    
    
    $
    857
    
    
    
    18
    %
    
    $
    15,970
    
    
    $
    14,087
    
    
    $
    1,883
    
    
    
    13
    %
 28




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##### Table of Contents



Comparison of Q3 2004 to Q3 2003 and YTD 2004 to YTD 2003 Depreciation and amortization expense increased by $0.9 million in Q3 2004
from Q3 2003 and increased by $1.9 million in YTD 2004 from YTD 2003, primarily
due to increased capital expenditures in our Network Services division as well
as the
addition of depreciable fixed assets and amortizable assets from our
Network Services division in Q3 2004 and YTD 2004 due to the acquisition of
Gains Asia in January 2004. Interest Expense, net ConsolidatedQ3
    
    Q3
    
    $
    
    %
    
    YTD
    
    YTD
    
    $
    
    %(dollars in thousands)
    
    2004
    
    2003
    
    Change
    
    Change
    
    2004
    
    2003
    
    Change
    
    ChangeInterest expense, net.
    
    $
    5,391
    
    
    $
    6,008
    
    
    $
    (617
    )
    
    
    (10
    %)
    
    $
    16,727
    
    
    $
    18,690
    
    
    $
    (1,963
    )
    
    
    (11
    %)
 Comparison of Q3 2004 to Q3 2003 and YTD 2004 to YTD 2003 Interest expense, net decreased by $0.6 million in Q3 2004 from Q3 2003
and decreased by $2.0 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 rate for YTD 2004 was 53.1% compared to 307.0% 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, combined with lower absolute amounts of pre-tax
earnings (or loss) for the three and nine months of each fiscal year, generates
a more significant impact on our effective tax rates. Income (Loss) from Continuing Operations ConsolidatedQ3
    
    Q3
    
    $
    
    %
    
    YTD
    
    YTD
    
    $
    
    %(dollars in thousands)
    
    2004
    
    2003
    
    Change
    
    Change
    
    2004
    
    2003
    
    Change
    
    ChangeIncome (loss) from
continuing operations.
    
    $
    2,060
    
    
    $
    (1,394
    )
    
    $
    3,454
    
    
    
    248
    %
    
    $
    3,381
    
    
    $
    (1,790
    )
    
    $
    5,171
    
    
    
    289
    %
 We expect to have net income for the entire 2004 fiscal year of
approximately $2.0 million to $4.0 million. However, the actual amount may be
lower. Comparison of Q3 2004 to Q3 2003 For Q3 2004, we had income from continuing operations of $2.1 million
compared to a loss from continuing operations in Q3 2003 of $1.4 million.
This was due to the increase in gross profit of $8.5 million offset by the
increase in research and development expense of $1.0 million, the increase in
selling, general and administrative expense of $2.7 million, the increase in
depreciation and amortization of $0.9 million, the increase in interest and
other expense of $1.1 million and the decrease in income taxes of $0.7 million.
Of the $3.5 million increase in income from continuing operations in Q3 2004
compared to Q3 2003, our Trading Systems division accounted for $1.3 million of
the increase and our Network Services division accounted for $2.2 million of
the increase. Comparison of YTD 2004 to YTD 2003 For YTD 2004, we had income from continuing operations of $3.4 million
compared to a loss from continuing operations in YTD 2003 of $1.8 million.
This was due to the increase in gross profit of $23.4 million offset by the
increase in research and development expense of $2.4 million, the increase in
selling, general and administrative expense of $12.0 million, the increase in
depreciation and amortization of $1.9 million, the increase in interest and
other expense of $0.7 million, and the increase in income taxes of $1.2
million. Of the $5.2 million increase in income from continuing operations in
YTD 2004 compared to YTD 2003, our Trading Systems division accounted for $2.8
million of the increase and our Network Services division accounted for $2.4
million of the increase. 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 29




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##### Table of Contents



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 in December 2003; and (3) payments totaling $11.9 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
payments due under our senior subordinated notes of $8.6 million paid on
December 15, 2003 and June 15, 2004, 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 $17.4 million at June 30,
2004. With the exception of mergers and acquisitions activity, we do not
currently anticipate any other non-recurring uses of cash in the near future. The Senior Secured Credit Facilities On December 20, 2001, we entered into the senior secured credit facilities
comprised of a $105.0 million term loan and a $15.0 million revolving credit
facility. On September 2, 2003, we amended and restated our senior secured
credit facilities. The amended and restated senior secured credit facilities
consisted of a $25.0 million revolving credit facility and a $55.0 million term
loan. The term loan was borrowed in full at closing. On April 20, 2004, we
completed an agreement to increase the availability under our revolving credit
facility by $10.0 million under the provisions mentioned above. As of June 30,
2004 the total amount available for borrowing under the revolving credit
facility is $30.7 million ($35.0 million reduced by outstanding letters of
credit of $4.3 million) provided, however, that we can increase the committed
amount under these facilities by up to $15.0 million so long as one or more
lenders agrees to provide this incremental commitment and other customary
conditions are satisfied. For the nine months ended June 30, 2004, the weighted
average interest rate for borrowings outstanding under the amended and restated
senior secured credit facilities was 4.94%. 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 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 30




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##### Table of Contents



and restated senior secured credit facilities, are pari
passu in right of payment with any future senior subordinated indebtedness, and
are unconditionally guaranteed by certain of our domestic restricted
subsidiaries. Interest on the notes accrues at the rate of 11.50% per annum and
is payable semi-annually in arrears on June 15 and December 15, the 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 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, we may be required to pay those taxes and are no longer able to
seek indemnification from Global Crossing. As of the date of this filing, 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 June 30, 2004, we have made
settlement payments aggregating $1.9 million, including a $1.1 million payment
made to one jurisdiction in May 2004. We estimate that the range of our
exposure for additional tax liabilities is from $0.0 to $18.0 million, which
has been reduced from $36.0 million as a result of our settlement negotiations.
In computing our 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 effect on our financial
condition and results of operations, requiring us to seek additional financing.
In that event, we cannot make assurances that 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 from continuing operations was
$23.8 million for YTD 2004 compared to $18.9 million for YTD 2003.
The increase of
$4.9 million is primarily comprised of (i) income
from continuing operations of
$3.4 million in YTD 2004 compared to a loss from continuing operations of
$1.8 million
in YTD 2003; (ii) additional net non-cash charges of
$18.4 million in YTD 2004 as compared to $14.5 in YTD 2003
primarily due to higher depreciation and amortization charges; and
(iii) changes in operating assets and liabilities providing net
cash of $2.0 million in YTD 2004 compared to $6.2 million
in YTD 2003. Cash flows provided by operating activities related to
discontinued operations was $15.4 million for YTD 2004 as
compared to a use of cash of $7.8 million for YTD 2003. This
difference principally reflects the completion of a large project in
progress at September 30, 2003 and collection of accounts
receivable on such project in the YTD 2004 period as compared to the
cash funding required as the same project was in progress during the
YTD 2003 period. 31




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##### Table of Contents



Cash used in investing activities from continuing operations was $28.4
million for YTD 2004 compared to cash provided by investing activities from
continuing operations of $4.5 million for YTD 2003. Cash usage in YTD 2004
related primarily to the acquisitions of Gains Asia for $15.2 million and Purple Voice for $0.5
million, and the settlement of amounts owed relating to Gains US and UK of $6.8
million. The cash provided by investing activities for YTD 2003 related
primarily to the cash acquired in the acquisition of Gains US and UK of $4.1
million combined with $4.2 million relating to the settlement with Global
Crossing. Capital expenditures for YTD 2004 and YTD 2003 were $6.0 million and
$3.8 million, respectively. Cash used in financing activities was $18.5 million for YTD 2004 compared
to $19.0 million for YTD 2003. The primary use of cash in YTD 2004 was the
payment of a special cash dividend of $18.0 million. The primary use of cash in
YTD 2003 was the repayment of principal on our amended and restated senior
secured credit facilities of $18.6 million. The effect of exchange rate changes on cash represents increases and
decreases in various currencies when translated into US dollars. As an
international company, we are subjected to currency fluctuation risk, which
resulted in a decrease of $0.7 million in YTD 2004 compared to $0.9 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
senior secured credit facilities. 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 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. On April 20, 2004, we completed an agreement to increase our availability
under the revolving credit facility by $10.0 million, from $25 million to $35
million under the increase provisions mentioned in Note 7. As of June 30, 2004,
the amount available under the revolving credit facility was $30.7 million as
availability of $35.0 million was 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 32




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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. In addition,
to the extent we make further acquisitions, we may require additional funds to
finance such acquisitions. Contractual Obligations and Other Commercial Commitments The following summarizes our contractual obligations at June 30, 2004, and
the effect such obligations are expected to have on our liquidity and cash flow
in future periods. (dollars in thousands) Payments Due by PeriodLess than
    
    1-3
    
    4-5
    
    After 5Contractual Obligations:
    
    Total
    
    1 year
    
    years
    
    years
    
    yearsDeferred Compensation Agreements
    
    $
    4,964
    
    
    $
    788
    
    
    $
    1,005
    
    
    $
    899
    
    
    $
    2,272Network Carrier Commitments
    
    
    9,825
    
    
    
    7,125
    
    
    
    2,700
    
    
    
    
    
    
    
    Long-Term Debt
    
    
    204,725
    
    
    
    550
    
    
    
    1,100
    
    
    
    53,075
    
    
    
    150,000Operating Leases
    
    
    34,049
    
    
    
    6,365
    
    
    
    11,428
    
    
    
    9,100
    
    
    
    7,156Total Contractual Cash Obligations
    
    $
    253,563
    
    
    $
    14,828
    
    
    $
    16,233
    
    
    $
    63,074
    
    
    $
    159,428
 Amount of Commitment Expiration per PeriodTotalAmounts
    
    Less than
    
    1-3
    
    4-5
    
    Over 5Other Commercial Commitments:
    
    Committed
    
    1 year
    
    years
    
    years
    
    yearsLine of Credit
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Standby Letters of Credit
    
    
    4,250
    
    
    
    4,250
    
    
    
    
    
    
    
    
    
    
    
    Guaranties for Global Crossing Affiliates
    
    
    2,973
    
    
    
    1,687
    
    
    
    1,286
    
    
    
    
    
    
    
    Total Commercial Commitments
    
    $
    7,223
    
    
    $
    5,937
    
    
    $
    1,286
    
    
    $
    
    
    
    $
    
 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. 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 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
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 our 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. 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. 33




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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 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 an annual fair value test 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 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 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 its 30 year history. Our acquired trade name has
significant market recognition and we expect to derive benefits from the use of
such asset beyond the foreseeable future. We most recently completed the required annual impairment and fair value
tests 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
nine months ended June 30, 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 $89.7 million and $16.3 million, respectively, at June 30,
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 and subsequent acquisition of 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. 34




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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)
    
    June 30, 2004
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    TotalLong-Term Debt:Fixed RateSenior
Subordinated
Notes,
interest
payable at
11.5%,
maturing 2009
    
    $
    162.0
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    150.0
    
    
    $
    150.0Variable RateSenior Secured
Credit
Facilities -
Term Loan
(interest
payable at
4.6% at June
30, 2004)
    
    $
    55.2
    
    
    $
    0.3
    
    
    $
    0.5
    
    
    $
    0.5
    
    
    $
    0.6
    
    
    $
    52.8
    
    
    $
    
    
    
    $
    54.7
 
 Item 4. Controls and Procedures The Company maintains disclosure controls and procedures designed to
ensure that information required to be disclosed in the Companys Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified by the SEC and that such information is accumulated and communicated
to the Companys management, including its Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosures. As of the end of the period covered by this report, the Company performed
an evaluation of the effectiveness of the design and operation of its
disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e)
and 15d-15(e). The evaluation was performed under the supervision and with the
participation of the Companys management, including the Companys Chief
Executive Officer and Chief Financial Officer. Based upon the evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the
Companys disclosure controls and procedures were effective in ensuring that
material information relating to the Company (including its consolidated
subsidiaries) was made known to them by others within the Companys
consolidated group during the period in which this report was being prepared
and that the information required to be included in the report has been
recorded, processed, summarized and reported on a timely basis. During the Companys most recent fiscal quarter, there have been no
significant changes in the Companys internal controls that have materially
affected, or 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 for the two lawsuits described below which involve the Companys
former I.T.S. division, the Company is not a party to any pending legal
proceedings other than claims and lawsuits arising in the normal course of
business. Under the terms of the sale agreement, the Company remains liable for
pre-closing liabilities relating to the I.T.S. division, including the two
lawsuits described below. Management believes the proceedings will not have a
material adverse effect on the Companys consolidated financial condition or
results of operations. On June 27, 2000, an action was brought against several defendants,
including the Companys subsidiary, IPC Communications, Inc., in the United
States District Court for the Southern District of New York by two
telecommunications cabling contractors alleging that IPC Communications, Inc.
violated federal antitrust and New York state law by conspiring with the
International Brotherhood of Electrical Workers Local Union Number 3, AFL-CIO,
and five electrical contractors to exclude plaintiffs from telecommunications
wiring and systems installation jobs in the New York City metropolitan area.
Subsequently, the complaint was amended to add an additional plaintiff and an
additional defendant contractor. The Company believes the suit is without
merit. However, there can be no assurance that the resolution of this lawsuit
will ultimately be favorable. Plaintiffs are seeking injunctive relief and
damages from the defendants, jointly and severally, in excess of an aggregate
of $75.0 million. On September 8, 2003, an action was brought against several defendants,
including the Companys subsidiary, IPC Information Systems, Inc. and its
President, in the United States District Court for the Eastern District of New
York by Advance Relocation & Storage Co., Inc., a moving company. The complaint
alleges that IPC Information Systems, Inc. and 23 other defendants violated the
Racketeer Influenced and Corrupt Organizations Act and engaged in tortious
interference with prospective business advantage by preventing the plaintiff
from obtaining work as a mover in jobs performed in large commercial buildings
in New York City. The Company believes the suit is without merit and intends to
vigorously defend against all claims alleged against it in the complaint.
Plaintiffs are seeking injunctive relief and damages from the defendants,
jointly and severally, in an aggregate amount of approximately $7.0 million. 
 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 10.18
    
    Amendment to the Amended and Restated Labor Pooling
Agreement, dated as of June 15, 2004, by and between Kleinknecht
Electric Company,
Inc. (NY) and IPC
Information
Systems, LLC.10.19
    
    Amendment to the Amended and Restated Labor Pooling
Agreement, dated as of June 15, 2004, by and between Kleinknecht
Electric Company,
Inc. (NJ) and IPC
Information
Systems, LLC.10.20
    
    Employment agreement between IPC
Information Systems, LLC and Timothy Whelan, dated as of July 15, 2004.31.1
    
    Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certificate of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certificate of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 36




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##### Table of Contents



(B)
    
    REPORTS ON FORM 8-K  The Company filed a report on Form 8-K on June 23, 2004. The Form 8-K
was for the purpose of announcing that on June 18, 2004, IPC
Acquisition Corp., through its subsidiary IPC Information Systems, LLC,
announced that it has entered into an agreement to sell assets related
to its Information Transport Systems (I.T.S.) division to a group of
private investors.On May 10, 2004, the Company furnished a report regarding our second quarter
2004 earnings release.On August 5, 2004, the Company furnished a report
regarding our third quarter
2004 earnings release. 37




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##### Table of Contents



SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. IPC Acquisition Corp.Dated:
August 13, 2004
    
    By:
    
    /s/ TIMOTHY WHELANTimothy WhelanChief Financial Officer(Principal Financial and AccountingOfficer and Duly Authorized Officer)
 38