-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IsX4eQMWdW4aXOJrSSyV65xUkdlLgBCEfThv+Zux09Nrf+PuYqYE4mvN59fwgpq6 hqdVT+UmlEdmbVQRS2llyA== 0000936392-97-000804.txt : 19970616 0000936392-97-000804.hdr.sgml : 19970616 ACCESSION NUMBER: 0000936392-97-000804 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970430 FILED AS OF DATE: 19970613 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: IPL SYSTEMS INC CENTRAL INDEX KEY: 0000351810 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER STORAGE DEVICES [3572] IRS NUMBER: 042511897 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-10370 FILM NUMBER: 97624003 BUSINESS ADDRESS: STREET 1: 124 ACTON ST CITY: MAYNARD STATE: MA ZIP: 01754 BUSINESS PHONE: 5084611000 MAIL ADDRESS: STREET 2: 124 ACTON STREET CITY: MAYNARD STATE: MA ZIP: 01754 10-Q 1 FORM 10-Q 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------- FORM 10-Q X Quarterly Report Under Section 13 or 15(d) of the Securities Exchange - --- Act of 1934 For Quarter Ended April 30, 1997 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 0-10370 ------- IPL SYSTEMS, INC. (Exact name of Registrant as specified in its charter) ------------------------------- MASSACHUSETTS 04-2511897 (State or jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 124 ACTON STREET, MAYNARD, MASSACHUSETTS 01754 (Address of principal executive offices and Zip Code) (508)461-1000 (Registrant's Telephone Number, including area code) ------------------------------- --------------------------------------------------------------- Former name, former address, and former fiscal year, if changed since last report. Indicate by a 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 periods 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 --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date. Class Outstanding at June 3, 1997 ----- --------------------------- Class A Common Stock $.01 par value 23,712,200 1 2 ANDATACO FORM 10-Q INDEX - --------------------------------------------------------------------------------
Page No. PART I. FINANCIAL INFORMATION Item 1. Financial Statements* Balance Sheet at April 30, 1997 (unaudited) and October 31, 1996 3 Statement of Operations (unaudited) for the three-month and six-month periods ended April 30, 1997 and 1996 4 Statement of Cash Flows (unaudited) for the six-month periods ended April 30, 1997 and 1996 5 Notes to Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 PART II. OTHER INFORMATION Item 5. Other Information 17 Item 6. Exhibits and Reports on Form 8-K 17 Signatures 18
* On June 3, 1997 (the "Closing Date"), IPL Systems, Inc. ("IPL") completed a business combination with ANDATACO, a California corporation ("ANDATACO"), whereby ANDATACO was merged with a wholly-owned subsidiary of IPL (the "Merger"). Under the terms of the merger agreement, the shareholders of ANDATACO were issued a total of 18,078,381 shares of IPL Class A Common Stock in exchange for all outstanding shares of ANDATACO. Although as a legal matter the Merger will result in ANDATACO becoming a subsidiary of IPL, for financial reporting purposes the Merger will be treated as a recapitalization of ANDATACO and an acquisition of IPL by ANDATACO using the purchase method of accounting (reverse acquisition). Consequently, the financial reporting requirements of the Securities and Exchange Commission require that the financial statements reported by IPL subsequent to the Merger be those of ANDATACO, which will include the results of operations of IPL from the date of the Merger. Historically, IPL had a December 31 year end. In June 1997, IPL changed its fiscal year end from December 31 to October 31. ANDATACO has an October 31 year end (with quarterly periods ending in January, April and July). In May 1997, IPL filed interim financial information for its first quarter ended March 31, 1997. Because of the requirement to account for the Merger as a reverse acquisition, the interim financial information contained in this report is solely that of ANDATACO for its second quarter ended April 30, 1997. IPL will file interim financial information for its third quarter ending July 31, 1997, which period will include the effects of the Merger (and will include the results of operations of IPL for the months of June and July and the results of operations of ANDATACO for the months of May, June and July). -2- 3 PART I - FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS ANDATACO BALANCE SHEET - --------------------------------------------------------------------------------
APRIL 30, OCTOBER 31, 1997 1996 (Unaudited) ASSETS Current assets: Cash $ 435,000 $ 765,000 Accounts receivable, net 12,819,000 12,980,000 Inventories 6,775,000 7,149,000 Other current assets 377,000 214,000 ------------ ------------ Total current assets 20,406,000 21,108,000 Equipment and improvements, net 2,464,000 2,463,000 Other assets 125,000 96,000 ------------ ------------ $ 22,995,000 $ 23,667,000 ============ ============ LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities: Accounts payable $ 8,917,000 $ 10,053,000 Accrued expenses and other current liabilities 2,663,000 1,959,000 Current portion of notes payable 113,000 164,000 ------------ ------------ Total current liabilities 11,693,000 12,176,000 ------------ ------------ Bank line of credit 7,000,000 7,053,000 Bonuses payable 268,000 167,000 Notes payable, less current portion 85,000 142,000 Shareholder loan 5,196,000 4,927,000 ------------ ------------ Total long-term liabilities 12,549,000 12,289,000 ------------ ------------ Shareholders' deficit: Common stock 2,000 2,000 Accumulated deficit (1,249,000) (800,000) ------------ ------------ Total shareholders' deficit (1,247,000) (798,000) ------------ ------------ $ 22,995,000 $ 23,667,000 ============ ============
See notes to unaudited financial statements. -3- 4 ANDATACO STATEMENT OF OPERATIONS (Unaudited) - --------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED APRIL 30, APRIL 30, 1997 1996 1997 1996 Sales $ 21,540,000 $ 20,385,000 $ 47,037,000 $ 45,936,000 Cost of sales 16,953,000 16,744,000 36,458,000 37,645,000 ------------ ------------ ------------ ------------ Gross profit 4,587,000 3,641,000 10,579,000 8,291,000 ------------ ------------ ------------ ------------ Operating expenses: Selling, general and administrative 4,542,000 4,564,000 9,835,000 9,034,000 Research and development 150,000 326,000 614,000 724,000 ------------ ------------ ------------ ------------ Total operating expenses 4,692,000 4,890,000 10,449,000 9,758,000 ------------ ------------ ------------ ------------ Loss (income) from operations (105,000) (1,249,000) 130,000 (1,467,000) Interest expense 228,000 179,000 573,000 363,000 ------------ ------------ ------------ ------------ Loss before provision for income taxes (333,000) (1,428,000) (443,000) (1,830,000) Provision for income taxes 6,000 -- 6,000 -- ------------ ------------ ------------ ------------ Net loss $ (339,000) $ (1,428,000) $ (449,000) $ (1,830,000) ============ ============ ============ ============ Net loss per share $ (33.90) $ (142.80) $ (44.90) $ (183.00) ============ ============ ============ ============ Shares used in computing net loss per share 10,000 10,000 10,000 10,000 ============ ============ ============ ============ Unaudited pro forma data: Loss before pro forma benefit from income taxes $ (333,000) $ (1,428,000) $ (443,000) $ (1,830,000) Pro forma benefit from income taxes (137,000) (585,000) (182,000) (750,000) ------------ ------------ ------------ ------------ Loss after pro forma benefit from income taxes $ (196,000) $ (843,000) $ (261,000) $ (1,080,000) ============ ============ ============ ============ Pro forma net loss per share $ (19.60) $ (84.30) $ (26.10) $ (108.00) ============ ============ ============ ============
See notes to unaudited financial statements. -4- 5 ANDATACO STATEMENT OF CASH FLOWS (Unaudited) - --------------------------------------------------------------------------------
SIX MONTHS ENDED APRIL 30, 1997 1996 ----------- ----------- Cash flows from operating activities: Net loss $ (449,000) $(1,830,000) Adjustments to reconcile net loss to cash used in operating activities: Depreciation and amortization 300,000 220,000 Changes in assets and liabilities: Accounts receivable 161,000 814,000 Inventories 374,000 1,251,000 Other assets (192,000) 82,000 Accounts payable (1,136,000) (478,000) Accrued expenses and other current liabilities 704,000 (245,000) Bonuses payable 101,000 15,000 ----------- ----------- Net cash used in operating activities (137,000) (171,000) ----------- ----------- Cash flows from investing activities: Purchases of equipment and improvements (301,000) (512,000) ----------- ----------- Net cash used in investing activities (301,000) (512,000) ----------- ----------- Cash flows from financing activities: Net payments (proceeds) under bank line of credit (53,000) 2,037,000 Proceeds from shareholder loan 269,000 -- Payments on shareholder loan -- (458,000) Payments on notes payable (108,000) (172,000) Dividends paid -- (691,000) ----------- ----------- Net cash provided by financing activities 108,000 716,000 ----------- ----------- Net change in cash (330,000) 33,000 Cash at beginning of period 765,000 305,000 ----------- ----------- Cash at end of period $ 435,000 $ 338,000 =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest $ 472,000 $ 218,000 =========== ===========
See notes to unaudited financial statements. -5- 6 ANDATACO NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- NOTE 1 - GENERAL On June 3, 1997 (the "Closing Date"), IPL Systems, Inc. ("IPL") completed a business combination with ANDATACO whereby ANDATACO was merged with a wholly-owned subsidiary of IPL (the "Merger"). Under the terms of the merger agreement, the shareholders of ANDATACO were issued a total of 18,078,381 shares of IPL Class A Common Stock in exchange for all outstanding shares of ANDATACO. Although as a legal matter the Merger will result in ANDATACO becoming a subsidiary of IPL, for financial reporting purposes the Merger will be treated as a recapitalization of ANDATACO and an acquisition of IPL by ANDATACO using the purchase method of accounting (reverse acquisition). Consequently, the financial reporting requirements of the Securities and Exchange Commission require that the financial statements reported by IPL subsequent to the Merger be those of ANDATACO, which will include the results of operations of IPL from the date of the Merger. Historically, IPL had a December 31 year end. In June 1997, IPL changed its fiscal year end from December 31 to October 31. ANDATACO has an October 31 year end (with quarterly periods ending in January, April and July). In May 1997, IPL filed interim financial information for its first quarter ended March 31, 1997. Because of the requirement to account for the Merger as a reverse acquisition, the interim financial information contained in this report is solely that of ANDATACO for its second quarter ended April 30, 1997. IPL will file interim financial information for its third quarter ending July 31, 1997, which period will include the effects of the Merger (and will include the results of operations of IPL for the months of June and July and the results of operations of ANDATACO for the months of May, June and July). The ANDATACO balance sheet as of April 30, 1997 and the related statements of operations and of cash flows for the three-month and six-month periods ended April 30, 1997 and 1996 have been prepared by ANDATACO and have not been audited. Such financial statements, in the opinion of management, include all adjustments (consisting only of normal, recurring accruals) that ANDATACO considers necessary for a fair presentation of its financial position, results of operations, and cash flows for such periods. However, they do not contain all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the financial statements and notes thereto included in ANDATACO's financial statements for the year ended October 31, 1996 included in IPL's Proxy Statement dated May 6, 1997. The interim financial information contained herein is not necessarily indicative of the results to be expected for the full fiscal year ending October 31, 1997. NOTE 2- BASIS OF PRESENTATION The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. NOTE 3 - NET LOSS PER SHARE Net loss per common share is computed based on the weighted average number of common shares outstanding during each quarter. Shares issuable upon exercise of outstanding stock options have been excluded from the computation if their effect would be antidilutive. In February 1997, the Financial Accounting Standards Board released Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share", which ANDATACO will adopt in the first quarter of fiscal 1998. Had SFAS No. 128 been effective for the three-month and six-month periods ended April 30, 1997 and 1996, basic and diluted loss per share under SFAS No. 128 would have been the same as the reported net loss per common share. -6- 7 ANDATACO NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- NOTE 4 - UNAUDITED PRO FORMA DATA The unaudited pro forma data presented in the statement of operations reflect ANDATACO's conversion from an S Corporation to a C Corporation, and the resultant adjustments for U.S. federal and state income taxes as if ANDATACO had been taxed as a C Corporation rather than an S Corporation since inception. The differences between financial reporting and tax bases of assets and liabilities are not significant. NOTE 5 - INVENTORIES
APRIL 30, OCTOBER 31, 1997 1996 (Unaudited) Inventories are comprised of the following: Raw materials $6,042,000 $5,937,000 Work in progress 168,000 366,000 Finished goods 565,000 846,000 ---------- ---------- $6,775,000 $7,149,000 ========== ==========
NOTE 6 - UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS The following tables set forth unaudited pro forma combined financial information to reflect the effect of the Merger using the purchase method of accounting, as required by SEC reporting requirements (see Note 1). The unaudited pro forma combined balance sheet as of April 30, 1997 has been prepared as if the Merger was consummated on April 30, 1997. The unaudited pro forma combined statement of operations for the year ended October 31, 1996 and for the six-month periods ended April 30, 1997 and 1996 give effect to the Merger as if it were consummated on November 1, 1995. Based on the Fair Value of $2.06 per share of IPL Stock (the Fair Value of IPL Stock is based on the average market price of IPL Stock for a period before and after the announcement of the proposed Merger on February 10, 1997), ANDATACO anticipates that the excess purchase price over the tangible net assets and identifiable intangible assets of IPL purchased is currently estimated to be approximately $7.4 million; however, this estimated amount is subject to reduction based on the allocation of the purchase price as determined by an independent valuation to be conducted as of the Closing Date. The historical information presented for IPL (i) for the year ended September 30, 1996 is derived from the unaudited financial statements of IPL for the twelve months then ended, and (ii) as of March 31, 1997 and for the six months ended March 31, 1997 and 1996 is derived from the unaudited financial statements of IPL as of that date and for the periods then ended. The historical information for ANDATACO (i) for the year ended October 31, 1996 is derived from the audited financial statements of ANDATACO for the year then ended, and (ii) as of April 30, 1997 and for the six months ended April 30, 1997 and 1996 is derived from the unaudited financial statements of ANDATACO as of that date and for the periods then ended. The unaudited pro forma combined financial statements have been prepared by management. The unaudited pro forma data are not designed to represent and do not represent what the combined results of operations or financial position would have been had the Merger been completed on or as of the dates assumed, and are not intended to project the combined results of operations for any future period or as of any future date. The unaudited pro forma combined financial statements give effect to the Merger but do not reflect nonrecurring charges that will result from the Merger or estimated expense reductions, including elimination of duplicate facilities and personnel costs, that are expected to result from the Merger. -7- 8 ANDATACO NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- PRO FORMA COMBINED BALANCE SHEET (UNAUDITED) (DOLLARS IN THOUSANDS)
HISTORICAL PRO FORMA ANDATACO IPL ---------------------------- APRIL 30, MARCH 31, 1997 1997 ADJUSTMENTS COMBINED -------- -------- ----------- --------- ASSETS: Current assets: Cash $ 435 $ 1,918 $ -- $ 2,353 Accounts receivable, net 12,819 1,477 -- 14,296 Inventories 6,775 2,567 15 (2) 9,357 Other current assets 377 302 -- 679 -------- -------- -------- -------- Total current assets 20,406 6,264 15 26,685 Equipment and improvements, net 2,464 1,518 304 (2) 4,286 Other assets 125 -- -- 125 Goodwill -- -- 7,439 (3) 7,439 -------- -------- -------- -------- $ 22,995 $ 7,782 $ 7,758 $ 38,535 ======== ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $ 8,917 $ 1,338 $ -- $ 10,255 Accrued expenses and other current liabilities 2,663 1,892 404 (2) 4,959 Current portion of notes payable 113 -- -- 113 -------- -------- -------- -------- Total current liabilities 11,693 3,230 404 15,327 -------- -------- -------- -------- Long-term liabilities: Bank line of credit 7,000 -- -- 7,000 Bonuses payable 268 -- -- 268 Notes payable, less current portion 85 -- -- 85 Shareholder loan 5,196 -- -- 5,196 -------- -------- -------- -------- Total long-term liabilities 12,549 -- -- 12,549 -------- -------- -------- -------- Shareholders' equity (deficit): Common stock 2 56 181 (1) 239 Additional paid in capital -- 17,379 (6,959)(1)(4) 10,420 Accumulated deficit (1,249) (12,883) 14,132 (1)(4) -- -------- -------- -------- -------- Total shareholders' equity (deficit) (1,247) 4,552 7,354 10,659 -------- -------- -------- -------- $ 22,995 $ 7,782 $ 7,758 $ 38,535 ======== ======== ======== ========
-8- 9 ANDATACO NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- PRO FORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL PRO FORMA --------------------------------- ----------------------------------- ANDATACO IPL SIX MONTHS SIX MONTHS ENDED ENDED APRIL 30, MARCH 31, 1997 1997 ADJUSTMENTS COMBINED Sales $ 47,037 $ 4,655 $ -- $ 51,692 Cost of sales 36,458 2,663 -- 39,121 ------------ ------------ ------------ ------------ Gross profit 10,579 1,992 -- 12,571 ------------ ------------ ------------ ------------ Operating expenses: Selling, general and administrative 9,835 4,258 774(6)(7) 14,867 Research and development 614 733 -- 1,347 ------------ ------------ ------------ ------------ Total operating expenses 10,449 4,991 774 16,214 ------------ ------------ ------------ ------------ Income (loss) from operations 130 (2,999) (774) (3,643) Other income (expense): Interest income -- 6 -- 6 Interest expense (573) -- -- (573) ------------ ------------ ------------ ------------ Total other income (expense) (573) 6 -- (567) ------------ ------------ ------------ ------------ Loss before provision for income taxes (443) (2,993) (774) (4,210) Provision for income taxes 6 -- -- 6 ------------ ------------ ------------ ------------ Net loss $ (449) $ (2,993) $ (774) $ (4,216) ============ ============ ============ ============ Net loss per share -- $ (0.53) -- $ (0.18) ============ ============ ============ ============ Shares used in computing net loss per share -- 5,626,000 18,078,000 23,704,000 ============ ============ ============ ============
-9- 10 ANDATACO NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- PRO FORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL PRO FORMA --------------------------------- ---------------------------------- ANDATACO IPL YEAR ENDED YEAR ENDED OCTOBER 31, SEPTEMBER 30, 1996 1996 ADJUSTMENTS COMBINED Sales $ 99,733 $ 21,658 $ -- $ 121,391 Cost of sales 80,375 12,689 15 (5) 93,079 ------------ ------------ ------------ ------------ Gross profit 19,358 8,969 (15) 28,312 ------------ ------------ ------------ ------------ Operating expenses: Selling, general and administrative 17,569 9,362 1,549 (6)(7) 28,480 Research and development 919 1,408 -- 2,327 Restructuring -- (100) -- (100) ------------ ------------ ------------ ------------ Total operating expenses 18,488 10,670 1,549 30,707 ------------ ------------ ------------ ------------ Income (loss) from operations 870 (1,701) (1,564) (2,395) Other income (expense): Interest income 1 147 -- 148 Interest expense (773) -- -- (773) Other (59) 28 -- (31) ------------ ------------ ------------ ------------ Total other income (expense) (831) 175 -- (656) ------------ ------------ ------------ ------------ Income (loss) before provision for income taxes 39 (1,526) (1,564) (3,051) Provision for income taxes -- -- -- -- ------------ ------------ ------------ ------------ Net income (loss) $ 39 $ (1,526) $ (1,564) $ (3,051) ============ ============ ============ ============ Net loss per share -- $ (0.27) -- $ (0.13) ============ ============ ============ ============ Shares used in computing net loss per share -- 5,634,000 18,078,000 23,712,000 ============ ============ ============ ============
-10- 11 ANDATACO NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- PRO FORMA COMBINED STATEMENT OF OPERATIONS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL PRO FORMA --------------------------------- --------------------------------- ANDATACO IPL SIX MONTHS SIX MONTHS ENDED ENDED APRIL 30, MARCH 31, 1996 1996 ADJUSTMENTS COMBINED Sales $ 45,936 $ 14,117 $ -- $ 60,053 Cost of sales 37,645 8,533 15 (5) 46,193 ------------ ------------ ------------ ------------ Gross profit 8,291 5,584 (15) 13,860 ------------ ------------ ------------ ------------ Operating expenses: Selling, general and administrative 9,034 5,222 774 (6)(7) 15,030 Research and development 724 717 -- 1,441 Restructuring -- (100) -- (100) ------------ ------------ ------------ ------------ Total operating expenses 9,758 5,839 774 16,371 ------------ ------------ ------------ ------------ Loss from operations (1,467) (255) (789) (2,511) Other income (expense): Interest income -- 200 -- 200 Interest expense (363) -- -- (363) Other -- (94) -- (94) ------------ ------------ ------------ ------------ Total other income (expense) (363) 106 -- (257) ------------ ------------ ------------ ------------ Loss before provision for income taxes (1,830) (149) (789) (2,768) Provision for income taxes -- -- -- -- ------------ ------------ ------------ ------------ Net loss $ (1,830) $ (149) $ (789) $ (2,768) ============ ============ ============ ============ Net loss per share -- $ (0.03) -- $ (0.12) ============ ============ ============ ============ Shares used in computing net loss per share -- 5,617,000 18,078,000 23,695,000 ============ ============ ============ ============
-11- 12 ANDATACO NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - ------------------------------------------------------------------------------- ADJUSTMENTS Pro forma adjustments are made to reflect: (1) The issuance of the Merger shares and the elimination of the common shareholders' equity accounts of IPL. (2) The allocation of the purchase price to record at fair value the IPL tangible net assets acquired by ANDATACO. (3) The excess of acquisition cost over the fair value of the tangible net assets and identifiable intangible assets acquired. This estimated allocation is subject to reduction based on an independent valuation to be conducted as of the Closing Date. (4) The elimination of ANDATACO's $1,249,000 accumulated deficit against additional paid in capital in connection with ANDATACO's change from a Subchapter S Corporation to a Subchapter C Corporation effective at the Closing Date. (5) Increase in cost of sales reflecting the sale of the inventory acquired at fair value. (6) Additional depreciation resulting from increased basis of equipment and improvements acquired, based on estimated average useful lives of five years. (7) Amortization of goodwill on a straight-line basis over five years. (8) No adjustment has been made for the distribution to the ANDATACO shareholders for taxes payable by such shareholders with respect to the earnings of ANDATACO for the short S Corporation taxable period as of the Closing Date due to estimated operating losses at that date. INCOME TAXES With respect to the unaudited pro forma balance sheet, ANDATACO has provided a deferred tax asset valuation allowance for net deferred tax assets which "more likely than not" will not be realized based on recent operating results. With respect to the unaudited pro forma statement of operations, the tax provision is calculated giving effect to the change of ANDATACO from a Subchapter S corporation to a Subchapter C corporation, assuming that such change occurred on November 1, 1995. No income tax provision or benefit was recorded for the year ended October 31, 1996 and the six months ended April 30, 1997 and 1996 due to net losses incurred during those periods, which losses have not resulted in the recording of an income tax benefit due to a full valuation allowance also being recorded. NET LOSS PER SHARE Pro forma per share calculations are based upon the weighted average number of pre-Merger shares of IPL common stock outstanding plus the aggregate number of IPL shares issued in connection with the Merger. -12- 13 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion contained in this report may contain forward-looking statements based on the current expectations of IPL's management. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. See "Important Facts Regarding Forward-Looking Statements of IPL Systems, Inc." filed as Exhibit 99.1 to IPL's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, which is incorporated by reference in this report. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. IPL undertakes no obligation to publicly release the result of any revisions to these forward-looking statements which may be made to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. Overview On June 3, 1997 (the "Closing Date"), IPL Systems, Inc. ("IPL") completed a business combination with ANDATACO whereby ANDATACO was merged with a wholly owned subsidiary of IPL (the "Merger"). Under the terms of the merger agreement, the shareholders of ANDATACO were issued a total of 18,078,381 shares of IPL Class A Common Stock in exchange for all outstanding shares of ANDATACO. Although as a legal matter the merger will result in ANDATACO becoming a subsidiary of IPL, for financial reporting purposes the Merger will be treated as a recapitalization of ANDATACO and an acquisition of IPL by ANDATACO using the purchase method of accounting (reverse acquisition). Consequently, the financial reporting requirements of the Securities and Exchange Commission require that the financial statements reported by IPL subsequent to the merger be those of ANDATACO, which will include the results of operations of IPL from the date of the Merger. Historically, IPL had a December 31 year end. In June 1997, IPL changed its fiscal year end from December 31 to October 31. ANDATACO has an October 31 year end (with quarterly periods ending in January, April and July). In May 1997, IPL filed interim financial information for its first quarter ended March 31, 1997. Because of the requirement to account for the Merger as a reverse acquisition, the interim financial information contained in this report is solely that of ANDATACO for its second quarter ended April 30, 1997. IPL will file interim financial information for its third quarter ending July 31, 1997, which period will include the effects of the Merger (and will include the results of operations of IPL for the months of June and July and the results of operations of ANDATACO for the months of May, June and July). Description of ANDATACO's Business ANDATACO designs, markets and services high availability, business-critical storage and backup solutions for UNIX and Windows NT environments. ANDATACO delivers service and support from 19 sales and service offices across the United States, through worldwide business affiliates in Europe, Asia, Latin America, Canada and Australia, and through the World-Wide Web. -13- 14 Results of Operations Results for the Second Quarter of Fiscal Year 1997 ended April 30, 1997 compared to the Second Quarter of Fiscal Year 1996 ended April 30, 1996 Revenues for the second quarter of FY 1997 of $21,540,000 increased by $1,155,000, or 5.7%, over the same period of FY 1996. The increase was primarily attributed to an increase in sales of ANDATACO'S internally designed GigaRAID products following their introduction in the second quarter of FY 1996. GigaRAID product sales were $7,036,000 in the second quarter of FY 1997 compared to $259,000 in the second quarter of FY 1996. The GigaRAID product sales surpassed the previous year's sales of non-GigaRAID, or mass storage, products that they are replacing, in line with ANDATACO'S strategy to develop and market differentiated technologies capable of producing higher margins. Gross profit increased to $4,587,000 in the second quarter of FY 1997, representing approximately 21.3% of revenues, compared to $3,641,000 in the second quarter of FY 1996, representing approximately 17.9% of revenues. The increase was due primarily to higher profit margins on ANDATACO'S GigaRAID product line, as well as a reduction in costs of components used to manufacture ANDATACO'S products. Total operating expenses decreased to $4,692,000 in the second quarter of FY 1997 from $4,890,000 in the second quarter of FY 1996. The decrease in total operating expenses was primarily attributable to decreases in research and development expenses in the second quarter of FY 1997. The decreases in research and development expenses, however, are the result of the timing of such expenses and are not the result of any decreases in overall research and development being performed by ANDATACO. ANDATACO expects research and development expenses to increase as it continues to design and develop new products. Operating expenses decreased in the second quarter of FY 1997 also because of reductions in personnel as ANDATACO began the transition to a design and development company from its former focus on reselling and distributing products from other manufacturers. ANDATACO anticipates that selling and marketing expenses will increase as it continues to staff appropriately for the design and development model. Certain one-time charges are expected to be incurred in the third quarter as a result of the merger, primarily the potential write-off of acquired in-process research and development. This amount will be determined by an independent valuation to be conducted as of the Closing Date. This one-time charge could be as much as $2,500,000. Six months ended April 30, 1997 compared to six months ended April 30, 1996 Revenues for the six-month period ended April 30, 1997 of $47,037,000 increased by $1,101,000, or 2.4%, over the six-month period ended April 30, 1996. The increase in revenues during the first six months of FY 1997 is the result of an increase in sales of ANDATACO'S internally designed GigaRAID products. GigaRAID product sales were $18,341,000 in the first six months of FY 1997 and $259,000 in the first six months of FY 1996. The GigaRAID product sales -14- 15 surpassed the previous year's sales of non-GigaRAID, or mass storage, products that they are replacing, in line with the ANDATACO'S strategy to develop and market differentiated technologies capable of producing higher margins. Gross profit increased to 22.5% of revenues for the six-month period ended April 30, 1997, compared to 18.0% of revenues for the same period of FY 1996. The increase in gross profit was primarily attributable to higher margins on the GigaRAID product line, as well as a reduction in the costs of components used to manufacture ANDATACO'S products. Total operating expenses increased to $10,449,000 in the six-month period ended April 30, 1997 from $9,758,000 for the same period of FY 1996. The increase was principally the result of increased selling, general and administrative expenses related to the hiring of additional sales personnel during the first quarter of FY 1997 (decreases were then made in the second quarter of FY 1997). The increase in selling, general and administrative expenses was slightly offset by a decrease in research and development expenses. Average borrowings from all sources during the first six months of FY 1997 were $13,163,000 compared to average borrowings of $8,347,000 for the same period of FY 1996. This increase in average borrowings resulted in an increase in interest expense of $210,000 for the first six months of FY 1997 over the comparable period of FY 1996. Liquidity and Capital Resources As of April 30, 1997 and October 31, 1996, ANDATACO'S cash balance was approximately $435,000 and $765,000, respectively. The decrease in cash was primarily attributable to the timing of payments to vendors as well as legal and accounting fees associated with the merger (these legal and accounting fees were included in other current assets at April 30, 1997 pending completion of the merger). Inventories decreased by approximately 5.2% to $6,775,000 at April 30, 1997 compared to $7,149,000 at October 31, 1996. Accounts payable decreased by 11.3% ($1,136,000) at April 30, 1997 from October 31, 1996. The decrease in accounts payable was primarily due to the timing of payments to vendors as noted above, as well as the timing of product purchases. ANDATACO currently maintains a credit facility which permits borrowings of the lesser of $10,000,000 or a percentage of eligible accounts receivable and inventory. As of April 30, 1997, ANDATACO had borrowings under this credit line of approximately $7,000,000. Management believes that ANDATACO'S cash and availability under the line of credit are sufficient to meet the operating requirements and integration costs of its existing business for a period of at least twelve months. Income Taxes Prior to the consummation of the Merger, ANDATACO elected to be taxed under Subchapter S of the Internal Revenue Code of 1986, as amended (the "Code"), and consequently all federal -15- 16 income taxes and most state taxes were paid directly by its shareholders. Concurrent with the consummation of the Merger, ANDATACO elected to be taxed as a Subchapter C corporation under the Code. Consequently, ANDATACO will be subject to federal and state corporate income taxes. On a pro forma basis, ANDATACO would have recorded income tax benefits at 41%, which is the approximate combined rate for both federal and state taxes. -16- 17 PART II. OTHER INFORMATION ITEM 5. OTHER INFORMATION Effective June 3, 1997, IPL changed its fiscal year end from December 31 to October 31. The transition period will be covered by IPL's Form 10-K for the year ended October 31, 1997. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 2.1 Agreement and Plan of Merger and Reorganization dated as of February 28, 1997 by and among IPL, IPL Acquisition Corporation, ANDATACO and W. David Sykes.(1) 10.1 OEM Agreement dated as of February 25, 1997 between IPL and Andataco.(2) 10.2 Consulting Agreement dated as of March 1, 1997 between the Company and Harris Ravine.(2) 27 Financial Data Schedule (b) Reports on Form 8-K During the three month period ended April 30, 1997, the following current reports were filed by IPL on Form 8-K under Item 5, Other Events: 1. Current Report on Form 8-K dated February 10, 1997 announcing the signing of a letter of intent to enter into an agreement and plan of reorganization whereby ANDATACO would be merged with a to-be-formed wholly owned subsidiary of IPL. 2. Current Report on Form 8-K dated February 28, 1997 announcing the signing of the Agreement and Plan of Reorganization as of February 28, 1997 by and among IPL, IPL Acquisition Corporation, ANDATACO and W. David Sykes. - ------------ (1) Filed with the SEC as an Exhibit to IPL's Current Report on Form 8-K dated February 28, 1997, and incorporated herein by this reference. (2) Filed with the SEC as an Exhibit to IPL's Annual Report on Form 10-K/A for the Fiscal Year Ended December 31, 1996, and incorporated herein by this reference. -17- 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. IPL SYSTEMS, INC. Date: June 13, 1997 By: /s/ Harris Ravine -------------------------------- Name: Harris Ravine Title: Chief Executive Officer (on behalf of registrant and as its principal executive officer) Date: June 13, 1997 BY: /s/ Richard A. Hudzik -------------------------------- Name: Richard A. Hudzik Title: Vice President Finance and Chief Financial Officer (on behalf of registrant and as its principal financial officer) -18- EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS OCT-31-1997 OCT-31-1996 APR-30-1997 435 0 13,073 (254) 6,775 20,406 4,329 (1,865) 22,995 11,693 0 0 0 2 (1,249) 22,995 47,037 47,037 36,458 36,458 (573) 0 573 (443) 6 (449) 0 0 0 (449) (44.90) (44.90)
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