-----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, WUulkc2zgQZpQm5oCu30bYaArIsn+ozpUmyxsh+LlARt5t6EcEbVmdVvTsYlVT1o R4oKJrbu5mmPgzR303uXRQ== 0000936392-98-001257.txt : 19980915 0000936392-98-001257.hdr.sgml : 19980915 ACCESSION NUMBER: 0000936392-98-001257 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980731 FILED AS OF DATE: 19980914 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ANDATACO INC CENTRAL INDEX KEY: 0000351810 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER STORAGE DEVICES [3572] IRS NUMBER: 042511897 STATE OF INCORPORATION: MA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-10370 FILM NUMBER: 98708964 BUSINESS ADDRESS: STREET 1: 124 ACTON ST CITY: MAYNARD STATE: MA ZIP: 01754 BUSINESS PHONE: 5084611000 MAIL ADDRESS: STREET 1: 10140 MESA RIM ROAD STREET 2: 124 ACTON STREET CITY: SAN DIEGO STATE: CA ZIP: 92121 FORMER COMPANY: FORMER CONFORMED NAME: IPL SYSTEMS INC DATE OF NAME CHANGE: 19920703 10-Q 1 FORM 10-Q 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934. FOR THE QUARTERLY PERIOD ENDED JULY 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM ____TO ____ . COMMISSION FILE NUMBER: 0-10370 ANDATACO, INC. -------------- formerly 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.) 10140 MESA RIM RD., SAN DIEGO, CALIFORNIA 92121 (Address of principal executive offices and Zip Code) (619) 453-9191 (Registrant's Telephone Number, including area code) 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 and 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 filing requirements for the past 90 days. Yes [X] No [ ] As of September 5, 1998 there were 23,819,399 shares of the Registrant's common stock, $0.01 par value, issued and outstanding. ================================================================================ 2 ANDATACO, INC. FORM 10-Q INDEX - --------------------------------------------------------------------------------
PAGE NO. PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheet at July 31, 1998 (unaudited) and October 31, 1997 3 Consolidated Statement of Operations (unaudited) for the three-month and nine-month periods ended July 31, 1998 and 1997 4 Consolidated Statement of Cash Flows (unaudited) for the nine-month period ended July 31, 1998 and 1997 5 Notes to Consolidated Financial Statements (unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. OTHER INFORMATION Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 15 Signatures
3 PART I - FINANCIAL INFORMATION ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS ANDATACO, INC. CONSOLIDATED BALANCE SHEET - --------------------------------------------------------------------------------
JULY 31, OCTOBER 31, 1998 1997 ------------ ------------ (UNAUDITED) ASSETS Current assets: Cash $ 320,000 $ 41,000 Accounts receivable, net 8,352,000 10,846,000 Inventories 4,959,000 7,458,000 Other current assets 406,000 353,000 ------------ ------------ Total current assets 14,037,000 18,698,000 Goodwill, net 6,411,000 7,665,000 Equipment and improvements, net 3,660,000 3,599,000 Other assets 1,000 27,000 ------------ ------------ $ 24,109,000 $ 29,989,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 6,569,000 $ 7,660,000 Accrued expenses 2,674,000 4,202,000 Deferred revenue 2,417,000 1,554,000 Current portion of notes payable -- 113,000 ------------ ------------ Total current liabilities 11,660,000 13,529,000 ------------ ------------ Long-term liabilities: Bank line of credit 5,000,000 6,500,000 Notes payable, less current portion -- 28,000 Shareholder loan 5,196,000 5,196,000 ------------ ------------ Total long-term liabilities 10,196,000 11,724,000 ------------ ------------ Shareholders' equity: Common stock 238,000 238,000 Additional paid in capital 10,107,000 10,107,000 Accumulated deficit (8,092,000) (5,609,000) ------------ ------------ Total shareholders' equity 2,253,000 4,736,000 ------------ ------------ $ 24,109,000 $ 29,989,000 ============ ============
See notes to unaudited consolidated financial statements. - 3 - 4 ANDATACO, INC. CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited) - --------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED JULY 31, JULY 31, --------------------------------- --------------------------------- 1998 1997 1998 1997 ------------ ------------ ------------ ------------ Sales $ 17,092,000 $ 22,057,000 $ 59,848,000 $ 69,094,000 Cost of sales 12,733,000 17,151,000 42,033,000 53,609,000 ------------ ------------ ------------ ------------ Gross profit 4,359,000 4,906,000 17,815,000 15,485,000 ------------ ------------ ------------ ------------ Operating expenses: Selling, general and administrative 5,325,000 6,015,000 17,788,000 15,690,000 Rent expense to shareholder 83,000 83,000 249,000 249,000 Purchased research and development -- 2,400,000 -- 2,400,000 Research and development 568,000 304,000 1,482,000 918,000 ------------ ------------ ------------ ------------ Total operating expenses 5,976,000 8,802,000 19,519,000 19,257,000 ------------ ------------ ------------ ------------ Loss from operations (1,617,000) (3,896,000) (1,704,000) (3,772,000) Interest expense 140,000 156,000 428,000 501,000 Interest expense to shareholder 117,000 117,000 351,000 345,000 ------------ ------------ ------------ ------------ Net loss $ (1,874,000) $ (4,169,000) $ (2,483,000) $ (4,618,000) ============ ============ ============ ============ Loss per share: Basic $ (0.08) $ (0.19) $ (0.10) $ (0.24) ============ ============ ============ ============ Diluted $ (0.08) $ (0.19) $ (0.10) $ (0.24) ============ ============ ============ ============ Shares used in computing net loss per share Basic 23,819,399 21,688,262 23,819,399 19,294,898 ============ ============ ============ ============ Diluted 23,819,399 21,688,262 23,819,399 19,294,898 ============ ============ ============ ============
See notes to unaudited consolidated financial statements. - 4 - 5 ANDATACO, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) - --------------------------------------------------------------------------------
NINE MONTHS ENDED JULY 31, ------------------------------- 1998 1997 ----------- ----------- Cash flows from operating activities: Net loss $(2,483,000) $(4,618,000) Adjustments to reconcile net loss to cash provided by (used in) operating activities: Depreciation and amortization 1,237,000 784,000 Amortization of goodwill 1,254,000 279,000 Purchased research and development -- 2,400,000 Stock compensation -- 106,000 Changes in assets and liabilities: Accounts receivable 2,494,000 1,637,000 Inventories 2,499,000 (1,244,000) Other assets (27,000) 261,000 Accounts payable (1,091,000) (1,722,000) Accrued expenses (1,528,000) 1,304,000 Deferred revenue 863,000 -- ----------- ----------- Net cash provided by (used in) operating activities 3,218,000 (813,000) ----------- ----------- Cash flows from investing activities: Cash acquired in merger transaction (net of cash expended of $478,000) -- 676,000 Payments for purchases of property and equipment (1,298,000) (445,000) ----------- ----------- Net cash (used in) provided by investing activities (1,298,000) 231,000 ----------- ----------- Cash flows from financing activities: Payments under bank line of credit agreement,net (1,500,000) (53,000) Proceeds from shareholder loan -- 269,000 Payments on notes payable (141,000) (137,000) ----------- ----------- Net cash (used in) provided by financing activities (1,641,000) 79,000 ----------- ----------- Net increase (decrease) in cash 279,000 (503,000) Cash at beginning of period 41,000 765,000 ----------- ----------- Cash at end of period $ 320,000 $ 262,000 =========== ===========
See notes to unaudited consolidated financial statements. - 5 - 6 ANDATACO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- NOTE 1- NAME CHANGE On April 8, 1998, the Company held its Annual Meeting of Shareholders. At the meeting, the shareholders approved the amendment of the Company's Articles of Organization to change the name of IPL Systems, Inc. to Andataco, Inc. Concurrent with that change, the Company also changed the name of its wholly owned subsidiary ANDATACO to ANDATACO of California. 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. The accompanying unaudited consolidated financial statements of Andataco, Inc. ("ADT", or the "Company") have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended October 31, 1997. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting of only normal recurring items, necessary for a fair presentation of the Company's financial position as of July 31, 1998 and its results of operations for the three-month and nine-month periods ended July 31, 1998 and 1997. The interim financial information contained herein is not necessarily indicative of the results to be expected for any other interim period or the full fiscal year ending October 31, 1998. NOTE 3- BUSINESS COMBINATION On June 3, 1997 (the "Closing Date"), ADT (formally IPL Systems, Inc.) completed a business combination with ANDATACO of California (formally ANDATACO), whereby ANDATACO of California was merged with a wholly-owned subsidiary of ADT (the "Merger"). Under the terms of the merger agreement, the shareholders of ANDATACO of California were issued a total of 18,078,381 shares of ADT Class A Common Stock in exchange for all outstanding shares of capital stock of ANDATACO of California. Although as a legal matter the Merger resulted in ANDATACO of California becoming a wholly-owned subsidiary of ADT, for financial reporting purposes the Merger was treated as a recapitalization of ANDATACO of California and an acquisition of ADT by ANDATACO of California (reverse acquisition). The financial reporting requirements of the Securities and Exchange Commission require that the financial statements reported by ADT subsequent to the Merger be those of ANDATACO of California, which include the results of operations of ADT from the Closing Date. The acquisition of ADT by ANDATACO of California was accounted for using the purchase method. Accordingly, the purchase price was allocated to the estimated fair market value of identifiable tangible and intangible assets acquired and liabilities assumed. Based upon an independent valuation, the Company allocated $2,400,000 to acquired in-process research and development for which there is no future alternative use and $400,000 to existing proprietary technology for which technological feasibility had been established. As required by generally accepted accounting principles, the amount allocated to in-process research and development was recorded as a one-time charge to operations and the amount allocated to existing technology was amortized over its estimated useful life. The excess of the purchase price over the identifiable net assets acquired of $8,362,000 was recorded as goodwill and is being amortized on a straight-line basis over its estimated useful life of five years. - 6 - 7 ANDATACO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- NOTE 4 - NET LOSS PER SHARE Basic and diluted net income per share have been computed under the guidelines of Statement of Financial Accounting Standard (FAS) No.128, "Earnings Per Share." Basic earnings per share ("EPS") is calculated by dividing the income available to common shareholders by the weighted average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted EPS is computed by dividing the income available to common shareholders by the weighted average number of common shares outstanding for the period in addition to the weighted average number of common stock equivalents outstanding for the period. Net income remains the same for the calculations of basic EPS and diluted EPS. The Company has restated EPS for prior periods concurrent with the adoption of FAS 128. The number of shares of the Company's common stock outstanding immediately before the Merger has been treated as having been issued at the Merger date. Shares issuable upon exercise of outstanding stock options of 2,184,428 have been excluded from the diluted EPS computation, as their effect would be antidilutive. NOTE 5 - INVENTORIES
JULY 31, OCTOBER 31, 1998 1997 (Unaudited) Inventories are comprised of the following: Purchased components $4,226,000 $5,541,000 Work in progress 182,000 125,000 Finished goods 551,000 1,792,000 ---------- ---------- $4,959,000 $7,458,000 ========== ==========
- 7 - 8 ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the unaudited consolidated financial statements included elsewhere within this quarterly report. Fluctuations in annual and quarterly results may occur as a result of factors affecting demand for the Company's products such as the timing of the Company's and competitors' new product introductions and upgrades. Due to such fluctuations, historical results and percentage relationships are not necessarily indicative of the operating results for any future period. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements usually contain the words "estimate," "anticipate," "expect" or similar expressions. All forward-looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties. The forward-looking statements included herein are based on current expectations and entail risks and uncertainties such as those set forth below and in the Company's Form 10-K which could cause the Company's actual results to differ materially from those projected in the forward-looking statements. The Company disclaims any obligation to update or publicly announce revisions to any such statements to reflect future events or developments. OVERVIEW ADT designs, manufactures, and distributes storage solutions based on its Application-Specific Architecture ("ASA") for Windows NT and UNIX environments. The Company develops products to meet the individual performance and availability profiles of storage-intensive applications in its target markets. The Company's open-architecture solutions include Redundant Array of Independent Disks ("RAID") and RAID-ready disk arrays; tape backup and restore products; and web storage management and other storage management utilities, remote mirroring and disaster recovery software. These products support multiple server platforms, including Sun Microsystems, Hewlett-Packard, Silicon Graphics, Inc. and various NT systems. The Company distributes internally developed products, as well as products from other manufacturers through direct, indirect and original equipment manufacturer ("OEM") sales and service channels throughout the world. The Company backs its products with maintenance and technical support. In addition, it provides customized consulting service programs. The GigaRAID Series is a family of RAID and RAID-ready disk and tape storage systems that combine with the Company's proprietary, award-winning modular packaging architecture, Enterprise Storage Packaging ("ESP"), to create complete storage solutions. The GigaRAID/HA provides high performance and availability for OLTP/Database applications characterized by small block/random data processing. The GigaRAID/FT, is fully redundant and configurable for either large block, sequential applications, or small block, random applications. In the second quarter of fiscal 1998 the GigaRAID/FC Series, one of the first storage systems to provide the availability, performance and connectivity advantages of Fibre Channel technology, was introduced. Other GigaRAID Series products, including the GigaRAID/SX, offer high performance and availability for certain data warehouse, seismic processing and video applications characterized by large block, sequential processing. In August 1998, the Company announced three new storage products: an enhanced version of the GigaRAID/HA; the GigaRAID/AA which is the next generation of the GigaRAID/SX; and the GigaRAID 8000 LVD enclosure, featuring Ultra2 SCSI Low Voltage Differential (LVD) interface technology. The Company also introduced in August 1998 two storage management software products, Client/S for the GigaRAID/HA, and Web Storage Manager for the GigaRAID/AA. Historically, the reseller business or the sale of third party non-GigaRAID products accounted for the majority of the Company's revenues, representing 100% of revenues in fiscal 1995 and declining to 37.2% and 34.6% in fiscal 1996 and 1997, respectively. The Company plans to continue to sell third party products and to focus increased resources on the design, development, manufacturing and marketing of internally developed and GigaRAID products. For the nine months ended July 31, 1998 and 1997, revenue - 8 - 9 from sales of internally developed and GigaRAID products represented 59.2% and 42.6% of total revenue, respectively. RESULTS OF OPERATIONS The following table sets forth items in the Company's statement of operations as a percentage of net sales for the periods presented. The data has been derived from the unaudited condensed consolidated financial statements.
Three Months Ended Nine Months Ended July 31, July 31, ---------------------- ---------------------- 1998 1997 1998 1997 ------ ------ ------ ------ Sales 100.0% 100.0% 100.0% 100.0% Cost of sales 74.5 77.8 70.2 77.6 ------ ------ ------ ------ Gross profit 25.5 22.2 29.8 22.4 Operating expenses: Selling, general and administrative 31.1 27.2 29.7 22.7 Rent expense to shareholder 0.5 0.4 0.4 0.4 Purchased research and development -- 10.9 -- 3.5 Research and development 3.3 1.4 2.5 1.3 ------ ------ ------ ------ Total operating expenses 34.9 39.9 32.6 27.9 ------ ------ ------ ------ Loss from operations (9.4) (17.7) (2.8) (5.5) Interest expense 1.5 1.2 1.3 1.2 ------ ------ ------ ------ Net loss (10.9)% (18.9)% (4.1)% (6.7)% ====== ====== ====== ======
- 9 - 10 Results of Operations - Third Quarter of Fiscal 1998 compared to Third Quarter of Fiscal 1997 Sales. Sales for the three months ended July 31, 1998 were $17,092,000, a decrease of 22.5% from sales of $22,057,000 for the same period in the prior year. The decrease was primarily attributable to a decrease in sales of older mass storage products including RAID Lite, RAPID-Tape, JBOD Disk and JBOT Tape, as well as lower sales in non-GigaRAID distribution products. Mass storage product sales were $970,000 in the third quarter of fiscal 1998 compared to $3,747,000 in the third quarter of fiscal 1997. Non-GigaRAID distribution product sales were $4,252,000 in the third quarter of fiscal 1998 compared to $7,079,000 in the same period in 1997. The decrease in older mass storage and non-GigaRAID distribution product sales is in line with the Company's strategy to focus increased resources on newer GigaRAID products which produce higher margins. However, GigaRAID product sales in the third quarter of fiscal 1998 remained relatively flat compared to sales in the third quarter of fiscal 1997. The lower than expected sales of GigaRAID products, in the third quarter of fiscal 1998 was a direct result of a slower than anticipated ramp in the Company's Fibre Channel solutions offering including GigaRAID/FT and GigaRAID/FC. Gross Profit. Gross profit in the third quarter of fiscal 1998 was $4,359,000, representing approximately 25.5% of revenues, compared to $4,906,000 in the third quarter of fiscal 1997, representing approximately 22.2% of sales. The increase in gross profit percentage was due primarily to the shift in product mix from the third quarter of fiscal 1998 compared to the third quarter of fiscal 1997. The Company's GigaRAID product family sales accounted for 62.6% of revenues for the third quarter of fiscal 1998 as compared to 48.9% of revenues in the third quarter of fiscal 1997. The Company's GigaRAID product family has a higher average gross margin as compared to non-GigaRAID mass storage and third party products. In addition, there was a reduction in costs of components used to manufacture products in the third quarter of fiscal 1998 compared to the third quarter of fiscal 1997. Selling, General and Administrative. Selling, general and administrative ("SG&A") expenses consist primarily of the salaries, commissions and benefits of sales, marketing and customer support personnel and administrative and corporate services personnel, as well as consulting, advertising, promotion, and certain Merger related expenses (i.e. goodwill amortization). SG&A expenses were $5,325,000 and $6,015,000 for the three months ended July 31, 1998 and 1997, respectively. The decrease in the current period's SG&A expenses over such expenses incurred in the comparable period of the prior fiscal year primarily represents the reduction in salesforce expenses, bad debt charges, and reduced administrative expenses related to headcount reductions. Merger related expenses for the periods include goodwill amortization of $418,000 and $278,000 included in the third quarter of fiscal 1998 and 1997, respectively, and amortization of proprietary technology of $200,000 in the third quarter of fiscal 1997. Research and Development. Research and development expenses consist primarily of salaries, employee benefits, overhead and outside contractors. Such expenses were $568,000 and $304,000 for the quarters ended July 31, 1998 and 1997, respectively. The level of research and development expenses is in line with the Company's strategy to continue to focus increased resources on design and development of in-house products and differentiating technologies for which it believes there is a need in the market. However, there can be no assurance that product development programs invested in by the Company will be successful or that products resulting from such programs will achieve market acceptance. Results of Operations - First Nine Months of Fiscal 1998 compared to First Nine Months of Fiscal 1997 Sales. Sales for the nine months ended July 31, 1998 were $59,848,000, a decrease of 13.4% from sales of $69,094,000 for the same period in the prior year. The decrease was primarily attributable to a decrease in sales of older mass storage products including RAID Lite, RAPID-Tape, JBOD Disk and JBOT Tape, as well as lower sales in non-GigaRAID distribution products. Mass storage product sales were $4,062,000 in the first nine months of fiscal 1998 compared to $16,459,000 in the first nine months of fiscal 1997. Non-GigaRAID distribution product sales decreased by $4,973,000 to $17,029,000 in the first nine months of fiscal 1998 compared to $22,002,000 in the first nine months of fiscal 1997. Although the Company experienced an increase in sales of internally designed and distribution GigaRAID products of $6,006,000 over the same period in 1997, such increase was more than offset by the decrease in the sales of non- - 10 - 11 GigaRAID mass storage and third-party products. The decrease in non-GigaRAID mass storage and third-party product sales is in line with the Company's strategy to focus increased resources on internally designed products, including the GigaRAID product family, capable of producing higher margins. This is consistent with the Company's transition towards "owned solutions" - strategic technologies designed in-house to create technical, time-to-market and gross margin advantages. By combining engineered technology with selected products manufactured by its distribution and development partners, the Company provides a strong, sophisticated product line targeted to fast-growing segments of the open systems storage market. Gross Profit. Notwithstanding the decline in sales, gross profit for the first nine months of fiscal year 1998 was $17,815,000, representing approximately 29.8% of revenues, compared to $15,485,000 in the first nine months of fiscal 1997, representing approximately 22.4% of sales. The increase in gross profit percentage was due primarily to the shift in product mix from period to period. The Company's GigaRAID product family sales accounted for 59.2% of revenues for the first nine months of fiscal 1998 as compared to 42.6% of revenues in the first nine months of fiscal 1997. The Company's GigaRAID product family has a higher average gross margin as compared to non-GigaRAID mass storage and third party products. In addition, there was a reduction in costs of components used to manufacture products in the first nine months of fiscal 1998 compared to the comparable period in fiscal 1997. Selling, General and Administrative. SG&A expenses were $17,788,000 and $15,690,000 for the nine months ended July 31, 1998 and 1997, respectively. The increase in the current period's SG&A expenses over such expenses incurred in the comparable period of the prior fiscal year is primarily due to an increase of $975,000 of goodwill amortization, an increase in depreciation expense of approximately $653,000 related to the addition of fixed assets from the Merger, and the addition of key sales executives and management personnel in the current period. Research and Development. Research and development expenses were $1,482,000 and $918,000 for the nine months ended July 31, 1998 and 1997, respectively. The level of research and development expenses is in line with the Company's strategy to continue to focus increased resources on design and development of in-house products and differentiating technologies for which it believes there is a need in the market. However, there can be no assurance that product development programs invested in by the Company will be successful or that products resulting from such programs will achieve market acceptance. Interest Expense. The decrease in interest expense of $73,000, or 14.6%, in the first nine months of fiscal 1998 over the comparable period in fiscal 1997 is primarily due to the reduction in the outstanding portion of the Company's bank line of credit. LIQUIDITY AND CAPITAL RESOURCES During the first nine months of fiscal 1998, the Company generated $3,218,000 of cash from operating activities, primarily from improved management of working capital. Included in this net change was a decrease of $2,499,000 in inventories, and a reduction in trade accounts receivable of $2,494,000, partially offset by a reduction of accrued expenses of $1,528,000. Offsetting cash generated from operations was the reduction in the outstanding portion of the Company's bank line of credit of $1,500,000 and payments for purchases of capital equipment of $1,298,000. On April 30, 1998, the Company obtained a credit facility with a new financial institution. The new credit facility permits the Company to borrow the lesser of $15,000,000 or a percentage of eligible accounts receivable and inventory ($6,239,000 available at July 31, 1998). As of July 31, 1998, the Company had $5,000,000 outstanding under this credit line. The credit facility expires on April 30, 2001; consequently, borrowings under this line have been classified as long term. The shareholder loan to the president and principal shareholder is unsecured, due in June 2004, with interest payable monthly at 9 percent per annum. This loan is subordinated to the bank line of credit. - 11 - 12 The Company is currently satisfying all working capital and capital expenditure requirements through internally generated cash flows from operations and borrowings available on its credit facility. Management believes that its financial position and available borrowings on its credit facility will be sufficient to meet the operating requirements of its business for a period of at least twelve months. INCOME TAXES Prior to the consummation of the Merger, ANDATACO of California elected to be taxed under Subchapter S of the Internal Revenue Code of 1986, as amended, and consequently all federal income taxes and most state taxes were paid directly by its shareholders. Concurrent with the Merger, ANDATACO of California changed its taxpayer status from a Subchapter S Corporation to a Subchapter C Corporation. Effective with that change, the Company transferred the amount of its accumulated deficit at that date to additional paid in capital. Therefore, the Company's accumulated deficit at July 31, 1998 includes losses solely incurred by the Company since the Merger. Because of the change in taxpayer status to a Subchapter C Corporation, the Company is subject to federal and state income taxes. The tax provision is calculated giving effect to the change of ANDATACO of California from a Subchapter S Corporation to a Subchapter C Corporation, and the resultant adjustments for federal and state income taxes, as if ANDATACO of California had been taxed as a C Corporation rather than an S Corporation since inception. The Company has recorded deferred tax assets and liabilities due to its change in taxpayer status to a Subchapter C Corporation. The Company has recorded a valuation allowance in full for deferred tax assets which, more likely than not, will not be realized based on recent operating results. No income tax provision or benefit was recorded for the nine-month period ended July 31, 1998 due to the net loss incurred during this period, which loss has not resulted in the recording of an income tax benefit due to a full valuation allowance also being recorded. No pro forma calculation of income tax is presented because as a Subchapter C Corporation the Company would not have been liable for income taxes due to losses sustained, which losses have not resulted in the recording of an income tax benefit due to a full valuation allowance also being recorded. YEAR 2000 Many current computer systems and software products were not designed to handle any dates beyond the year 1999. As a result, computer systems and/or software used by many companies may need to be modified prior to the Year 2000 in order to remain functional. Significant uncertainty exists in the hardware and software industry concerning the potential effects associated with such compliance. In mid-1997, the Company formed an internal task force to evaluate those areas of the Company that may be affected by the Year 2000 problem and devised a plan for the Company to become Year 2000 compliant in a timely manner (the "Plan"). The Plan focuses on three major areas; the Company's internal business transaction systems; the products the Company sells and the business transaction systems of its business partners, including suppliers, customers and bankers. To date, the Company has executed approximately two-thirds of its Plan and anticipates completing the remaining portions of the Plan by the end of calendar year 1998 while the evaluation and testing of certain ancillary PC office and specialized PC applications will continue through 1999. Internal Business Transaction Systems The Company has completed a review of its critical business transaction systems, and its Year 2000 compliance related to business transaction systems is as follows: - 12 - 13 All of the Company's systems for processing business transactions are Year 2000 compliant and the Company expects that these systems will correctly process transactions prior to and following 12:00am January 1, 2000. This compliance extends to the underlying hardware, operating systems, and other software on which the Company's business system operates. This compliance includes the following transactions and related printed documents: accepting orders from customers, fulfilling customer orders, invoicing customers, crediting customer accounts, applying customer payments, refunding customers, placing orders with vendors, receiving vendor shipments, processing vendor invoices, and paying vendors. The Company is in the process of evaluating certain ancillary PC office applications (e.g. word processing, spreadsheets, e-mail etc.) and specialized PC applications including art, drawing and other creative department applications, hardware design and other engineering department applications, software development systems, bank account management, fixed asset management, and stock option database management. This effort will continue through 1999. The Company has incurred to date no incremental material costs associated with its efforts to become Year 2000 compliant, as the majority of the costs have occurred as a result of normal upgrade procedures. Based on current information, the Company does not expect future costs to modify its information technology infrastructure to be material to its financial condition or results of operations. However, there can be no assurances that there will not be interruptions or other limitations of financial and operating systems functionally or that the Company will not incur significant costs to avoid such interruptions or limitations. Products the Company Sells The Company has also completed a review of its manufactured product line. However, the Company is still in the process of evaluating third party products and software sold by ADT for Year 2000 compliance. The Company's Year 2000 compliance related to the products it sells is as follows: All ADT manufactured products are Year 2000 compliant and the Company believes these manufactured products will not produce date errors in changing from the year 1999 to 2000. The functionality of all of the Company's manufactured products, however, are dependent on the software compliance of the underlying operating systems. All ADT developed software products are Year 2000 compliant. The Company is still in the process of evaluating third party products and software sold by ADT for Year 2000 compliance. In the event that any of the significant third party products and software sold by ADT do not successfully achieve Year 2000 compliance on a timely basis, the Company's business or operations could be adversely affected. The Company's Business Partners The Company's suppliers (particularly sole-source and long lead-time suppliers), key customers and other key business partners (e.g. bankers) may be adversely affected by their respective failure to address the Year 2000 problem. Should any of the Company's suppliers encounter Year 2000 problems that cause them to delay manufacturing or shipments of key components to ADT, the Company may be forced to delay or cancel shipments of its products, which would have a material adverse effect on the Company's results of operations. Any inability of ADT's key customers to become Year 2000 compliant which would cause them to delay or cancel substantial purchase orders or delivery of ADT's products would also have a material adverse effect on the Company's results of operations. Additionally, any inability of the Company's other key business partners, including the Company's bank, to become Year 2000 compliant could cause them to become unable to provide critical business services, such as to provide funding on the Company's line of credit, and could therefore also have a material adverse effect on the Company. - 13 - 14 The Company is currently in the process of identifying key customers, vendors and other significant business partners (e.g. bankers) and obtaining Year 2000 compliance statements. The Company anticipates completion of this effort by the end of 1998; however, there can be no assurances that any such efforts will be successful. The Company has incurred to date no incremental material costs associated with the Year 2000 issue. Based on current information, the Company does not expect future costs to execute the remainder of its Year 2000 compliance plan to be material to its financial condition or results of operations. However, there can be no assurances that there will not be interruptions or other limitations of financial and operating systems functionally or that the Company will not incur significant costs to avoid such interruptions or limitations. Costs incurred relating to the Year 2000 issue will be expensed by the Company during the period in which they are incurred. The Company's expectations about future costs associated with the Year 2000 issue are subject to uncertainties that could cause actual results to have a greater financial impact than currently anticipated. Factors that could influence the amount and timing of future costs include but are not limited to the success of the Company's customers and suppliers in addressing the Year 2000 issue. - 14 - 15 PART II - OTHER INFORMATION ITEM 5: OTHER INFORMATION On August 11, 1998 the Company received correspondence from The Nasdaq Stock Market notifying the Company of its intention to delist the Company's common stock, effective with the close of business on August 18, 1998, on account of the Company no longer meeting the Nasdaq SmallCap Market's continuing listing requirements for net tangible assets and market capitalization. On August 17, 1998 the Company requested a hearing to appeal this proposed action. Pursuant to Nasdaq rules, the request for a hearing has postponed the proposed delisting of the Compnay until Nasdaq has had an opportunity to hear and consider the appeal. As of September 11, 1998, no hearing date has been set by Nasdaq. ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits 10.1 Amendment No. 1 to Loan Agreement dated as of July 29, 1998 between Wells Fargo Bank and the Company. 27.1 Financial Data Schedule
(b) Reports on Form 8-K None SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Andataco, Inc. Date: September 14, 1998 By: /s/ Harris Ravine --------------------------------------- Harris Ravine Chief Executive Officer (on behalf of registrant and as its principal executive officer) Date: September 14, 1998 By: /s/ Diane Wong --------------------------------------- Diane Wong Vice President and Corporate Controller (on behalf of registrant and as its principal financial officer) - 15 - EX-10.1 2 EXHIBIT 10.1 1 EXHIBIT 10.1 AMENDMENT NO. 1 TO LOAN AGREEMENT This Amendment No. 1 to Loan Agreement ("Amendment") dated as of July 29, 1998, is made by and between anDATAco of California, Inc., a California corporation ("Borrower"), and Wells Fargo Bank, National Association ("Lender"). RECITALS This Amendment is made with reference to the following facts: A. Borrower is currently indebted to Lender pursuant to the terms and conditions of that certain Loan Agreement between Borrower and Lender dated as of April 30, 1998 (as amended from time to time, the "Loan Agreement"). Capitalized terms used herein and not otherwise defined shall have the meanings set forth for such terms in the Loan Agreement. B. Subject to the terms and conditions set forth herein, Borrower and Lender have agreed to amend the Loan Agreement as set forth below. AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants and benefits contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are acknowledged, Borrower and Lender agree as follows: 1. AMENDMENTS OF CREDIT AGREEMENT 1.1 Section 3.2. Notwithstanding anything to the contrary contained in the second sentence of Section 3.2, during the period commencing August 1, 1998 and ending on the Net Worth Satisfaction Date (as defined below), the fee referred to in the second sentence of Section 3.2 shall be 2.50% and not 2.00%. As used in this Amendment, "Net Worth Satisfaction Date" shall mean the first day of the first fiscal month subsequent to receipt by Lender from Borrower of financial statements pursuant to Section 8.4(b) of the Loan Agreement which indicate that Borrower's Tangible Net Worth exceeds $1,800,000.00, provided, however, that in the event that Borrower's Tangible Net Worth exceeds $1,800,000.00 in the final fiscal month of Borrower's fiscal year, "Net Worth Satisfaction Date" shall mean the first day of the first fiscal month subsequent to receipt by Lender from Borrower of audited financial statements pursuant to Section 8.4(a) of the Loan Agreement indicating such Tangible Net Worth. -1- 2 1.2 Section 8.10(a). The table in Section 8.10(a) is amended by replacing the first two entries thereof with the following:
Period Minimum Tangible Net Worth ------ -------------------------- July 31, 1998 through October 30, 1998 $1,000,000.00 October 31, 1998 through January 30, 1999 1,000,000.00
1.3 Exhibit B. Exhibit B attached to the Loan Agreement is replaced by Exhibit B attached hereto as Annex 1. 2. CONDITIONS PRECEDENT The effectiveness of this Amendment and Lender's agreements set forth herein are subject to the satisfaction of each of the following conditions precedent on or before July __, 1998: 2.1 Documentation. Borrower shall have delivered or caused to be delivered to Lender, at Borrower's sole cost and expense, the following, each of which shall be in form and substance satisfactory to Lender: (a) The executed original of this Amendment, including the Consent of Guarantor attached hereto as Exhibit A; (b) The First Amended and Restated Line of Credit Note dated July 29, 1998 by Borrower in favor of Lender in the form of Annex 1 attached to this Amendment; (c) Such additional agreements, certificates, reports, approvals, instruments, documents, consents and/or reaffirmations as Lender may reasonably request. 2.2 Amendment Fee. Lender shall have received an amendment fee in the sum of $5,000.00 from Borrower. 2.3 Representations and Warranties. All of Borrower's representations and warranties contained herein shall be true and correct on and as of the date of execution hereof and no Event of Default shall have occurred and be continuing under the Loan Agreement or any of the other Loan Documents, as modified hereby. -2- 3 3. REPRESENTATIONS AND WARRANTIES Borrower makes the following representations and warranties to Lender as of the date hereof, which representations and warranties shall survive the execution, termination or expiration of this Amendment and shall continue in full force and effect until the full and final satisfaction and discharge of all obligations of Borrower to Lender under the Loan Agreement and the other Loan Documents: 3.1 Reaffirmation of Prior Representations and Warranties. Borrower hereby reaffirms and restates as of the date hereof, all of the representations and warranties made by Borrower in the Loan Agreement and the other Loan Documents, except to the extent such representations and warranties specifically relate to an earlier date. 3.2 No Default. After giving effect to this Amendment, no Event of Default has occurred and remains continuing under any of the Loan Documents. 3.3 Due Execution. The execution, delivery and performance of this Amendment and any instruments, documents or agreements executed in connection herewith are within the powers of Borrower, have been duly authorized by all necessary action, and do not contravene any law or the articles of incorporation or bylaws of Borrower, result in a breach of, or constitute a default under, any contractual restriction, indenture, trust agreement or other instrument or agreement binding upon Borrower. 3.4 No Further Consent. The execution, delivery and performance of this Amendment and any documents or agreements executed in connection herewith do not require any consent or approval not previously obtained of any stockholder, beneficiary or creditor of Borrower. 3.5 Binding Agreement. This Amendment, and each of the other instruments, documents and agreements executed in connection herewith constitute the legal, valid and binding obligation of Borrower or other party thereto and are enforceable against Borrower in accordance with their terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium, reorganization or similar laws or equitable principles relating to or limiting creditors' rights generally. 4. MISCELLANEOUS 4.1 Recitals Incorporated. The Recitals set forth above are incorporated into and are made a part of this Amendment. 4.2 Further Assurances. Borrower, at its sole cost and expense, agrees to execute and deliver all documents and instruments and to take all other actions as may be specifically provided for herein and as may be required in order to consummate the purposes of -3- 4 this Amendment. Borrower shall diligently and in good faith pursue the satisfaction of any conditions or contingencies in this Amendment. 4.3 No Third Parties. Except as specifically provided herein, no third party shall be benefited by any of the provisions of this Amendment; nor shall any such third party have the right to rely in any manner upon any of the terms hereof, and none of the covenants, representations, warranties or agreements herein contained shall run in favor of any third party. 4.4 Time is of the Essence. Time is of the essence for the performance of all obligations and the satisfaction of all conditions of this Amendment. The parties intend that all time periods specified in this Amendment shall be strictly applied, without any extension (whether or not material) unless specifically agreed to in writing by all parties hereto. 4.5 Costs and Expenses. In addition to the obligations of Borrower under the Loan Agreement, Borrower agrees to pay all costs and expenses (including without limitation reasonable attorneys' fees) expended or incurred by Lender in connection with the negotiation, documentation and preparation of this Amendment and any other documents executed in connection herewith, and in carrying out the terms of this Amendment, whether incurred before or after the effective date hereof. 4.6 Integration; Interpretation. The Loan Documents, including this Amendment and the documents, instruments and agreements executed in connection herewith, contain or expressly incorporate by reference the entire agreement of the parties with respect to the matters contemplated herein and supersede all prior negotiations, discussions and correspondence. The Loan Documents shall not be modified except by written instrument executed by all parties. 4.7 Counterparts and Execution. This Amendment may be executed in counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. However, this Amendment shall not be binding on Lender until all parties have executed it. 4.8 Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of California. 4.9 Non-Impairment of Loan Documents. On the date all conditions precedent set forth herein are satisfied in full, this Amendment shall be a part of the Loan Agreement. Except as expressly provided in this Amendment or in any other document, instrument or agreement executed by Lender, all provisions of the Loan Documents shall remain in full force and effect, and the Lender shall continue to have all its rights and remedies under the Loan Documents. 4.10 No Waiver. Nothing herein shall be deemed a waiver by Lender of any Event of Default. No delay or omission of Lender to exercise any right, remedy or power under any of the Loan Documents shall impair such right, remedy or power or be construed to be a -4- 5 waiver of any default or an acquiescence therein, and single or partial exercise of any such right, remedy or power shall not preclude other or further exercise thereof or the exercise of any other right, remedy or power. No waiver of any term, covenant, or condition shall be deemed to waive Lender's right to enforce such term, covenant or condition at any other time. 4.11 Successors and Assigns. The terms of this Amendment shall be binding upon and inure to the benefit of the successors and assigns of the parties to this Amendment. IN WITNESS WHEREOF, this Amendment has been duly executed as of the date first set forth above. ANDATACO OF CALIFORNIA, INC., WELLS FARGO BANK, a California corporation NATIONAL ASSOCIATION By: /s/ W. DAVID SKYES By: /s/ DALE FOSTER ------------------------ ---------------------------- Dale Foster Title: President Vice President -------------------- -5- 6 Exhibit A Consent of Guarantor In order to induce Lender to agree to the terms of the Amendment, Guarantor (a) acknowledges receipt of a copy of the Amendment and that certain First Amended and Restated Line of Credit Note dated July 29, 1998 by Borrower in favor of Lender (the "Amended Note"), (b) consents to Borrower entering into the Amendment and the Amended Note and all of the other documents, instruments and agreements now or hereafter executed in connection therewith, (c) agrees that nothing contained in the Amendment or the Amended Note, or in any other document, instrument or agreement executed in connection therewith, shall serve to diminish, alter, amend or affect in any way such Guarantor's obligations under that certain Continuing Guaranty dated as of April 30, 1998 by Guarantor in favor of Lender (the "Guaranty"). Guarantor expressly and knowingly reaffirms its liability under the Guaranty and acknowledges that it has no defense, offset or counterclaim against Lender with respect to the Guaranty. "Guarantor" ANDATACO, INC. By: /s/ W. DAVID SYKES -------------------------- Title: President ---------------------- -6- 7 Exhibit B Annex 1 FIRST AMENDED AND RESTATED LINE OF CREDIT NOTE $15,000,000 Pasadena, California July 29, 1998 FOR VALUE RECEIVED, the undersigned, anDATAco of California, Inc., a California corporation ("Borrower"), promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") at its office at 245 S. Los Robles Avenue, Suite 600, Pasadena, California, or at such other place as the holder hereof may designate, in lawful money of the United States of America and in immediately available funds, the principal sum of Fifteen Million Dollars ($15,000,000), or so much thereof as may be advanced and be outstanding, with interest thereon, to be computed on each advance from the date of its disbursement (computed on the basis of a 360-day year, actual days elapsed) either (i) at a fluctuating rate per annum equal to the Prime Rate in effect from time to time, provided, however, that during the period commencing August 1, 1998 and ending on the Net Worth Satisfaction Date (as defined in the First Amendment, as defined below), all interest determined in relation to the Prime Rate hereunder shall be computed at a fluctuating rate per annum equal to one half of one percent (.50%) above the Prime Rate in effect from time to time, or (ii) at a fixed rate per annum determined by Bank to be two and one-half percent (2.5%) above Bank's LIBOR in effect on the first day of the applicable Fixed Rate Term, provided, however, that during the period commencing August 1, 1998 and ending on the Net Worth Satisfaction Date (as defined in the First Amendment, as defined below), interest on each LIBOR option selected hereunder shall be computed at a fixed rate per annum determined by Bank to be three percent (3.0%) above Bank's LIBOR in effect on the first day of the applicable Fixed Rate Term. When interest is determined in relation to the Prime Rate, each change in the rate of interest hereunder shall become effective on the date each Prime Rate change is announced within Bank. With respect to each LIBOR option selected hereunder, Bank is hereby authorized to note the date, principal amount, interest rate and Fixed Rate Term applicable thereto and any payments made thereon on Bank's books and records (either manually or by electronic entry) and/or on any schedule attached to this Note, which notations shall be prima facie evidence of the accuracy of the information noted. This Note amends and restates in its entirety that certain Line of Credit Note dated April 30, 1998 executed and delivered by Borrower to the order of Bank in the original principal amount of up to $15,000,000.00 (the "Prior Note"). Amounts outstanding and committed under the Prior Note shall, upon the effectiveness of this Note be deemed to be outstanding and committed hereunder and evidenced hereby, subject, however, to all terms and conditions hereunder and under the Loan Agreement described below. A. DEFINITIONS: As used herein, the following terms shall have the meanings set forth after each: 1. "Business Day" means any day except a Saturday, Sunday or any other day designated as a holiday under Federal or California statute or regulation. 2. "Fixed Rate Term" means a period commencing on a Business Day and continuing for one (1), two (2), three (3) or six (6) months, as designated by Borrower, during which all or a portion of the outstanding principal balance of this Note bears interest determined in relation to Bank's LIBOR; provided however, that (i) no Fixed Rate Term may be selected for a principal -1- 8 amount less than One Million Dollars ($1,000,000); (ii) no Fixed Rate Term shall extend beyond the scheduled maturity date hereof; (iii) no Fixed Rate Term may be selected during the continuance of an Event of Default (as such term is defined in the Loan Agreement described below); and (iv) no more than eight (8) Fixed Rate Terms may be in existence at any time. If any Fixed Rate Term would end on a day which is not a Business Day, then such Fixed Rate Term shall be extended to the next succeeding Business Day. 3. "LIBOR" means the rate per annum (rounded upward, if necessary, to the nearest whole 1/8 of 1%) and determined pursuant to the following formula: Base LIBOR LIBOR = ------------------------------- 100% - LIBOR Reserve Percentage (a) "Base LIBOR" means the rate per annum for United States dollar deposits quoted by Bank as the Inter-Bank Market Offered Rate, with the understanding that such rate is quoted by Bank for the purpose of calculating effective rates of interest for loans making reference thereto, on the first day of a Fixed Rate Term for delivery of funds on said date for a period of time approximately equal to the number of days in such Fixed Rate Term and in an amount approximately equal to the principal amount to which such Fixed Rate Term applies. Borrower understands and agrees that Bank may base its quotation of the Inter-Bank Market Offered Rate upon such offers or other market indicators of the Inter-Bank Market as Bank in its discretion deems appropriate including, but not limited to, the rate offered for U.S. dollar deposits on the London Inter-Bank Market. (b) "LIBOR Reserve Percentage" means the reserve percentage prescribed by the Board of Governors of the Federal Reserve System (or any successor) for "Eurocurrency Liabilities" (as defined in Regulation D of the Federal Reserve Board, as amended), adjusted by Bank for expected changes in such reserve percentage during the applicable Fixed Rate Term. 4. "Prime Rate" means at any time the rate of interest most recently announced within Bank at its principal office in San Francisco as its Prime Rate, with the understanding that the Prime Rate is one of Bank's base rates and serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto, and is evidenced by the recording thereof after its announcement in such internal publication or publications as Bank may designate. B. INTEREST: 1. Payment of Interest. Interest accrued on this Note shall be payable on the first (1st) day of each month, commencing August 1, 1998 and on the last day of each Fixed Rate Term. 2. Selection of Interest Rate Options. At any time any portion of this Note bears interest determined in relation to Bank's LIBOR, it may be continued by Borrower at the end of the Fixed Rate Term applicable thereto so that all or a portion thereof bears interest determined in relation to the Prime Rate or in relation to Bank's LIBOR for a new Fixed Rate Term designated by Borrower. At any time any portion of this Note bears interest determined in relation to the Prime Rate, Borrower may convert all or a portion thereof so that it bears interest determined in relation to Bank's LIBOR for a Fixed Rate Term designated by Borrower. At the time each advance is requested hereunder or Borrower wishes to select the LIBOR option for all or a portion of the outstanding principal balance hereof, and at the end of each Fixed Rate Term, Borrower shall give Bank notice specifying (a) the interest rate option selected by Borrower, (b) the principal amount subject thereto, and (c) if the LIBOR option is selected, the length of the applicable Fixed Rate Term. Any such notice may be given by telephone so long as, with respect to each LIBOR selection, (i) Bank receives written confirmation from Borrower not later than three (3) Business Days after -2- 9 such telephone notice is given, and (ii) such notice is given to Bank prior to 10:00 a.m., California time, on the first day of the Fixed Rate Term. For each LIBOR option requested hereunder, Bank will quote the applicable fixed rate to Borrower at approximately 10:00 a.m., California time, on the first day of the Fixed Rate Term. If Borrower does not immediately accept the rate quoted by Bank, any subsequent acceptance by Borrower shall be subject to a redetermination by Bank of the applicable fixed rate; provided however, that if Borrower fails to accept any such rate by 11:00 a.m., California time, on the Business Day such quotation is given, then the quoted rate shall expire and Bank shall have no obligation to permit a LIBOR option to be selected on such day. If no specific designation of interest is made at the time any advance is requested hereunder or at the end of any Fixed Rate Term, Borrower shall be deemed to have made a Prime Rate interest selection for such advance or the principal amount to which such Fixed Rate Term applied. 3. Additional LIBOR Provisions. (a) If Bank at any time shall determine that for any reason adequate and reasonable means do not exist for ascertaining Bank's LIBOR, then Bank shall promptly give notice thereof to Borrower. If such notice is given and until such notice has been withdrawn by Bank, then (i) no new LIBOR option may be selected by Borrower, and (ii) any portion of the outstanding principal balance hereof which bears interest determined in relation to Bank's LIBOR, subsequent to the end of the Fixed Rate Term applicable thereto, shall bear interest determined in relation to the Prime Rate. (b) If any law, treaty, rule, regulation or determination of a court or governmental authority or any change therein or in the interpretation or application thereof (each, a "Change in Law") shall make it unlawful for Bank (i) to make LIBOR options available hereunder, or (ii) to maintain interest rates based on Bank's LIBOR, then in the former event, any obligation of Bank to make available such unlawful LIBOR options shall immediately be cancelled, and in the latter event, any such unlawful LIBOR-based interest rates then outstanding shall be converted, at Bank's option, so that interest on the portion of the outstanding principal balance subject thereto is determined in relation to the Prime Rate; provided however, that if any such Change in Law shall permit any LIBOR-based interest rates to remain in effect until the expiration of the Fixed Rate Term applicable thereto, then such permitted LIBOR-based interest rates shall continue in effect until the expiration of such Fixed Rate Term. Upon the occurrence of any of the foregoing events, Borrower shall pay to Bank immediately upon demand such amounts as may be necessary to compensate Bank for any fines, fees, charges, penalties or other costs incurred or payable by Bank as a result thereof and which are attributable to any LIBOR options made available to Borrower hereunder, and any reasonable allocation made by Bank among its operations shall be conclusive and binding upon Borrower. (c) If any Change in Law or compliance by Bank with any request or directive (whether or not having the force of law) from any central bank or other governmental authority shall: (i) subject Bank to any tax, duty or other charge with respect to any LIBOR options, or change the basis of taxation of payments to Bank of principal, interest, fees or any other amount payable hereunder (except for changes in the rate of tax on the overall net income of Bank); or (ii) impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances or loans by, or any other acquisition of funds by any office of Bank; or (iii) impose on Bank any other condition; -3- 10 and the result of any of the foregoing is to increase the cost to Bank of making, renewing or maintaining any LIBOR options hereunder and/or to reduce any amount receivable by Bank in connection therewith, then in any such case, Borrower shall pay to Bank immediately upon demand such amounts as may be necessary to compensate Bank for any additional costs incurred by Bank and/or reductions in amounts received by Bank which are attributable to such LIBOR options. In determining which costs incurred by Bank and/or reductions in amounts received by Bank are attributable to any LIBOR options made available to Borrower hereunder, any reasonable allocation made by Bank among its operations shall be conclusive and binding upon Borrower. 4. Default Interest. During the continuance of an Event of Default, the outstanding principal balance of this Note shall bear interest until paid in full at an increased rate per annum (computed on the basis of a 360-day year, actual days elapsed) equal to two percent (2%) above the rate of interest from time to time applicable to this Note. C. BORROWING AND REPAYMENT: 1. Borrowing and Repayment. Borrower may from time to time during the term of this Note borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions of this Note and of any document executed in connection with or governing this Note; provided however, that the total outstanding borrowings under this Note shall not at any time exceed the principal amount stated above. The unpaid principal balance of this obligation at any time shall be the total amounts advanced hereunder by the holder hereof less the amount of principal payments made hereon by or for Borrower, which balance may be endorsed hereon from time to time by the holder. The outstanding principal balance of this Note shall be due and payable in full on April 30, 2001. 2. Advances. Advances hereunder, to the total amount of the principal sum stated above, may be made by the holder at the oral or written request of (a) Richard A. Hudzik, W. David Sykes or Harris Ravine, any one acting alone, who are authorized to request advances and direct the disposition of any advances until written notice of the revocation of such authority is received by the holder at the office designated above, or (b) any person, with respect to advances deposited to the credit of any account of Borrower with the holder, which advances, when so deposited, shall be conclusively presumed to have been made to or for the benefit of Borrower regardless of the fact that persons other than those authorized to request advances may have authority to draw against such account. The holder shall have no obligation to determine whether any person requesting an advance is or has been authorized by Borrower. 3. Application of Payments. Each payment made on this Note shall be credited first, to any interest then due and second, to the outstanding principal balance hereof. All payments credited to principal shall be applied first, to the outstanding principal balance of this Note which bears interest determined in relation to the Prime Rate, if any, and second, to the outstanding principal balance of this Note which bears interest determined in relation to Bank's LIBOR, with such payments applied to the oldest Fixed Rate Term first. 4. Prepayment. (a) Prime Rate. Borrower may prepay principal on any portion of this Note which bears interest determined in relation to the Prime Rate at any time, in any amount and without penalty. (b) LIBOR. Borrower may prepay principal on any portion of this Note which bears interest determined in relation to Bank's LIBOR at any time and in the minimum amount of One Million Dollars ($1,000,000); provided however, that if the outstanding principal balance of such portion of this Note is less than said amount, the minimum prepayment amount shall be the entire -4- 11 outstanding principal balance thereof. In consideration of Bank providing this prepayment option to Borrower, or if any such portion of this Note shall become due and payable at any time prior to the last day of the Fixed Rate Term applicable thereto by acceleration or otherwise, Borrower shall pay to Bank immediately upon demand a fee which is the sum of the discounted monthly differences for each month from the month of prepayment through the month in which such Fixed Rate Term matures, calculated as follows for each such month: (i) Determine the amount of interest which would have accrued each month on the amount prepaid at the interest rate applicable to such amount had it remained outstanding until the last day of the Fixed Rate Term applicable thereto. (ii) Subtract from the amount determined in (i) above the amount of interest which would have accrued for the same month on the amount prepaid for the remaining term of such Fixed Rate Term at Bank's LIBOR in effect on the date of prepayment for new loans made for such term and in a principal amount equal to the amount prepaid. (iii) If the result obtained in (ii) for any month is greater than zero, discount that difference by Bank's LIBOR used in (ii) above. Borrower acknowledges that prepayment of such amount may result in Bank incurring additional costs, expenses and/or liabilities, and that it is difficult to ascertain the full extent of such costs, expenses and/or liabilities. Borrower, therefore, agrees to pay the above-described prepayment fee and agrees that said amount represents a reasonable estimate of the prepayment costs, expenses and/or liabilities of Bank. If Borrower fails to pay any prepayment fee when due, the amount of such prepayment fee shall thereafter bear interest until paid at a rate per annum two percent (2%) above the Prime Rate in effect from time to time (computed on the basis of a 360-day year, actual days elapsed). D. EVENTS OF DEFAULT: This Note is made pursuant to and is subject to the terms and conditions of that certain Loan Agreement between Borrower and Bank dated as of April 30, 1998, as amended by that certain Amendment No. 1 to Loan Agreement dated as of July 29, 1998 (the "First Amendment"), and as further amended from time to time (the "Loan Agreement"). Any default in the payment or performance of any obligation under this Note, or any defined event of default under the Loan Agreement, shall constitute an "Event of Default" under this Note. E. MISCELLANEOUS: 1. Remedies. Upon the occurrence of any Event of Default, the holder of this Note, at the holder's option, may declare all sums of principal and interest outstanding hereunder to be immediately due and payable without presentment, demand, protest or notice of dishonor, all of which are expressly waived by Borrower, and the obligation, if any, of the holder to extend any further credit hereunder shall immediately cease and terminate. Borrower shall pay to the holder immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of the holder's in-house counsel), incurred by the holder in connection with the enforcement of the holder's rights and/or the collection of any amounts which become due to the holder under this Note, and the prosecution or defense of any action in any way related to this Note, including without limitation, -5- 12 any action for declaratory relief, and including any of the foregoing incurred in connection with any bankruptcy proceeding relating to Borrower. -6- 13 2. Governing Law. This Note shall be governed by and construed in accordance with the laws of the State of California. anDATAco of California, Inc. a California corporation By: /s/ W. DAVID SYKES ------------------------------- Name: W. David Sykes Title: President -7- EX-27.1 3 EXHIBIT 27.1
5 3-MOS OCT-31-1998 MAY-01-1998 JUL-31-1998 320,000 0 8,352,000 0 4,959,000 14,037,000 3,660,000 0 24,109,000 11,660,000 0 0 0 238,000 10,107,000 24,109,000 17,092,000 17,092,000 12,733,000 12,733,000 5,976,000 0 257,000 (1,874,000) 0 (1,874,000) 0 0 0 (1,874,000) (0.08) (0.08)
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