-----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, AWoAzpRQhFwOEznutCtAzq72XUw+P/yJpbAdNe+IifGTtBRVXvJN27l8CdMSMaLv 31jVqlBq5AamkVPoF0BcUw== 0000944209-99-000093.txt : 19990201 0000944209-99-000093.hdr.sgml : 19990201 ACCESSION NUMBER: 0000944209-99-000093 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981031 FILED AS OF DATE: 19990129 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-K SEC ACT: SEC FILE NUMBER: 000-10370 FILM NUMBER: 99516629 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-K 1 FORM 10-K DATED OCTOBER 31, 1998 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K (Mark One) [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934. For the fiscal year ended October 31, 1998, OR [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT OF 1934. Commission File Number: 0-10370 ---------------- ANDATACO, INC. (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-2511897 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.)
10140 Mesa Rim Road, San Diego, California 92121 (Address of principal executive offices) (619) 453-9191 (Registrant's telephone number, including area code) ---------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock, $.01 Par Value (Title of Class) Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter 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 [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] As of January 15, 1999, the aggregate market value of Class A Common Stock held by non-affiliates of the Registrant was $4,348,589, based on the closing sale price of such stock on the Nasdaq Over-The-Counter Bulletin Board Market./1/ The number of shares outstanding of the Registrant's Class A Common Stock, $0.01 par value, as of January 15, 1999 was 23,819,399. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the Company's Definitive Proxy Statement to be filed with the Securities and Exchange Commission (the "Commission"), no later than 120 days after October 31, 1998, pursuant to Regulation 14A in connection with the 1999 Annual Meeting of Stockholders to be held on April 8, 1999 are incorporated by reference into Part III of this Form 10-K. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - -------- /1/ Excludes 18,021,281 shares of Common Stock held by directors and officers and shareholders whose beneficial ownership equaled or exceeded 10% of the shares outstanding on January 15, 1999. Exclusion of shares held by any person should not be construed to indicate that such person possess the power, direct or indirect, to direct or cause the direction of management or policies of the Registrant or that such person is controlled by or under common control with the Registrant. This Annual Report on Form 10-K contains certain forward-looking statements that involve risks and uncertainties. The Company's actual future results could differ materially from those statements. Factors that could cause or contribute to such differences include, but are not limited to, those found in this Annual Report on Form 10-K in Part I, Item 1 under the caption "Certain Risk Factors Related to the Company's Business", in Part II, Item 7 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and additional factors discussed elsewhere in this Annual Report. PART I ITEM 1. BUSINESS Andataco, Inc. (herein "ANDATACO", or the "Company") designs, develops, manufactures, markets and supports high performance, high availability information storage solutions for the Open Systems markets in the Windows NT and UNIX environments including Sun Microsystems, Hewlett-Packard, Silicon Graphics, and NT-based computing systems. The Company's fully integrated hierarchy of data storage solutions includes fault tolerant Redundant Array of Independent Disks ("RAID") and RAID-ready disk storage, tape backup and restore products and data storage management software. Technical support and professional services back the Company's products. The Company distributes internally developed products, as well as products from other manufacturers through its solution sales group, original equipment manufacturer ("OEM") and sales and service channels throughout the world. The customers for the Company's products represent a cross-section of industries and government agencies operating in distributed client/server as well as centralized computing environments. These customers range in size from FORTUNE 1000 companies to small businesses, and from national to local governments. No one customer accounted for more than 10 percent of total revenue during fiscal years 1998, 1997 and 1996. Significant Business Developments Merger with ANDATACO of California On June 3, 1997 (the "Closing Date"), the Company (formerly IPL Systems, Inc.) completed a business combination with ANDATACO of California (formerly ANDATACO), whereby ANDATACO of California was merged with a wholly-owned subsidiary of the Company (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 the Company's Class A Common Stock (the "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 ANDATACO, for financial reporting purposes the Merger was treated as a recapitalization of ANDATACO of California and an acquisition of the Company by ANDATACO of California (reverse acquisition). The financial reporting requirements of the Securities and Exchange Commission require that the financial statements reported by the Company subsequent to the Merger be those of ANDATACO of California, which include the results of operations of the Company from the Closing Date. The business combination with ANDATACO of California has allowed the Company to achieve several strategic objectives, including acquiring ANDATACO of California's customer base, increasing the Company's revenues, realizing certain cost savings and adding ANDATACO of California's skilled and experienced personnel. The Merger 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 was 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 technology was recorded as a one-time charge to operations and the amount 2 allocated to existing technology was amortized over its estimated remaining economic 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. Products The Company strives to meet its customers' storage and information management needs by providing the market with comprehensive, performance- oriented and flexible storage solutions. ANDATACO believes that the success of corporations today depends on their ability to access and manage the exploding volumes of data coming on line from so many divergent sources. To that end, ANDATACO's focus on Simplifying Data Access is the foundation of all efforts at ANDATACO. ANDATACO provides comprehensive, performance-oriented and flexible storage solutions to meet today's continuous-availability mass storage needs. The Company is committed to the design and implementation of leading storage systems, featuring both parallel SCSI and Fibre interfaces, that bridge the gap between CPU performance and I/O throughput. Recognizing that applications have unique data patterns, ANDATACO developed the design process that matches the Company's storage systems to these individual patterns. ANDATACO solutions combine storage hardware, software and services to create the exact performance, availability and scalability profile required by each client application. ANDATACO solutions include: GigaRAID High Availability Series of advanced disk arrays; GigaRAID JBOD Product Family; Enterprise Storage Packaging(TM) ("ESP"); and comprehensive tape backup and restore solutions. GigaRAID High Availability Series ANDATACO's award-winning modular packaging architecture, ESP, is the framework of the GigaRAID Series. ESP combines, for the first time, microprocessors and enclosures, to provide the user industry-leading, modular, and building block packaging combined with proactive, storage management functionality. All critical components of the enclosure are monitored and a "Call Home" feature alerts the user should any critical component go out of specification. GigaRAID/AA, the newest member of ANDATACO's family of fault-tolerant RAID storage systems for the UNIX and Windows NT environments, is a high- performance RAID array that combines the fault-tolerant benefits of RAID with innovative proactive storage management. The GigaRAID/AA is manufactured for continuous data availability and provides seamless operation to the host with dual controller in-the-box failover and allows for continuous 40MB/Sec performance on all four drive channels with up to 60 drives (with a single controller), optimizing large-block sequential applications. The GigaRAID/AA provides visual, audible and electronic alarms signaling potential system failures allowing system administrators the opportunity to repair faulty components before affecting critical business information. Providing capacities of up to 1.08TB per base system, each GigaRAID/AA system includes single or dual-active controllers and is available in Workgroup or Enterprise enclosures. GigaRAID/AA's powerful microprocessor, coupled with its cable-less chassis, provides the outstanding performance and higher reliability needed for a full range of application types, including imaging, video-on-demand, bulk storage or on-line transactions. For optional remote monitoring and control across the Intranet or the Internet, ANDATACO's RAID Management Utility (RMU) provides a user-friendly Graphic User Interface ("GUI") to facilitate asset management, service agent management, and system configuration. The recently reintroduced GigaRAID/SX is a high-performance RAID array that combines the fault-tolerant benefits of RAID with innovative proactive storage management. The GigaRAID/SX is designed for large block, sequential applications such as: video, data warehousing, Geographic Information Systems ("GIS"), and seismic analysis. The GigaRAID/SX provides visual, audible and electronic alarms signaling potential system failures allowing system administrators the opportunity to repair faulty components before affecting critical business information. Providing capacities of up to 540GB per controller, each GigaRAID/SX system includes a single-active controller and is available in Workgroup or Enterprise enclosures. GigaRAID/SX's powerful 3 microprocessor coupled with its cable-less chassis provides the outstanding performance and higher reliability needed for a full range of application types, including imaging, video-on-demand, bulk storage or on-line transactions. ANDATACO's RAID Management Utility (RMU) is an application designed for monitoring and controlling ANDATACO's GigaRAID SCSI-to-SCSI RAID controller from a local server, Intranet or the Internet. With ANDATACO's GigaRAID/SX storage systems, RMU provides an easy-to-use GUI through Netscape 2.x which allows configuring, monitoring and servicing of systems with simple point-and- click operations. The use of Netscape and RMU provides quick, reliable RAID Management access in heterogeneous environments. RMU provides a full range of management tools to configure, initialize consistency check and rebuild the drives in a GigaRAID/SX system. The "system view" provides a display of the GigaRAID/SX configuration being managed. By clicking on a device in the system, information is displayed on the browser to indicate drive number, channel number, state, vendor, model, number and size. RMU's icon-based Web application allows a customer to view and update any configuration option such as: create new pack, create system drive, and change write policy options, all from the ease and comfort of Netscape browser. ANDATACO's GigaRAID/HA overcomes the performance bottlenecks associated with traditional RAID implementations for small block, random, I/O-intensive applications such as: Relational Database Management Systems ("RDBMS"), On- Line Transaction Processing ("OLTP"), Messaging and NT environments. While designed to accommodate multiple RAID levels, the GigaRAID/HA's biggest advantage over the competition becomes apparent with the industry's first and only embedded I/O database accelerator software, called Database RAID(TM). This eliminates the performance penalty typically associated with RAID level 5 protection in small block random environments such as OLTP, RDBMS, Oracle, Sybase, Informix, and other database applications. The GigaRAID/HA with Database RAIDTM is the only storage product on the market today that provides the power of data placement, allows for segregation of indices from tablespaces and conforms to the tuning parameters recommended by the major database vendors for best performance. In Windows NT environments, the GigaRAID/HA is designed to excel in Microsoft Exchange and SQL server applications. Its robustness is demonstrated through sustained performance, automatic recovery of failed disks and the scalability to grow with a company's requirements. ANDATACO's Client/S GUI (Graphical User Interface) software manages and monitors system configuration, providing status notification for the GigaRAID/HA array. Developed to enable the system user to set-up, tune and modify their disk arrays for specific application, Client/S is the latest Application Specific Architecture ("ASA") product offering. Client/S provides simple GUI menus for system configuration and provides E-mail notification in the event of a failure or a change in status. With Client/S, users can 1) control any GigaRAID/HA from any network location, 2) view locations of all GigaRAID/HA units in the enterprise, 3) receive an on-line graphical indication of any GigaRAID/HA fault in the enterprise and 4) receive on-line instructions for correcting detected faults. In addition, users have complete access to all system configuration options, RAID controller microcode upgrade capabilities and password protection for critical functions providing the most comprehensive RAID system management toolbox in its class. ANDATACO's GigaRAID/FT is fully-redundant and configurable for either large block, sequential applications such as: video, data-warehousing, and seismic analysis, or small block, random applications such as: OLTP/Database, financial, and technology development. Optional I/O path failover software is available for upstream protection. GigaRAID/FT provides the ultimate in high availability, including dual active RAID controllers with mirrored cache, and multiple levels of hardware and software fault-tolerance, including I/O path failover (through Sun Solaris, IBM AIX, and Windows NT) and server failover (through Sun Solaris). For system administrators supporting high-end workstations, GigaRAID/FT brings three levels of automatic failover to the high-end server marketplace by providing: 1) RAID set failover from one RAID controller to another; 2) Optional SCSI path monitoring and transparent rerouting; and 4 3) Optional application failover from one server to another, including Oracle, Sybase and Informix applications. The GigaRAID/FT is also designed for high-end performance in database environments with dual independent RAID controllers that provide twice the I/O throughput during normal operating conditions. And with up to 128MB of mirrored write cache, GigaRAID/FT meets and exceeds the response time requirements of I/O-intensive environments. ANDATACO's GigaRAID/FC is the high-performance, fault-tolerant fibre channel product for today's bandwidth and storage requirements with the flexibility to grow exponentially. Configurable for either large-block, sequential applications such as video, data-warehousing, and seismic analysis, or small- block, random applications such as OLTP/Database, financial, and technology development, the flexilibity of GigaRAID/FC allows medium-range RAID-Ready solutions to grow into multi-terabyte, dual-active, fault-tolerant configurations for disaster recovery. This product is designed using RAID and RAID-Ready, Flexible High-Performance Storage Solutions. GigaRAID/FC 5000 FC-to-FC is the RAID-Ready member of the family, allowing both host-based software RAID or standard JBOD configurations. The flexibility of GigaRAID/FC provides cost-effective migration as a company's data storage requirements expand. The GigaRAID/FC 3400/3500 is the successor to the first active/active SCSI RAID product on the market, now with fibre channel connectivity to host servers, hubs, and switches. With single or dual active RAID storage processors, redundant fans and power supplies, and hot-swappable components, the 3400/3500 system offers high levels of serviceability in addition to field upgrade option from standard SCSI to fibre channel host connectivity. GigaRAID/FC 5400/5500 is the high-end member of ANDATACO's family of RAID storage systems for the UNIX and Windows NT environments. The GigaRAID/FC 5400/5500 of RAID 0, 1, 0/1, 3 and 5 disk arrays satisfy the on-line storage needs of the UNIX and NT enterprise with a powerful combination of third- generation features that result in industry-leading performance, capacity, availability, system management and self-maintenance capabilities. GigaRAID JBOD Product Family GigaRAID/8000 LVD is the first Ultra2 SCSI low voltage differential ("LVD") storage solution to market featuring 80 MB/sec transfer rates, increased cable distances, and ANDATACO's Enterprise Storage Packaging technology. This RAID- ready system provides continuous data availability and the performance, capacity, and flexibility needed in today's environments. The GigaRAID/8000 LVD incorporates LVD signaling to provide improved performance and flexibility. With maximum burst bandwidth of 80 MB/sec, Ultra2 provides an optimal solution for data-intensive applications. This solution not only offers improved performance, but also increased device connectivity allowing up to 12 meters on a fully loaded bus with 15 devices. Testing, utilizing the Iometer (an I/O performance analysis tool), indicates sustained MB/sec transfer rates for a fully populated unit, in excess of 70 MB/sec. The GigaRAID/8000 LVD provides the storage and performance to meet escalating requirements for more capacity and faster data movement. Features include modular hot-swappable components, an Ultra2 SCSI LVD cableless backplane, and proactive system monitoring. Through customer replaceable Chassis Interface Adapters (CIAs), one system provides connectivity to Ultra2 SCSI LVD, Ultra SCSI high-voltage differential and Ultra SCSI single-ended host bus adapters ("HBAs"). Flexibility is key; allowing attachment to Ultra SCSI single-ended, Ultra SCSI high voltage differential and Ultra2 SCSI LVD all with the same system. This flexibility provides the investment protection demanded by today's data intensive applications. The GigaRAID/8000 system is a RAID-ready solution designed for UNIX and NT environments. This system is designed for high performance with fault tolerant, scalable disk and tape SCSI storage devices. Utilizing 18GB drives the GigaRAID/8000 system can house up to 144GB in a single tower system or up to 288GB in a dual 16-drive tower system. Designed to increase data accessibility and user productivity, the 5 GigaRAID/8000 series features modular, hot-swappable components, an Ultra-SCSI backplane and a cable-less design with Single Connector Attach ("SCA") technology. It provides proactive system management through visual, audible and electronic on-line alarms when potential environmental thresholds are exceeded. ANDATACO's Web Storage Manager ("WSM") is an application designed for monitoring and controlling storage from a local server, Intranet or the Internet. In heterogeneous environments, WSM uniquely offers a common Netscape graphical user interface to storage systems incorporating ANDATACO's GigaRAID/8000 family of storage systems. ANDATACO's innovative firmware built into the storage system monitors all activity of the disks, tapes and CDs in the chassis. The information gathered is reported back to the WSM host-based Web server application, which is displayed and controlled via a Netscape 2.x client browser. When an alarm condition such as over-temperature, power outage or fan failure is reached, the condition is displayed within the Netscape 2.x browser. Simply clicking on the graphic of a device in the browser will cause information such as the manufacturer, firmware level, SCSI ID and capacity to appear. The GigaRAID/3000 series is a system for UNIX and NT environments. The GigaRAID/3000 series is comprised of scalable disk and tape storage devices, supporting a storage capacity of up to 54GB (utilizing three 18.1GB disk drives). Designed to increase data accessibility and user productivity, the GigaRAID/3000 series features modular, hot-swappable components, and an Ultra- SCSI backplane with Single Connector Attach (SCA) technology. It provides proactive system management through visual and audible alarms, which alert you when potential environmental thresholds are exceeded. The GigaRAID/3000 accommodates a complete hierarchy of 3.5" and 5.25" disk and tape drives providing a modular, scalable solution. The GigaRAID/1000 is ANDATACO's low-cost, entry-level desktop Ultra SCSI storage system. The GigaRAID/1000 accommodates the latest in high performance disk and 8mm tape technology, providing storage capacities up to 40GB and data transfer rates of 40MB/sec. Enterprise Storage Packaging(TM) ESP is an advanced packaging technology comprised of a modular architecture providing flexibility throughout the product line. ESP's innovative design increases productivity, improves data accessibility and reduces the cost of managing storage. Increased productivity is accomplished with a high performance, zero stub-length design and optimized with Ultra2 SCSI data transfer rates of 80MB/second. Continuous data availability is provided through ESP's redundant active components, which are user-replaceable and can be replaced on-line. With the addition of WSM, ESP hardware can be monitored and controlled in real-time via a Netscape or Internet Explorer browser. Removable Storage Elements ("RSE") hot-swappable, modular building blocks are the modular building blocks for the entire family of ESP enclosures. The RSE can house a complete hierarchy of 3.5" and 5.25" form factor devices. Highest Reliability and Performance with SCA Connectivity RSEs support (SCA and SCA-2) standard narrow or wide, Fast, Ultra and Ultra2 SCSI devices. The entire ESP product line provides cableless connection for reliability and efficient use of cable distance. Innovative Cooling System supports 12,000 RPM drives on the inside, an innovative "venturi effect" system allows ample cooling for high performance devices up to 12,000 RPM. Hot swappable power supply/fan assemblies pull air through the ESP system continuously. Tape Solutions--Autoloader and Library Backup DLT TM Enterprise Backup Solution Libraries--Enterprise Backup Solution libraries vary in size to accommodate your backup solution. The libraries come with one to nine DLT 2000XT, DLT 4000 and DLT 7000 drives to produce native capacities up to 9.24 Terabytes and a native aggregate transfer rate up to 45 MB/Sec. DLT TM Autoloaders--Utilizing DLT technology and automated robotics, the Quantum DLT2700XT, DLT4700 and DLTStor, and Exabyte 18D are single drive, multiple-cartridge autoloaders with up to 280GB of native storage and are a perfect sequential tape backup solution. 6 8mm Autoloaders and Libraries--Utilizing 8mm technology and automated robotics, products include Exabyte libraries with one to four drives and capacities up to 1.6TB of native storage. Enterprise Backup Solutions (EBS)--Using DLT TM Technology, Enterprise Backup Solutions systems provide the adaptability needed to handle tomorrow's higher capacity, faster drives as well as a wide range of formats and powerful software. EBS libraries, an Odetics product, are part of a tradition of engineering excellence. Since the early U.S. space explorations and continuing today, Odetics spaceborne tape systems store vast volumes of information collected by the world's space craft until receiving stations are available to accept such information. ANDATACO's EBS provides the flexibility necessary to meet virtually any data management requirement. Sales and Marketing The Company distributes its internally developed products, and products from other manufacturers, through a network of 20 sales offices, and through distributors in Europe, Asia, Latin America, Canada and Australia. The Company sells its products directly to end users through its field sales organization and indirectly through two channels: (i) original equipment manufacturers ("OEMs") and (ii) volume, consisting of systems integrators, technical distributors and value added resellers ("VARs"). The Company's direct sales to end users through its field sales organization has historically been the Company's primary sales channel representing over 90% of total sales. The Company's domestic sales organization consists of approximately 50 persons located in 20 sales offices in 12 states. The Company has supply agreements with selected OEMs, all of which incorporate ANDATACO's products into their system offerings. The OEM sales cycle is often lengthy and typically consists of a general technology evaluation, qualification of the product specifications, verification of product performance against these specifications, integration testing of the product within the customers' systems, product announcement and volume shipment. As is typical in the industry, the Company's OEM contracts provide for annual price reviews and the customers are not required to purchase minimum quantities. The Company supports this channel through corporate head office and other Company field representatives. The Company's volume channel includes systems integrators, technical distributors and VARs, each of which sells primarily to end-users. ANDATACO's products are frequently packaged by these customers as part of a complete data processing system or combined with other storage devices to deliver a storage subsystem. The Company supports this channel through its field sales force. ANDATACO supports its sales efforts with various marketing programs designed to build the Company's reputation as a reliable storage manufacturer, leverage key partnerships for a complete suite of product offerings and to attract new customers. Its direct customers and channel partners are provided with a full range of marketing materials, including product specification literature and application notes. The Company maintains press relations and trade association memberships and participates in national and regional trade shows. The Company also maintains a World Wide Web site ( HYPERLINK http://www.andataco.com) which features marketing information, product specifications, partners pages, news releases and application, service and technical support notes and investor relations information. Customer Service and Support The quality and reliability of the Company's products and the support of these products are important elements of the Company's business. The Company provides comprehensive customer and technical service support for all of its products through its technical, customer and professional services organization, including on-site maintenance, help desk support, contract programming, project management, and consulting services. The Company's standard warranty is a one-year return-to-factory policy which covers both parts and labor. The Company passes on to the customer the warranty provided by the manufacturers for products that the 7 Company distributes and for drives and tapes used in the Company's products that are manufactured by a third party. The Company also offers extended warranty (two, three and five years) and on-site service for certain of its products, including 24-hour service, seven days a week or 9-hour service, five days a week, for which it contracts primarily with third-party service providers. In addition, the Company offers a Depot Express program for certain of its products. Depot Express provides for advance replacement of a failed component. If ANDATACO's Help Desk technical staff determines a replacement is necessary, the Company will ship a new component by the next working day, based upon availability. This service is available for a one-time fee at the time of the original purchase. The Company also offers an Incident Depot Express program for certain of its products. Incident Depot Express provides expedited shipment for a failed component on a per-incident basis, based upon availability. This is a non- contracted service and does not require a charge at the time of the original purchase. A fee is charged only if a component fails and a replacement is shipped out. Manufacturing The Company's manufacturing operations are located in San Diego, California with three separate assembly lines. ANDATACO performs product assembly, integration and testing, while leaving component and piece-part manufacturing to its supplier partners. The Company works closely with a group of regional, national and international suppliers, which are carefully selected based on their ability to provide quality parts and components that meet the Company's specifications and volume requirements. A number of the Company's parts and components are not available off the shelf, and are specifically designed by the Company for integration into its products. In its current facility, the Company believes that it has the capacity to support unit output several times greater than its current run rate. The Company currently uses a single shift which is capable of greater production levels, and could expand further by adding multiple shifts or utilizing a qualified out-source assembly site. Staffing levels are currently controlled and adjusted to meet requirements. The Company has and will continue to rely on outside vendors to manufacture certain subsystems and electronic components and subassemblies used in the production of the Company's products. Certain components, subassemblies, materials and equipment necessary for the manufacture of the Company's products are obtained from a sole supplier or a limited group of suppliers. The Company's reliance on sole suppliers or a limited group of suppliers involves several risks, including a potential inability to obtain an adequate supply of required products and reduced control over the price, timely delivery, reliability and quality of finished products. The Company does not have any long-term supply agreements with its suppliers. Certain of the Company's suppliers have relatively limited financial and other resources. Any inability to obtain timely deliveries of products and services having acceptable qualities, or any other circumstance that could require the Company to seek alternative sources of supply or to manufacture its own electronic components, subassemblies and manufacturing equipment internally, could delay the Company's ability to ship its products. Any such delay could damage relationships with customers and could have a material adverse effect on the Company's business and operating results. Competition The computer data storage industry is intensely competitive and is characterized by rapid technological change and constant price pressure. The Company competes with a number of companies in various markets, including EMC Corporation, Hewlett-Packard, Sun Microsystems, Silicon Graphics, Compaq Computer Corporation and Digital Equipment Corporation, each of which has substantially greater name recognition, engineering, manufacturing and marketing capabilities, and greater financial and personnel resources than the Company. The Company believes that to date no dominant leader has emerged in the high bandwidth segment of the open systems market. The Company expects to experience increased competition from established and 8 emerging computer storage hardware and management software companies, particularly DEC, Hewlett-Packard, Sun Microsystems, Silicon Graphics, Compaq and EMC Corporation. In addition, increased competitive pressure could lead to intensified priced-based competition, which could result in a decline in both sales volume and price reductions. These factors would have a material adverse effect on the Company's results of operations. There also has been, and may continue to be, a willingness on the part of certain large competitors to reduce prices in order to preserve or gain market share, which cannot be foreseen by the Company. The Company believes that pricing pressures are likely to continue as competitors develop more competitive product offerings. The principal elements of competition in the Company's markets include rapid introduction of new technology, product quality and reliability, price and performance characteristics, service and support, and responsiveness to customers. The Company believes that, in general, it competes favorably in many of these areas. However, there can be no assurance that the Company will be able to compete successfully or that competition will not have a material adverse effect on the Company's results of operations. Patents and Protection of Proprietary Technology The Company believes that its success in developing new products depends primarily upon the technical competence and creative skills of its personnel rather than on the ownership of copyrights or patents. Although the Company believes that its products and other proprietary rights do not infringe the proprietary rights of third parties, there can be no assurance that other third parties will not assert infringement claims against the Company or that such claims will not be successful. If any infringement exists the Company would seek, based upon industry practice, licenses to such patents, but there can be no assurance that the Company will be able to obtain any such licenses on terms which would not have a material adverse effect on its business. The Company also relies on unpatented proprietary technology, and there can be no assurance that others may not independently develop the same or similar technology or otherwise obtain access to the Company's proprietary technology. To protect its rights in these areas, the Company requires all employees to enter into confidentiality agreements. There can be no assurance that these agreements will provide meaningful protection for the Company's trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information. If the Company is unable to maintain the proprietary nature of its technologies, the Company's business could be adversely affected. Regulatory Approvals All of the Company's current and proposed products have to comply with and have regulatory or independent laboratory approval based on emissions and safety standards for computing equipment. Delays in complying with such standards or in obtaining any such approvals could delay introductions of new products. International sales are subject to compliance with laws of various countries, import/export restrictions and tariff regulations. While the Company is aware that it may be subject to export restrictions with respect to certain countries, it has not experienced difficulty in obtaining export licenses from the United States Department of Commerce for sales into countries where it presently sells. Employees As of January 15, 1999, the Company employed approximately 165 full-time employees, of whom approximately 14 were employed in research and development, 82 in sales, marketing and customer support and 69 in operations and administration. None of the Company's employees is represented by a labor union or subject to a collective bargaining agreement. The Company's management believes its employee relations to be good. 9 Executive Officers and Key Employees The executive officers and key employees of the Company and their ages as of January 15, 1999 are as follows:
Name Age Positions Held ---- --- -------------- Harris Ravine............ 56 Chief Executive Officer of the Company W. David Sykes........... 42 President Arun Taneja.............. 51 Senior Vice President of Marketing Jack Corrao.............. 36 Vice President of Operations Diane Wong............... 36 Vice President of Finance, Corporate Controller
Harris Ravine was elected Chairman of the Board and appointed Chief Executive Officer of the Company upon the consummation of the Merger. Mr. Ravine has served as Chief Executive Officer and as Chairman of the Board of Directors of ANDATACO since June 1997. From 1995 through May 1997, he was a principal in BI Capital, a private venture capital group investing in technology and medical start up opportunities. From 1985 to 1994, Mr. Ravine held senior executive positions with Storage Technology Corporation, most recently as Executive Vice President, Chief Administrative Officer and Group Officer for midrange and UNIX applications. Mr. Ravine is a member of the board of directors of Amplicon Financial, Inc., a publicly-held financial services company. W. David Sykes founded ANDATACO of California in November 1986 and served as its President and Chief Executive Officer until the Merger, at which time Mr. Sykes was elected Vice Chairman of the Board of Directors and appointed President of the Company. He has also served as a director of ANDATACO of California since November 1986. Arun Taneja joined the Company in February 1998 as Senior Vice President of Marketing. Prior to joining ANDATACO, Mr. Taneja was Vice President of Marketing of Invincible Technologies Corporation. From 1994 to 1996, Mr. Taneja was employed by Axil Computer, Inc. as Vice President of Worldwide Marketing. Mr. Taneja served as Vice President of Marketing of Univel from 1992 to 1994. Jack Corrao joined ANDATACO of California in 1993 as its Strategic Product Development Manager to develop and assist in the marketing of high-end storage products. In 1994, he was promoted to Manager of Application Engineering. Mr. Corrao was promoted to his current position, Vice President of Operations, in 1995. Mr. Corrao has worked in the high-tech industry for 17 years. Prior to joining ANDATACO of California, he was the Director of Concurrent Operations for Artecon, Inc. and the Manufacturing Manager for SCS. Diane Wong joined the Company in June 1997 as Controller. Ms. Wong was appointed Vice President of Finance, Corporate Controller and Clerk in August 1998. Prior to joining the Company, Ms. Wong was a Senior Audit Manager at Price Waterhouse LLP. From 1989 to 1997 Ms. Wong held various positions including management positions at Price Waterhouse LLP. 10 CERTAIN RISK FACTORS RELATED TO THE COMPANY'S BUSINESS In addition to those risks identified elsewhere in this Annual Report on Form 10-K, the Company's business and results of operations are subject to other risks, including the following risk factors: Rapid Technological and Market Changes. The market for the Company's products is characterized by rapidly changing technology and evolving customer needs which increasingly shorten the life cycles of existing products and require ongoing development and introduction of new products at an increasingly rapid rate. The Company's ability to realize its expectations will depend on its success at enhancing its current offerings, developing new products that keep pace with developments in technology and meet evolving customer requirements for performance and price, and delivering those products with appropriate customer service and support. This will require, among other things, correctly anticipating customer needs, hiring and retaining personnel with the necessary skills and creativity, and providing adequate resources for product development. Failure by the Company to anticipate or respond adequately to technological developments and customer requirements, significant delays in the development, product testing, or availability of new or enhanced products, or the failure of customers to accept such products could adversely affect the Company's technological position and operating results. Furthermore, there can be no assurance that the Company's competitors will not succeed in developing products or technologies that have superior price/performance characteristics compared to any products being offered or developed by the Company. Fluctuations in Operating Results and Recent Losses. The Company has recently experienced losses from operations and may in the future experience further losses and significant period-to-period fluctuations in operating results due to product design, development, manufacturing and marketing expenditures. If significant variations were to occur between forecasts and actual orders with respect to its products, the Company may not be able to reduce its expenses proportionately and operating results could be adversely affected. The Company's revenues in any quarter are dependent on the timing of product shipments as well as the status of competing product introductions. Like many other high technology companies, a disproportionately large percentage of quarterly sales occur in the closing weeks of each quarter. Any forward-looking statements about operating results made by members of management will be based on assumptions about the likelihood of closing sales then in the pipeline and other factors management considers reasonable based in part on knowledge of performance in prior periods. The failure to consummate any of those sales may have a disproportionately negative impact on operating results, given the Company's relatively high fixed costs, and may thus prevent management's projections from being realized. Dependence on Key Personnel. The success of the Company's operations depends on its ability to attract and retain experienced technical, sales, marketing and management personnel. Such personnel are in great demand and the Company must compete for their services. Management's projections necessarily assume that the Company will continue to attract and retain such personnel, and the failure to do so could have a material adverse effect on the Company's ability to develop and market competitive products. Dependence on Suppliers. The Company has and will continue to rely on outside vendors to manufacture certain subsystems and electronic components and subassemblies used in the production of the Company's products. Certain components, subassemblies, materials and equipment necessary for the manufacture of the Company's products are obtained from a sole supplier or a limited group of suppliers. The Company's reliance on sole suppliers or a limited group of suppliers involves several risks, including a potential inability to obtain an adequate supply of required products and reduced control over the price, timely delivery, reliability and quality of finished products. The Company does not have any long-term supply agreements with its suppliers. Certain of the Company's suppliers have relatively limited financial and other resources. Any inability to obtain timely deliveries of products and services having acceptable qualities, or any other circumstance that could require the Company to seek alternative sources of supply or to manufacture its own electronic components, subassemblies and manufacturing equipment internally, could delay the Company's ability to ship its products. Any such delay could damage relationships with customers and could have a material adverse effect on the Company's business and operating results. 11 Dependence on New Products. To meet its strategic objectives, the Company must continue to develop, manufacture and market new products, develop new processes and improve its existing processes. As a result, the Company expects to continue to make significant investments in research and development and to consider from time to time the strategic acquisition of businesses, products, or technologies complementary to the Company's business. The success of the Company in developing, introducing and selling new and enhanced products depends upon a variety of factors, including product selection, timely and efficient completion of product design and development, timely and efficient implementation of manufacturing and assembly processes, effective sales and marketing and product performance in the field. There can be no assurance that the Company will be able to develop and introduce new products or enhancements to its existing products and processes in manner that satisfies customer needs or achieves market acceptance. The failure to do so would have a material adverse effect on the Company's business, financial condition and results of operations. Competition. The computer data storage industry is intensely competitive and is characterized by rapid technological change and constant price pressure. The Company competes with a number of companies in various markets, including EMC Corporation, Hewlett-Packard, Sun Microsystems, Silicon Graphics, Compaq Computer Corporation and Digital Equipment Corporation, each of which has substantially greater name recognition, engineering, manufacturing and marketing capabilities, and greater financial and personnel resources than the Company. The Company believes that to date no dominant leader has emerged in the high bandwidth segment of the open systems market. The Company expects to experience increased competition from established and emerging computer storage hardware and management software companies, particularly DEC, Hewlett- Packard, Sun Microsystems, Silicon Graphics, Compaq and EMC Corporation. In addition, increased competitive pressure could lead to intensified priced-based competition, which could result in a decline in both sales volume and price reductions. These factors would have a material adverse effect on the Company's results of operations. There also has been, and may continue to be, a willingness on the part of certain large competitors to reduce prices in order to preserve or gain market share, which cannot be foreseen by the Company. The Company believes that pricing pressures are likely to continue as competitors develop more competitive product offerings. The principal elements of competition in the Company's markets include rapid introduction of new technology, product quality and reliability, price and performance characteristics, service and support, and responsiveness to customers. The Company believes that, in general, it competes favorably in many of these areas. However, there can be no assurance that the Company will be able to compete successfully or that competition will not have a material adverse effect on the Company's results of operations. Stock Price Volatility. The trading price of the Company's Common Stock could be subject to significant fluctuations in response to variations in quarterly operating results, the gain or loss of significant orders, changes in earnings estimates by analysts, announcements of technological innovations or new products by the Company or its competitors, general conditions in the storage solutions industries and other events or factors. The Company was delisted from the Nasdaq SmallCap Market on December 3, 1998 and is currently trading on the Nasdaq Over-The-Counter Bulletin Board Market. In addition, the stock market in general has experienced extreme price and volume fluctuations that have affected the market price for many companies in industries similar or related to that of the Company and that have been unrelated to the operating performance of those companies. Control of Majority Stockholder. W. David Sykes the Company's President and Vice Chairman of the Board and his affiliates beneficially own 75.7% of the Company's outstanding Common Stock. As a result, Mr. Sykes will have the ability to control the election of all the Company's directors, to determine the outcome of all the corporate actions submitted to the vote of the Company's stockholders and to generally control the affairs and management of the Company. In addition, the voting power of Mr. Sykes under certain circumstances could have the effect of delaying or preventing a change in control of the Company. Transition from Reseller to Manufacturing Business. Historically, the reseller business of the Company accounted for the majority of the Company's revenues. In Fiscal 1998, revenue from the sale of third party 12 non-GigaRAID products accounted for 18.9% of revenues. Such decline is attributable to the Company's strategy to focus increased resources on the design, development, manufacturing and marketing of internally developed products. There can be no assurance, however, that the Company will be successful in developing any new products. The Company's success will depend, in part, on its ability to maintain and enhance its existing products and broaden its product offerings by developing and introducing new products that keep pace with technological developments in a cost effective manner, respond to evolving customer preferences and requirements and achieve market acceptance. Lack of market acceptance for the Company's existing or new products, the Company's failure to introduce new products in a timely or cost effective manner, or the Company's failure to achieve a technological advantage over its competition while also remaining price competitive, would materially adversely affect the Company's results of operations and financial condition. There can be no assurance that the Company will be successful in its product development efforts. In addition, there can be no assurance that the Company's products, even if successfully developed, will achieve timely market acceptance. Moreover, the introduction of products embodying new technology and the emergence of new industry standards could render the Company's existing products obsolete and unmarketable. The Company's future success will depend on its ability to continue to develop and manufacture new competitive products and to enhance its existing products, both of which will require continued investment in engineering and product development. The success of product enhancements and new products depends on a variety of factors, including product selection and specification, timely and efficient completion of product design, cost effective implementation of manufacturing and assembly processes and effective sales and marketing efforts. There can be no assurance that the Company will be able to successfully manage all of the diverse aspects of successful new product development in order to develop and maintain competitive products. Year 2000 Compliance. 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 mission critical business transaction systems; the products the Company sells; and issues associated with the Company's business partners, including suppliers, customers, and bankers. To date, the Company has executed approximately 95% of its Plan and anticipates completing the remaining portions of the Plan by the end of the third calendar quarter of 1999 while the evaluation and testing of certain ancillary PC office and specialized PC applications will continue through 1999. However, if the Company's Plan cannot be completed on a timely basis, the Year 2000 issue could have a material adverse impact on the Company's business, financial condition and results of operations. Because of the many uncertainties associated with Year 2000 compliance issues, and because the Company's assessment is necessarily based on information from third party vendors and suppliers, there can be no assurance that the Company's assessment is correct. If the Company's assessment is incorrect, it could have a material adverse effect on the Company's business. ITEM 2. PROPERTIES The Company's principal administrative, marketing and sales activities are located in approximately 42,400 square feet of facilities in San Diego, California leased from an entity owned by the president and principal shareholder of the Company. The space is occupied under a lease agreement that expires in March 2003. The Company also leases approximately 24,700 square feet of office and manufacturing space located in Maynard, Massachusetts, primarily for research and development activities, for a term extending through March 2001. The Company distributes internally developed products, and products from other manufacturers, through a network of 20 sales offices worldwide. See Note 9 of the Notes to Consolidated Financial Statements for information regarding the Company's obligations under its facilities leases. 13 ITEM 3. LEGAL PROCEEDINGS There are no legal proceedings to which the Company is a party, other than routine litigation incidental to its business, which, in the opinion of its management, is unlikely to have a material adverse effect on its financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of the Company's security holders during the quarter ended October 31, 1998. 14 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS The Company's Common Stock was traded on the Nasdaq SmallCap Market under the symbol ANDA until December 3, 1998. The Company is currently traded on the Nasdaq Over-The-Counter Bulletin Board under the symbol ANDA. The following table reflects, for the period indicated, the high and low sales prices for the Common Stock as reported by Nasdaq prior to December 4, 1998, and as reported by the Nasdaq Over-The-Counter Bulletin Board after such date.
Price -------------- Year High Low ---- ---- --- 1998: First Quarter............................................... $2.000 $1.0938 Second Quarter.............................................. 2.500 1.5625 Third Quarter............................................... 2.250 1.0625 Fourth Quarter.............................................. 1.250 0.5000 1997: First Quarter............................................... 2.125 1.3375 Second Quarter.............................................. 2.625 1.4175 Third Quarter............................................... 1.750 0.9375 Fourth Quarter.............................................. 2.750 1.3125
On January 15, 1999, the last sale price of the Company's Common Stock was $0.75, and there were approximately 265 stockholders of record of the Company's Common Stock. The Company has never declared or paid any cash dividends on its Common Stock. The Company currently intends to retain future earnings to finance the growth and development of its business. ITEM 6. SELECTED FINANCIAL DATA. The following financial data, insofar as it relates to each of the fiscal years 1994 through 1998, have been derived from audited consolidated financial statements and notes thereto. This data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of the Company and related notes thereto set forth at the pages indicated in Item 14(a)(1).
Year Ended October 31, ------------------------------------------- 1998 1997 1996 1995 1994 ------- ------- ------- -------- ------- (in thousands, except for per share amounts) Sales............................ $77,519 $93,259 $99,733 $100,048 $83,559 Operating (loss) income.......... (1,413) (5,098) 811 2,838 181 Net (loss) income................ (2,434) (6,209) 39 2,106 (202) Net (loss) income per share...... (0.10) (0.30) 0.00 0.12 (0.01) Shares used to compute per share data............................ 23,819 20,464 18,168 18,184 18,078 Working capital.................. $ 3,486 $ 5,169 $ 8,932 $ 3,639 $ 2,069 Total assets..................... 25,682 29,989 23,667 26,481 18,285 Shareholders' equity (deficit)... 2,302 4,736 (798) 2,118 12
15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion contained herein as well as elsewhere in this report contains forward-looking statements based on the current expectations of the Company's management. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. Factors that could cause or contribute to such differences include but are not limited to fluctuations in the Company's operating results, continued new product introductions by the Company, market acceptance of the Company's new product introductions, new product introductions by competitors, technological changes in the computer storage industry and other factors referred to herein including but not limited to the factors discussed under the caption "Certain Risk Factors Related to the Company's Business." Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. The Company 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 ANDATACO designs, develops, manufactures, markets and supports high performance, high availability information storage solutions for the Open Systems markets in the Windows NT and UNIX environments including Sun Microsystems, Hewlett-Packard, Silicon Graphics, and NT-based computing systems. The Company's fully integrated hierarchy of data storage solutions includes fault tolerant RAID and RAID-ready disk storage, tape backup and restore products and data storage management software. Technical support and professional services back the Company's products. The Company distributes internally developed products, and products from other manufacturers, through a network of sales offices worldwide and through distributors in Europe, Asia, Latin America, Canada, and Australia. The customers for the Company's products represent a cross-section of industries and government agencies operating in distributed client/server as well as centralized computing environments. These customers range in size from FORTUNE 1000 companies to small businesses, and from national to local governments. 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 introduced two powerful new RAID storage systems, an enhanced version of the GigaRAID/HA, and the GigaRAID/AA which is the next generation of the GigaRAID/SX. The Company also announced the industry's first Ultra2 SCSI LVD intelligent storage enclosure, the GigaRAID 8000 LVD enclosure, featuring Ultra2 SCSI 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. In fiscal year 1998 the Company focused its efforts on identifying and developing solutions for selected market segments in which the Company could provide customers with application-specific storage. These markets include, high technology development companies, oil and gas exploration, financial and retail markets with large data warehouse and relational database installations, and video and entertainment. The Company's goal is to become the leading provider of open systems storage solutions. The principal elements of the Company's business strategy are as follows: . Develop open systems SCSI-based storage solutions based on its intelligent enclosure and controller technology. . Cooperate with leading hardware and software developers, resellers and systems integrators to enhance its storage and storage management product offerings for end users. 16 . Develop solutions for the OEM market based on its enclosure and controller technology as well as its web storage management software. . Expand its service business through the Professional Services Group established by the Company during fiscal year 1997. Results of Operations The following table sets forth for the Company's results of operations and the percentage relationship of certain items to sales during the periods shown:
Year ended October 31, --------------------- 1998 1997 1996 ----- ----- ----- Sales................................................. 100.0% 100.0% 100.0% Cost of sales......................................... 70.0 76.9 80.6 ----- ----- ----- Gross profit.......................................... 30.0 23.1 19.4 ----- ----- ----- Operating expenses: Selling, general and administrative................. 29.4 24.3 17.4 Rent expense to shareholder......................... 0.4 0.3 0.3 Purchased research and development.................. -- 2.6 -- Research and development............................ 2.0 1.4 0.9 ----- ----- ----- Total operating expenses.............................. 31.8 28.6 18.6 ----- ----- ----- (Loss) income from operations......................... (1.8) (5.5) 0.8 Other expense, net.................................... (1.3) (1.2) (0.8) ----- ----- ----- Net (loss) income..................................... (3.1)% (6.7)% 0.0% ===== ===== ===== The following table sets forth the Company's product mix as a percentage of sales during the periods shown: Year ended October 31, --------------------- 1998 1997 1996 ----- ----- ----- GigaRAID Product Family: GigaRAID/SA/HA/SX/HA/AA............................. 16.6% 15.0% 0.5% GigaRAID FT/FC...................................... 27.9 13.8 9.6 GigaRAID 3000/8000.................................. 15.6 20.0 5.0 Rapid Tape.......................................... 0.3 1.1 1.9 RAID Lite........................................... 0.1 1.4 11.8 RAID-ready Disk Arrays.............................. 3.1 4.9 20.9 Tape Library Systems................................ 3.0 9.2 13.1 ----- ----- ----- 66.6 65.4 62.8 Non-GigaRAID Distribution Product: ATL................................................. 6.5 3.3 2.3 OEM................................................. 2.1 -- -- Service............................................. 5.9 1.9 -- Other............................................... 18.9 29.4 34.9 ----- ----- ----- 100.0% 100.0% 100.0% ===== ===== =====
Fiscal Year Ended October 31, 1998 Compared to Fiscal Year Ended October 31, 1997 Revenues. Revenues in fiscal 1998 were $77,519,000 compared with $93,259,000 in fiscal 1997. The increase in sales of current GigaRAID products, OEM revenues, and service revenues of $7,913,000, $1,677,000 and $2,750,000, respectively, in fiscal 1998 as compared with fiscal 1997, was more than offset by the $16,980,000 decrease of older mass storage products including RAID Lite and RAPID-Tape products and a 17 decrease of $10,771,000 in sales of non-GigaRAID distribution products. The decrease in non-GigaRAID distribution product sales in fiscal 1998 compared to fiscal 1997 is consistent with the Company's strategy to focus its sales organization on internally designed products capable of producing higher margins and its focus on expanding its OEM channel. Although the Company plans to continue to sell third-party non-GigaRAID products, management's strategy is to focus increased resources on the design, development, manufacturing and marketing of internally developed products. Gross Profit. Notwithstanding the decline in revenues, gross profit in fiscal 1998 was $23,226,000, representing 30.0% of revenues compared to $21,577,000 in fiscal 1997, representing 23.1% of revenues. This increase in gross profit was primarily attributable to increased revenues from higher margin internally designed and integrated GigaRAID products as a percentage of total revenues as well as the reduction in costs of certain components used to manufacture products in fiscal 1998 as compared to fiscal 1997. The increase was also attributable to the 153.2% increase in service revenue in fiscal 1998 as compared to fiscal 1997. Selling, General and Administrative Expense. Selling, general and administrative ("SG&A") expenses increased $135,000, or 0.6%, to $22,755,000 in fiscal 1998 as compared with $22,620,000 in fiscal 1997. SG&A consists primarily of salaries, commissions and employee benefits, as well as consulting, advertising, promotion and certain Merger related expenses. In fiscal 1998, the Company incurred $2,536,000 of SG&A related to the Merger between the Company and ANDATACO of California as compared to $2,133,000 in fiscal 1997. The Merger related expenses primarily include amortization of goodwill, amortization of existing purchased technology, and depreciation of acquired equipment and improvements. Excluding the Merger related SG&A expenses, fiscal 1998 SG&A expense decreased $268,000 as compared to fiscal 1997. This decrease was primarily due to a reduction in payroll and executive compensation related to headcount reductions, lower commissions associated with sales and support personnel, and a reduction of bad debt charges. Research and Development. Research and development increased $227,000, or 17.1%, in fiscal 1998 to $1,552,000 from $1,325,000 as compared to fiscal 1997. The increase was primarily due to design development of various products and technologies, including, but not limited to, the GigaRAID/AA, GigaRAID/HA and GigaRAID/8000 LVD product family, Ultra 3 160/M technology, OEM partnership agreements and storage management software. In fiscal 1998, the Company incurred $850,000 in costs in connection with the development of Hewlett-Packard's new Sure Tape(R) enclosure. All development costs were reimbursed by Hewlett-Packard throughout fiscal 1998 and recorded as a credit to research and development costs including a fourth quarter reimbursement of $340,000. This is in line with the Company's strategy to continue to focus increased resources on design and development of 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 in which the Company invests will be successful or that products resulting from such programs will achieve market acceptance. Interest Expense. Interest expense decreased $97,000, or 14.9%, to $553,000 in fiscal 1998 from $650,000 in fiscal 1997. The decrease was primarily the result of the decrease in the bank borrowings throughout the year and the Company's effective borrowing rate in fiscal 1998 as compared to fiscal 1997. Net Loss. In 1998 the Company had a net loss of $2,434,000, or $0.10 per share, compared with the 1997 net loss of $6,209,000, or $0.30 per share. Fiscal Year Ended October 31, 1997 Compared to Fiscal Year Ended October 31, 1996 Revenues. In fiscal 1997, the Company's revenues remained relatively flat at $93,259,000 compared to $99,733,000 in fiscal 1996. The 6.5% decrease in revenues was primarily attributable to a decrease of $32,127,000 in sales of older mass storage products including RAID Lite and RAPID-Tape products and a decrease of $4,760,000 in sales of non-GigaRAID distribution products. The decrease was partially offset by a $27,112,000 increase in sales of internally developed GigaRAID Products and a $3,300,000 increase in 18 distribution GigaRAID products. The decrease in non-GigaRAID distribution product sales in fiscal 1997 compared to fiscal 1996 is consistent with the Company's strategy to focus its sales organization on internally designed products capable of producing higher margins. The decrease in revenues was further impacted by the Merger. The time required of management to affect the integration of operations and administration, and the restructuring of the combined sales and service organization, diverted personnel and management resources from day to day operating activities. Gross Profit. Gross margins increased slightly to 23.1% in fiscal 1997 compared with 19.4% in fiscal 1996. The increase in gross profit was attributable to the increased revenues from higher margin products as well as the reduction in costs of certain components used to manufacture products in fiscal 1997 compared to fiscal 1996. Selling, General and Administrative Expense. SG&A expenses increased approximately $5,322,000, or 30.8%, to $22,620,000 in fiscal 1997 from $17,298,000 in fiscal 1996. In fiscal 1997, the Company had an additional $2,133,000 of SG&A related to the Merger including $1,036,000 representing the portion of the Company's expenses not eliminated as a result of the Merger in order to effect the integration, goodwill amortization of $697,000, and $400,000 of amortization of existing purchased technology related to the Merger. Before the impact of these changes in fiscal 1997, SG&A expenses increased $3,189,000 or 18.4%. This increase is primarily due to costs associated with the development of the Company's sales organization and overall infrastructure including the addition of sales and support personnel; the focus of its sales organization on internally developed and other GigaRAID products capable of producing higher margins; the development of alternative distribution channels; and the addition of key management, service and engineering personnel. Research and Development. Research and development increased $406,000, or 44.2%, in fiscal 1997 to $1,325,000 from $919,000 as compared with fiscal 1996. Such expenses consisted primarily of salaries, employee benefits, overhead and outside contractors. The increase in product development costs in fiscal 1997 over fiscal 1996 was primarily due to an increase in personnel and related expenses resulting from the Merger, including additional costs incurred to further develop the acquired in-process research and development. The Merger in June 1997 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, in fiscal 1997 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 technology was recorded as a one-time charge to operations and the amount allocated to existing technology was amortized over its estimated remaining economic life. The in-process research and development purchased in the acquisition generally related to the next generation of Database RAID Architecture which merged the Company's Advanced Controller Technology with ANDATACO of California's ESP. The research and development costs incurred in fiscal 1997 after the Merger were largely incurred to merge the Company's Advanced Controller Technology with the ANDATACO of California packaging technology, resulting in the initial beta shipment of the GigaRAID/HA in July 1997 and general availability in September 1997. The post-merger effort in developing this technology represented 33% of the product development cycle, or a two month period of a total six month product development period. Interest Expense. Interest expense increased $178,000, or 37.7%, to $650,000 in fiscal 1997 from $472,000 in fiscal 1996. The increase was primarily a result of an increase in bank borrowings throughout the year and the Company's effective borrowing rate in fiscal 1997 as compared to fiscal 1996. Interest expense on the shareholder loan increased $160,000, or 53.2%, to $461,000 in fiscal 1997 from $301,000 in fiscal 1996. The increase was the result of an increase of the shareholder loan balance. Net Loss. In 1997 the Company had a net loss of $6,209,000, or $0.30 per share, compared with 1996 net income of $39,000, or $0.00 per share. 19 Liquidity and Capital Resources The Company's cash as of October 31, 1998 was $23,000 compared with $41,000 at October 31, 1997. Net working capital decreased by $1,683,000 to $3,486,000 at October 31, 1998 from that of the prior year. During fiscal 1998, the Company generated $2,692,000 from operating activities which was primarily used in investing expenditures for purchases of property and equipment of $1,531,000 and finance activities for payments on notes payable and a net reduction in the bank line of credit of $1,179,000. Management believes that its projected income and its bank line of credit will be sufficient to meet the Company's capital and operating requirements for the next 12 months. If sales are less than projected, or if the Company is unable to generate adequate cash flow from its sales, the Company may need to seek additional sources of capital and/or decrease its planned capital and operating expenditures. 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. Inflation Inflation has not had a significant negative impact on the Company's operations during the periods presented. The Company has historically been able to pass on to its customers increases in raw material prices caused by inflation. There can be no assurance, however, that the Company will be able to continue to pass on any future increases should they occur. Although the Company's exposure to the effects of inflation will be magnified by the expected increase in OEM business, the Company believes that its continuous efforts at material and labor cost reductions will minimize such effects. 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 mission critical business transaction systems; the products the Company sells; and the issues associated with its business partners, including suppliers, customers and bankers. To date, the Company has executed approximately 95% of its Plan and anticipates completing the remaining portions of the Plan by the end of the second calendar quarter of 1999 while the evaluation and testing of certain ancillary PC office and specialized PC applications will continue through 1999. Costs incurred directly relating to the Year 2000 issue are expensed by the Company during the period in which they are incurred. 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. Costs incurred in fiscal 1998 directly relating to the Year 2000 issue include the time spent by employees reviewing and addressing Year 2000 risks and amounted to $20,000. Based on current information, the Company does not expect future costs to address Year 2000 risks to be material. However, there can be no assurances that there will not be interruptions or other limitations of financial or operating systems functionally or that the Company will not incur significant costs to avoid such interruptions 20 or limitations. 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 suppliers in completing their respective plan of action for Year 2000 compliance. Mission Critical 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: 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 12:00 am January 1, 2000. This compliance extends to the underlying hardware, operating systems, and other software on which the Company's business systems operate. 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. Products the Company Sells The Company has also completed a review of all significant products the Company sells for Year 2000 compliance. All significant products that the Company currently sells are Year 2000 compliant and the Company believes these products will not produce date errors in changing from the year 1999 to 2000. Any products the Company intends to sell in the future will be reviewed for Year 2000 compliance. The functionality of all of these products, however, are dependent on the software compliance of the underlying operating systems. 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 ANDATACO, 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 ANDATACO's key customers to become Year 2000 compliant which would cause them to delay or cancel substantial purchase orders or delivery of ANDATACO'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. The Company does not rely on any one significant customer (i.e. representing greater than 10% of total revenue). However, it is unknown how customer spending patterns may be impacted by Year 2000 programs. As customers focus on preparing their businesses for the Year 2000 in the near term, capital budgets may be spent on remediation efforts, potentially delaying the purchase and implementation of new systems, thereby creating less demand for the Company's products and services. This could adversely affect the Company's business. 21 Conversely, demand for the Company's products could accelerate as customers focus on the need to protect their stored data by enhancing their capabilities. The Company has contacted all identified key vendors and obtained either a statement of Year 2000 compliance or a status report on the progress achieved to date on execution of their respective Year 2000 Plan. Based on this review, the Company is satisfied that all identified key vendors have satisfactorily addressed their Year 2000 issues with a plan of action as applicable and are, or will be, Year 2000 compliant by the end of the third calendar quarter of 1999. 22 SELECTED QUARTERLY FNANCIAL DATA (In thousands, except per share data) The following table presents selected quarterly financial information for the periods indicated. This information has been derived from unaudited consolidated financial statements which, in the opinion of management, include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of such information. These operating results are not necessarily indicative of results for any future period.
Jan. April July Oct. 31, 30, 31, 31, 1998 1998 1998 1998 Fiscal 1998: ------- ------- ------- ------- Sales....................................... $21,760 $20,996 $17,092 $17,671 Gross profit................................ 6,785 6,671 4,359 5,411 (Loss) income from operations............... (140) 78 (1,617) 291 Net (loss) income........................... (420) (189) (1,874) 49 Net (loss) income per share................. (0.02) (0.01) (0.08) 0.00 Jan. April July Oct. 31, 30, 31, 31, 1997 1997 1997 1997 Fiscal 1997: ------- ------- ------- ------- Sales....................................... $25,497 $21,540 $22,057 $24,165 Gross profit................................ 5,992 4,587 4,906 6,092 (Loss) income from operations............... 235 (111) (3,896) (1,326) Net (loss) income........................... (110) (339) (4,169) (1,591) Net (loss) income per share................. (0.01) (0.02) (0.19) (0.07)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's Consolidated Financial Statements and supplementary data required by this item are set forth in the pages indicated in Item 14(a)(1). 23 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT See the section entitled "Executive Officers" in Part I Item 1 hereof for information regarding executive officers. The information required by this item with respect to directors is incorporated by reference from the information under the caption "Election of Directors" contained in the Company's Definitive Proxy Statement which will be filed with the Commission pursuant to Regulation 14A in connection with the solicitation of proxies for the Company's 1999 Annual Meeting of Stockholders to be held on April 8, 1999 (the "Proxy Statement"). ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to the information appearing under the caption "Executive Compensation" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to the information appearing under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the information appearing under the caption "Certain Transactions" of the Proxy Statement and Note 10 of the Notes to Consolidated Financial Statements contained elsewhere in this report. 24 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Page Number ------ (a)(1) Index to Consolidated Financial Statements: The financial statements required by this item are admitted in a separate section beginning on page F-1 of this Annual Report on Form 10-K. Report of Independent Accountants.................................................. F-1 Consolidated Balance Sheet as of October 31, 1998 and 1997......................... F-2 Consolidated Statement of Operations for the Years Ended October 31, 1998, 1997 and 1996.......................................................................... F-3 Consolidated Statement of Cash Flows for the Years Ended October 31, 1998, 1997 and 1996.......................................................................... F-4 Consolidated Statement of Shareholders' Equity (Deficit) For the Years Ended October 31, 1998, 1997, and 1996.................................................. F-5 Notes to Consolidated Financial Statements F-6 (a)(2) Index to Financial Statement Schedules: The financial statement schedules required by this item are submitted in a separate section beginning on page S-1 of this Annual Report on Form 10-K. Schedule VIII-- Valuation and Qualifying Accounts.................................. S-1
All other schedules are omitted because they are not applicable, or not required, or because the required information is included in the Consolidated Financial Statements or notes thereto appearing elsewhere in this Annual Report on Form 10-K.
(a)(3) Index to Exhibits: Exhibit Number Description of Document ------- ----------------------- 2.1 Agreement and Plan of Merger and Reorganization dated as of February 28, 1997, by and among the Company, IPL Acquisition Corp., ANDATACO and W. David Sykes, filed as Exhibit 2.1 to the Company's Current Report on Form 8-K dated as of February 28, 1997 and incorporated herein by reference. 3.1 Restated Articles of Organization dated March 24, 1981, and Articles of Amendment, dated May 12, 1981, and July 8, 1992, filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (the "1992 Form 10-K"), and incorporated herein by reference. 3.2 By-Laws, as amended, filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1987 (Commission File No. 0-10370) and incorporated herein by reference. 10.1 Stockholder Agreement dated as of April 25, 1980, as amended, filed as Exhibit 10.8 to the Company's Registration Statement on Form S-1 (File No. 2-71414) "1981 Registration Statement") and incorporated herein by reference. 10.2 Second Amendment to Stockholder Agreement dated as of May 24, 1989, filed as Exhibit 10.3. to the Company's Registration Statement on Form S-1 (File No. 33- 40454) (the "1991 Registration Statement") and incorporated herein by reference.
25
Exhibit Number Description of Document ------- ----------------------- 10.3 Form of Indemnification Agreement, filed as Exhibit 10.8 to the Company's 1991 Registration Statement and incorporated herein by reference. 10.4 Lease dated August 20, 1992 between the Company and Maynard Industrial Park Associates, filed as Exhibit 10.2 to the 1992 Form 10-K and incorporated herein by reference. 10.5 1993 Director Stock Option Plan, filed as Exhibit 10.12 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (the "1993 Form 10-K") and incorporated herein by reference. 10.6 Form of Executive Severance Agreement, filed as Exhibit 10.13 to the 1993 Form 10-K and incorporated herein by reference. 10.7 1991/1993 Consolidated Equity Incentive Plan, filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 (the "1994 Form 10-K") and incorporated herein by reference. 10.8 Consulting Agreement dated as of January 1, 1995 between the Company and Firecracker Technology Corp., filed as Exhibit 10.8 to the 1994 Form 10-K and incorporated herein by reference. 10.9 Employment Agreement with Ronald J. Gellert dated as of December 4, 1995 between the Company and Ronald J. Gellert, filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 (the "1995 Form 10-K") and incorporated herein by reference. 10.10 Stock Option Agreement dated as of December 4, 1995 between the Company and Ronald J. Gellert, filed as Exhibit 10.10 to the 1995 Form 10-K and incorporated herein by reference. 10.11 1996 Consolidated Equity Incentive Plan, filed as Exhibit 10.11 to Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996 (the "1996 Form 10-K") and incorporated herein by reference. 10.12 Consulting Agreement dated as of October 1, 1996 between the Company and Cornelius P. McMullan, filed as Exhibit 10.12 to the 1996 Form 10-K and incorporated herein by reference. 10.13 Consulting Agreement dated as of October 1, 1996 between the Company and Harris Ravine, filed as Exhibit 10.13 to the 1996 Form 10-K and incorporated herein by reference. 10.14 Consulting Agreement dated as of January 1, 1997 between the Company and BI Capital, Ltd., filed as Exhibit 10.14 to the 1996 Form 10-K and incorporated herein by reference. 10.15 Consulting Agreement dated as of March 1, 1997 between the Company and Harris Ravine, filed as Exhibit 10.15 to the 1996 Form 10-K and incorporated herein by reference. 10.16 OEM Agreement dated as of February 25, 1997 between the Company and ANDATACO, filed as Exhibit 10.16 to the 1996 Form 10-K and incorporated herein by reference. 10.17 Lease Agreement dated January 1, 1993 and Addendum dated October 1, 1994, between the Company and Syko Properties, Inc., filed as Exhibit 10.17 to the 1997 Form 10-K and incorporated herein by reference. 10.18 Line of Credit Agreement dated 12/1/97 between Imperial Savings Bank and the Company, filed as Exhibit 10.18 to the 1997 Form 10-K and incorporated herein by reference. 10.19 Employment Agreement dated May 1, 1997, entered between ANDATACO and Harris Ravine, filed as Exhibit 10.19 to the 1997 Form 10-K and incorporated herein by reference. 10.20 Employment Agreement dated June 3, 1997, entered into between the Company and W. David Sykes, filed as Exhibit 10.20 to the 1997 Form 10-K and incorporated herein by reference.
26
Exhibit Number Description of Document ------- ----------------------- 10.21 Noncompetition Agreement dated June 3, 1997, entered into between the Company and W. David Sykes, filed as Exhibit 10.21 to the 1997 Form 10-K and incorporated herein by reference. 10.22 Letter Agreement regarding employment terms dated September 20, 1996 between the Company and Richard A. Hudzik, filed as Exhibit 10.22 to the 1997 Form 10-K and incorporated herein by reference. 10.23 Compensation Agreement dated July 8, 1997, entered between the Company and Peter W. Bell, filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 1997 and incorporated herein by reference. 10.24 Promissory Note dated February 10, 1997, between the Company and W. David Sykes, filed as Exhibit 10.24 to the 1997 Form 10-K and incorporated herein by reference. 10.25 Loan Agreement dated as of April 30, 1998 between Wells Fargo Bank and the Company, filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended April 30, 1998 and incorporated herein by reference. 10.26 Amendment No. 1 to Loan Agreement dated as of July 29, 1998 between Wells Fargo Bank and the Company, filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31,1998 and incorporated herein by reference. 10.27 Amendment No. 2 to Loan Agreement dated as of December 14, 1998 between Wells Fargo Bank and the Company. 10.28 Letter Agreement dated May 5, 1997 between the Company and Diane Wong. 10.29 Letter Agreement dated January 27, 1998 between the Company and Arun Taneja. 21.1 List of subsidiaries. 23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants, filed herewith as Exhibit 23.
Executive Compensation Plans and Arrangements Exhibits 10.3, 10.5 through 10.15 and 10.19 through 10.23 to this Form 10-K are management contracts or compensatory plan arrangements. Reports on Form 8-K There were no reports on Form 8-K filed for the quarter ended October 31, 1998. 27 SIGNATURES Pursuant to the requirement of Section 13 or 15 (d) of the Securities Exchange Act of 1934, IPL Systems, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ANDATACO, INC. /s/ Harris Ravine By: _________________________________ Harris Ravine Chief Executive Officer January 27, 1999 POWER OF ATTORNEY KNOW BY ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Harris Ravine and W. David Sykes, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that all said attorneys-in-fact and agents, or any of them or their of his substitute or substituted, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Harris Ravine Chief Executive Officer January 27, 1999 ____________________________________ and Director (Principal Harris Ravine Executive Officer) /s/ W. David Sykes President and Vice Chairman January 27, 1999 ____________________________________ of the Board and Director W. David Sykes /s/ Diane Wong Vice President of Finance January 27, 1999 ____________________________________ and Corporate Controller Diane Wong (Principal Financial and Accounting Officer) /s/ Cornelius P. McMullan Director January 27, 1999 ____________________________________ Cornelius P. McMullan /s/ Melville Straus Director January 27, 1999 ____________________________________ Melville Straus
28 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Andataco, Inc. In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) of this Form 10-K present fairly, in all material respects, the financial position of Andataco, Inc. and its subsidiaries at October 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 1998, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14(a)(2) of this Form 10-K presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP San Diego, California January 13, 1999 F-1 ANDATACO, INC. CONSOLIDATED BALANCE SHEET
October 31, ------------------------ 1998 1997 ----------- ----------- ASSETS Current assets: Cash............................................... $ 23,000 $ 41,000 Accounts receivable, net........................... 10,628,000 10,846,000 Inventories........................................ 4,923,000 7,458,000 Other current assets............................... 634,000 353,000 ----------- ----------- Total current assets............................. 16,208,000 18,698,000 Goodwill, net........................................ 5,993,000 7,665,000 Property and equipment, net.......................... 3,415,000 3,599,000 Other assets......................................... 66,000 27,000 ----------- ----------- $25,682,000 $29,989,000 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable................................... $ 7,853,000 $ 7,660,000 Accrued expenses................................... 2,610,000 4,202,000 Deferred revenue................................... 2,259,000 1,554,000 Current portion of notes payable................... -- 113,000 ----------- ----------- Total current liabilities........................ 12,722,000 13,529,000 ----------- ----------- Bank line of credit.................................. 5,462,000 6,500,000 Notes payable, less current portion.................. -- 28,000 Shareholder loan..................................... 5,196,000 5,196,000 ----------- ----------- Total long-term liabilities...................... 10,658,000 11,724,000 ----------- ----------- Commitments and contingencies (Note 9) Shareholders' equity: Common stock, $0.01 par value; 40,000,000 shares authorized; 23,819,399 shares issued and outstanding....................................... 238,000 238,000 Additional paid in capital......................... 10,107,000 10,107,000 Accumulated deficit................................ (8,043,000) (5,609,000) ----------- ----------- Total shareholders' equity....................... 2,302,000 4,736,000 ----------- ----------- $25,682,000 $29,989,000 =========== ===========
See accompanying notes to consolidated financial statements. F-2 ANDATACO, INC. CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended October 31, ------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Sales.................................. $77,519,000 $93,259,000 $99,733,000 Cost of sales.......................... 54,293,000 71,682,000 80,375,000 ----------- ----------- ----------- Gross profit......................... 23,226,000 21,577,000 19,358,000 Operating expenses: Selling, general and administrative.. 22,755,000 22,620,000 17,298,000 Rent expense to shareholder.......... 332,000 330,000 330,000 Purchased research and development... -- 2,400,000 -- Research and development............. 1,552,000 1,325,000 919,000 ----------- ----------- ----------- 24,639,000 26,675,000 18,547,000 ----------- ----------- ----------- (Loss) income from operations.......... (1,413,000) (5,098,000) 811,000 Other income (expense): Interest income...................... -- -- 1,000 Interest expense..................... (553,000) (650,000) (472,000) Interest expense to shareholder...... (468,000) (461,000) (301,000) ----------- ----------- ----------- (1,021,000) (1,111,000) (772,000) ----------- ----------- ----------- (Loss) income before provision for taxes................................. (2,434,000) (6,209,000) 39,000 Provision for income taxes............. -- -- -- ----------- ----------- ----------- Net (loss) income...................... $(2,434,000) $(6,209,000) $ 39,000 =========== =========== =========== Net (loss) income per share (basic and diluted).............................. $ (0.10) $ (0.30) $ 0.00 =========== =========== =========== Shares used in computing net (loss) income per share: Basic................................ 23,819,000 20,464,000 18,078,000 =========== =========== =========== Diluted.............................. 23,819,000 20,464,000 18,168,000 =========== =========== ===========
See accompanying notes to consolidated financial statements. F-3 ANDATACO, INC. CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended October 31, ------------------------------------ 1998 1997 1996 ----------- ----------- ---------- Cash flows from operating activities: Net (loss) income......................... $(2,434,000) $(6,209,000) $ 39,000 Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities: Depreciation and amortization.......... 1,715,000 1,335,000 446,000 Amortization of goodwill............... 1,672,000 697,000 -- Purchased research and development..... -- 2,400,00 -- Stock compensation..................... -- 137,000 -- Changes in assets and liabilities, net of Merger transaction (Note 2): Accounts receivable.................... 218,000 3,149,000 492,000 Inventories............................ 2,535,000 192,000 3,176,000 Other assets........................... (320,000) 73,000 (70,000) Accounts payable....................... 193,000 (3,525,000) (4,866,000) Accrued expenses....................... (1,592,000) 328,000 (569,000) Deferred revenue....................... 705,000 1,154,000 74,000 ----------- ----------- ---------- Net cash provided by (used in) operating activities................. 2,692,000 (269,000) (1,278,000) ----------- ----------- ---------- Cash flows from investing activities: Cash acquired in Merger transaction (net of cash expended of $478,000) (Note 2)... -- 676,000 -- Payments for purchases of property and equipment................................ (1,531,000) (682,000) (770,000) ----------- ----------- ---------- Net cash used in investing activities........................... (1,531,000) (6,000) (770,000) ----------- ----------- ---------- Cash flows from financing activities: (Payments) proceeds under bank line of credit agreement, net.................... (1,038,000) (553,000) 4,508,000 Dividends paid............................ -- -- (2,955,000) Proceeds from shareholder loan............ -- 269,000 2,000,000 Payments on shareholder loan.............. -- -- (758,000) Payments on notes payable................. (141,000) (165,000) (287,000) ----------- ----------- ---------- Net cash (used in) provided by financing activities................. (1,179,000) (449,000) 2,508,000 ----------- ----------- ---------- Net (decrease) increase in cash............ (18,000) (724,000) 460,000 Cash at beginning of year.................. 41,000 765,000 305,000 ----------- ----------- ---------- Cash at end of year $ 23,000 $ 41,000 $ 765,000 =========== =========== ========== Supplemental disclosures of cash flow information: Cash paid for interest.................... $ 976,000 $ 1,127,000 $ 812,000 =========== =========== ========== Cash paid for income taxes................ $ -- $ -- $ 27,000 =========== =========== ========== Supplemental disclosure of non-cash activities: Issuance of stock in Merger transaction (Note 2)..................................$.. -- $11,606,000 $ -- =========== =========== ==========
See accompanying notes to consolidated financial statements. F-4 ANDATACO, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
Common Stock Additional Accumulated -------------------- Paid in Earnings Shares Amount Capital (Deficit) Total ---------- -------- ----------- ----------- ----------- Balance at October 31, 1995................... 10,000 $ 2,000 $ 2,116,000 $ 2,118,000 Dividends paid.......... (2,955,000) (2,955,000) Net income.............. 39,000 39,000 ---------- -------- ----------- ----------- ----------- Balance at October 31, 1996................... 10,000 2,000 (800,000) (798,000) Recapitalization of ANDATACO of California as a result of Merger with IPL Systems, Inc. (Note 2)............... (10,000) (2,000) $ 2,000 -- Elimination of S Corporation deficit against additional paid in capital at date of Merger (Note 2)........ (1,400,000) 1,400,000 -- IPL common stock outstanding immediately before Merger (Note 2)..................... 5,633,819 56,000 (56,000) -- Issuance of IPL common stock in Merger (Note 2)..................... 18,078,381 181,000 11,425,000 11,606,000 Issuance of common stock for compensation....... 107,199 1,000 136,000 137,000 Net loss................ (6,209,000) (6,209,000) ---------- -------- ----------- ----------- ----------- Balance at October 31, 1997................... 23,819,399 238,000 10,107,000 (5,609,000) 4,736,000 Net loss................ (2,434,000) (2,434,000) ---------- -------- ----------- ----------- ----------- Balance at October 31, 1998................... 23,819,399 $238,000 $10,107,000 $(8,043,000) $ 2,302,000 ========== ======== =========== =========== ===========
See accompanying notes to consolidated financial statements. F-5 ANDATACO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1--The Company ANDATACO, Inc. (the "Company" or "ANDA"), founded in 1986, designs, develops, manufactures, markets and supports high performance, high availability information storage solutions for the open systems markets in the Windows NT and UNIX environments. The Company's fully integrated hierarchy of data storage solutions includes fault tolerant RAID (Redundant Array of Independent Disks) and RAID-ready disk storage, tape backup and restore products, and data storage management software. The Company supplies its products through direct, indirect and original equipment manufacturer sales and service channels throughout the world. The Company's president and principal shareholder and his affiliates beneficially own 75.9% of the Company's outstanding common stock. NOTE 2--Business Combination On June 3, 1997 (the "Closing Date"), ANDA (formerly IPL Systems, Inc.) completed a business combination with ANDATACO of California, whereby ANDATACO of California was merged with a wholly-owned subsidiary of ANDA (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 ANDA 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 ANDA, for financial reporting purposes the Merger was treated as a recapitalization of ANDATACO of California and an acquisition of ANDA by ANDATACO of California (reverse acquisition). The financial reporting requirements of the Securities and Exchange Commission require that the financial statements reported by ANDA subsequent to the Merger be those of ANDATACO of California, which include the results of operations of ANDA from the Closing Date. The acquisition of ANDA 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. The following table sets forth the allocation of the purchase price to the estimated fair value of identifiable tangible and intangible assets acquired and liabilities assumed: Purchase Price: Fair value of ANDA stock of 5,633,819 shares outstanding immediately before the Merger................................ $11,606,000 Transaction costs............................................. 478,000 ----------- 12,084,000 ----------- Allocation of Purchase Price to Identifiable Net Assets: Tangible assets............................................... 4,203,000 Assumed liabilities........................................... (3,281,000) In-process research and development........................... 2,400,000 Intangible asset.............................................. 400,000 ----------- 3,722,000 ----------- Excess of Purchase Price Over Identifiable Net Assets......... $ 8,362,000 ===========
F-6 ANDATACO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following is unaudited pro forma results of operations as if the transaction had been consummated at the beginning of fiscal year ended October 31, 1997:
Year Ended October 31, 1997 ------------ (unaudited) Sales..................................................... $ 97,507,000 ============ Net loss.................................................. $(12,500,000) ============ Net loss per share (basic and diluted).................... $ (0.53) ============
NOTE 3--Summary of Significant Accounting Policies Principles of Consolidation The financial statements as of and for the year ended October 31, 1998 consolidate the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Management Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make 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 revenues and expenses during the reporting period. Actual results could differ from those estimates. Management believes that its projected income and its bank line of credit will be sufficient to meet the Company's capital and operating requirements for the next 12 months. If sales are less than projected, or if the Company is unable to generate adequate cash flow from its sales, the Company may need to seek additional sources of capital and/or decrease its planned capital and operating expenditures. Revenue Recognition Revenue from the sale of products is recognized as of the date shipments are made to customers net of an allowance for returns. A provision is made for warranty costs in excess of those provided for by the original equipment manufacturer. Revenue related to extended warranty contracts is deferred and recognized over the period in which costs are expected to be incurred, based upon historical evidence, in performing services under the contract. The Company also contracts with outside vendors to provide service relating to various on-site warranties which are offered for sale to customers; on-site warranty revenues and amounts paid in advance to outside service organizations are recognized in the financial statements in sales and cost of goods sold, respectively, over the warranty period. Inventories Inventories are stated at the lower of cost (first-in-first-out method) or market. Property and Equipment Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the depreciable assets (generally five years). Leasehold improvements are amortized on a straight-line basis over the shorter of the useful life of the asset or the lease term. Upon the sale or retirement of property or equipment, the asset cost and related accumulated depreciation are removed from the respective accounts and any gain or loss is included in the results of operations. Total depreciation and amortization was $1,715,000, $935,000 and $446,000 in fiscal 1998, 1997 and 1996, respectively. F-7 ANDATACO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Long-Lived Assets The Company assesses potential impairments to its long-lived assets, identifiable intangibles and goodwill when there is evidence that events or changes in circumstances have made recovery of an asset's carrying value unlikely. An impairment loss would be recognized when the sum of the expected future net undiscounted cash flows is less than the carrying amount of the asset. No such impairment losses have been recorded by the Company. Goodwill The Company has classified as goodwill the purchase price in excess of fair value of the identifiable net assets acquired in the Merger. Goodwill is being amortized on a straight-line basis over its estimated useful life of five years. Amortization charged to operations amounted to $1,672,000 and $697,000 for the years ended October 31, 1998 and 1997, respectively. Research and Development Costs Research and development costs are expensed as incurred. Stock-Based Compensation The Company measures compensation expense for its stock-based employee compensation plans using the intrinsic value method and provides pro forma disclosures of net income and earnings per share as if fair value based methods had been applied in measuring compensation expense (Note 8). Compensation charges related to non-employee stock-based compensation are measured using fair value based methods. Income Taxes The Company records a provision (benefit) for income taxes using the liability method. Current income tax expense or benefit represents the amount of income taxes expected to be payable or refundable for the current year. A deferred income tax liability or asset is established for the expected future consequences resulting from the differences between the financial reporting and income tax bases of assets and liabilities and from net operating loss and credit carryforwards. Deferred income tax expense or benefit represents the net change during the year in the deferred income tax liability or asset. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be more likely than not realized. 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 October 31, 1998 includes losses solely incurred by the Company since the Merger. 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. 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 in fiscal 1997 is calculated giving effect to the change of ANDATACO of California from a Subchapter S Corporation to a Subchapter C Corporation, and 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. Pro Forma Net Income (Loss) per Share (Unaudited) Pro forma net income (loss) per share amounts of $(0.10), $(0.31) and $0.00 in fiscal 1998, 1997 and 1996, respectively, reflect the Company's conversion from a Subchapter S Corporation to a Subchapter C Corporation F-8 ANDATACO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) and the resultant adjustments for federal and state income taxes as if the Company had been taxed as a Subchapter C Corporation rather than a Subchapter S Corporation since inception. Pro forma net income (loss) per share is computed based on the weighted average number of shares of common stock outstanding during the respective periods. Fair Value of Financial Instruments It is management's belief that the carrying amounts shown for the Company's financial instruments are reasonable estimates of their related fair values based on their terms or short-term nature. The carrying amount shown for the bank line of credit approximates its fair value due to the relatively short term nature of this arrangement and to its adjustable interest rate. The carrying amounts shown for notes payable and shareholder loan are reasonable approximations of their fair values based upon the interest rates at which the Company could enter into similar borrowing arrangements. Net Income (Loss) Per Share The Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" as required in the first quarter of fiscal 1998. Basic earnings per share is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed based on the weighted average number of shares of common stock outstanding during the period increased by the weighted average number of common stock equivalents outstanding during the period, using the treasury stock method. Shares issuable upon exercise of outstanding stock options and warrants, totaling 2,991,000 and 2,402,000 as of October 31, 1998 and 1997, respectively, have been excluded from the computation of diluted earnings per share as their effect would be anti-dilutive. Concentration of Credit Risk The Company's customers include original equipment manufacturers, integrators, distributors and end-users. Financial instruments which potentially subject the Company to concentrations of credit risk are primarily accounts receivable. The Company performs ongoing credit evaluations of its customers, generally requires no collateral and maintains allowances for potential credit losses and sales returns. Credit losses have been within management's expectations. Dependence on Suppliers The Company has and will continue to rely on outside vendors to manufacture certain subsystems and electronic components and subassemblies used in the production of the Company's products. Certain components, subassemblies, materials and equipment necessary for the manufacture of the Company's products are obtained from a sole supplier or a limited group of suppliers. The Company performs ongoing quality and supply evaluation reviews with its outside vendors. Supply, delivery and quality of subsystems and electronic components and subassemblies have been adequate to fulfill customer orders and management does not expect any vendor problems in the next 12 months. New Accounting Pronouncements In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 130 ("FAS 130"), "Reporting Comprehensive Income," which the Company will be required to adopt in the first quarter of fiscal 1999. This statement will require the Company to report in the financial statements, in addition to net income, comprehensive income and its components including, as applicable, foreign currency items, minimum pension liability adjustments and unrealized gains and losses on F-9 ANDATACO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) certain investments in debt and equity securities. Upon adoption, the Company will also be required to reclassify financial statements for earlier periods provided for comparative purposes. The Company expects that adoption will have no material impact on the Company's statement of operations. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131 ("FAS 131"), "Disclosures about Segments of an Enterprise and Related Information," which the Company will be required to adopt for fiscal 1999. This statement establishes standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. Under FAS 131, operating segments are to be determined consistent with the way that management organizes and evaluates financial information internally for making operating decisions and assessing performance. The Company expects that adoption will have no material impact on the Company's financial statements. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133 ("FAS 133"), "Accounting for Derivative Instruments and Hedging Activities," which the Company will be required to adopt for fiscal 2000. This statement establishes a new model for accounting for derivatives and hedging activities. Under FAS 133, all derivatives must be recognized as assets and liabilities and measured at fair value. The Company expects that adoption will have no material impact on the Company's financial statements. NOTE 4--Composition of Certain Financial Statement Captions
October 31, ------------------------ 1998 1997 ----------- ----------- Accounts receivable: Accounts receivable--trade.......................... $10,960,000 $11,106,000 Less allowance for doubtful accounts and returns.... (332,000) (260,000) ----------- ----------- $10,628,000 $10,846,000 =========== =========== Inventories: Purchased components................................ $ 3,900,000 $ 5,541,000 Work in progress.................................... 280,000 125,000 Finished goods...................................... 743,000 1,792,000 ----------- ----------- $ 4,923,000 $ 7,458,000 =========== =========== Property and equipment: Equipment........................................... $ 5,666,000 $ 4,334,000 Leasehold improvements.............................. 1,098,000 942,000 Furniture and fixtures.............................. 809,000 797,000 Vehicles............................................ 150,000 119,000 ----------- ----------- 7,723,000 6,192,000 Less accumulated depreciation and amortization...... (4,308,000) (2,593,000) ----------- ----------- $ 3,415,000 $ 3,599,000 =========== =========== Accrued expenses: Sales commissions................................... $ 885,000 $ 1,807,000 Other............................................... 1,725,000 2,395,000 ----------- ----------- $ 2,610,000 $ 4,202,000 =========== ===========
F-10 ANDATACO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Bonuses Payable The Company has recorded a long-term obligation related to ten-year bonus agreements (the "Agreements") with certain employees. Under the Agreements, a bonus will be payable to an employee ten years after the date employment commenced with the Company. Continuous employment during the ten years is a condition precedent to the Company's obligation to pay the bonus. The bonus is accrued over the ten year service period; amounts forfeited are credited to operations. In fiscal 1998, the last participating member of the Agreement achieved the ten year anniversary and was paid in full. At October 31, 1998 and 1997, the Company has accrued $0 and $172,000 as a short-term liability. A net charge of $6,000 and $5,000 and a net credit of $108,000 are included in the results of operations for the years ended October 31, 1998, 1997 and 1996, respectively. The Company has a management incentive award plan which provides for the payment of cash awards or bonuses to officers and other key employees when the Company achieves specified objectives. Awards earned under the plan were $0, $17,000, and $0 during the years ended October 31, 1998, 1997 and 1996, respectively. NOTE 5--Bank Line of Credit The Company has a revolving line of credit with a bank which provides for it to borrow the lesser of (i) $10,000,000 or (ii) 80 percent of eligible domestic accounts receivable plus the lesser of $1,750,000 or 25 percent of eligible inventory, at the bank's prime rate plus one-half percent (8.5 percent at October 31, 1998). The revolving line of credit was renewed in April 1998 for a thirty-six month period. The line is secured by all of the Company's property and accounts receivable and is guaranteed by the Company's principal shareholder. As of October 31, 1998 and 1997, there was $5,462,000 and $6,500,000 outstanding and $3,799,000 and $3,311,000 available under the line of credit, respectively. The credit agreement includes covenants which, among other things, require the Company to maintain stated minimum working capital and net worth amounts plus specific liquidity and long-term solvency ratios. NOTE 6--Notes Payable
October 31, ----------------- 1998 1997 ------- --------- Notes payable are comprised as follows: Note payable to a bank, payable in monthly installments of $9,375 principal plus interest at the bank's prime rate plus 1 percent (9.5 percent at October 31, 1997) through April 1998 (secured by certain assets)................... $ -- $ 141,000 ------- --------- -- 141,000 Less current portion...................................... -- (113,000) ------- --------- $ -- $ 28,000 ======= =========
F-11 ANDATACO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 7--Income Taxes No provision for income taxes has been recorded in fiscal 1998 and 1997 because of losses incurred in these years. Deferred income taxes at October 31, 1998 and 1997 are comprised as follows:
October 31, ------------------------ 1998 1997 ----------- ----------- Deferred tax assets: Net operating loss carryforwards.................... $ 5,120,000 $ 3,991,000 Inventory........................................... 666,000 1,299,000 Allowance for doubtful accounts and returns......... 130,000 194,000 Warranty reserves................................... 59,000 102,000 Vacation and deferred compensation.................. 86,000 268,000 State income taxes.................................. 5,000 4,000 Property and equipment depreciation................. 150,000 -- Other............................................... 39,000 259,000 ----------- ----------- Gross deferred tax asset.......................... 6,255,000 6,117,000 ----------- ----------- Deferred tax liabilities: Property and equipment depreciation................. -- (33,000) ----------- ----------- Gross deferred tax liability...................... -- (33,000) ----------- ----------- Valuation allowance................................... (6,255,000) (6,084,000) ----------- ----------- Net deferred income taxes............................. $ -- $ -- =========== ===========
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. The Company has approximately $14,159,000 in federal and $5,793,000 in state net operating loss carryforwards which expire through 2018 and 2003, respectively. The Company experienced a change of control as a result of the Merger, which limits the ability of the Company to utilize the carryforward amounts. Any future change of control, as defined in Section 382 of the Internal Revenue Code, could further limit the Company's ability to utilize the carryforwards. A reconciliation of the provision for income taxes to the amount computed by applying the statutory federal income tax rate to income before income taxes follows:
Year Ended October 31, ------------------------------- 1998 1997 1996 --------- ----------- ------- Amount computed at statutory federal rate of 34%.................................. $(828,000) $(2,111,000) $13,000 Benefit of "S" Corporation status........ -- 209,000 (13,000) Increase in valuation allowance.......... 171,000 783,000 -- Expenses not deductible for tax purposes................................ 602,000 1,257,000 -- Conversion from "S" to "C" Corporation... -- (138,000) -- Other.................................... 55,000 -- -- --------- ----------- ------- $ -- $ -- $ -- ========= =========== =======
F-12 ANDATACO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 8--Stock Options and Employee Benefit Plans The Company has a number of stock option plans, administered by its Board of Directors or its designees, which provide for the issuance of options to employees, officers and directors. The exercise price of a stock option is generally equal to the fair market value of the Company's common stock on the date the option is granted. Certain of the plans permit options granted to qualify as "Incentive Stock Options" under the Internal Revenue Code while other plans are specified as non-qualified. Additionally, certain of the non- qualified plans call for 100% vesting of outstanding options upon a change of control of the Company. Options generally vest at a rate of 20 percent per year over a period of five years from the date of grant and expire after a period not to exceed ten years. However, the Board may, at its discretion, implement a different vesting schedule with respect to any new stock option grant. A total of 4,725,500 shares of Class A Common Stock has been reserved for issuance under the Company's stock option plans. Transactions under the Company's stock option plans during the years ended October 31, 1998, 1997 and 1996 are summarized as follows:
1993, 1996 Consolidated and 1997 Plans Director Plan -------------------------------------------- -------------------------- Weighted Weighted Weighted Average Weighted Number Average Average Number of Exercise Average Fair of Exercise Fair Options Price Value Options Price Value ---------------- ------------ ------------ ------- -------- -------- Outstanding, October 31, 1995................... 522,300 $ 3.04 32,000 $ 6.12 Granted................ 243,500 2.40 $ 1.08 12,000 14.54 $3.27 Exercised.............. (46,300) 2.66 -- Canceled............... (143,900) 3.48 (7,200) 8.92 ---------------- ------ Outstanding, October 31, 1996................... 575,600 2.69 36,800 8.32 Granted................ 1,989,500 1.56 1.07 -- Canceled............... (380,600) 2.79 -- ---------------- ------ Outstanding, October 31, 1997................... 2,184,500 1.64 36,800 8.32 Granted................ 2,031,000 1.33 1.08 -- Canceled............... (1,437,272) 1.53 (4,800) 8.92 ---------------- ------ Outstanding, October 31, 1998................... 2,778,228 0.97 32,000 8.23 ================ ====== Exercisable, October 31, 1998................... 512,985 1.13 19,600 10.28 ================ ======
The following table sets forth information regarding options outstanding at October 31, 1998 under the 1993, 1996 Consolidated and 1997 Plans:
Weighted Weighted Average Weighted Average Exercise Range of Number Average Remaining Price for Number of Exercise Currently Exercise Life Currently Options Prices Exercisable Price (Years) Exercisable --------- ---------- ----------- -------- --------- ----------- 200,000 $0.69 -- $0.69 9.92 $ -- 1,654,852 0.75 186,845 0.75 9.31 0.75 530,000 0.81--1.13 250,000 1.09 8.71 1.13 278,000 1.56--1.88 -- 1.75 9.02 -- 115,376 2.00--2.44 76,140 2.11 7.94 2.11 --------- ------- 2,778,228 512,985 ========= =======
F-13 ANDATACO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table sets forth information regarding options outstanding at October 31, 1998 under the Director Plan:
Weighted Weighted Average Weighted Average Exercise Range of Number Average Remaining Price for Number of Exercise Currently Exercise Life Currently Options Prices Exercisable Price (Years) Exercisable --------- ---------- ----------- -------- --------- ----------- 10,000 $3.25 4,000 $3.25 7.06 $3.25 10,000 5.63 6,000 5.63 6.61 5.63 6,000 8.25--9.25 3,600 8.58 6.63 8.81 6,000 20.50 6,000 20.50 2.81 20.50 ------ ------ 32,000 19,600 ====== ======
No compensation expense has been recognized for the Company's employee option grants, which are fixed in nature, as the options have been granted at fair market value. Pro forma information regarding net income and net earnings per common share is determined as if the Company had accounted for its stock- based awards to employees under fair value methods. The fair value of options granted in fiscal 1998, 1997 and 1996 has been estimated at the date of grant using the Black-Scholes option pricing model using the following assumptions:
Year Ended October 31, ----------------- 1998 1997 1996 ----- ---- ---- Risk-free interest rate................................... 5.50% 6.13% 6.16% Volatility................................................ 168.0% 80.0% 80.0% Dividend yield............................................ 0.0% 0.0% 0.0% Expected life (years)..................................... 6.0 5.0 5.0
For purposes of pro forma disclosures, the estimated fair value of the options is assumed to be amortized to expense over the options' vesting period. The Company's pro forma information for the years ended October 31 is as follows:
Year Ended October 31, ---------------------------------- 1998 1997 1996 ----------- ----------- -------- Net (loss) income: As reported........................... $(2,434,000) $(6,209,000) $ 39,000 =========== =========== ======== Pro forma............................. $(3,120,000) $(6,385,000) $(69,000) =========== =========== ======== Net (loss) income per share: As reported........................... $ (0.10) $ (0.30) $ 0.00 =========== =========== ======== Pro forma............................. $ (0.13) $ (0.31) $ 0.00 =========== =========== ========
401(k) Plan During 1992, the Company adopted an employee savings and retirement plan (the "401(k) Plan") covering all of the Company's employees. The 401(k) Plan permits, but does not require, matching contributions by the Company on behalf of all participants. No such contributions were made in fiscal 1998, 1997 or 1996. Stock Warrant There are warrants outstanding with a right to purchase 180,783 shares of the Company's common stock with an exercise price of $1.94 per share. The warrants expire in March 1999. F-14 ANDATACO, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) NOTE 9--Commitments and Contingencies The Company currently conducts its operations in twenty facilities throughout the United States. Certain of these facilities are leased from various parties, including related parties, under noncancelable operating leases that expire at various times through October 2003. Future minimum rental commitments under non-cancelable operating leases, inclusive of the Company's obligation to its president and principal shareholder (Note 10), are reflected in the following table:
Year ending October 31, ----------------------- 1999......................................................... $ 786,000 2000......................................................... 727,000 2001......................................................... 604,000 2002......................................................... 494,000 2003......................................................... 187,000 ---------- $2,798,000 ==========
Total rent expense was $1,107,000, $918,000 and $853,000 for the years ended October 31, 1998, 1997 and 1996, respectively. The Company may be subject to various claims and legal proceedings in the ordinary course of conducting its business. In the opinion of management, the liability associated with the resolution of such matters, if any, will not have a material adverse effect on the Company's financial position, results of operations or cash flows. NOTE 10--Certain Related Party Transactions The Company currently leases its corporate headquarters from an entity owned by the president and principal shareholder of the Company. The Company paid this entity approximately $330,000 during each of the years ended October 31, 1998, 1997 and 1996 under the terms of the lease agreement. The shareholder loan from the Company's president and principal shareholder to the Company is unsecured, due in June 2004, with interest payable monthly at 9 percent per annum. This loan is subordinate to the bank line of credit. Interest expense from the shareholder loan was $468,000, $461,000 and $301,000 during the years ended October 31, 1998, 1997 and 1996, respectively. F-15 Schedule VIII-- Valuation and Qualifying Accounts Fiscal Years Ended October 31, 1998, 1997 and 1996
Additions Balance at Additions Resulting Balance at Beginning Charged from End of of Year to Income Merger Deductions* Year ---------- --------- ---------- ----------- ---------- Allowance for Doubtful Accounts Receivable: 1998.................. $ 417,000 $138,000 $ -- $ 223,000 $ 332,000 1997.................. 219,000 236,000 339,000 377,000 417,000 1996.................. 272,000 60,000 -- 113,000 219,000 Allowance for Inventory Obsolescence: 1998.................. $3,261,000 $600,000 $ 238,000 $2,404,000 $1,695,000 1997.................. 200,000 600,000 2,463,000 2,000 3,261,000 1996.................. 183,000 30,000 -- 13,000 200,000
- -------- * Deductions represent amounts written off against the allowance, net of recoveries. S-1 EX-10.27 2 AMENDMENT #2 TO LOAN AGREEMENT EXHIBIT 10.27 AMENDMENT NO. 2 TO ------------------ LOAN AGREEMENT -------------- This Amendment No. 2 to Loan Agreement ("Amendment") dated as of --------- December 14, 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 1.4. Section 1.4(B) is amended to read in full as ----------- follows: "(B) the lesser of (i) the sum of twenty-five percent (25%) of the Value of Eligible Inventory, or (ii) an amount equal to $1,750,000; less" ---- 1.2 Section 1.24. Section 1.24 is amended by replacing the number ------------ ------------ "$15,000,000" therein with the number "$10,000,000". 1.3 Section 2.4. Section 2.4 is amended to read in full as follows: ----------- ----------- "All indebtedness of Borrower to Lender pursuant to this Agreement shall be guaranteed by Guarantor in the principal amount of Ten Million Dollars ($10,000,000), as evidenced by and subject to the terms of a guaranty in form and substance satisfactory to Lender (the 'Guaranty')." 1.4 Section 8.10(a). The table in Section 8.10(a) is amended by --------------- --------------- replacing the third through the seventh entries thereof with the following: Period Minimum Tangible Net Worth ------ -------------------------- January 31, 1999 through April 29, 1999 $1,200,000.00 April 30, 1999 through July 30, 1999 1,400,000.00 July 31, 1999 through October 30, 1999 1,600,000.00 October 31, 1999 through January 31, 2000 1,900,000.00 February 1, 2000 through April 29, 2000 3,600,000.00 1.5 Section 10.1(m). Section 10.1(m) is amended by replacing the --------------- --------------- reference to "Richard A. Hudzik" therein with "Diane Wong". 1.6 Section 11.1. The first sentence of Section 11.1(a) is amended to ------------ --------------- read in full as follows: "This Agreement and the other Loan Documents shall become effective as of the date set forth on the first page hereof and shall continue in full force and effect for a term ending on the date four (4) years from the date hereof." 1.7 Section 11.3. Section 11.3 is amended by deleting the fourth line ------------ ------------ of Borrower's address in its entirety and by replacing it with the following: "Attention: Diane Wong." 1.8 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 December 14, 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; (b) The Second Amended and Restated Line of Credit Note dated December 14, 1998 by Borrower in favor of Lender in the form of Annex 1 attached to this Amendment; ------- (c) The First Amended and Restated Continuing Guaranty dated December 14, 1998 by Guarantor in favor of Lender in the form of Annex 2 attached to this Amendment; ------- (d) With respect to each of Borrower and Guarantor, such documentation as Lender may reasonably require to establish such party's authority to execute, deliver and perform any Loan Document to which it is a party, the identity, authority and capacity of each responsible official thereof authorized to act on its behalf, including without limitation, certified copies of corporate resolutions, incumbency certificates, and the like; and (e) 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 $2,500.00 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. 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 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 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 Sykes By: /s/ Angelo Samperisi ----------------------- ---------------------- Title: President Angelo Samperisi ----------------------- Vice President EX-10.28 3 LETTER AGREEMENT EXHIBIT 10.28 May 1, 1997 Diane Wong 831 Neptune Avenue Encinitas, CA 92024 Re: Offer of Employment Dear Diane, I am very pleased to confirm our offer to you of employment with ANDATACO (the "Company"). You will report to me, in the position of Controller. If you accept our offer, your effective date of hire will be June 16, 1997. The terms of our offer are as follows: 1. Your starting salary will be $7,916.66 per month, payable as earned in accordance with the Company's normal payroll policies. 2. You are eligible for the Executive Bonus Plan which can pay up to 15% depending on Company financial performance. 3. You are eligible for an option plan which vest equally over four years, when available. The number of options to be no less than 60,000. 4. You are eligible for Andataco 401k profit sharing when available. 5. You will be eligible for the group health insurance, paid holidays, twelve (12) vacation days, and sick days as stipulated in the Company's personnel policies. 6. If your employment is terminated by Andataco without mutual consent by yourself, you will be eligible to seek other employment or be entitled to up to six (6) months severance pay, whichever comes sooner. 7. As an employee of the Company you will have access to certain Company confidential information and you may, during the course of your employment, develop certain information or inventions which will be the property of the Company. To protect the interest of the Company, you will need to sign the Company's standard "Proprietary Rights & Confidentiality Agreement" as a condition of your employment. We wish to impress upon you that we do not wish you to bring with you any confidential or proprietary material of any former employer or to violate any other obligations you may have to your former employers. Letter to Diane Wong Offer of Employment May 1, 1997 Page Two of Three 8. Your employment with the Company is terminable at will, which means that you will be free to terminate your employment with the Company at any time for any reason or no reason, with or without notice. Similarly, the Company may terminate your employment at any time for any reason or no reason, with or without notice, subject to the provisions of Item 6. By accepting this offer of employment, you will be agreeing that your employment is terminable at will, and acknowledge that no one has the authority to promise you, either orally or in writing, anything to the contrary. 9. The terms of this letter constitutes the entire agreement between us regarding your employment with the Company and shall supersede any other agreements made prior to or on the date of this letter. This offer, if not accepted, will expire on May 8, 1997 at 5:00pm. The Company requires the following as an important condition to employment: all new employees must pass the pre-employment drug screening test and provide information verifying authorization to work in the United States. You have three (3) days of acceptance of this offer to provide the verifying documents. Please be aware that as our Company evolves, there may be opportunities or changes in your initial responsibilities, salary, title, or reporting relationships. Any disputes or questions arising hereunder, including the construction or application of this Agreement, shall be settled by arbitration in accordance with the rules of the American Arbitration Association then in force. If the parties cannot agree upon an arbitrator with ten (10) days after demand of either party, either or both parties may request the American Arbitration Association to name a panel of five (5) arbitrators. Andataco shall strike the names of two (2) on this list; the offeree shall then strike two (2) names and the remaining name shall be the arbitrator. The decision of the arbitrator shall be final and binding upon the parties, both as to law and to fact, and shall not be appealable to any court in any jurisdiction. The expenses of the arbitrator shall be shared equally by the parties, unless the arbitrator determines that the expenses shall be otherwise assessed. The Company is an Affirmative Action and Equal Opportunity Employer and does not discriminate based on age, color, disability, national origin, race, medical condition, marital status, religion or sex. Letter to Diane Wong Offer of Employment May 1, 1997 Page Three of Three We are pleased to extend this offer to you. To let us know that you have read it and accept all of its terms, please sign and return this letter to me. We look forward to you joining us, Diane, and feel confident that your abilities and qualifications will contribute to our mutual success. If you have any questions, please feel free to contact me or Ligaya Bowman at (619) 453-9191. Sincerely, ANDATACO /s/ Richard A. Hudzik - --------------------- Richard Hudzik Chief Financial Officer Acknowledged, Accepted and Agreed /s/ Diane Wong Date signed May 5, 1997 - ---------------------------- ------------------ Diane Wong EX-10.29 4 LETTER AGREEMENT EXHIBIT 10.29 January 27, 1998 Arun Taneja 12 Wedgewood Drive Hopkinton, MA 01748 Re: Offer of Employment Dear Arun, I am very pleased to confirm our offer to you of employment with ANDATACO (the "Company"). You will report to me, in the position of Senior Vice President of Marketing. If you accept our offer, your effective date of hire will be January 9, 1998. The terms of our offer are as follows: 1. Your starting salary will be $13,750.00 per month, payable as earned in accordance with the Company's normal payroll policies. 2. You are eligible for a $25,000 quarterly bonus based on the Company's achievement of the quarterly Budget. If the Company achieves it's quarterly budgeted pre-tax income you will be paid a bonus of $20,000. If the Company exceeds it's quarterly budgeted pre-tax income by 10% or more you will be paid an additional $5,000. 3. You are eligible to participate in the company's option plan. Options granted under this plan will vest equally over five (5) years. The number of options to be granted will be no less then 200,000. This option grant is subject to Board approval at which time the strike price of the shares shall be fixed. 4. You will be eligible for the group health insurance, paid holidays, vacation days, and sick days as stipulated in the Company's personnel policies. 5. As an employee of the Company you will have access to certain Company confidential information and you may, during the course of your employment, develop certain information or inventions which will be the property of the Company. To protect the interest of the Company, you will need to sign the Company's standard "Proprietary Rights & Confidentiality Agreement" as a condition of your employment, a copy of which is attached hereto. We wish to impress upon you that we do not wish you to bring with you any confidential or proprietary material of any former employer or to violate any other obligations you may have to your former employers. Letter to Arun Taneja Offer of Employment January 27, 1998 Page Two of Three 6. Your employment with the Company is terminable at will, which means that you will be free to terminate your employment with the Company at any time for any reason or no reason, with or without notice. Similarly, the Company may terminate your employment at any time for any reason or no reason, with or without notice. By accepting this offer of employment, you will be agreeing that your employment is terminable at will, and acknowledge that no one has the authority to promise you, either orally or in writing, anything to the contrary. Not withstanding the above, it is understood that in the event your employment is terminated for other than legal cause as that term is defined under California law, or for non-performance of duties, during the first three (3) years of employment with the Company, You shall be entitled to six (6) months severance pay equal to the monthly base compensation provided for under paragraph 1 above. If such termination should occur following your employment with the Company for more than three (3) consecutive years, the severance payment shall be equal to twelve (12) months pay. Any such severance pay shall be made monthly. Non-performance of duties shall be determined by the Board of Directors. You will be informed of such non-performance in writing from the Board of Directors and given up to thirty (30) days to cure such non-performance. The Board of Directors will determine if performance has improved to be acceptable during the thirty (30) day cure period. 7. The terms of this letter constitutes the entire agreement between us regarding your employment with the Company and shall supersede any other agreements made prior to or on the date of this letter. This offer, if not accepted, will expire on February 4, 1998 at 5:00pm. The Company requires the following as an important condition to employment: all new employees must pass the pre-employment drug screening test and provide information verifying authorization to work in the United States. You have three (3) days of acceptance of this offer to provide the verifying documents. Please be aware that as our Company evolves, there may be opportunities or changes in your initial responsibilities, salary, title, or reporting relationships. Any disputes or questions arising hereunder, including the construction or application of this Agreement, shall be settled by arbitration in accordance with the rules of the American Arbitration Association then in force. If the parties cannot agree upon an arbitrator with ten (10) days after demand of either party, either or both parties may request the American Arbitration Association to name a panel of five (5) arbitrators. Andataco shall strike the names of two (2) on this list; the offeree shall then strike two (2) names and the remaining name shall be the arbitrator. The decision of the arbitrator shall be final and binding upon the parties, both as to law and to fact, and shall not be appealable to any court in any jurisdiction. The expenses of the arbitrator shall be shared equally by the parties, unless the arbitrator determines that the expenses shall be otherwise assessed. Letter to Arun Taneja Offer of Employment January 27, 1998 Page Three of Three The Company is an Affirmative Action and Equal Opportunity Employer and does not discriminate based on age, color, disability, national origin, race, medical condition, marital status, religion or sex. We are pleased to extend this offer to you. To let us know that you have read it and accept all of its terms, please sign and return this letter to me. We look forward to you joining us, Arun, and feel confident that your abilities and qualifications will contribute to our mutual success. Sincerely, Acknowledged, Accepted and Agreed ANDATACO /s/ Arun Taneja ----------------------------------- Arun Taneja /s/ W. David Sykes - ------------------------ W. David Sykes President Date signed January 30, 1998 ---------------------- EX-21.1 5 LIST OF SUBSIDIARIES EXHIBIT 21.1 ANDATACO, INC. SUBSIDIARIES OF REGISTRANT ANDATACO of California IPL International Sales Corporation IPL Investments, Inc. EX-23.1 6 CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-35441 and 333-35467) of Andataco, Inc. of our report dated January 13, 1999 appearing on page F-1 of this Form 10-K. PricewaterhouseCoopers LLP San Diego, California January 27, 1999 EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FY98 ANDATACO, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR OCT-31-1998 NOV-01-1997 OCT-31-1998 23,000 0 10,628,000 0 4,923,000 16,208,000 3,415,000 0 25,682,000 12,722,060 0 0 0 238,000 0 2,302,000 77,519,000 77,519,000 54,293,000 24,639,000 0 (1,413,000) 1,021,000 (2,434,000) 0 (2,434,000) 0 0 0 (2,434,000) (0.10) (0.10)
-----END PRIVACY-ENHANCED MESSAGE-----