-----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, Tvn2rFDovhQZxRswdx/GdMkb0vvcF75wnytrkYZBNdqvScDPxhmQH4RWJvwYJt4K QxMpmlb7bm6RVus9ELFB5w== 0000950135-97-001569.txt : 19970401 0000950135-97-001569.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950135-97-001569 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: IPL SYSTEMS INC CENTRAL INDEX KEY: 0000351810 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER STORAGE DEVICES [3572] IRS NUMBER: 042511897 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-10370 FILM NUMBER: 97570583 BUSINESS ADDRESS: STREET 1: 124 ACTON ST CITY: MAYNARD STATE: MA ZIP: 01754 BUSINESS PHONE: 5084611000 MAIL ADDRESS: STREET 2: 124 ACTON STREET CITY: MAYNARD STATE: MA ZIP: 01754 10-K405 1 IPL SYSTEMS, INC. 1 ================================================================================ - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-K [X] Annual Report pursuant to Section 13 or 15 (d) of the Securities and Exchange Act of 1934. For the fiscal year ended December 31, 1996 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934. Commission file Number 0-10370 IPL SYSTEMS, INC. (Exact name of Registrant as specified in its charter) ---------- MASSACHUSETTS 04-2511897 (State or jurisdiction of (I.R.S. Employer Indentification No.) incorporation or organization) 124 Acton Street, Maynard, Massachusetts 01754 (Address of principal executive offices and Zip Code) (508) 461-1000 (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 a check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the Registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes X No --- --- 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 definative proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X] The aggregate market value of Class A Common Stock held by non-affiliates of the Registrant as of March 12, 1997 was: $ 10,888,232 The number of shares outstanding of the Registrant's Class A Common Stock as of March 12, 1997 was: 5,633,819 DOCUMENTS INCORPORATED BY REFEREENCE Portions of the Registrant's Proxy Statement for the 1997 Annual Meeting are incorporated by reference into Part III of this Form 10-K. - -------------------------------------------------------------------------------- ================================================================================ 2 PART Item 1. Business -------- GENERAL IPL Systems, Inc. ("IPL" or the "Company") provides open-architecture storage solutions for Hewlett Packard, Sun Microsystems, DEC Alpha, and IBM RS/6000 and AS/400 Business servers, as well as Novell NetWare and Windows NT environments. IPL design, manufactures, services and sells its products through direct, indirect and OEM sales and service channels worldwide. IPL has entered into an Agreement and Plan of Merger and Reorganization (the "Merger Agreement"), dated as of February 28, 1997, among IPL, IPL Acquisition Corp. ("Merger Sub"), a Delaware corporation and a wholly-owned subsidiary of IPL, ANDATACO ("ANDATACO"), a California corporation, and W. David Sykes, the controlling shareholder of ANDATACO providing for the merger (the "Merger") of Merger Sub with and into ANDATACO. The Merger would result in former holders of ANDATACO equity (including options, warrants and other rights to acquire ANDATACO Common Stock, $1.00 par value per share) owning 74.8% of the post-merger IPL Stock on a fully diluted basis. It is anticipated that approval of matters related to the Merger will be submitted to the shareholders of IPL and, if approved, will be consummated in the second quarter of 1997. In addition to approval by the Company's shareholders, the Merger Agreement is subject to several conditions, including those concerning the accuracy of the Company's representations and warranties, the performance by the Company of certain covenants, the agreement by a member of the Company's board of directors to serve as Chief Executive Officer of ANDATACO following the Merger and the expiration or early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. There can be no assurance that these or any other conditions to the Merger will be satisfied or that the Merger will be consummated. For additional information regarding the terms of the Merger and the Merger Agreement, see the Company's Current Report on Form 8-K filed on March 25, 1997. IPL was incorporated in Massachusetts on January 15, 1973. The Company's principal office is located at 124 Acton Street, Maynard, Massachusetts 01754, and its telephone number at that address is (508) 461-1000. The discussion contained in this section as well as elsewhere in this report may contain 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. See "Important Factors Regarding Forward-Looking Statements of IPL Systems, Inc." attached hereto as Exhibit 99.1 and incorporated by reference into this report. 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. See Rider re Exhibit 99.1. 1 3 RECENT DEVELOPMENT OF BUSINESS In 1996, IPL's strategy was to continue its focus on the large and growing market for open systems storage. The Company's DataBase RAID (Redundant Array of Independent Disks) architecture provides data management solutions for users of large relational databases (such as Oracle, Sybase and Informix). Several factors during 1996 adversely affected the Company's ability to fully exploit the potential of its products in the market. These factors included the inability to market and sell the Company products effectively, which resulted in part from the departure of certain key sales personnel, and the delayed introduction of certain strategic technology. PRODUCT DEVELOPMENT The Company's product development strategy is to identify opportunities for new storage solutions for the open systems Very Large Database ("VLDB") market. Typically, the Company will identify new devices available from third parties which may bring significant benefits to users of IPL's targeted computer platforms. The Company then adapts or develops its proprietary controllers to provide an interface between these devices and the host computer without requiring changes to the host's hardware or software. This approach is intended to decrease development costs, accelerate new product development cycles and enable the Company to be early to market with its storage offerings. See "Research and Development" below. In the fourth quarter of 1996, the Company introduced dual active controller arrays for the open systems storage market. RAIDTower II's dual controllers handle data simultaneously (active-active), as opposed to most implementations in which one controller is active while the other sits idle (active-passive), waiting for the other controller to fail. RAIDTower II's dual active controllers accelerate performance because of multiple data paths from the host IOPs. The protection of dual controller redundancy, combined with fast performance, may make RAIDTower II an attractive solution for VLDB users whose business operations demand high performance and high availability of critical information. IPL expects that the product's success in the market will depend upon customer demand for active-active solutions and its ability to expand sales channels in the U.S. MARKETS Industry analysts from the International Data Corporation ("IDC") project that the multi-billion dollar open systems storage market will continue to grow for the next several years, at the rate of 20-30% annually. IPL's target customer in this environment is the VLDB user whose storage needs range from 20-30 gigabytes to multiple terabytes of data. Typically, this data is distributed across multiple servers in data warehouse and on-line transaction processing ("OLTP") applications in which data must be available at all 2 4 times, and data loss is unacceptable. IPL products are designed to address the requirements of these environments. During 1996, the Company concentrated primarily on UNIX platforms (including Hewlett Packard and Sun business servers), and added windows NT connectivity during the course of the year. UNIX is expected to continue as the primary market in 1997. SALES AND DISTRIBUTION The Company's new focus on open systems required adjustment in 1996 to the direct sales force in North America, including some restaffing and significant training of IPL personnel to support users in UNIX multi-server environments. By the end of 1996, the 15 member sales team in North America consisted of 9 sales representatives, 3 inside sales staff supporting the field, and 3 field engineers. In connection with the Merger Agreement, IPL engaged ANDATACO as a non-exclusive worldwide reseller of IPL's products pursuant to an OEM Agreement dated as of February 25, 1997. Shortly thereafter, IPL discontinued direct sales, which included the termination of its direct sales force. The Company now relies almost exclusively on ANDATACO as the primary distributor of its products. ANDATACO has hired many of the prior IPL employees, as well as certain representatives who had previously left IPL to work with other companies. The OEM Agreement can be terminated by either party on thirty day's notice. If the OEM Agreement is terminated, there can be no assurance that the Company will be able to access alternative distribution channels and may, therefore, confront significant difficulties marketing its products. There also can be no assurance that the Company's relationship with ANDATACO will ultimately prove successful. In addition to its existing agreements with its STARs in the U.S., during 1996, the Company continued to market its technology, on a limited basis, through independent non-exclusive distributors worldwide. In Europe, these distributors included Decision Systems International (DSI), an affiliate of Ing.C.Olivetti & C.,S.p.A. ("Olivetti"), and GUWA Computer Systems. In Asia, these distributors included Kanamatsu Electric LTD (KEL). The Company's international distributors remained focused on the IBM AS/400 market during 1996. While some overseas customers are beginning to move toward open systems technology, the pace of adoption overseas is still expected to lag behind the U.S. The Company is not currently attempting to engage new distributors and is relying primarily on its relationship with ANDATACO for growth. The Company expects that its relationship with ANDATACO may improve sales; however there can be no assurance of such improvement or, if its relationship with ANDATACO is unsuccessful or only moderately successful, that the Company could expand sales through other distributors. Overall, the Company continues to have difficulty penetrating markets, both in the U.S. and abroad, and no assurance can be given that the Company's efforts, including the transition out of direct sales, will be able to reverse this trend. Consistent with industry practice, the Company provides its distributors with discounts from IPL list prices, which are based on a number of factors, including the nature and volume of the distributor's business and its sales territory. Generally, IPL's agreements with its distributors establish territories and pricing and may be canceled on short notice and/or contain no firm purchase commitments. All of the Company's sales in 1996 were in U.S. dollars. For additional information regarding the Company's export sales, see Note 11 of the Notes to Consolidated Financial Statements contained elsewhere in this report. 3 5 BACKLOG The Company believes that sales backlog is generally not material to its business because the Company usually ships products within 30 days from receipt of orders. MANUFACTURING AND SUPPLIERS Manufacture of the Company's disk drive sub-systems and tape drive systems involves the assembly of purchased electro/mechanical components, custom-made printed circuit boards fabricated in accordance with the Company's proprietary designs, storage devices, standard integrated circuits and power supplies. All products manufactured by IPL in this manner are then tested in the Company's quality assurance program. The Company has and will continue to rely on outside vendors to manufacture certain 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 pricing pressure. IPL competes with a number of companies offering computer data storage, backup and recovery systems. In the open systems storage market, EMC , Data General Corporation, server systems manufacturers and resellers of servers are the major competitors, but the Company believes that to date no dominant suppliers have emerged in the very large database segment of the open systems storage market. Because IPL's systems have to be compatible with the systems of the principal manufacturers of UNIX-based open systems computers and the relational database software programs, IPL's competitive position and operating results may be adversely affected by, among other factors, modifications in the design of such systems or programs, the introduction of new products by such manufacturers or other competitors, reductions in the pricing of storage solutions in these markets, or the implementation of new marketing strategies by any of its principal competitors. 4 6 Today IPL focuses less on the AS/400 market than in prior years, but continues to support its AS/400 customers. In this market, competitors include International Business Machines ("IBM") and others. In both the UNIX and AS/400 markets, the company's competitors may have substantially greater financial, product development marketing distribution resources than the Company. There are several elements of competition in the market for computer storage solutions. Principal among them are product quality and reliability, time to market, price/performance characteristics, service and support, marketing and distribution capability and the ability to deliver products in large volumes. IPL believes that it competes favorably with respect to these elements, except for marketing and distribution capabilities. PRODUCT WARRANTY AND SERVICE Disk and tape drive products have a warranty that covers defective material and workmanship during the warranty period. Installation and maintenance service is available to customers through various service providers, including Olivetti North America, a U.S. affiliate of Olivetti, and DecisionOne. Certain of the Company's major distributors also provide similar services. Technical support for these services is provided from the Company's Maynard, Massachusetts, and Brussels, Belgium offices. RESEARCH AND DEVELOPMENT IPL's ability to compete successfully depends upon the identification and development of new storage, backup, and recovery solutions for the open systems market. To achieve this goal, the Company's engineering group continuously monitors hardware and software product development. With the Company's focus on integrated hardware and software solutions, IPL has developed software to further enhance its storage products. This software includes the Centralized Management Systems ("CMS"), which monitors, tunes and services IPL storage in local and distributed environments, and the software component in ParellelBACK. Continued research and development in software is intended to enhance ease of use, maintenance, and functionality of the Company's storage solutions. With respect to hardware, IPL will often evaluate and test a major component that becomes available in the market, and subject it to IPL's own reliability testing procedures to enable IPL to select the best available products with adaptive potential for its markets. Once such a component has been identified and qualified under IPL's reliability testing procedures, IPL then applies its knowledge of host systems to adapt one of its proprietary controllers or develop a new controller to provide an interface between the peripheral storage device and the identified host computer. To facilitate this process, IPL has designed standard controllers for several of the existing peripheral interfaces. 5 7 To the extent that IPL is able to use its proprietary controllers for new subsystems, the Company has been able to develop new products quickly at low expense. However, because the computer industry is subject to rapid technological development, there can be no assurance that IPL will be able to respond in an effective or timely fashion to such changes. Historically, IPL has been able to respond to technological changes introduced to the AS/400 market. In 1996, the Company responded to demand in the open systems market for new dual controller technology by introducing the RAIDTower II. To date, IPL remains one of a limited number of manufacturers delivering dual (active-active) controller subsystems. Despite this early introduction, however, the Company has had limited initial success in marketing this product. The Company expects, subject to the risk factors mentioned herein, that this ability to respond should continue with manufacturers in the open systems business for which the Company currently develops storage and backup technology. These manufacturers include Hewlett Packard, Sun Microsystems and others. During its fiscal year ended December 31, 1996, the Company incurred costs of $1,439,000 for engineering and product development, compared to $1,317,000 in 1995 and $1,784,000 in 1994. The Company's research and development efforts continue to focus on new products that utilize the Company's engineering expertise in the design of storage products. 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. The Company has no patents on its current products, but in 1995 the Company filed applications for patents in the United States and foreign countries with respect to the ParallelBACK product and another product introduced in 1996. The status of patents involves complex legal and factual questions and the breadth of claims allowed is uncertain. There can be no assurance as to the likelihood that pending patents will be issued or that any such patents will afford protection against competitors with similar technology. In addition, patent applications filed in foreign countries may provide significantly less patent protection than the United States. No assurances can be given that patents issued to the Company will not be infringed upon or designed around by others. Due to the rapid technological development of the computer data storage industry with concurrent extensive patent coverage and with the rapid rate of issuance of new patents, certain aspects of the Company's products may infringe patents unknown to the Company. Patent protection may also be obtained in the future on new inventions and designs for peripheral storage subsystems or the computers to which the Company's subsystems attach. 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 or any such patents 6 8 are issued, 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 IPL 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 On March 18, 1997, the Company had 61 full-time employees. The Company believes it has a satisfactory relationship with its employees. The success of the Company's operations depends, in part, on the Company's ability to attract and retain experienced technical, sales, marketing and management personnel. Such experienced personnel are in great demand and the Company must compete for their services. None of the Company's employees is covered by a collective bargaining agreement. Item 2. Properties. ---------- The Company currently occupies approximately 59,000 square feet of leased office and manufacturing space worldwide, with an average annualized rental cost, net of sub-lease/income, of approximately $370,000 for 1996. Since April 1995, the Company's lease of its facility located in Maynard Massachusetts covers 123,700 square feet of office and manufacturing space for a term extending through March 31, 1998. During 1995, the Company consolidated its activities into approximately 42,000 square feet in the Maynard facility and has offered the remaining space for sublease (See Notes 6 and 12 of 7 9 Notes to the Consolidated Financial Statements). In March 1996 the Company subleased an additional 36,700 square feet of its Maynard facility for a term commensurate with the prime lease. In February 1997 the Company subleased an additional 5,425 feet of its Maynard facility with options for a term commensurate with the prime lease. In support of its direct sales program, the Company had 9 regional offices which generally consisted of not more than approximately 1,000 square feet, made available to the Company under occupancy and service agreements with terms ranging between twelve and thirty-six months all of which are expected to be terminated within months in connection with the Company's transition out of Direct Sales in the U.S. Item 3. Legal Proceedings. ----------------- There are no legal proceedings to which the Company is a party, other than routine litigation incidental to the business, none of which is believed to be material. 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 December 31, 1996. 8 10 PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. The Company's Class A Common Stock is traded on the Nasdaq Stock Market system under the symbol IPLS. The following table reflects, for the period indicated, the high and low sales prices for the Class A Common Stock as reported by Nasdaq. Price ----- Year High Low - ---- ---- --- 1996 First Quarter 5 7/8 2 1/2 Second Quarter 8 1/4 3 1/2 Third Quarter 4 1/4 1 7/8 Fourth Quarter 2 1/2 1 1/4 Year - ---- 1995 First Quarter 5 1/2 2 Second Quarter 6 3/4 3 5/8 Third Quarter 7 7/8 5 3/8 Fourth Quarter 6 5/16 2 3/4 On March 12, 1997 the last sale price of the Company's Class A Common Stock was $2.313, and there were approximately 280 record holders and more than 2400 beneficial holders of the Company's Class A Common Stock. The Company has never paid a cash dividend on its Class A Common Stock and it is currently anticipated that cash dividends will not be paid to holders of Class A Common Stock in the foreseeable future. 9 11
Item 6. Selected Financial Data. ----------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Five-year Financial Summary Revenues $ 17,064 $ 24,764 $ 29,949 $ 39,721 $ 53,572 Dollars in thousands (except per share amounts) Net income (loss) $ (2,142) $ (3,464) $ (15,046) $ (2,451) $ 3,053 Net income (loss) per share $ (0.38) $ (0.63) $ (2.80) $ (0.47) $ 0.56 Weighted average common shares outstanding 5,617,926 5,469,177 5,381,519 5,235,964 5,435,649 Working capital $ 4,921 $ 6,195 $ 8,285 $ 21,549 $ 25,935 Total assets $ 10,614 $ 13,742 $ 18,764 $ 37,757 $ 39,355 Long-term debt $ -- $ -- $ -- $ -- $ -- Shareholder's equity $ 6,550 $ 8,543 $ 11,352 $ 26,398 $ 28,399 Current ratio 2.2:1 2.2:1 2.1:1 2.9:1 3.4:1
10 12 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW The discussion contained in this item may contain forward-looking statements based on the current expectations of the Company's management. Such statements are subject to certain risks and uncertainties which would cause actual results to differ materially from those projected. See "Important Factors Regarding Forward-Looking Statements of IPL Systems, Inc." Filed as Exhibit 99.1 to this report which is incorporated by reference into this report . 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. The Company and ANDATACO entered into a definitive agreement dated as of February 28, 1997 to merge the two companies. See Item 1, "Business - General" above. IPL management believes that a successful merger would allow the Company to obtain greater penetration into the rapidly expanding open systems storage market and provide a broader revenue base to enable the Company access to additional capital resources and reduction in overhead costs as a percentage of revenues. In the absence of such a merger, management believes, based on its cash flow estimates, that overhead cost burdens could be reduced in order to provide a break-even cash flow and permit the Company's continuance as a going concern only if recent revenue levels increased. Absent the Merger or an alternative third-party channel of distribution, through ANDATACO or otherwise, management does not believe that the Company will be able to achieve any such increase in revenue. The Company's net loss for 1996 was $2,142,000, or $0.38 per share, compared with a net loss of $3,464,000, or $0.63 per share in 1995. The lower net loss in 1996 resulted from higher gross margins from the sale of open systems products, as well as reduced expenses. The Company has experienced increased expenses in 1997 in connection with the Merger Agreement. The Company has discontinued direct sales. In the foreseeable future, the Company intends to sell almost exclusively pursuant to arrangements with ANDATACO. See Item 1 above. The pace of early sales under the Company's new marketing approach have been disappointing and there can be no assurance that sales will ultimately improve. Furthermore, the Company's reliance on one primary distributor is inherently risky. RESULTS OF OPERATIONS 1995 COMPARED WITH 1994 - --------------------------------------------- Revenues in 1996 were $17,064,000 compared with $24,764,000 in 1995. This 31% decrease in revenue compared to a year ago is the result of several factors, including continued competitive pressures; changes in the business priorities of the Company's major European distributors; the departure of several U.S. sales representatives employed 11 13 by IPL and the delay in releasing certain strategic new technology. Total open systems products sales grew from 26% of total product revenue in 1995 to 54% in 1996. Total U.S. sales were 73% and international sales were 27% in 1996 compared with 66% and 34%, respectively, for 1995. Disk revenue was 75% of total revenue in 1996 and 77% in 1995 respectively. Gross margins were 44% in 1996 compared with 38% in 1995. The improvement is the result of reduced costs, increased gross margins on U.S. open systems product sales, and higher extended warranty revenues as well as partial recoveries of a doubtful accounts receivable that was reserved in an earlier period which totalled $1,550,000 in 1996 and $1,767,000 in 1995. Selling, general and administrative expenses decreased approximately 26% to $8,501,000 in 1996 compared with $11,436,000 in 1995. This $2,935,000 decrease is primarily due to IPL employing fewer sales representatives and ongoing expense control as well as the reduction in revenue. Engineering and development expenses were $1,439,000 in 1996 compared with $1,317,000 in 1995. These additional expenses permitted the Company to develop new storage backup and disaster recovery solutions for the database segment of the UNIX market. On October 3, 1996, the Company announced the RAIDTower II storage system with dual active technology. Restructuring expenses were increased $497,000 in 1995 to cover the entire occupancy cost for unused space for the balance of the lease term of the Company's Maynard facility. In 1994, the Company recorded a $1,971,000 restructuring charge in connection with substantially reducing the scale of its operations, and refocused on product development and sales efforts on the open systems market. The 1994 restructuring expense was reduced by $100,000 in the first quarter of 1996, when the Company sublet a portion of the unused space in its Maynard facility. The occupancy cost associated with this space had been previously expensed in the third quarter of 1995 when restructuring expenses increased $497,000 to cover the entire occupancy cost for unused space for the balance of the lease term of the Company's Maynard facility. In the fourth quarter of 1994, the Company had recorded a $1,971,000 restructuring charge when it had reduced the scale of its operation and refocused on product development and sales efforts in the open systems market. Other income decreased to $123,000 in 1996 from $274,000 in 1995 primarily due to lower average cash balances during 1996. The Company had no federal tax liability in 1996. The Company fully utilized its benefit from the net operating loss carryback in 1994. There are approximately $14,000,000 of federal and $26,000,000 of state tax loss carryforwards available through 2011 and 2001, respectively. The Company's ability to use these losses will be subject to certain annual limitations as a result of the change in control if the proposed Merger is consummated. See Note 5 to the Notes to Consolidated Financial Statements. 12 14 In 1996 the Company had a net loss of $2,142,000, or $ 0.38 per share, compared with the 1995 net loss of $3,464,000, or $0.63 per share. 1995 COMPARED WITH 1994 In 1995, the Company's revenues were $24,764,000 compared to $29,949,000 in 1994. This decline was primarily due to a significant reduction in purchases made by the Company's European distributors who have been slow to transition to the open systems technology. Continued competitive pressures and changes in the business priorities of the Company's major European distributors contributed to the decline in European sales. U.S. and non-European revenues were approximately the same for 1995 and 1994. Open systems product sales represented 26% of total product revenue in 1995 compared to 2% in 1994. Disk revenue was 77% of total revenue in 1995 and 75% in 1994. Gross margins were 38% in 1995 compared with 10% in 1994. The increase in margins of approximately 280% was due to reduced costs, the transition from the AS/400 market to the open systems market, and a partial recovery of a doubtful accounts receivable in 1995 which had been fully reserved in 1994. The 1994 gross margin was reduced by $4,600,000 relating to provisions for bad debts and excess and obsolete inventory reserves. Selling, general and administrative expenses decreased approximately 27% in 1995 from 1994. This was primarily due to reengineering of the Company's operations and ongoing expense control. Engineering and development expenses decreased approximately 26% in 1995 compared with 1994 as a result of lower costs associated with the development of open systems products. Total other income decreased from $274,000 in 1995 to $288,000 in 1994 primarily due to lower average cash balance during 1995. There was no federal tax liability in 1995. The Company fully utilized its benefit from the net operating loss carryback in 1994. The effective tax benefit rate in 1994 was 7.2% In 1995 the Company had a net loss of $3,464,000 or $0.63 per share, compared with the 1994 net loss of $15,046,000 or $2.80 per share. LIQUIDITY AND CAPITAL RESOURCES The Company's cash and equivalents as of December 31, 1996 were $2,274,000 compared with $3,595,000 at December 31, 1995. Accounts receivable decreased 41% from $4,019,000 at December 31, 1995 to $2,391,000 at December 31, 1996. This decrease was the result of the reduction in revenue. Inventories increased 15% to $3,891,000 at December 31, 1996 from $3,375,000 at December 31, 1995, due primarily 13 15 to the new RAIDTower II product and also maintaining RAIDTower I product in anticipation of higher revenue in the fourth quarter of 1996. Accounts payable and accrued expenses decreased $1,135,000 primarily due to reduced purchasing requirements and operating expenses. As of December 31, 1996, IPL had working capital of $4,921,000, a decrease of $1,274,000, or approximately 21%, from $6,195,000 as of December 31, 1995. IPL's current ratio remained stable at about 2.2:1 as of the end of both years. In the year ended December 31, 1996, IPL used $1,159,000 in cash to fund the losses of its operating activities. If IPL's operating activities continue to generate losses and use IPL's remaining cash, IPL will need to either liquidate assets or seek outside sources of financing, which, if available at all, may not be available on reasonable terms. IPL's management does not anticipate any such needs if both (i) its OEM Agreement with ANDATACO produces cash receipts anticipated by Company management and (ii) the Merger is consummated by the end of May. If the Merger is delayed or terminated or if projected cash receipts from the arrangements with ANDATACO are less than management projects, IPL will need to attempt to access outside sources of capital. There can be no assurance, however, that such outside sources of capital will be available. 14 16 Item 8. Financial Statements and Supplementary Data. ------------------------------------------- See Item 14 for Financial Statement filed as part of this Form 10-K. Quarterly Financial Data (Unaudited) Summarized unaudited quarterly financial data for 1995 and 1994 (dollars in thousands, except per share amounts) is as follows:
1996 - Three Months Ended March 31 June 30 Sept. 30 Dec. 31 - ---------------------------------------------------------------------------------------------------------------- Revenue $ 7,101 $ 4,464 $ 3,077 $ 2,422 Net income (loss) 230 ( 581) ( 796) ( 996) Net income (loss) per common share .04 ( 0.10) ( 0.14) ( 0.18)
1995 - Three Months Ended March 31 June 30 Sept. 30 Dec. 31 - ---------------------------------------------------------------------------------------------------------------- Revenue $ 6,517 $ 6,707 $ 4,524 $ 7,016 Net loss ( 785) ( 389) ( 1,910) ( 380) Net loss per common share ( 0.15) ( 0.07) ( 0.35) ( 0.07)
Item 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 15 17 PART III Item 10. Directors and Executive Officers of the Registrant. -------------------------------------------------- The information required to be reported hereunder is incorporated by reference to the information reported in the Company's Proxy Statement for its 1997 Annual Meeting of Stockholders under the caption "Election of Directors", "Executive Officers" and "Compliance with Section 16 (a) of the Securities Exchange Act of 1934". Item 11. Executive Compensation. ---------------------- The information required to be reported hereunder is incorporated by reference to the information reported in the Company's Proxy Statement for its 1997 Annual Meeting of Stockholders under the caption "Executive Compensation" and "Election of Directors -- Director Compensation." Item 12. Security Ownership of Certain Beneficial Owners and Management. -------------------------------------------------------------- The information required to be reported hereunder is incorporated by reference to the information reported in the Company's Proxy Statement for its 1997 Annual Meeting of Stockholders under the caption "Share Ownership". Item 13. Certain Relationships and Related Transactions. ---------------------------------------------- The information required to be reported hereunder is incorporated by reference to the information reported in the Company's Proxy Statement for its 1997 Annual Meeting of Stockholders under the caption "Certain Transactions" and Note 10 of the Notes to Consolidated Financial Statements contained elsewhere in this report. 16 18 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. - ------------------------------------------------------------------------- Page Number ----------- (a) (1) The following report and financial statements of IPL Systems, Inc. are filed as part of this Form 10-K: Independent Auditors' Report 23 Consolidated Balance Sheets - December 31, 1996 and 1995 24 Consolidated Statements of Operations - Years Ended December 31, 1996, 1995 and 1994 25 Consolidated Statements of Stockholders' Equity -- Years Ended December 31, 1996, 1995, and 1994 26 Consolidated Statements of Cash Flows -- Years Ended December 31, 1996, 1995 and 1994 27 Notes to Consolidated Financial Statements 28 (a) (2) The following report and financial schedule of IPL Systems, Inc. are filed as part of the Form 10-K: Schedule VIII -- Valuation of Qualifying Accounts 38 Independent Auditors' Consent and Report on Schedule 76 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. 17 19 (a) (3) The following exhibits are filed as part of this Form 10-K: Exhibit Number Exhibit - ------ ------- 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 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. 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. 18 20 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 to the 1995 Form 10-K and incorporated herein by reference. 10.11 1996 Consolidated Equity Incentive Plan, filed herewith as Exhibit 10.11. 10.12 Consulting Agreement dated as of October 1, 1996 between the Company and Cornelius P. McMullan, filed herewith as Exhibit 10.12. 10.13 Consulting Agreement dated as of October 1, 1996 between the Company and Harris Ravine, filed herewith as Exhibit 10.13. 10.14 Consulting Agreement dated as of January 1, 1997 between the Company and BI Capital, Ltd., filed herewith as Exhibit 10.14. 10.15 Form of Consulting Agreement dated as of March 1, 1997 between the Company and Harris Ravine, filed herewith as Exhibit 10.15. 10.16 OEM Agreement dated as of February 25, 1997 between the Company and ANDATACO, filed herewith as Exhibit 10.16. 11 Computation of Net Income per Common Share, filed herewith as Exhibit 11. 21.1 List of subsidiaries, filed as Exhibit 22 to the 1991 Registration Statement and incorporated herein by reference. 23. Consent of Deloitte & Touche LLP, Independent Certified Public Accountants, filed herewith as Exhibit 23. 99.1 Important Factors Regarding Future Results of IPL Systems, Inc., filed herewith as Exhibit 99.1. EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS Exhibits 10.3 and 10.5 through 10.15 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 December 31, 1996. 19 21 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. IPL SYSTEMS, INC. By: /s/ Ronald J. Gellert ----------------------- Ronald J. Gellert President and Chief Executive Officer March 26, 1997 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/ Ronald J. Gellert - ----------------------------- President, Chief Executive March 26, 1997 Ronald J. Gellert Officer and Director (Principal Executive Officer) /s/ Eugene F. Tallone - ----------------------------- Vice President - Finance, Chief March 26, 1997 Eugene F. Tallone Financial Officer and Treasurer (Principal Financial and Accounting Officer) /s/ Stephen J. Ippolito - ----------------------------- Director March 26, 1997 Stephen J. Ippolito /s/ Cornelius P. McMullan - ----------------------------- Director March 26, 1997 Cornelius P. McMullan /s/ Harris Ravine - ----------------------------- Director March 26, 1997 Harris Ravine
20 22 INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Stockholders of IPL Systems, Inc. Maynard, Massachusetts We have audited the accompanying consolidated balance sheets of IPL Systems, Inc. and its subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of IPL Systems, Inc. and its subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company's losses from operations and past and anticipated cash flow deficiencies raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. As discussed in Note 14 to the consolidated financial statements, the Company has signed a Definitive Agreement of Merger and Reorganization dated as of February 28, 1997 with anDATAco and taken certain other related actions. Boston, Massachusetts February 21, 1997 (Except for Note 14, for which the date is March 7, 1997) 23 IPL SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 - -----------------------------------------------------------------------------------------------------------------------------------
ASSETS 1996 1995 CURRENT ASSETS: Cash and equivalents $ 2,274,080 $ 3,595,268 Accounts receivable - trade (net of allowance for doubtful accounts of $353,000 and $2,111,000) 2,391,330 4,018,511 Inventories 3,891,466 3,375,652 Prepaid expenses and other current assets 428,289 404,564 ----------- ------------ Total current assets 8,985,165 11,393,995 ----------- ------------ EQUIPMENT, FIXTURES AND LEASEHOLD IMPROVEMENTS: Manufacturing equipment 4,931,807 4,883,499 Office equipment and fixtures 2,190,977 2,319,517 Customer support equipment 3,103,577 3,500,011 Leasehold improvements 1,338,598 1,334,788 ----------- ------------ 11,564,959 12,037,815 Less accumulated depreciation and amortization 9,935,858 9,689,630 ----------- ------------ 1,629,101 2,348,185 $ 10,614,266 $ 13,742,180 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995 CURRENT LIABILITIES: Trade accounts payable $ 3,188,660 $ 3,583,605 Accrued payroll expenses 391,554 827,026 Accrued restructuring expenses 291,773 594,782 Other accrued expenses 192,307 193,959 ------------ ------------ Total current liabilities $ 4,064,294 $ 5,199,372 ------------ ------------ STOCKHOLDERS' EQUITY: Class A common stock, $.01 par value - authorized, 20,000,000 shares; issued and outstanding, 5,633,819 shares and 5,200,590 shares at December 31, 1996 and 1995, respectively 56,338 52,006 Class C common stock, $.01 par value - authorized, 2,250,000 shares; issued and outstanding, 386,929 shares at December 31, 1995 - 3,869 Additional paid-in capital 17,378,568 17,230,023 Deficit (10,884,934) (8,743,090) ------------ ------------ Total stockholders' equity 6,549,972 8,542,808 ------------ ------------ $ 10,614,266 $ 13,742,180 ============ ============
See notes to consolidated financial statements. -2- 24 IPL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 - --------------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 REVENUES: Product $14,593,901 $22,952,315 $ 27,511,453 Service 2,470,531 1,811,500 2,437,072 ----------- ----------- ------------ 17,064,432 24,763,815 29,948,525 ----------- ----------- ------------ COSTS AND EXPENSES: Cost of sales 9,488,716 15,251,668 26,938,094 Selling, general and administrative expenses 8,501,768 11,436,222 15,759,705 Engineering and development 1,438,936 1,317,299 1,784,113 Restructuring expenses (income) (100,000) 496,880 1,970,587 ----------- ----------- ----------- 19,329,420 28,502,069 46,452,499 ----------- ----------- ----------- OPERATING LOSS (2,264,988) (3,738,254) (16,503,974) OTHER INCOME: Interest 118,922 199,568 162,857 Other, net 4,222 74,923 124,906 ----------- ----------- ----------- LOSS BEFORE INCOME TAX BENEFIT (2,141,844) (3,463,763) (16,216,211) INCOME TAX BENEFIT - Federal - - (1,170,000) NET LOSS $(2,141,844) $(3,463,763) $(15,046,211) =========== =========== ============ NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE $ (0.38) $ (0.63) $ (2.80) =========== =========== ============ COMMON AND COMMON EQUIVALENT SHARES USED IN CALCULATION OF NET LOSS PER SHARE 5,617,926 5,469,177 5,381,519 =========== =========== ============
See notes to consolidated financial statements. -3- 25 IPL SYSTEMS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 - ----------------------------------------------------------------------------------------------------------------------------
Common Stock ------------------------------------------------ Class A (Voting) Class C (Voting) Additional Retained ------------------------ -------------------- Paid-in Earnings Shares Amount Shares Amount Capital (Deficit) BALANCE, JANUARY 1, 1994 4,501,776 $45,018 879,743 $ 8,797 $16,577,458 $ 9,766,884 Net loss for the year -- -- -- -- -- (15,046,211) --------- ------- -------- ------- ----------- ------------ BALANCE, DECEMBER 31, 1994 4,501,776 45,018 879,743 8,797 16,577,458 (5,279,327) Net loss for the year -- -- -- -- -- (3,463,763) Exercise of stock options 206,000 2,060 -- -- 652,565 -- Conversion of Class C to Class A stock 492,814 4,928 (492,814) (4,928) -- -- --------- ------- -------- ------- ----------- ------------ BALANCE, DECEMBER 31, 1995 5,200,590 52,006 386,929 3,869 17,230,023 (8,743,090) Net loss for the year -- -- -- -- -- (2,141,844) Exercise of stock options 46,300 463 -- -- 122,517 -- Consultant's stock option compensation -- -- -- -- 26,028 -- Conversion of Class C to Class A stock 386,929 3,869 (386,929) (3,869) -- -- --------- ------- -------- ------- ----------- ------------ BALANCE, DECEMBER 31, 1996 5,633,819 $56,338 -- $ -- $17,378,568 $(10,884,934) ========= ======= ======== ======= =========== ============ Total BALANCE, JANUARY 1, 1994 $ 26,398,157 Net loss for the year (15,046,211) ------------ BALANCE, DECEMBER 31, 1994 11,351,946 Net loss for the year (3,463,763) Exercise of stock options 654,625 Conversion of Class C to Class A stock -- ------------ BALANCE, DECEMBER 31, 1995 8,542,808 Net loss for the year (2,141,844) Exercise of stock options 122,980 Consultant's stock option compensation 26,028 Conversion of Class C to Class A stock -- ------------ BALANCE, DECEMBER 31, 1996 $ 6,549,972 ============
See notes to consolidated financial statements. -4- 26 IPL SYSTEMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 - -------------------------------------------------------------------------------
1996 1995 1994 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(2,141,844) $(3,463,763) $(15,046,211) Adjustments to reconcile net loss to net cash (used for) provided by operating activities: Depreciation and amortization 976,561 1,213,005 2,614,596 Loss on the sale of equipment and fixtures 27,479 27,072 46,223 Consultant's stock option compensation 26,028 - - Noncash restructuring expenses - - 1,185,790 Bad debt expense (recoveries) (432,535) (1,374,995) 3,173,526 Inventory reserves 409,473 (1,422,474) 1,382,055 Changes in assets and liabilities: Accounts receivable - trade 2,059,716 5,971,339 6,279,971 Inventories (925,287) 1,107,188 3,436,420 Prepaid expenses and other current assets (23,725) (46,599) 177,095 Refundable income taxes - 1,425,000 475,000 Deferred income taxes - - 395,000 Trade accounts payable and accrued payroll expenses (832,069) (2,248,464) (4,506,131) Accrued restructuring expenses (303,009) 35,496 559,286 ----------- ----------- ------------ Total adjustments 982,632 4,686,568 15,218,831 Net cash (used for) provided by operating activities (1,159,212) 1,222,805 172,620 ----------- ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Additions to equipment, fixtures and leasehold improvements (298,895) (568,488) (2,064,398) Proceeds from sale of equipment and fixtures 13,939 47,514 - ----------- ------------ ------------ Cash used for investing activities (284,956) (520,974) (2,064,398) ----------- ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES - Exercise of stock options 122,980 654,625 - ----------- ------------ ------------ CASH AND EQUIVALENTS: Net (decrease) increase (1,321,188) 1,356,456 (1,891,778) Balance, beginning of year 3,595,268 2,238,812 4,130,590 ----------- ------------ ------------- Balance, end of year $ 2,274,080 $ 3,595,268 $ 2,238,812 =========== ============ ============= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION - Income taxes paid $ 53,000 $ - $ 23,000 =========== ============ =============
See notes to consolidated financial statements. -5- 27 IPL SYSTEMS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 - ------------------------------------------------------------------------------- 1. INDUSTRY IPL Systems, Inc. (the "Company"), founded in 1973, provides open architecture database storage solutions for multi-host computer environments. The Company supplies its products through direct, indirect and Original Equipment Manufacturer ("OEM") sales and service channels throughout the world. 2. GOING CONCERN MATTERS The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the consolidated financial statements, during the years ended December 31, 1996, 1995 and 1994, the Company incurred net losses of $2,141,844, $3,463,763 and $15,046,211, respectively, and net cash used for operating activities totaled $1,159,212 in 1996. In addition, the Company anticipates, absent corrective actions, a cash flow deficiency during 1997. These factors, among others, indicate that the Company may be unable to continue as a going concern for a reasonable period of time. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's continuation as a going concern within the next year is dependent upon its ability to generate sufficient cash flow from operations to meet its obligations on a timely basis, and/or to obtain additional financing as may be required. In the long-term, its success is dependent ultimately on the attainment of successful operational results. Management believes that a successful merger, as discussed in Note 14, will allow the Company to realize certain cost savings, further penetrate the rapidly expanding open architecture storage market and provide sufficient working capital to sustain operations through 1997. In the absence of such a merger, management believes, based on its cash flow estimates, that overhead cost burdens could be reduced in order to provide a break-even cash flow and result in the Company's continuance as a going concern only if revenue levels are substantially increased over current levels. If revenue levels do not increase, the Company would likely be forced to either liquidate assets or seek outside sources of financing, which, if available at all, may not be available on reasonable terms. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES - The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. In 1996 and 1995, the allowance for doubtful accounts was reduced by $1,758,000 and $1,557,000, respectively, principally as a result of partial collection of previously reserved balances. -6- 28 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, IPL Investments, Inc. and IPL International Sales Corporation. All intercompany accounts and transactions have been eliminated. FAIR VALUE - The fair value of assets and liabilities representing financial instruments approximates their carrying value. CASH AND EQUIVALENTS - For purposes of reporting cash flows, cash and equivalents include cash on hand and amounts on short-term deposit with banks or other financial institutions. INVENTORIES - Inventories are stated at the lower of cost (based on the first-in, first-out method) or market. At December 31, 1996, the Company was in the process of a product transition. Inventory levels at that time reflect raw materials, work-in-process, and finished goods relating to new and existing products. Management has developed a program to reduce inventory to desired levels over the near term and believes no loss will be incurred on its disposition. EQUIPMENT, FIXTURES AND LEASEHOLD IMPROVEMENTS - Maintenance, repairs and minor renewals are charged to operations as incurred. Depreciation of equipment and fixtures is computed by the straight-line method over the estimated useful lives of the assets which range between two and seven years. Leasehold improvements are amortized over the term of the lease or the useful lives of the assets, whichever is shorter. Customer support inventory is valued at cost when available for service and is amortized over a four-year period using the straight-line method. The Company continually reviews its equipment, fixtures and leasehold improvements to determine that the carrying values have not been impaired. STOCK-BASED COMPENSATION - Effective January 1, 1995, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). SFAS No. 123 requires that the fair values of stock-based compensation to employees and non-employees be either disclosed or reported in the consolidated financial statements. Compensation expense associated with awards of stock or options to employees is measured using the intrinsic value method. Compensation expense associated with awards to non-employees is measured using a fair value method. The effect of adopting SFAS No. 123 for the year ended December 31, 1996 was to increase net loss by $26,028. REVENUE RECOGNITION - Product and parts sales are recorded when shipped under the terms of firm purchase contracts. Service revenue includes parts sales, warranty, extended warranty and repairs charges. Warranty and extended warranty revenue for contracts for which the liability for on-site service and component replacement have been transferred to or assumed by third parties are recognized at time of sale together with the associated costs. For those contracts which the Company is liable for any portion of on-site service or component replacement, the Company recognizes that portion of the warranty and extended warranty income and expense ratably over the contract period. INCOME TAXES - The Company utilizes the liability method of accounting for income taxes. Deferred taxes are based on the difference between the financial statement and tax bases of assets and liabilities, and the deferred tax expense or credit represents the change in the deferred tax asset or liability balance. -7- 29 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) LOSS PER SHARE - Loss per common and common equivalent share is computed based on the weighted average number of shares outstanding and the dilutive effect (when applicable) of common share equivalents based on the treasury stock method. Common share equivalents are not included in loss periods as the effect is anti-dilutive. RECLASSIFICATIONS - Certain amounts in the 1995 and 1994 consolidated financial statements have been reclassified to conform with the 1996 presentation. 4. INVENTORIES Inventories consist of the following at December 31: 1996 1995 Raw materials $ 1,764,001 $ 1,460,423 Work-in-process 976,978 651,245 Finished goods 1,150,487 1,263,984 ------------ ------------ $ 3,891,466 $ 3,375,652 ============ ============ 5. INCOME TAXES Income tax expense (benefit) consists of the following for the years ended December 31:
1996 1995 1994 Current - federal $ - $ - $(1,565,000) Deferred: Federal (711,000) (974,000) (4,255,000) State (101,000) (305,000) (1,125,000) Change in valuation allowance 812,000 1,279,000 5,775,000 --------- ---------- ----------- $ - $ - $(1,170,000) ========= ========== ===========
The following is a reconciliation between the actual income tax benefit and income taxes computed by applying the statutory federal income tax rate to loss before income tax benefit for the years ended December 31: 1996 1995 1994 U.S. federal statutory rate (35.0)% (35.0)% (35.0)% Change in valuation allowance 37.9 36.9 35.6 Benefit of prior year tax credits - - (5.3) Other, net (2.9) (1.9) (2.5) ----- ----- ---- 0.0 % 0.0 % (7.2)% ==== ===== ==== -8- 30 5. INCOME TAXES (CONTINUED) The tax effects of significant items comprising the Company's deferred tax assets as of December 31 are as follows: 1996 1995 Reserves and accruals not currently deductible: Accounts receivable $ 141,000 $ 865,000 Inventory 409,000 238,000 Warranty 352,000 294,000 Compensation 41,000 56,000 Restructuring 117,000 238,000 Other 1,000 131,000 ---------- ----------- 1,061,000 1,822,000 Depreciation 258,000 467,000 Loss carryforward amounts 6,063,000 4,280,000 Tax credits 944,000 945,000 ---------- ----------- 8,326,000 7,514,000 Valuation allowance (8,326,000) (7,514,000) ---------- ----------- $ - $ - ========== =========== The Company has approximately $13,652,000 in net federal operating loss carryforwards which expire through 2011, and approximately $25,703,000 in state operating loss carryforwards which expire through 2001. The ability of the Company to utilize these loss carryforward amounts will be limited in the event of a change in control, as defined by the Internal Revenue Code. The change in the valuation allowance represents the amount required to fully reserve against the recorded deferred tax assets, due to uncertainty about their future realization. 6. LEASE COMMITMENT AND RENT EXPENSE The Company leases manufacturing and office facilities under a lease which expires in 1998 and leases office space at various U.S. locations and in Belgium under leases which expire through 1997. The following is a schedule by years of future rental payments, net of related sublease income, required under these leases: 1997 $278,682 1998 68,551 Rental expense, net of sublease income, amounted to approximately $370,000, $493,000 and $564,000 in 1996, 1995 and 1994, respectively. -9- 31 7. CLASS C COMMON STOCK Class C common stock was convertible into an equal number of shares of Class A common stock at any time at the option of the holder but was required to be converted if the number of shares of Class C common stock outstanding became less than 5% of all shares outstanding. In 1995 and through February 6, 1996, the Class C shares were converted to Class A common stock. 8. EMPLOYEE STOCK PLANS The Consolidated 1991/1993 Equity Incentive Plan (the "1993 Plan") provides for the grant of incentive stock options, nonstatutory stock options and stock appreciation rights to key employees and consultants, subject to terms and conditions determined by the Company. A total of 650,000 shares of Class A common stock has been reserved for issuance under the 1993 Plan. In December 1995, the Company granted an option (the "1995 Plan") with respect to 115,000 shares not covered by the 1993 Plan. In 1996, the stockholders approved the Consolidated 1996 Equity Incentive Plan (the "1996 Plan") to provide for grants of incentive stock options to employees and consultants, subject to terms and conditions determined by the Company. Upon approval of the 1996 Plan, the 1995 Plan was consolidated with the 1996 Plan (the "Consolidated 1996 Plan"). A total of 650,000 shares of Class A common stock, which includes the 115,000 shares of the 1995 Plan, has been reserved for issuance under the Consolidated 1996 Plan. On December 29, 1994, the Company amended incentive stock options previously granted with respect to an aggregate of 357,000 shares of Class A common stock under the 1993 Plan, whereby options were repriced to market value on that date. There was no financial statement impact as a result of this change. Under the 1993 Director Stock Option Plan (the "Director Plan"), directors who are not employees of the Company are granted initial options of 10,000 shares of Class A common stock, which are exercisable over five years, subject to continued service as a director. A total of 75,000 shares of Class A common stock has been reserved for issuance under the Director Plan. -10- 32 8. EMPLOYEE STOCK PLANS (CONTINUED) The following table presents activity under the:
1993 AND 1996 CONSOLIDATED PLANS DIRECTOR PLAN -------------------------------------------- --------------------------------------- WEIGHTED WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE AVERAGE NUMBER EXERCISE FAIR NUMBER EXERCISE FAIR OF OPTIONS PRICE VALUE OF OPTIONS PRICE VALUE Outstanding, January 1, 1994 590,500 $7.46 20,000 $9.25 Granted 570,000 2.90 4,000 7.25 Exercised - - - - Terminated (520,500) 7.58 - - ------- ------- Outstanding, December 31, 1994 640,000 3.84 24,000 8.92 Granted 209,500 3.38 $1.79 20,000 4.44 $2.35 Exercised (206,000) 3.18 - - Terminated (121,200) 7.62 (12,000) 8.92 ------- ------- Outstanding, December 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 - - Terminated (143,900) 3.48 (7,200) 8.92 ------- ------- Outstanding, December 31, 1996 575,600 2.69 36,800 8.32 ======= ======= Exerciseable, December 31, 1996 176,800 16,800 ======= ======= Exerciseable, December 31, 1995 139,400 4,400 ======= =======
-11- 33 8. EMPLOYEE STOCK PLANS (CONTINUED) The following table sets forth information regarding options outstanding at December 31, 1996 under the 1993 and 1996 Consolidated Plans:
Weighted Average Weighted Weighted Exercise Range Of Number Average Average Price For Exercise Currently Exercise Remaining Currently Number Of Options Prices Exercisable Price Life (Years) Exercisable 418,100 $2.00 - 3.00 143,500 $2.40 6.7 $2.29 153,500 3.25 - 4.88 31,300 3.31 9.0 3.04 4,000 8.75 2,000 8.75 6.6 8.75
The following table sets forth information regarding options outstanding at December 31, 1996 under the Director Plan:
Weighted Average Weighted Weighted Exercise Range Of Number Average Average Price Exercise Currently Exercise Remaining Currently Number Of Options Prices Exercisable Price Life (Years) Exercisable 10,000 $ 3.25 2,000 $ 3.25 8.9 $ 3.25 10,000 5.63 2,000 5.63 8.4 5.63 16,800 7.25 - 20.50 12,800 12.94 6.6 14.09
The fair value of options on their grant date under all stock option plans was measured using the Black/Scholes option pricing model. Key assumptions used to apply this pricing model are as follows: 1996 1995 Risk-free interest rate 6.01% 6.01% Expected life of option grants 1-5 years 1-5 years Expected volatility of underlying stock 80% 80% Expected dividend payment rate, as a percentage of the stock price on the date of grant - - Expected terminations 50% 50% The option pricing model used was designed to value readily tradeable stock options with relatively short lives. The options granted to employees are not tradeable with contractual lives of up to ten years and graded vesting up to five years. However, management believes that the assumptions used to value the options and the model applied yield a reasonable estimate of the fair value of the grants made under the circumstances. -12- 34 8. EMPLOYEE STOCK PLANS (CONTINUED) As described in Note 3, the Company uses the intrinsic value method to measure compensation expense associated with grants of stock options to employees. During 1996, the Company granted options to purchase 50,000 shares of Class A common stock under the 1996 Consolidated Plan to certain Directors acting as non-employee consultants. The compensation expense relating to those options, as valued using the fair value method, aggregated $26,028 and is included in net loss for the year ended December 31, 1996. Had the Company used the fair value method for all options to measure compensation, reported net income and earnings per share would have been as follows: 1996 1995 Net loss: As reported $ (2,141,844) $ (3,463,763) Pro forma (2,275,376) (3,674,539) Net loss per common share: As reported (.38) (.63) Pro forma (.40) (.67) 9. EMPLOYEE BENEFIT PLANS Effective December 1, 1991, the Company adopted the IPL Systems, Inc. 401(k) Plan under Section 401(k) of the Internal Revenue Code. The 401(k) plan covers substantially all employees who meet minimum service requirements. The amount of the Company's annual contribution is discretionary. No contributions were made by the Company for the years ended December 31, 1996, 1995 and 1994. 10. RELATED PARTY SALES - The Company has a distribution agreement with certain European affiliates of Olivetti Holding N.V. ("Olivetti"), entered into while Olivetti was the beneficial owner of the issued and outstanding Class C common stock. Sales to these entities, all in Europe, totaled $2,401,000, $3,630,000 and $7,763,000 in 1996, 1995 and 1994, respectively. Related amounts outstanding, included in accounts receivable - trade, totaled $318,000 and $1,147,000 at December 31, 1996 and 1995, respectively. PURCHASES - The Company contracts with Olivetti N.A., Inc., a subsidiary of Olivetti, to provide installation and warranty coverage for the majority of the Company's U.S. product sales. Expenses incurred by the Company in connection with this agreement totaled $1,114,000, $1,612,000 and $1,759,000 in 1996, 1995 and 1994, respectively, of which $251,000 is included in trade accounts payable at December 31, 1995. 11. SALES INFORMATION MAJOR CUSTOMERS - The Company had sales to an unaffiliated major customer of approximately $2,796,000 (16% of revenue) in 1996 and $3,675,000 (15% of revenue) to a different unaffiliated customer in 1994. EXPORTS - Export sales to unaffiliated customers which are principally in Europe, on materially the same terms as to domestic customers, totaled $2,190,000, $4,741,000 and $6,115,000 in 1996, 1995 and 1994, respectively. -13- 35 12. RESTRUCTURING EXPENSES In November 1994, the Company approved and executed a restructuring program (the "Plan") to focus future product development and sales efforts in the open systems market. As a result of this change in product strategy, the Company streamlined its operations by reducing its workforce, consolidating and closing certain facilities and writing off idle and excess assets. These costs are presented in the Company's 1994 consolidated statement of operations as a restructuring charge of $1,970,587. In September 1995, the Company revised its estimates of the costs associated with the Plan and recorded an additional restructuring charge of $496,880 related to the net lease obligation on certain idle facilities. In March 1996, the Company changed its estimate of the cost of the Plan and recognized a reduction in future net lease expenses in the amount of $100,000, net of required additional leasehold improvements, following the sublease of certain excess space to an unrelated party. Restructuring charges were recorded and payments were made in 1996, 1995 and 1994 as follows:
1994 ----------------------------------------- BALANCE, DECEMBER 31, INITIAL EXPENSE PAID 1994 Excess space: Occupancy costs, net $ 473,652 $ 2,269 $471,383 Write-down of leasehold improvements 850,914 -- -- Write-down of idle assets 334,876 -- -- Severance costs 311,145 223,242 87,903 ---------- -------- -------- $1,970,587 $225,511 $559,286 ========== ======== ======== 1995 --------------------------------------- BALANCE ADDITIONAL DECEMBER 31, RESERVE PAID 1995 Excess space: Occupancy costs, net $ 496,880 $373,481 $594,782 Severance costs -- 87,903 -- ---------- -------- -------- $ 496,880 $461,384 $594,782 ========== ======== ========
-14- 36 12. RESTRUCTURING EXPENSES (CONTINUED)
1996 -------------------------------------------- BALANCE, REDUCTION IN DECEMBER 31, EXPENSES PAID 1996 Excess space - occupancy costs (income), net $(100,000) $203,009 $291,773
13. CONTINGENCIES The Company is the subject of various legal proceedings which arose in the normal course of business, the outcome of which management believes will not be material to the Company's consolidated financial position, operations or liquidity. 14. SUBSEQUENT EVENTS The Company entered into a Definitive Agreement of Merger and Reorganization dated as of February 28, 1997, with anDATAco, a California-based, privately held company that designs, manufactures and markets network storage solutions. Under the terms of the agreement, the shareholders of anDATAco will receive approximately three shares for each share of the Company deemed to be outstanding on a fully diluted basis. The merger is subject to various conditions, including approval by the stockholders of the Company and other regulatory and third-party approvals. On February 24, 1997, the Company and anDATAco entered into a one-year nonexclusive OEM Agreement, whereby anDATAco will purchase up to $1,500,000 of product from the Company in each of March and April 1997. On March 7, 1997, the Company terminated the employment of its direct sales force, many of whom were subsequently employed by anDATAco. * * * * * * -15- 37 IPL SYSTEMS, INC. SCHEDULE VIII VALUATION AND QUALIFYING ACCOUNTS DECEMBER 31, 1996 (DOLLARS IN THOUSAND) - ----------------------------------------------------------------------------------------------------------
Charged Balance at Charged to to Other Balance Begining Cost and Accounts at End of Period Expenses Describe Write off Period Description - ----------- DEDUCTED FROM ASSETS TO WHICH THEY APPLY: Allowed for doubtful accounts - sales: Year ending December 31,1996 2,111 (1,739) (B) (19) (A) -- 353 Year ended December 31, 1995 3,668 (1,519) (B) (38) (A) -- 2,111 Year ended December 31, 1994 463 3,165 40 (A) -- 3,668 - ---------------------------------------------------------------------------------------------------------- (A) Charged against sales for product not returned by year end (B) Includes partial recovery of a doubtful account receivable totaling $1,767,000 in 1995 and $1,550,000 in 1996
22 EX-10.11 2 CONSOLIDATED EQUITY INCENTIVE PLAN 1 Exhibit 10.11 As Amended 11/96 IPL SYSTEMS, INC. 1996 CONSOLIDATED EQUITY INCENTIVE PLAN 1. Purpose. The purpose of the IPL Systems, Inc. 1996 Equity Incentive Plan (the "PLAN") is to attract and retain key personnel of IPL Systems, Inc. (the "COMPANY") and its affiliates, to provide an incentive for them to achieve long-range performance goals, and to enable them to participate in the long-term growth of the Company by the granting of awards ("AWARDS") with respect to the Company's Class A Common Stock, $0.01 par value (the "COMMON STOCK"). The option granted by the Company to one of its employees in December 1995 with respect to 115,000 shares of the Common Stock (the "1995 Equity Plan") shall be consolidated with and subject to the Plan for all purposes, and shall be amended and restated in its entirety so as to be consistent with the terms of the Plan and incentive stock options granted under the Plan to the extent such terms do not adversely affect the rights and privileges of the holder of the option granted under the 1995 Equity Plan. 2. Administration. The Plan will be administered by a committee of not less than two members of the Board of Directors of the Company appointed by the Board to administer the Plan (the "COMMITTEE"); provided, however, that in any instance the Board of Directors may take any action delegated hereunder to the Committee. Each member of the Committee will be a "Non-Employee Director" or the equivalent within the meaning of Rule 16b-3(b)(3)(i) under the Securities Exchange Act of 1934, as amended from time to time (the "EXCHANGE ACT"). The Committee will select those persons to receive Awards under the Plan ("PARTICIPANTS") and will determine the terms and conditions of all Awards. The Committee will have authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the operation of the Plan as it from time to time considers advisable, and to interpret the provisions of the Plan. The Committee's decisions will be final and binding. To the extent permitted by applicable law, the Committee may delegate to one or more executive officers of the Company the power to make Awards to Participants who are not subject to Section 16 of the Exchange Act and all determinations under the Plan with respect thereto, provided that the Committee will fix the maximum amount of such Awards for all such Participants and a maximum for any one Participant. 2 3. Eligibility. All employees, directors and consultants of the Company (or any business entity in which the Company owns directly or indirectly 50% or more of the total voting power or has a significant financial interest as determined by the Committee) capable of contributing significantly to the successful performance of the Company, other than an employee who has irrevocably elected not to be eligible, are eligible to be Participants in the Plan. 4. Types of Awards. (a) Stock Options. The Committee may grant options ("STOCK OPTIONS") to purchase shares of Common Stock upon such terms and conditions as the Committee determines. Stock Options may include both incentive stock options that comply with the requirements of Section 422 of the Internal Revenue Code of 1986, as amended from time to time (the "CODE") and nonstatutory stock options that are not intended to comply with such requirements. No incentive stock option may be granted under the Plan more than ten years after the effective date of the Plan. Payment of the exercise price may be made in cash or, to the extent permitted by the Committee at or after the grant of the Stock Option, in whole or in part by delivery of a note or shares of Common Stock owned by the optionee or by retaining shares otherwise issuable pursuant to the Stock Option, in each case valued at fair market value on the date of delivery or retention, or such other lawful consideration as the Committee may determine. (b) Stock Appreciation Rights. The Committee may grant stock appreciation rights ("SARS") upon such terms and conditions as the Committee determines. SARs are rights to receive any excess in value of shares of Common Stock over the exercise price. The Committee will determine at the time of grant or thereafter whether SARs are to be settled in cash, Common Stock or other securities of the Company, other Awards or other property. 5. Stock Available for Awards. (a) Amount. Subject to adjustment under subsection (b), Awards may be made under the Plan for up to 650,000 shares of Common Stock. If any Award expires or is terminated unexercised or is forfeited or settled in a manner that results in fewer shares outstanding than were awarded, the shares subject to such Award, to the extent of such expiration, termination, forfeiture or decrease, will again be available for award under the Plan. Common Stock issued through the assumption or substitution of outstanding grants from an acquired company will not reduce the shares available for Awards under the Plan. Shares issued under the Plan may consist in whole or in part of authorized but unissued shares or treasury shares. (b) Adjustment. In the event that the Committee determines that any stock dividend, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination, exchange of shares or other change affects the - 2 - 3 Common Stock such that an adjustment is required in order to preserve the benefits intended to be provided by the Plan, then the Committee (subject in the case of incentive stock options to any limitation required under the Code) will equitably adjust any or all of (i) the number and kind of shares for which Awards may be made under the Plan, (ii) the number and kind of shares subject to outstanding Awards and (iii) the exercise price with respect to any of the foregoing. In making such adjustments, the Committee may ignore fractional shares so that the number of shares subject to any Award will be a whole number. If considered appropriate, the Committee may make provision for a cash payment with respect to all or part of an outstanding Award instead of or in addition to any such adjustment. (c) Limit on Individual Grants. Subject to adjustment under subsection (b), the maximum number of shares of Common Stock subject to Stock Options and SARs that may be granted to any Participant in the aggregate will not exceed 250,000 shares. 6. General Provisions Applicable to Awards. (a) Awards at Fair Market Value. The Committee will establish the exercise price of an Award at the time the Award is granted. The exercise price will not be less than 100% of the fair market value of the Common Stock on the date of the Award, provided that (i) in the case of a nonstatutory Stock Option or an SAR granted to a new employee of the Company within 90 days of the date of employment, the exercise price may be less than 100% of fair market value on the date of such Award so long as such price is not less than 100% of fair market value at the date of employment and (ii) in the case of an SAR granted in tandem with a Stock Option, the exercise price may be less than 100% of fair market value on the date of such Award so long as such exercise price is not less than the exercise price of the related Stock Option. (b) Fair Market Value. The fair market value of the Common Stock or any other property will be the fair market value of such property as determined by the Committee in good faith or in the manner established by the Committee from time to time. (c) Limitations on Transferability. Awards will not be transferable by the Participant other than by will or the laws of descent and distribution and are exercisable during such person's lifetime only by such person or by such person's guardian or legal representative; provided, however, that the Committee may, in its discretion, waive such restriction in any case. (d) Documentation. Each Award under the Plan will be evidenced by a writing delivered to the Participant specifying the terms and conditions thereof and containing such other terms and conditions not inconsistent with the provisions of the Plan as the Committee considers necessary or advisable to achieve the purposes of the Plan. These terms and conditions may include performance criteria, vesting requirements, restrictions on transfer and payment rules. The Committee may establish the terms and conditions at the time the Award is granted or may provide that such terms and conditions will be determined at anytime thereafter. - 3 - 4 (e) Committee Discretion. Each type of Award may be made alone, in addition to or in relation to any other Award. SARs granted in tandem with a Stock Option will terminate to the extent that the related Stock Option is exercised, and the related Stock Option will terminate to the extent that the tandem SARs are exercised. The terms of each type of Award need not be identical, and the Committee need not treat Participants uniformly. Except as otherwise provided by the Plan or a particular Award, any determination with respect to an Award may be made by the Committee at the time of grant or at any time thereafter. (f) Dividends and Cash Awards. In the discretion of the Committee, any Award under the Plan may provide the Participant with (i) dividends or dividend equivalents payable currently or deferred with or without interest and (ii) cash payments in lieu of or in addition to an Award. (g) Termination of Employment. The Committee will determine the effect on an Award of the disability, death, retirement or other termination of employment of a Participant and the extent to which, and the period during which, the Participant's legal representative, guardian or beneficiary may receive payment of an Award or exercise rights thereunder. A Participant may designate a beneficiary in a manner determined by the Committee. In the absence of an effective designation, a Participant's beneficiary will be the Participant's estate. (h) Change in Control. In order to preserve a Participant's rights under an Award in the event of a change in control of the Company, the Committee in its discretion may, at the time an Award is made or at any time thereafter, take one or more of the following actions: (i) provide for the acceleration of any time period relating to the exercise or payment of the Award, (ii) provide for payment to the Participant of cash or other property with a fair market value equal to the amount that would have been received upon the exercise or payment of the Award had the Award been exercised or paid upon the change in control, (iii) adjust the terms of the Award in a manner determined by the Committee to reflect the change in control, (iv) cause the Award to be assumed, or new rights substituted therefor, by another entity, or (v) make such other provision as the Committee may consider equitable to the Participant and in the best interests of the Company. (i) Loans. The Committee may authorize the making of loans or cash payments to Participants in connection with the grant or exercise of any Award under the Plan, which loans may be secured by any security, including Common Stock, underlying such Award (provided that the loan will not exceed the fair market value of the security underlying such Award), and which may be forgiven upon such terms and conditions as the Committee may establish at the time of such loan or at any time thereafter. (j) Withholding Taxes. The Participant will pay to the Company, or make provision satisfactory to the Committee for payment of, any taxes required by law to be withheld in respect of Awards under the Plan no later than the date of the event creating the tax liability. In the Committee's discretion, such tax obligations may be paid in whole or in - 4 - 5 part in shares of Common Stock, including shares retained from the Award creating the tax obligation, valued at fair market value on the date of delivery. The Company and its affiliates may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to the Participant. (k) Foreign Nationals. Awards may be made to Participants who are foreign nationals or employed outside the United States on such terms and conditions different from those specified in the Plan as the Committee considers necessary or advisable to achieve the purposes of the Plan or to comply with applicable laws. (l) Amendment of Award. The Committee may amend, modify or terminate any outstanding Award, including substituting therefor another Award of the same or a different type and changing the date of exercise or realization, provided that the Participant's consent to such action will be required unless the Committee determines that the action, taking into account any related action, would not materially and adversely affect the Participant. 7. Miscellaneous. (a) No Right To Employment. No person will have any claim or right to be granted an Award. Neither the Plan nor any Award hereunder will be deemed to give any employee the right to continued employment or to limit the right of the Company to discharge any employee at any time. (b) No Rights As Shareholder. Subject to the provisions of the applicable Award, no Participant or beneficiary will have any rights as a shareholder with respect to any shares of Common Stock to be distributed under the Plan until he or she becomes the holder thereof. A Participant to whom Common Stock is awarded will be considered the holder of such Common Stock at the time of the Award except as otherwise provided in the applicable Award. (c) Effective Date. The Plan will be effective on March 21, 1996. (d) Amendment of Plan. The Board of Directors of the Company may amend, suspend or terminate the Plan or any portion thereof at any time, subject to any shareholder approval that the Board determines to be necessary or advisable. (e) Governing Law. The provisions of the Plan will be governed by and interpreted in accordance with the laws of the Commonwealth of Massachusetts. ----------------------------------------- This Plan was adopted by the Board of Directors on March 21, 1996 and amended on November 1, 1996. This Plan was adopted by the shareholders of the Company on May 29, 1996. - 5 - EX-10.12 3 CONSULTING AGREEMENT W/ C.P. MCMULLAN 1 Exhibit 10.12 CONSULTING AGREEMENT This Consulting Agreement (this "Agreement") is entered into effective as of October 1, 1996 (the "Effective Date") between IPL Systems, Inc. ("IPL"), a Massachusetts corporation with its principal executive offices at 124 Acton Street, Maynard, Massachusetts, and Cornelius P. McMullan ("Consultant"), residing at . RECITALS A. Consultant is an outside director of IPL. B. IPL, on behalf of itself and its subsidiaries and successors, whether now existing or hereafter acquired or established (severally and collectively, the "Company") desires to obtain the services of Consultant in addition to Consultant's activities as a director of IPL, and Consultant is willing to render his services to the Company, upon the terms and conditions set forth below. NOW, THEREFORE, in consideration of the mutual promises contained herein, the Company and Consultant hereby agree as follows: ARTICLE 1. ENGAGEMENT AND SCOPE OF WORK 1.1 ENGAGEMENT. Subject to the following terms and conditions, the Company hereby retains Consultant to provide such consulting services as may be requested by the Company from time to time in addition to Consultant's duties attending meetings of shareholders, directors and committees thereof in his capacity as a director of the Company, and Consultant accepts such engagement. During the term of this Agreement, Consultant agrees to provide consulting services to the Company as requested by its Chief Executive Officer, including without limitation (i) assistance to the senior management of the Company in formulating strategy and tactics for distribution of the Company's products, including anaylsis of alternative distribution channels in different markets and maximization of the competitive differentiation of the Company's products, and (ii) assistance in identifying and contacting potential corporate distribution partners and participation in meetings with their representatives. 1.2 MINIMUM COMMITMENT. Consultant agrees to provide at least twenty (20) days of consulting services during the term of this Agreement, but such services shall not exceed thirty (30) days without the mutual consent of the parties. Services performed on an hourly basis shall be computed on the basis of eight working hours per day; provided, however, that (i) travel time spent in a day outside of normal working hours in connection with at least four hours of consulting services shall not be counted as consulting services, and total travel and working time in one day aggregating more than eight hours shall not be counted as more than one day of consulting services. 2 ARTICLE 2. PAYMENTS AND INVOICES 2.1 MONTHLY RETAINER RATE. For all services provided under this Agreement, IPL will pay Consultant a fee at the rate of US$6,666 per month. Consultant acknowledges and agrees that the foregoing schedule of fees shall be full compensation for Consultant's services during the term of this Agreement. Fees will be paid monthly in arrears. 2.2 STOCK OPTIONS. The Company will grant Consultant a nonstatutory stock option (the "Option") to purchase Twenty-Five Thousand (25,000) shares of the Company's Class A Common Stock pursuant to the Company's Consolidated 1996 Equity Incentive Plan at a price equal to the closing price of the Company's Class A Common Stock on the last trading day before the date of grant. So long as Consultant is providing services to the Company under this Agreement, the Option shall become exercisable over the three-month term of this Agreement at the rate of 8,333 shares per month commencing with the conclusion of the first monthly period after the Effective Date or per each ten days of consulting services, whichever occurs first; provided, however, that on the last day of the third such month after the Effective Date or after thirty (30) days of service, whichever occurs first, the Option shall become exercisable as to 8,334 shares. The portion of the Option that is exercisable as of the termination of this Agreement shall remain exercisable until ninety (90) days after the later of (i) the date Consultant is no longer providing services under this Agreement or (ii) Consultant ceases to be a director of the Company. Consultant's options shall otherwise be subject to the terms of the Company's standard form of Nonstatutory Stock Option Certificate, and his acceptance thereof shall evidence his acceptance of the terms and conditions of the Option set forth therein. 2.3 EXPENSES. Travel and related expenses incurred by Consultant in connection with the performance of services under this Agreement will be reimbursed at actual costs by the Company in accordance with general policies and procedures established by the Company from time to time. No reimbursement will be made for any expenses other than travel and related expenses incurred by Consultant during the performance of services under this Agreement unless such expenses are approved in advance by the Company. All approvals by the Company must be given or confirmed in writing; expense approvals can be requested from the Chairman of the Board, the President, the Chief Financial Officer or the Vice President of Finance of the Company. ARTICLE 3. CONFIDENTIALITY AND INVENTIONS 3.1 CONFIDENTIALITY AND INVENTIONS. Consultant has executed, or in connection with this Agreement is executing, a Consultant Confidentiality and Inventions Agreement (the "Confidentiality Agreement") with the Company, and he agrees to be bound by the terms of the Confidentiality Agreement. - 2 - 3 ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF CONSULTANT 4.1 ABSENCE OF RESTRICTIONS. Consultant represents and warrants to the Company that he is presently under no contractual or other restrictions or obligation which is inconsistent with Consultant's execution of this Agreement or the Confidentiality Agreement or the performance of the Services, and agrees that during the Term, Consultant will not enter into any agreement, either written or oral, in conflict with this Agreement or the Confidentiality Agreement. ARTICLE 5. TERM AND TERMINATION 5.1 TERM. This Agreement shall have an initial term of three calendar (3) months from the Effective Date and may be extended by mutual agreement for additional three-month periods; provided, however, that the parties contemplate that Consultant's compensation during any such extension will be solely a continuation of cash compensation and reimbursement payable pursuant to Sections 2.1 and 2.3, respectively, and that no further equity compensation shall be granted for services provided hereunder. 5.2 TERMINATION. This Agreement may be terminated by the Company immediately upon written notice to Consultant and by Consultant upon thirty (30) days prior written notice to the Company. The Confidentiality Agreement and the provisions of Article 7 shall survive any termination of this Agreement. ARTICLE 6. MISCELLANEOUS 6.1 INDEPENDENT CONTRACTOR. Consultant is an independent contractor under this Agreement. He is not any employee or agent of the Company and as a result will not be entitled to participate in, or receive any benefit or right as an employee under any employee benefit or welfare plan of the Company nor have authority to represent or bind the Company in any manner in dealings with third parties. Consultant shall have sole responsibility for payment of all federal, state and local taxes or contributions imposed or required under unemployment insurance, social security and income tax laws and for filing all required tax forms with respect to any amounts paid by the Company to Consultant hereunder. Consultant shall indemnify and hold the Company harmless against any claim or liability (including penalties) resulting from failure of Consultant to pay such taxes or contributions or file any such tax forms. 6.2 NOTICES. All notices, requests, demands and other communications to be given pursuant to this Agreement shall be in writing and shall be deemed to have been duly given to a party if delivered by hand or mailed by registered or certified mail, return receipt requested, postage prepaid, to such party at its address set forth in the first paragraph or at such other address as such party shall have designated by notice in writing to the other party. - 3 - 4 6.3 SEVERABILITY. If any one or more of the provisions of this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, it shall not affect any other term or provision of this Agreement. If any provision in this Agreement shall be held to be excessively broad, it shall be construed by limiting it so as to be enforceable to the extent compatible with applicable law. 6.4 CAPTIONS. Captions of sections have been added only for convenience and shall not be deemed to be a part of this Agreement. 6.5 BINDING EFFECT. Consultant's obligations under this Agreement shall be binding upon his heirs, executors and administrators and shall inure to the benefit of the Company's successors and assigns. 6.6 COMPLETE AGREEMENT; AMENDMENTS. This Agreement, together with the Confidentiality Agreement, constitutes the entire agreement between the parties with respect to the subject matter hereof and may not be modified or amended except in a writing signed by both parties. 6.7 RIGHTS OF PUBLICITY. The Company shall have the right to use Consultant's name and likeness in any publicity materials prepared by it and in presentations to current or prospective clients, investors and others. Consultant shall not have the right to use the Company's name in any publications or publicity materials prepared by him without obtaining the prior written consent of the Company. 6.8 APPLICABLE LAW. This Agreement shall be considered to have been made in the United States, and shall be interpreted in accordance with the laws of the Commonwealth of Massachusetts, United States of America, and the parties hereby submit to the jurisdiction of the courts of that state. 6.9 NONWAIVER PROVISION. The waiver by either party hereto of any right hereunder or of the failure to perform or of a breach by the other party shall not be deemed a waiver of any other right hereunder or of any other breach or failure by said other party whether of a similar nature or otherwise. 6.10 ASSIGNMENT. Neither this Agreement nor any rights hereunder shall be assignable by either party hereto without the prior written consent of the other party. 6.11 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall be deemed to be one and the same instrument. - 4 - 5 IN WITNESS WHEREOF, the Company and the Consultant have duly executed and delivered this Agreement as of the date first written above. IPL SYSTEMS, INC. CONSULTANT By: /S/ Ronald J. Gellert /S/ Cornelius P. McMullan ------------------------- -------------------------- [signature] Title: President and Chief Executive Officer - 5 - EX-10.13 4 CONSULTING AGREEMENT W/ HARRIS RAVINE 1 Exhibit 10.13 CONSULTING AGREEMENT This Consulting Agreement (this "Agreement") is entered into effective as of October 1, 1996 (the "Effective Date") between IPL Systems, Inc. ("IPL"), a Massachusetts corporation with its principal executive offices at 124 Acton Street, Maynard, Massachusetts, and Harris Ravine ("Consultant"), residing at - ------------------------------------------------------------------------------- RECITALS A. Consultant is an outside director of IPL. B. IPL, on behalf of itself and its subsidiaries and successors, whether now existing or hereafter acquired or established (severally and collectively, the "Company") desires to obtain the services of Consultant in addition to Consultant's activities as a director of IPL, and Consultant is willing to render his services to the Company, upon the terms and conditions set forth below. NOW, THEREFORE, in consideration of the mutual promises contained herein, the Company and Consultant hereby agree as follows: ARTICLE 1. ENGAGEMENT AND SCOPE OF WORK 1.1 ENGAGEMENT. Subject to the following terms and conditions, the Company hereby retains Consultant to provide such consulting services as may be requested by the Company from time to time in addition to Consultant's duties attending meetings of shareholders, directors and committees thereof in his capacity as a director of the Company, and Consultant accepts such engagement. During the term of this Agreement, Consultant agrees to provide consulting services to the Company as requested by its Chief Executive Officer, including without limitation (i) assistance to the senior management of the Company in formulating the Company's strategy and tactics for obtaining strategic partners and financing alternatives for any such strategic initiatives, and (ii) assistance in identifying and contacting potential strategic partners and sources of financing and participation in meetings with their representatives. 1.2 MINIMUM COMMITMENT. Consultant agrees to provide at least twenty (20) days of consulting services during the term of this Agreement, but such services shall not exceed thirty (30) days without the mutual consent of the parties. Services performed on an hourly basis shall be computed on the basis of eight working hours per day; provided, however, that (i) travel time spent in a day outside of normal working hours in connection with at least four hours of consulting services shall not be counted as consulting services, and total travel and working time in one day aggregating more than eight hours shall not be counted as more than one day of consulting services. 2 ARTICLE 2. PAYMENTS AND INVOICES 2.1 MONTHLY RETAINER RATE. For all services provided under this Agreement, IPL will pay Consultant a fee at the rate of US$6,333 per month. Consultant acknowledges and agrees that the foregoing schedule of fees shall be full compensation for Consultant's services during the term of this Agreement. Fees will be paid monthly in arrears. 2.2 STOCK OPTIONS. The Company will grant Consultant a nonstatutory stock option (the "Option") to purchase Twenty-Five Thousand (25,000) shares of the Company's Class A Common Stock pursuant to the Company's Consolidated 1995/1996 Equity Incentive Plan at a price equal to the closing price of the Company's Class A Common Stock on the last trading day before the date of grant. So long as Consultant is providing services to the Company under this Agreement, the Option shall become exercisable over the three-month term of this Agreement at the rate of 8,333 shares per month commencing with the conclusion of the first monthly period after the Effective Date or per each ten days of consulting services, whichever occurs first; provided, however, that on the last day of the third such month after the Effective Date or after thirty (30) days of service, whichever occurs first, the Option shall become exercisable as to 8,334 shares. The portion of the Option that is exercisable as of the termination of this Agreement shall remain exercisable until ninety (90) days after the later of (i) the date Consultant is no longer providing services under this Agreement or (ii) Consultant ceases to be a director of the Company. Consultant's options shall otherwise be subject to the terms of the Company's standard form of Nonstatutory Stock Option Certificate, and his acceptance thereof shall evidence his acceptance of the terms and conditions of the Option set forth therein. 2.3 EXPENSES. Travel and related expenses incurred by Consultant in connection with the performance of services under this Agreement will be reimbursed at actual costs by the Company in accordance with general policies and procedures established by the Company from time to time. No reimbursement will be made for any expenses other than travel and related expenses incurred by Consultant during the performance of services under this Agreement unless such expenses are approved in advance by the Company. All approvals by the Company must be given or confirmed in writing; expense approvals can be requested from the Chairman of the Board, the President, the Chief Financial Officer or the Vice President of Finance of the Company. ARTICLE 3. CONFIDENTIALITY AND INVENTIONS 3.1 CONFIDENTIALITY AND INVENTIONS. Consultant has executed, or in connection with this Agreement is executing, a Consultant Confidentiality and Inventions Agreement (the "Confidentiality Agreement") with the Company, and he agrees to be bound by the terms of the Confidentiality Agreement. - 2 - 3 ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF CONSULTANT 4.1 ABSENCE OF RESTRICTIONS. Consultant represents and warrants to the Company that he is presently under no contractual or other restrictions or obligation which is inconsistent with Consultant's execution of this Agreement or the Confidentiality Agreement or the performance of the Services, and agrees that during the Term, Consultant will not enter into any agreement, either written or oral, in conflict with this Agreement or the Confidentiality Agreement. ARTICLE 5. TERM AND TERMINATION 5.1 TERM. This Agreement shall have an initial term of three calendar (3) months from the Effective Date and may be extended by mutual agreement for additional three-month periods; provided, however, that the parties contemplate that Consultant's compensation during any such extension will be solely a continuation of cash compensation and reimbursement payable pursuant to Sections 2.1 and 2.3, respectively, and that no further equity compensation shall be granted for services provided hereunder. 5.2 TERMINATION. This Agreement may be terminated by the Company immediately upon written notice to Consultant and by Consultant upon thirty (30) days prior written notice to the Company. The Confidentiality Agreement and the provisions of Article 7 shall survive any termination of this Agreement. ARTICLE 6. MISCELLANEOUS 6.1 INDEPENDENT CONTRACTOR. Consultant is an independent contractor under this Agreement. He is not any employee or agent of the Company and as a result will not be entitled to participate in, or receive any benefit or right as an employee under any employee benefit or welfare plan of the Company nor have authority to represent or bind the Company in any manner in dealings with third parties. Consultant shall have sole responsibility for payment of all federal, state and local taxes or contributions imposed or required under unemployment insurance, social security and income tax laws and for filing all required tax forms with respect to any amounts paid by the Company to Consultant hereunder. Consultant shall indemnify and hold the Company harmless against any claim or liability (including penalties) resulting from failure of Consultant to pay such taxes or contributions or file any such tax forms. 6.2 NOTICES. All notices, requests, demands and other communications to be given pursuant to this Agreement shall be in writing and shall be deemed to have been duly given to a party if delivered by hand or mailed by registered or certified mail, return receipt requested, postage prepaid, to such party at its address set forth in the first paragraph or at such other address as such party shall have designated by notice in writing to the other party. - 3 - 4 6.3 SEVERABILITY. If any one or more of the provisions of this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, it shall not affect any other term or provision of this Agreement. If any provision in this Agreement shall be held to be excessively broad, it shall be construed by limiting it so as to be enforceable to the extent compatible with applicable law. 6.4 CAPTIONS. Captions of sections have been added only for convenience and shall not be deemed to be a part of this Agreement. 6.5 BINDING EFFECT. Consultant's obligations under this Agreement shall be binding upon his heirs, executors and administrators and shall inure to the benefit of the Company's successors and assigns. 6.6 COMPLETE AGREEMENT; AMENDMENTS. This Agreement, together with the Confidentiality Agreement, constitutes the entire agreement between the parties with respect to the subject matter hereof and may not be modified or amended except in a writing signed by both parties. 6.7 RIGHTS OF PUBLICITY. The Company shall have the right to use Consultant's name and likeness in any publicity materials prepared by it and in presentations to current or prospective clients, investors and others. Consultant shall not have the right to use the Company's name in any publications or publicity materials prepared by him without obtaining the prior written consent of the Company. 6.8 APPLICABLE LAW. This Agreement shall be considered to have been made in the United States, and shall be interpreted in accordance with the laws of the Commonwealth of Massachusetts, United States of America, and the parties hereby submit to the jurisdiction of the courts of that state. 6.9 NONWAIVER PROVISION. The waiver by either party hereto of any right hereunder or of the failure to perform or of a breach by the other party shall not be deemed a waiver of any other right hereunder or of any other breach or failure by said other party whether of a similar nature or otherwise. 6.10 ASSIGNMENT. Neither this Agreement nor any rights hereunder shall be assignable by either party hereto without the prior written consent of the other party. 6.11 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall be deemed to be one and the same instrument. - 4 - 5 IN WITNESS WHEREOF, the Company and the Consultant have duly executed and delivered this Agreement as of the date first written above. IPL SYSTEMS, INC. CONSULTANT By: /S/ Ronald J. Gellert /S/ Harris Ravine ------------------------ -------------------- [signature] Title: President and Chief Executive Officer - 5 - EX-10.14 5 CONSULTING AGREEMENT W/ BI CAPITAL LTD. 1 Exhibit 10.14 January 1, 1997 The Board of Directors IPL Systems, Inc. 124 Acton Street Maynard, MA 01754 Gentlemen: This letter confirms our understanding that IPL Systems, Inc. (the "Company" or "you") has engaged BI Capital ("BI Capital" or "we") to act as its financial advisor with respect to exploring the Company's strategic alternatives with ANDATACO, a California corporation. As part of our engagement, Harris Ravine will, if requested: a. assist the Company in negotiating with ANDATACO a transaction to merge the two companies; b. review with management and other members of the Board the Company's financial plans and analyze its strategic plans and business alternatives; and c. assist the Company in evaluating the proposed transaction with ANDATACO. In connection with BI Capital's engagement, the Company will furnish BI Capital with all information concerning the Company which BI Capital reasonably deems appropriate and will provide BI Capital with access to the Company's officers, directors, employees, accountants, counsel and other representatives (collectively, the "Representatives"). All non-public information concerning the Company which is given to BI Capital will be used solely in the course of the performance of our services hereunder and will be treated confidentially by us for so long as it remains non-public. Except as otherwise required by law, BI Capital will not disclose this information to a third party without the Company's consent. As compensation for our services hereunder, the Company agrees to pay BI Capital as follows: 1. A financial advisory fee of $25,000 per month payable on the last day of each month until termination of this agreement, and, with respect to the final month of this agreement, prorated for the portion of such month up to the date of termination. 2 The Board of Directors IPL Systems, Inc. January 1, 1997 Page 2 2. If, during the term of this agreement or six months after the termination by the Company of our engagement, a controlling interest in the Company or substantially all of its assets are acquired by any third party, a transaction fee of $50,000 shall be payable upon the closing of such transaction. In connection with this engagement, BI Capital is acting as an independent contractor with duties owing solely to the Company. This agreement shall be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts, without regard to conflicts of law principles thereof. This engagement shall terminate on the date of any definitive agreement between the Company and ANDATACO and may be terminated, with or without cause, at any time by either party upon seven business days notice to the other party. Our obligations with respect to non-public information, however, will survive termination of this agreement. We are delighted to accept this engagement and look forward to working with you on this assignment. Please confirm that the foregoing is in accordance with your understanding by signing and returning to us the enclosed duplicate of this letter. Very truly yours, BI CAPITAL By: /S/ Harris Ravine ------------------------ Name: Harris Ravine Title: Managing Director Accepted and agreed to as of the date first written above: IPL SYSTEMS, INC. By: /S/ Ronald J. Gellert -------------------------- Name: Ronald J. Gellert Title: President and Chief Executive Officer EX-10.15 6 CONSULTING AGREEMENT W/ HARRIS RAVINE 1 Exhibit 10.15 CONSULTING AGREEMENT This Consulting Agreement (this "Agreement") is entered into effective as of March 1, 1997 (the "Effective Date") between IPL Systems, Inc. ("IPL"), a Massachusetts corporation with its principal executive offices at 124 Acton Street, Maynard, Massachusetts, and Harris Ravine ("Consultant"), residing at - ------------------------------------------------------------------------------ RECITALS A. Consultant is an outside director of IPL. B. IPL, on behalf of itself and its subsidiaries and successors, whether now existing or hereafter acquired or established (severally and collectively, the "Company") desires to obtain the services of Consultant in addition to Consultant's activities as a director of IPL, and Consultant is willing to render his services to the Company, upon the terms and conditions set forth below. NOW, THEREFORE, in consideration of the mutual promises contained herein, the Company and Consultant hereby agree as follows: ARTICLE 1. ENGAGEMENT AND SCOPE OF WORK 1.1 ENGAGEMENT. Subject to the following terms and conditions, the Company hereby retains Consultant to provide such consulting services as may be requested by the Company from time to time in addition to Consultant's duties attending meetings of shareholders, directors and committees thereof in his capacity as a director of the Company, and Consultant accepts such engagement. During the term of this Agreement, Consultant agrees to provide consulting services to the Company as requested by its Chief Executive Officer, including without limitation assistance to the senior management of the Company in effecting the closing of the Agreement and Plan of Merger and Reorganization, dated as of February 28, 1997 (the "Merger Agreement"), among IPL, IPL Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of IPL (the "Merger Subsidiary"), ANDATACO, a California corporation ("ANDATACO"), and W. David Sykes. 1.2 MINIMUM COMMITMENT. Consultant agrees to provide at least twenty (20) days of consulting services per month during the term of this Agreement. Services performed on an hourly basis shall be computed on the basis of eight working hours per day; provided, however, that (i) travel time spent in a day outside of normal working hours in connection with at least four hours of consulting services shall not be counted as consulting services, and (ii) total travel and working time in one day aggregating more than eight hours shall not be counted as more than one day of consulting services. 2 ARTICLE 2. PAYMENTS AND INVOICES 2.1 MONTHLY RETAINER RATE. For all services provided under this Agreement, Consultant will receive a fee at the rate of US$25,000 per month in the aggregate; provided, however, that IPL's obligation to pay Consultant will be limited to US$6,250 per month unless (and only to the extent that) the remaining US$18,750 per month to be payable by IPL is reimbursed to IPL by ANDATACO pursuant to its agreement to pay IPL an amount equal to seventy-five percent (75%) of any compensation payable by IPL to Consultant pursuant to Section 5.9 of the Merger Agreement. Consultant acknowledges and agrees that the foregoing schedule of fees shall be full compensation for Consultant's services during the term of this Agreement. Fees will be paid monthly in arrears. 2.2 EXPENSES. Travel and related expenses incurred by Consultant in connection with the performance of services under this Agreement will be reimbursed at actual costs by the Company in accordance with general policies and procedures established by the Company from time to time. No reimbursement will be made for any expenses other than travel and related expenses incurred by Consultant during the performance of services under this Agreement unless such expenses are approved in advance by the Company. All approvals by the Company must be given or confirmed in writing; expense approvals can be requested from the Chairman of the Board, the President, the Chief Financial Officer or the Vice President of Finance of the Company. ARTICLE 3. CONFIDENTIALITY AND INVENTIONS 3.1 CONFIDENTIALITY AND INVENTIONS. Consultant has previously executed a Consultant Confidentiality and Inventions Agreement (the "Confidentiality Agreement") with the Company, and he agrees to continue to be bound by the terms of the Confidentiality Agreement. ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF CONSULTANT 4.1 ABSENCE OF RESTRICTIONS. Consultant represents and warrants to the Company that he is presently under no contractual or other restrictions or obligation which is inconsistent with Consultant's execution of this Agreement or the Confidentiality Agreement or the performance of the Services, and agrees that during the Term, Consultant will not enter into any agreement, either written or oral, in conflict with this Agreement or the Confidentiality Agreement. ARTICLE 5. TERM AND TERMINATION 5.1 TERM. This Agreement shall have a term from the Effective Date to the Closing Date (as defined in the Merger Agreement). - 2 - 3 5.2 TERMINATION. This Agreement shall terminate (i) upon the filing of the documents necessary to effect the merger of the Merger Subsidiary with and into ANDATACO with the Secretaries of State of the State of California and the State of Delaware or (ii) upon termination of the Merger Agreement pursuant to its terms. The Confidentiality Agreement and the provisions of Article 7 shall survive any termination of this Agreement. ARTICLE 6. MISCELLANEOUS 6.1 INDEPENDENT CONTRACTOR. Consultant is an independent contractor under this Agreement. He is not any employee or agent of the Company and as a result will not be entitled to participate in, or receive any benefit or right as an employee under any employee benefit or welfare plan of the Company nor have authority to represent or bind the Company in any manner in dealings with third parties. Consultant shall have sole responsibility for payment of all federal, state and local taxes or contributions imposed or required under unemployment insurance, social security and income tax laws and for filing all required tax forms with respect to any amounts paid by the Company to Consultant hereunder. Consultant shall indemnify and hold the Company harmless against any claim or liability (including penalties) resulting from failure of Consultant to pay such taxes or contributions or file any such tax forms. 6.2 NOTICES. All notices, requests, demands and other communications to be given pursuant to this Agreement shall be in writing and shall be deemed to have been duly given to a party if delivered by hand or mailed by registered or certified mail, return receipt requested, postage prepaid, to such party at its address set forth in the first paragraph or at such other address as such party shall have designated by notice in writing to the other party. 6.3 SEVERABILITY. If any one or more of the provisions of this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, it shall not affect any other term or provision of this Agreement. If any provision in this Agreement shall be held to be excessively broad, it shall be construed by limiting it so as to be enforceable to the extent compatible with applicable law. 6.4 CAPTIONS. Captions of sections have been added only for convenience and shall not be deemed to be a part of this Agreement. 6.5 BINDING EFFECT. Consultant's obligations under this Agreement shall be binding upon his heirs, executors and administrators and shall inure to the benefit of the Company's successors and assigns. 6.6 COMPLETE AGREEMENT; AMENDMENTS. This Agreement, together with the Confidentiality Agreement, constitutes the entire agreement between the parties with respect - 3 - 4 to the subject matter hereof and may not be modified or amended except in a writing signed by both parties. 6.7 RIGHTS OF PUBLICITY. The Company shall have the right to use Consultant's name and likeness in any publicity materials prepared by it and in presentations to current or prospective clients, investors and others. Consultant shall not have the right to use the Company's name in any publications or publicity materials prepared by him without obtaining the prior written consent of the Company. 6.8 APPLICABLE LAW. This Agreement shall be considered to have been made in the United States, and shall be interpreted in accordance with the laws of the Commonwealth of Massachusetts, United States of America, and the parties hereby submit to the jurisdiction of the courts of that state. 6.9 NONWAIVER PROVISION. The waiver by either party hereto of any right hereunder or of the failure to perform or of a breach by the other party shall not be deemed a waiver of any other right hereunder or of any other breach or failure by said other party whether of a similar nature or otherwise. 6.10 ASSIGNMENT. Neither this Agreement nor any rights hereunder shall be assignable by either party hereto without the prior written consent of the other party. 6.11 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall be deemed to be one and the same instrument. IN WITNESS WHEREOF, the Company and the Consultant have duly executed and delivered this Agreement as of the date first written above. IPL SYSTEMS, INC. CONSULTANT By: ---------------------------- ----------------------------- [signature] Title: ------------------------- - 4 - EX-10.16 7 OEM AGREEMENT W/ ANDATCO 1 Exhibit 10.16 MASTER OEM AGREEMENT -------------------- This master OEM Agreement is made the 25 day of February, 1997 (the "Effective Date"), between IPL Systems, Inc. (hereinafter referred to as "IPL"), a Massachusetts corporation with its principal place of business as 124 Acton Street, Maynard, MA 01754 and Andataco, a qualified OEM (defined below), having its principal place of business at 10140 Mesa Rim Road, San Diego, California 92121 (hereinafter referred to as "Andataco.") I. IPL and Andataco desire to enter into an Agreement for the purchase, resale, and service of IPL Products and Spares (defined below); and, II. Andataco agrees to act as an OEM "Reseller" for such Products and Spares and agrees to sell such Products and Spares pursuant to the terms and conditions contained herein. NOW, THEREFORE, the parties agree as follows: Section 1. Definitions. ----------- For the purpose of this Agreement, the following definitions shall apply; 1.1 "AGREEMENT" shall mean the terms and conditions specified herein, the Exhibits attached hereto, and all other documents incorporated by reference in this Agreement. 1.2 "AREA" shall mean the geographical locations where Andataco has authority to market the Products which shall mean the entire world with the exception of Europe. For this purpose "Europe" shall mean the countries of the European Union and of the European Free Trade Association. 1.3 "DATE OF SHIPMENT" shall mean the date the Products are delivered to a common carrier at IPL facilities. 1.4 "DROP SHIPMENT" shall mean the shipment by IPL of Products directly to the End User, at the request of Andataco. 1.5 "EFFECTIVE DATE" shall mean the date first written above. 1.6 "END USER" shall mean the ultimate consumer of the Products. 1.7 "PRODUCTS" shall mean the IPL computer hardware and software products described in Exhibit A attached hereto. IPL may, upon written notice to Andataco, add or delete Products on Exhibit A from time to time during the term of this Agreement. 2 1.8. "PROPRIETARY INFORMATION" shall mean data, documentation or other information provided by either party to the other which is proprietary and confidential to IPL. 1.9. "PURCHASE ORDER" shall mean an order for Products placed by Andataco pursuant to the terms and conditions of this Agreement. 1.10. "SPARES" shall mean spare parts for the Products, as listed on Exhibit A. 1.11. "OEM" shall mean a designated Storage Authorized Reseller who has executed a valid OEM Agreement. 1.12. "TERM" shall have the meaning set forth in Section 12. Section 2. Designation as IPL "OEM". ------------------------ 2.1. IPL hereby appoints Andataco as an authorized non-exclusive OEM of IPL Products and Spares in the Area. Andataco agrees that IPL may in its sole discretion (i) designate additional OEMS or resellers of the Products in the Area and (ii) market IPL Products through its own direct sales force in the Area. Section 3. Product Pricing And Discount. ---------------------------- 3.1. The IPL Products and Spares available for purchase are specified in the IPL Product List as set forth in Exhibit A attached hereto. The suggested End User list prices for IPL Products and Spares in effect as of the Effective Date of this Agreement are set forth in Exhibit A attached hereto and may be amended by IPL from time to time upon thirty (30) days written notice to Andataco. 3.2. Andataco shall be entitled to purchase Products and Spares at the discounts from IPL's standard End User list price based upon achieving the relevant Revenue Commitment levels, as set forth in Exhibit B attached hereto. IPL reserves the right to modify its discounts contained in Exhibit B attached hereto, from time to time upon thirty (30) days written notice to Andataco. Section 4. Shipment. -------- 4.1. Andataco shall be solely responsible for any and all costs of shipment and storage of the Products from IPL's production facilities in the United States. Shipments shall be made to Andataco's principal office unless otherwise specified. Unless otherwise agreed, IPL shall select the mode of shipment and the carrier. 4.2. In addition, Andataco may request that IPL make Drop Shipments of large orders directly to the End User. This shall be considered on a case by case basis and shall be at the sole discretion of IPL. -2- 3 4.3. In the event that Drop Shipment has been requested, Andataco shall provide a valid Sales Tax Exemption Certificate for each state where Andataco has requested that IPL ship its Products to. In the event that such Certificate is not provided, Andataco shall either (i) accept IPL shipment terms and conditions and be liable for applicable taxes for each shipment or (ii) hold the order for pick up arranged by Andataco independently from IPL. Section 5. Title. ----- 5.1. Title to the Products and risk of loss shall pass to Andataco upon delivery to a carrier, including responsibility for all transportation charges, taxes, losses and other costs incurred after delivery to the carrier by IPL. Andataco shall also indemnify and hold harmless, IPL from all risk of loss or damages occurring to the Products after delivery to a carrier. Andataco hereby undertakes to purchase insurance sufficient to comply with the foregoing. Section 6. Payment Terms. ------------- 6.1. Andataco shall receive a one and one-half percent (1.5%) discount from the purchase price for Products and Spares if it makes payment in full at the placement of the order with IPL; otherwise, payment in full shall be made by Andataco within Thirty (30) days after invoice by IPL. 6.2. Andataco's initial credit limit shall be established by IPL. To assist IPL in establishing and updating the credit limit of Andataco, such OEM shall submit audited financial statements, including statements of operation and balance sheets, as soon as they are available following the completion of each fiscal year of Andataco. In the event the credit limit is exceeded at any time, or in the event IPL otherwise becomes insecure as to payment for Products shipped to Andataco, IPL may in its sole discretion refuse shipments to Andataco or modify such credit limit. IPL shall be under no obligation to store the Products for Andataco beyond the scheduled shipment date, if Andataco has exceeded its credit limit. All Products affected may, at IPL's option, be shipped to another party or treated as canceled, subject to certain cancellation charges specified in Section 16 herein. 6.3. Late payments past due thirty (30) days or more may at IPL's discretion bear interest on the unpaid balance at one and one-half percent (1.5%) per month or the maximum rate allowed by law. Failure to make payments when due may, at IPL's discretion, result in delay of other shipments, and the placement of such OEM on credit hold until all past due balances are paid in full. IPL may also suspend all further IPL obligations to Andataco due to non-payment. 6.4. In the event of late payment, IPL reserves the right to adjust payment terms to require prepayment or other payment arrangements satisfactory to IPL in all subsequent deliveries of Products. -3- 4 Section 7. Purchase Orders. --------------- 7.1. Andataco shall submit Purchase Orders in writing for the Products to IPL thirty (30) days prior to the required shipment date for such orders. All Purchase Orders must reference this Agreement, specify the requested shipment date, Product type, features if applicable, unit price, total price, warranty type, initial shipment destination, and quantities of Products. In the event of any conflict, the terms and conditions of this Agreement shall prevail over the terms and conditions of any Purchase Order. 7.2. IPL shall accept or reject such Purchase Order within ten (10) business days after receipt of such Purchase Order. If IPL determines that it will be unable to meet the requested shipping dates, IPL shall, within such (10) day period, notify Andataco thereof and the parties shall thereafter agree upon a schedule for shipment. IPL shall in any event use reasonable efforts to meet the requested shipping dates in such Purchase Orders, but shall not be liable for damages for failing to do so. 7.3. Andataco shall have the right to cancel any Purchase Orders submitted to IPL, or change the order, any time prior to fifteen (15) days before the requested shipping date without penalty. If any Purchase Order is canceled by Andataco within fifteen (15) days of the requested date of shipment, Andataco shall be subject to the charges contained in Section 16 herein. 7.4. Andataco shall use IPL's latest lead times when estimating delivery dates to meet its End User requirements and for requesting delivery dates for the Products on its Purchase Orders. Section 8. Obligations of Andataco. ----------------------- 8.1. Andataco shall use its best efforts to promote the sale and/or lease of the Products throughout the Area, including but not limited to advertising of the Products in appropriate media, informing of End Users and potential End Users regarding the Products, and counseling of End Users on the selection of the proper Products. 8.2. Andataco shall keep an appropriate inventory of Products and Spares on hand in sufficient quantity to adequately sell and service End Users in the Area served by Andataco. 8.3. Andataco shall not advertise outside the Area, not shall it solicit any sales from End Users outside the Area, not shall it sell or ship any Products to End Users outside the area. 8.4. Andataco shall list the Products in its catalogs and advertise and promote the Products, in accordance with the provisions of Section 16.1 herein, and send copies of its catalogs and all advertising and sales promotion literature relating to the Products to IPL. 8.5. Andataco shall develop appropriate sales and marketing plans for the Products, and will provide copies thereof to IPL. IPL may review and evaluate such plans for compliance with IPL's worldwide policies and procedures for the marketing of the Products, and shall have -4- 5 the right to acquire Andataco to modify the said plans if they unreasonably interfere with IPL's ability to market the Products. 8.6. Andataco shall maintain a staff of sufficiently trained and qualified personnel to adequately develop and support the Area served by Andataco. 8.7. Each month, Andataco shall provide IPL a written report (a "Forecast") of its expected Product requirements for each of the succeeding three calendar month periods, including the month of the issuance of such Forecast. Each Forecast, the form of which is set out in EXHIBIT C, shall be for planning purposes only and shall not constitute an agreement by IPL to manufacture, nor for OEM to purchase, such quantities. IPL's obligations of availability and lead times as set forth in this agreement are dependent upon the timely provision of this Forecast. Failure to timely provide this Forecast releases IPL from any obligation of the availability and lead time provisions. Section 9. Obligations of IPL. ------------------ 9.1. IPL shall sell the Products and Spares to Andataco at the prices set forth in Exhibit A, as such Exhibit A may be modified from time to time hereunder, in quantities and lead times reflecting their current availability, and subject to certain discounts for which Andataco may be eligible under Exhibit B attached hereto. 9.2. IPL shall assist Andataco in the sale and service of Products by providing (i) manuals, Product literature, and other written materials, (ii) advertising and other sales promotional support, (iii) sales and service training of OEM's personnel, as IPL in its sole judgment deems necessary to effectuate the purposes of this Agreement. IPL may charge its then current prices for items listed in (i), (ii), (iii) above. 9.3. IPL shall keep OEM regularly informed of any changes to its published specifications and design of the Products. Section 10. Term. ---- 10.1. The term of the Agreement shall commence on the Effective Date first above written and shall continue for a period of one (1) year thereafter unless extended or prematurely terminated in accordance with the provisions of this Agreement. Section 11. Limited Warranty. ---------------- 11.1. IPL warrants to OEM that the Products purchased from IPL shall be free from defects in materials and workmanship, when given normal, proper and intended usage, for the IPL warranty period specified in Exhibit A attached hereto (the "Warranty Period"), and that during the Warranty Period such Products shall conform to their published product specifications. IPL agrees to repair or replace, at IPL's option, any part of a Product purchased -5- 6 hereunder which proves to be defective in design, material or workmanship in the course of normal intended use during the Warranty Period. This warranty shall not apply to used or refurbished Products. 11.2. The above warranty shall not apply to expendable components, such as but not limited to, fuses and bulbs, not shall IPL have any obligation under this Agreement to make repairs or replacements which are required by normal wear and tear, or result in whole or in part from catastrophe, fault or negligence of Andataco, or from improper or unauthorized use of the Product or use of the Product in a manner for which it was not designed, or by causes external to the Product, such as but not limited, to power failure or air conditioning failure. 11.3. This limited warranty shall not apply to any Products sold or transferred outside the United States (unless otherwise agreed in writing by IPL), or to Products sold by parties other than Andataco. 11.4. IPL does not warrant that the Products will perform in combination with devices or products not purchased from IPL, including but not limited to products designed and manufactured by Andataco nor will IPL be responsible for defects resulting from improper maintenance, modification or misuse. 11.5. In the event that Andataco believes that any Products are defective under 11.1 above, the Products shall at IPL's option, either (i) be returned by Andataco, transportation and insurance prepaid to IPL's designated facility for examination and testing or (ii) be repaired by IPL and an End User site, or an Andataco facility. IPL shall either repair or replace any such Product found to be defective and promptly return the same to Andataco or End-User, transportation and insurance prepaid, retaining the replaced part or Product. In the event that the IPL examination and testing does not verify any such defect, then IPL shall so advise Andataco and dispose of the Product in accordance with Andataco's instructions and at Andataco's cost, and Andataco shall reimburse IPL for testing expenses incurred at IPL's then current rates. IPL shall not be deemed to have any obligation with respect to data contained in any Product placed in its possession for warranty repair purposes. 11.6. In the event that IPL's optional ServiceONE program is chosen by Andataco as an to provide installation and/or warranty service to End Users of any Products, Andataco agrees to advise IPL in writing of the date Andataco ships the Product and the warranty option chosen, within ten (10) days from the date of shipment to OEM's End User by mailing to IPL the completed Warranty Account Registration Form ("WAR Form") in the form attached as Exhibit D. Any failure to so notify IPL may delay warranty service to the End User and shall entitle IPL to treat such failure as a breach of Andataco's obligations under this Agreement. Repaired products may consist in part of used parts which are warranted equivalent to new when used in the Products. Such warranty coverage shall be designated as local or remote depending on the location and type of Product and shall specify if the warranty is "Mail-Back Exchange" or "Depot". The End User requesting warranty or installation service must produce proof of an executed WAR Form, in order to be serviced by an IPL Customer Support Representative. An executed WAR Form shall be required for warranty coverage to End Users on Products sold to Andataco. Andataco shall maintain copies of all WAR Forms for five (5) years from the date of execution. -6- 7 11.7. THE FOREGOING WARRANTIES ARE IN LIEU OF ANY AND ALL REPRESENTATIONS AND WARRANTIES, EXPRESS OR IMPLIED, INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. IPL SHALL NOT BE LIABLE FOR ANY SPECIAL, CONSEQUENTIAL OR INCIDENTAL DAMAGES, INCLUDING BUT NOT LIMITED TO LOST DATA OR LOST PROFITS, RESULTING FROM THE USE OF THE IPL PRODUCTS, OR CAUSED BY ANY DEFECT, FAILURE OR MALFUNCTION, WHETHER SUCH CLAIM OR SUCH DAMAGE IS BASED UPON WARRANTY, CONTRACT, NEGLIGENCE OR OTHERWISE. UNDER NO CIRCUMSTANCES SHALL IPL BE LIABLE FOR AN AMOUNT GREATER THAN THE PURCHASE PRICE OF THE PRODUCT WITH RESPECT TO WHICH SUCH CLAIM IS MADE. Section 12. Limitation of Liability. ----------------------- 12.1. Except as expressly provided to the contrary in this Agreement, IPL shall not be liable for any loss or damage claimed to have resulted from the use of the Products or to be related in any way to their acquisition in the transaction to which this Agreement relates, regardless of the form of actions, and Andataco shall hold IPL harmless from any such claims and shall indemnify it for any expenses or cost incurred if any such claims are made. 12.2. Neither IPL nor Andataco shall be liable to the other for damages of any kind, including incidental or consequential damages, on account of the termination or expiration of this Agreement in accordance with its terms. Neither IPL nor Andataco shall be liable to the other on account of termination or expiration of this Agreement for reimbursement or damages for the loss of good will, prospective profits, or anticipated sales, or on account of any expenditures, investment, leased or commitments made by either IPL or Andataco or for any reason whatsoever based upon or growing out of such termination or expiration. Section 13. Indemnification. --------------- 13.1. IPL shall defend any claim, suit or proceeding brought against Andataco so far as it is based on a claim that the use or transfer by Andataco or the use by its End Users of any Product delivered hereunder constitutes an infringement of any patent or copyright in the United States of America, if notified within ten (10) days after its commencement and given full authority, information and assistance for the defense of same and IPL shall pay all damages and costs awarded therein against Andataco but shall not be liable for any compromise made without its consent, provided that IPL may, at any time it is concerned over the possible outcome of such an infringement action, at its option and expense, procure for Andataco the right to continue using and transferring the Products, replace or modify the Products so that the infringement will not exist, or remove the Product involved and refund to Andataco the price thereof as depreciated or amortized by an equal annual amount over the lifetime of the Product as established by IPL. -7- 8 13.2. IPL shall have no liability to Andataco with respect to any claim of patent infringement based on the combination of any Product with equipment or devices not supplied by IPL hereunder. 13.3. IPL shall not be liable to Andataco under any provision of this Section 13 if any patent infringement or claim thereof is based upon the use of the Products in connection with equipment or devices not delivered by IPL, or used in a manner for which the Products were not designed. Andataco shall indemnify IPL for, and hold it harmless for any loss, cost, or expense suffered or incurred in connection with any claim, suit, or proceeding brought against IPL so far as it is based on a claim that the manufacture or sale of any Products delivered hereunder and modified or altered, combined with any equipment or device not supplied by IPL hereunder constitutes such an infringement because of such modifications, alterations or combination. Section 14. Trademarks. ---------- 14.1. Andataco shall not alter any of the IPL trademarks or symbols affixed to the Products or their packaging, nor may Andataco add any other trademark or symbol thereto. During the term of this Agreement, Andataco shall have a non-exclusive license to use IPL trademarks and symbols in connection with its marketing of IPL Products. Andataco shall follow IPL instructions with respect to the use of such trademarks and symbols and agrees to discontinue their use immediately upon termination of this Agreement. Section 15. Proprietary Information. ----------------------- 15.1. No Proprietary Information disclosed by either party to the other in connection with this Agreement shall be disclosed to any person or entity other than the recipient party's employees directly involved with the recipient party's use of such information who are bound by written agreement to protect the confidentiality of such information, and such information shall otherwise be protected by the recipient party from disclosure to others with the same degree of care accorded to its own similar proprietary information. Information will not be subject to this provision if it is or becomes a matter of public knowledge without the fault of the recipient party, if it was a matter of written record in the recipient party's files prior to disclosure to it by the other party, or if it was or is received by the recipient party from a third person having no obligation of confidentiality to the providing party under circumstances permitting its unrestricted disclosure by the recipient party. Upon termination or expiration of this Agreement, each party shall promptly deliver to the other all Proprietary Information of the other party in the possession or control of such party and all copies thereof. The obligations under this Section shall continue for both parties for a period of ten (10) years after delivery by IPL to Andataco of the last Products under this Agreement. -8- 9 Section 16. Cancellation and Rescheduling of Products. ----------------------------------------- 16.1. Andataco may cancel delivery of any and all Products prior to shipment of such Products by sending written notice to IPL subject to the following terms and charges: (a) The charge per unit of Product shall be expressed as a percentage of the applicable unit price in effect when notice of cancellation or rescheduling is received by IPL. (b) Number of days prior to scheduled shipment that notice is received by IPL: 15 Days No Charge 6-14 Days 10% 5 Days or Less No Cancellation Allowed (c) Ten percent (10%) of the units scheduled for a particular shipment date may be rescheduled by up to sixty (60) days, provided that IPL receives written notice fifteen (15) days or more prior to a scheduled shipment date. No order or any portion thereof may be rescheduled more than one time. Any reschedule of greater than ten percent (10%) of an order and any subsequent reschedule of an order which has already been rescheduled shall be subject to the cancellation charges specified in Section 16(b) above. 16.2. The parties agree that the above charges and terms are fair and reasonable as cancellation charges, and Andataco agrees to pay IPL's invoice for such charges in accordance with the IPL payment terms specified in Section 6.1 herein. Section 17. Early Termination By IPL. ------------------------ 17.1. IPL may terminate this Agreement prior to the expiration of its term, upon written notice to Andataco, in the event of any one of the following conditions: (a) Any significant change in ownership and/or control of Andataco, which in the sole opinion of IPL is likely to affect adversely future sales of the Products; (b) If Andataco is declared insolvent; (c) If IPL is unable for whatever reason to deliver Products; (d) If Andataco does not make timely payments to IPL, within thirty (30) days of written demand by IPL. -9- 10 Section 18. Termination by Either Party. --------------------------- 18.1. In addition to the rights provided above, either party shall have the right to terminate this Agreement prior to the expiration of its term upon written notice to the other party: (a) in the event that the other party goes into liquidation, voluntary or otherwise, or goes into bankruptcy, or makes an assignment for the benefit of creditors, or in the event or a receiver being appointed for its property or of any part thereof; or (b) If either party shall commit any material breach of this Agreement which has not been remedied within thirty (30) days after written notice thereof has given by the other party; or (c) If either party undergoes a change of ownership or control which results in it directly or indirectly becoming owned or controlled by a competitor of the other party, to which said other party objects within thirty (30) days of learning of such a change. (d) For any reason, following thirty (30) days written notice to the other party. Section 19. Rights and Obligations Upon Expiration or Termination. ----------------------------------------------------- 19.1. Upon the expiration or early termination of this Agreement, Andataco shall cease representing itself as an authorized OEM of IPL Products and shall promptly return to IPL all pricing information, customer information, catalogues, literature and other documents and/or materials relating to the Products. The expiration of this Agreement shall not give rise to the payment of any indemnity whatsoever by either party to the other. 19.2. In addition to those provisions which by their terms survive, the following provisions shall survive expiration or termination of this Agreement: 7.1; 11.8; 12; 16.1; 19.1; and 26. Section 20. Export Regulations. ------------------ 20.1. The Products and Spares are subject to U.S. law and regulations governing their export to other countries. Andataco agrees that it shall be solely responsible for ensuring that any such exports are in full compliance with such all applicable U.S. export laws and regulations. This provision shall survive any termination or expiration of this Agreement. -10- 11 Section 21. Notices. ------- 21.1. Unless otherwise agreed to by the parties, all notices required under the Agreement shall be made by certified mail return receipt requested, and all notices shall be addressed to the attention of the party executing this Agreement or his or her successor at the address set forth at the beginning of this Agreement. Either party may, upon written notice to the other party, designate a different individual and/or address for the receipt of notices. Section 22. Successors; Non-Assignment. -------------------------- 22.1. All the terms, provisions and conditions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their representatives, heirs, successors, trustees, transferees, lawful assigns and legal representatives. Neither this Agreement, nor any right granted herein, is assignable by Andataco without the prior written consent of IPL which consent shall not be unreasonably withheld. Any attempt by Andataco to assign any said rights, or to delegate the duties or obligations imposed on Andataco by this Agreement without IPL's prior written consent shall be void. Section 23. General Status of The Parties. ----------------------------- 23.1. The relationship of the parties under this Agreement shall be and at all times remain one of independent contractors. Andataco is not an employee, agent or legal representative of IPL and shall have no authority to assume or create obligations on IPL's behalf with respect to the Products or otherwise, except as may be provided from time to time by written instruments signed by both parties. This Agreement creates no relationship or partnership, limited partnership or agency between the parties and the parties hereby acknowledge no other facts or relations exist that would create any such relationship between them. Section 24. Entire Agreement. ---------------- 24.1. This Agreement constitutes the entire Agreement between IPL and Andataco and shall not be amended, altered or changed except by a written agreement signed by the parties hereto. Any terms and conditions in any purchase order or other instrument issued by Andataco or End User in connection with this Agreement which are in addition to or inconsistent with the terms and conditions of this Agreement shall not be binding on IPL. Andataco acknowledges that it is not entering into this Agreement on the basis of any representations not expressly contained herein. -11- 12 Section 25. Waivers. ------- 25.1. No delay or omission on the part of either party to this Agreement in requiring performance by the other party hereunder, or in exercising any right hereunder, shall operate as a waiver or any provision hereof or of any right or rights hereunder; and the waiver or omission or delay in requiring performance or exercising any right hereunder on one occasion shall not be construed as a bar to or waiver of such performance or right, or of any right or remedy under this Agreement, on any future occasion. Section 26. Governing Law. ------------- 26.1. This Agreement shall be governed and construed in accordance with the laws of the Commonwealth of Massachusetts. The parties agree that any legal action arising out of or in connection with this Agreement shall be brought in the courts of the County of Middlesex, Massachusetts, of the U.S. Federal Court for the District of Massachusetts, and the parties irrevocably submit for all purposes to the jurisdiction of each such court. Section 27. Force Majeure. ------------- 27.1. Neither IPL nor Andataco shall be liable in any respect for failures to perform, or delays in performing, hereunder where such failure or delay shall have been due wholly or in part to unforeseen circumstances or causes beyond the reasonable control of IPL or Andataco, as the case may be, including but not limited to acts of God, acts of civil or military authority, fires, floods, epidemics, quarantine restrictions, war, riots, strikes, lock-outs, accidents to machinery or delays in transportation. EXECUTED under seal as of the date first above written. ANDATACO IPL SYSTEMS, INC. By: /s/ W. David Sykes By: /s/ Ronald J. Gellert ---------------------------- ------------------------------- Typed Name: W. David Sykes Typed Name: Ronald J. Gellert -------------------- ----------------------- Title: President Title: President & CEO ------------------------- ---------------------------- -12- EX-11 8 COMPUTATION OF INCOME PER SHARE 1 IPL SYSTEMS, INC. - ----------------- COMPUTATION OF NET LOSS PER COMMON SHARE EXHIBIT 11 YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Thousands of Dollars Except Per Share Amounts) - ------------------------------------------------------------------------------
Primary 1996 1995 1994 ---- ---- ---- Net loss ($ 2,142) ($ 3,464) ($ 15,046) ----------- ----------- ----------- Weighted average shares outstanding 5,617,926 5,469,177 5,381,519 Dilutive stock options based on the treasury stock method using average market price for the period -- -- -- ----------- ----------- ----------- Common shares used in calculation of loss per share 5,617,926 5,469,177 5,381,519 ----------- ----------- ----------- Net loss per common and common equivalent share ($ 0.38) ($ 0.63) ($ 2.80) =========== =========== ===========
2 IPL SYSTEMS, INC. - ----------------- COMPUTATION OF NET LOSS PER COMMON SHARE EXHIBIT 11 YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (Thousands of Dollars Except Per Share Amounts) - ------------------------------------------------------------------------------
Fully Diluted 1996 1995 1994 - ------------- ---- ---- ---- Net loss ($ 2,142) ($ 3,464) ($ 15,046) ----------- ----------- ----------- Weighted average shares outstanding 5,617,926 5,469,177 5,381,519 Dilutive stock options based on the treasury stock method using the higher of average or period and market price 96,680(A) 211,600(A) 128,963(A) ----------- ----------- ----------- Common shares used in calculation of loss per share 5,716,606 5,680,777 5,510,482 ----------- ----------- ----------- Net loss per common and common equivalent share: ($ 0.37) ($ 0.61) ($ 2.73) =========== =========== ===========
(A) This calculation is presented in accordance with Item 601 of Regulations S-X although it is not required by Paragraph 14 of APB Opinion No. 15. EX-23 9 CONSENT OF DELOITTE & TOUCHE LLP 1 Exhibit 23 INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE We consent to the incorporation by reference in Registration Statements Nos. 333-10025, 33- 79080, 33-79078 and 33-50090 of IPL Systems, Inc. on Form S-8 of our report dated February 21, 1997 (except for Note 14, for which the date is March 7, 1997), (which report includes an explanatory paragraph as to an uncertainty concerning going concern matters) appearing in this Annual Report on Form 10-K for the year ended December 31, 1996. Our audits of the financial statements referred to in our aforementioned report also included the financial statement schedule of IPL Systems, Inc., listed in Item 14. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Boston, Massachusetts March 19, 1997 EX-27 10 FINANCIAL DATA SCHEDLUE
5 1,000 US DOLLARS YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1 2,274 0 2,744 353 3,891 8,985 11,564 9,935 10,614 4,064 0 0 0 56 6,549 10,614 17,064 17,064 9,488 19,329 (123) 0 0 (2,141) 0 (2,141) 0 0 0 (2,141) (.38) (.37)
EX-99.1 11 IMPORTANT FACTORS REGARDING FUTURE RESULTS OF IPL 1 EXHIBIT 99.1 TO 1996 FORM 10-K Important Factors Regarding Future Results of IPL Systems, Inc. --------------------------------------------------------------- Information provided by IPL Systems, Inc. ("IPL" or the "Company") or its spokespersons from time to time may contain forward-looking statements concerning projected financial performance, product development or other aspects of future operations. Such statements will be based on the assumptions and expectations of the Company's management at the time such statements are made. The Company cautions investors that any forward-looking statements made by the Company are not guarantees of future performance. Various factors, including but not limited to the following, have affected the Company's results in the past and may cause its future results to differ materially from those projects in the forward-looking statements. Rapid Technological and Market Changes. The market for the Company's products is characterized by rapidly changing technology and evolving customer needs which shorten the life cycles of existing products and require ongoing development and introduction of new products. 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 through distribution channels 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, providing adequate resources for product development, and managing distribution channels effectively. 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. Competition. The computer data storage industry is intensely competitive and is characterized by rapid technological change and constant pricing pressure. IPL competes with a number of companies offering computer data storage, back-up and recovery systems, including International Business Machines ("IBM"), EMC Corporation ("EMC") and others, which have substantially greater financial, product development, marketing and distribution resources than the Company. In the open systems storage market, EMC , Data General Corporation, and the host systems manufacturers are the major competitors, but the Company believes that to date no dominant suppliers have emerged in the very large database ("VLDB") segment of the open systems storage market. In the AS/400 market, IBM is the major competitor. Because IPL's systems have to be compatible with the AS/400 computer systems or with the systems of the 23 2 principal manufacturers of UNIX-based open systems computers and the relational database software programs, IPL's competitive position and operating results may be adversely affected by, among other factors, modifications in the design of such systems or programs, the introduction of new products by such manufacturers or other competitors, reductions in the pricing of storage solutions in these markets, or the implementation of new marketing strategies by any of its principal competitors. The same is also true for the Company's existing AS/400 products which the Company continues to support for its existing customers. The Company has no plans for future development of AS/400 storage. Fluctuations in Operating Results; 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. The Company's revenues in any quarter are substantially dependent on the timing of product shipments to third party distributors (sales to which are often difficult to forecast) 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 fixed costs, and may thus prevent management's projections from being realized. Other factors that affect the Company's operating results and that management takes into account include competitive pricing trends and changes in the revenue and gross margin mix among open systems and AS/400 disk systems and tape systems for computer data storage. Changes in the factors underlying management's assumptions may result in a material variation between actual results and those forecast in any forward-looking statements made during a particular period. 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. The Company has no patents on its current products, but in 1995 the Company filed applications for patents in the United States and foreign countries with respect to new products scheduled to be introduced in 1996. The status of patents involves complex legal and factual questions and the breadth of claims allowed is uncertain. There can be no assurance as to the likelihood that pending patents will be issued or that any such patents will afford protection against competitors with similar technology. In addition, patent applications filed in foreign countries may provide significantly less patent protection than the United States. No assurances can be given that patents issued to the Company will not be infringed upon or designed around by others. 24 3 In addition, due to the rapid technological development of the computer data storage industry with concurrent extensive patent coverage and with the rapid rate of issuance of new patents, certain aspects of the Company's products may infringe patents unknown to the Company. Patent protection may also be obtained in the future on new inventions and designs for peripheral storage subsystems or the computers to which the Company's subsystems attach. 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 or any such patents are issued, 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. 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, so 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 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 25 4 damage relationships with customers and could have a material adverse effect on the Company's business and operating results. Dependence on Distributors and OEMs. In March 1997, the Company transitioned out of direct sales of its products to end users. It has non-exclusive distribution arrangements with a number of distributors and Original Equipment Manufacturers, all of which can and do sell products that are competitive with the Company's products. The Company's principal distributor is now ANDATACO, which entered into an OEM agreement with the Company as of February 25, 1997. All of the Company's distribution agreements are short-term agreements which can be terminated by either party within less than 30 days. Future Capital Needs As of December 31, 1996, IPL had working capital of $4.9 million and cash and cash equivalent of $2.27 million, a decrease of $1.3 million, or approximately 21% from $6.2 million as of December 31, 1995. IPL's current ratio remained stable at about 2.2:1 as of the end of both years. In the year ended December 31, 1996, IPL used $1.2 million in cash to fund the losses of its operating activities. If IPL's operating activities continue to generate losses and use IPL's remaining cash, IPL will need to either liquidate assets or seek outside sources of financing, which if available at all, may not be available on reasonable terms. IPL's management does not anticipate any such needs if the Merger is consummated by the end of May, but if there is any delay in the Merger or if the Merger Agreement is terminated, IPL will proceed to seek such additional sources of cash for the business. 26 -----END PRIVACY-ENHANCED MESSAGE-----