<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
/ / Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the fiscal year ended December 31, 1995
or
/ / Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____ to _____.
Commission file Number 0-10370
IPL SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
----------------------------------------------------
MASSACHUSETTS 04-2511897
(State or jurisdiction of (I.R.S. Employer Identification 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 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 be best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of Class A Common Stock held by non-affiliates of the
Registrant as of March 18, 1996 was: $24,278,137
The number of shares outstanding of the Registrant's Class A Common Stock as of
March 18, 1996 was: 5,595,819
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1996 Annual Meeting are
incorporated by reference into Part III of this Form 10-K.
================================================================================
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PART I
Item 1. Business.
--------
GENERAL
IPL Systems, Inc. ("IPL" or the "Company") provides open-architecture database
storage solutions for multi-host computer environments. IPL designs,
manufactures, sells, and services its products through direct, indirect STAR
(Storage Authorized Reseller) sales and service channels worldwide.
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 would 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.
RECENT DEVELOPMENT OF BUSINESS
In 1995, IPL identified the large and growing database segment of the open
systems storage market as a focus for product and market development. After
announcing major open systems products in January 1995, the Company later in the
year introduced its Database RAID[TRADEMARKS] (Redundant Array of Independent
Disks) architecture, which allowed users of very large relational databases to
take advantage of state-of-the-art RAID 5 technology without the performance
penalties and other restrictions associated with conventional RAID
implementations. The product differentiation created through this database focus
attracted a developing base of large new customers buying at prices which helped
generate improved gross margins in 1995 compared to the prior year. While
marketing Database RAID products to very large database ("VLDB") users, IPL also
focused research and development resources on the development of strategic
technology planned for introduction in April 1996. The Company believes this
technology to be so new in concept that in 1995 it filed patent applications to
protect its engineering design. See "Patents and Protection of Proprietary
Technology" below.
By targeting VLDB users, IPL's product and marketing strategies positioned the
Company in a growth market with differentiated storage technology designed
specifically for the
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market segment which is driving the fast pace of storage growth. The Company's
storage is designed to work with the leading relational databases, Oracle,
Informix, and Sybase, running on the industry's premier business servers, HP
9000, DEC Alpha, Sun SPARC and IBM RS/6000. (1)
The Company ended 1995 with the highest quarterly sales of the year, $7,016,000,
and the lowest quarterly net loss, $380,000. Open systems sales in 1995 were 60%
of total U.S. sales, and 41% of worldwide sales. New database business
opportunities combined with ongoing financial controls drove the Company's
progress toward its goal of achieving profitability in its growing new market.
PRODUCT DEVELOPMENT
The Company's strategy is to identify opportunities for new storage solutions
for the open systems 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.
Increasingly, however, the Company is focusing on developing software that can
enhance its storage solutions. Starting with the January 1994 introduction of
IPL's Centralized Management System ("CMS") software tools for storage
management, and continuing through to the 1996 introduction of innovative
back-up and restore devices with major software components, the Company has
evolved from a hardware manufacturer into a provider of hardware and software
solutions.
IPL's product development in 1995 produced integrated storage, back-up and
recovery solutions geared toward improving the performance and protection of
relational databases. This development strategy is in line with the dramatic
shift in buying criteria for computer users that has occurred since the
mid-1980's, when system hardware and storage devices drove the sale. Today's
customers select the application and the database first, followed by the
hardware technology solution -- system CPU and storage -- that solves the
business problem.
IPL products introduced in 1995, and developed in 1995 for 1996, are designed to
solve customers' business problems. The January 1995 announcement of the
Enterprise Storage Server Series provided one storage solution for the many
hardware platforms found in today's computing environments, and included the CMS
software to monitor, configure, tune and service local and distributed storage
applications.
[FN]
- - ----------------
(1) IBM RS/6000 is a trademark of International Business Machines Corporation,
Sun SPARC is a trademark of Sun Microsystems, Inc., HP 9000 is a trademark
of Hewlett Packard, and Alpha Series is a trademark of Digital Equipment
Corporation.
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The Database RAID architecture in the Enterprise Storage Series focused directly
on the areas that drive storage decisions, namely the database and its
performance running critical software applications. Through scaleable
architecture and user control over data placement, Database RAID solutions
overcome the disadvantages of conventional RAID products to improve database
performance. Key technology developed for 1996 includes backup and restore
technology that addresses the problem of customers' shrinking timeframes for
backing up critical database information -- and the need for practical disaster
recovery plans. A new extension of IPL's adaptive cache architecture is designed
to significantly improve the performance of customers' most frequently used
applications. See "Patents and Protection of Proprietary Technology" below.
MARKETS
IPL's entrance into the open systems market corresponded with the industry's
shift from proprietary systems to client/server computing based on open, or
non-proprietary, technology. IPL's primary market is the Unix multi-server
market. Industry researcher International Data Corporation projects this market
to grow aggressively over the next several years from its 1995 base of $5.8
billion. IPL's target customer in this market is the VLDB user whose critical
database information ranges from 50 gigabytes to multiple terabytes of data.
Typically, this data is distributed across multiple servers in data warehouses,
decision support systems, on-line transaction processing ("OLTP") and on-line
analytical processing ("OLAP") applications. In these applications data must be
available at all times; there is little or no downtime for back-up; and data
loss is unacceptable. This open systems environment expands the size and scope
of IPL's market focus as the Company continues to support its IBM AS/400
customer base.
SALES AND MARKETING
The Company's new focus on open systems required adjustment to the direct sales
force in North America, including some restaffing and significant training to
support users in Unix multi-server environments. The 24-member sales team in
North America is comprised of sales representatives, an inside sales staff
supporting the field, and regional systems engineers. In addition, the Company
supports international business primarily through its Brussels, Belgium office.
During 1995, the Company began recruiting new open systems integrators and
value-added resellers to its Storage Authorized Reseller (STAR) programs. The
Company also became a member of the business alliance programs of Oracle,
Informix, and Sybase. These relationships helped IPL deliver its message of
database specialization to VLDB users. In addition, the Company developed
reference selling arrangements with database design consultants. The Company
markets its products to key influencers and decision-makers within the database
community.
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DISTRIBUTION
In addition to its direct sales force and STARs in the U.S., the Company
continues to market its technology through independent non-exclusive
distributors worldwide. In Europe, these distributors include Decisions Systems
International (DSI), an affiliate of Ing.C.Olivetti & C.,S.p.A. ("Olivetti"),
and GUWA Computer Systems. In Asia, these distributors include Kanamatsu
Electric LTD (KEL) and Systex Corporation. All of the Company's sales in 1995
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.
The Company's international distributors remained focused on the AS/400 during
1995, with some beginning to move toward open systems technology, although the
pace of adoption overseas is still expected to lag behind the U.S. The Company
plans to support these efforts by current distributors and pursue additional
open systems relationships.
IPL continues to explore the development of an OEM channel for its products.
Under this kind of arrangement, the Company is marketing its proprietary
technology to systems manufacturers for integration into their own technology
and distribution of the enhanced products through their established channels.
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.
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 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 rigorously 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
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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, 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 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 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.
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.
PRODUCT WARRANTY AND SERVICE
The Company continues to progress with its program for achieving high levels of
product quality and reliability. Disk and tape drive products have a warranty
that covers defective material and workmanship during the warranty period.
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Installation and maintenance service is available to customers through various
service providers, including Olivetti North America, a U.S. affiliate of
Olivetti, and Decision One. 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, back-up, 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 CMS. 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.
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 its markets. The
Company knows of no reason that this historical ability to respond should not
continue with manufacturers in the open systems business for which the Company
currently develops storage and back-up technology. These manufacturers include
Hewlett Packard, Digital Equipment Corporation, IBM, Sun Microsystems, Novell
and Microsoft.
During its fiscal year ended December 31, 1995, the Company incurred costs of
$1,317,000 for engineering and product development, compared to $1,784,000 in
1994 and $2,164,000 in 1993. 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.
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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.
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.
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
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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, 1996, the Company had 85 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 1A. Executive Officers of the Registrant.
------------------------------------
<TABLE>
Listed below are the names and ages of all executive officers of the Company as
of March 18, 1996 and all positions and offices with the Company held by each
such person. Officers are elected annually by the Board of Directors and serve
until their respective successors are appointed. There is no family relationship
among any of the following executive officers nor is there any arrangement or
understanding between them and any other person pursuant to which they were to
be selected as an executive officer.
<CAPTION>
Name Age Position
- - ---- --- --------
<S> <C> <C>
Stephen J. Ippolito 49 Chairman of the Board, Chief Engineer, Director
Ronald J. Gellert 49 President, Chief Executive Officer, Director
Anita D. Buchanan 53 Vice President of Marketing
George A. Mele 34 Vice President of North American Sales
Michael D. Sullivan 41 Vice President of Manufacturing and Service
Eugene F. Tallone 56 Vice President of Finance, Treasurer, Chief Financial Officer
</TABLE>
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Mr. Ippolito has been Chairman of the Board of the Company and Chief Engineer
since 1985 and served as the Acting Chief Executive Officer of the Company from
September to December 1995. Mr. Ippolito also served as President of the Company
until September 1985 and Treasurer until August 1989.
Mr. Gellert joined the Company as its President, Chief Executive Officer and
Director in December 1995. Prior to joining IPL, Mr. Gellert held various senior
management positions with Sequoia Systems, Inc., a computing technology Company,
since 1987, most recently as Vice President/General Manager, Systems Business
Unit.
Ms. Buchanan joined the Company in 1991 as Director of Corporate Communications
and Investor Relations, and was named Vice President of Marketing in October
1995. Prior to joining the Company, Ms. Buchanan was Vice President of Marketing
and Software Sales for Selecterm, Inc., an IBM industry remarketer and provider
of local area network solutions for IBM systems.
Mr. Mele joined IPL in 1987, serving as National Sales Manager and Director of
Marketing prior to his appointment as Vice President of Marketing in January
1995. Since October 1995, he has served as Vice President of North American
Sales. Prior to joining IPL, Mr. Mele served as National Account Manager and
Product Manager at Leading Edge Computers, a PC manufacturer.
Mr. Sullivan joined the Company in January 1994 as Vice President of
Manufacturing, and assumed responsibility for service in May 1994. From 1978 to
1993, Mr. Sullivan was with Data General Corporation, a computer equipment
manufacturer, where he performed a number of manufacturing and engineering
roles, most recently as Manager of Engineering/Product Development of open
system servers and workstations.
Mr. Tallone joined the Company in August 1989 as Vice President of Finance,
Treasurer and Chief Financial Officer. Prior to joining the Company, Mr. Tallone
served as Vice President, Treasurer and Chief Financial Officer for Genome
Therapeutics Corp., a biotechnology Company, since 1985. Mr. Tallone had
previously held senior management positions with Millipore Corporation, G. D.
Searle & Co., National Industries and Stewart Warner Corporation.
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Item 2. Properties.
----------
The Company currently occupies approximately 67,000 square feet of leased office
and manufacturing space worldwide, with an average annualized rental cost of
$264,000 for 1995. In October 1993, the Company consolidated its two former
Waltham locations into one leased facility located in Maynard, Massachusetts.
Since April 1995, the Company's lease of this facility 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 Note 12 of Notes to the Consolidated Financial Statements). On
March 20, 1996 the Company subleased an additional 36,700 square feet of its
Maynard facility for a term commensurate with the prime lease. The Company also
maintains a representative office in metropolitan Brussels, Belgium under a
lease through February 15, 1997. In support of its direct sales program, the
Company has 13 regional offices which generally consist of not more than
approximately 1,000 square feet, made available to the Company under occupancy
and service agreements between twelve and thirty-six months.
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, 1995.
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PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
----------------------------------------------------------------
Matters.
-------
<TABLE>
The Company's Class A Common Stock is traded on the Nasdaq Stock Market system
under the symbol IPLSA. The following table reflects, for the period indicated,
the high and low sales prices for the Class A Common Stock as reported by
Nasdaq.
<CAPTION>
Price
-----
Year High Low
- - ---- ---- ---
<S> <C> <C> <C>
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
Year
- - ----
1994 First Quarter 9 3/4 6 3/4
Second Quarter 8 3 3/8
Third Quarter 4 3/8 3
Fourth Quarter 5 2 1/8
</TABLE>
On March 18, 1996 the last sale price of the Company's Class A Common Stock was
$5.25, and there were approximately 300 record holders and more than 2,500
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.
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<TABLE>
Item 6. Selected Financial Data.
-----------------------
<CAPTION>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Five-year Revenues $24,764 $ 29,949 $39,721 $53,572 $60,469
Financial
Summary Net income (loss) $(3,464) $(15,046) $(2,451) $ 3,053 $ 9,363
Dollars in Net income (loss)
thousands per share $ (0.63) $ (2.80) $ (0.47) $ 0.56 $ 1.73
(except per
share amounts) Weighted average
common shares
outstanding 5,469,177 5,381,519 5,235,964 5,435,649 5,414,204
Working capital $ 6,195 $ 8,285 $21,549 $25,935 $22,590
Total assets $13,742 $ 18,764 $37,757 $39,355 $30,643
Long-term debt $ -- $ -- $ -- $ -- $ --
Shareholder's
equity $ 8,543 $ 11,352 $26,398 $28,399 $24,625
Current ratio 2.2:1 2.1:1 2.9:1 3.4:1 4.8:1
</TABLE>
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Item 7. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations.
---------------------
OVERVIEW
The Company's net loss for 1995 was $3,464,000, or $0.63 per share, compared
with a net loss of $15,046,000, or $2.80 per share, in 1994. The lower net loss
in 1995 resulted from the continuing execution of IPL's strategy to market its
products to users of very large databases (Oracle, Sybase and Informix) running
on the industry's premier open systems business servers.
RESULTS OF OPERATIONS
1995 COMPARED WITH 1994
- - -----------------------
Revenues in 1995 were $24,764,000 compared with $29,949,000 in 1994. This
decline in sales was caused primarily by a significant reduction in purchases
made by the Company's European distributors. European sales declined 42% from
$11,880,000 in 1994 to $6,838,000 in 1995. Continued competitive pressures and
changes in the business priorities of the Company's major European distributors
contributed to the decline in European sales. Worldwide revenue exclusive of
Europe for 1995 and 1994 remained the same at approximately $18,000,000.
Following the Company's entry into the open systems market in the fourth quarter
of 1994, its open system sales represented 36% of total revenue in 1995 compared
with 2% in 1994. Total open systems revenue grew from 7% of the fourth quarter
revenue in 1994 to 41% in the fourth quarter of 1995. The slow transition of
international distributors to the open systems technology resulted in the fourth
quarter 1995 open systems revenue reaching only 10% of international sales
compared to 60 % of U.S. sales for that quarter. 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 improvement is the
result of reduced costs, the transition from the AS/400 market to the open
systems market, and a partial recovery of a doubtful accounts receivable
totaling $1,607,000. 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% to
$11,436,000 in 1995 compared with $15,759,000 in 1994. This $4,323,000 decrease
is primarily due to the positive effect of reengineering the Company's
operations and ongoing expense management. The reduced expenses positioned the
Company to compete in the aggressive open systems market.
Engineering and development expenses were $1,317,000 in 1995 compared with
$1,784,000 in 1994 as a result of lower costs associated with the development of
open systems products. Despite the reduced expenditures in 1995, the Company
introduced and shipped the Database Raid architecture expressly designed for
today's database
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environments. Additional enhancements in 1995 include the Centralized Management
System and the Autoalert which enabled database users to exploit new performance
features. The Company plans to continue 1996 engineering expenditures at levels
consistent with 1995 expenses.
Restructuring expenses were increased $497,000 in the third quarter of 1995 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 recorded a $1,971,000 restructuring charge substantially reducing the
scale of its operations, and refocused on product development and sales efforts
on the open systems market. As a result of the restructuring plan, payroll,
occupancy and depreciation charges in 1995 were reduced by approximately
$1,400,000, when compared to 1994.
Other income decreased to $274,000 in 1995 from $291,000 in 1994 primarily due
to lower average cash balances 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%. There is approximately $10,000,000 of federal and
$15,000,000 of state tax loss carryforward available through 2010. See Note 5 to
the Notes to Consolidated Financial Statements.
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.
1994 COMPARED WITH 1993
In 1994, the Company's revenues were $29,949,000 compared to $39,721,000 in
1993. This decline was primarily due to a significant reduction in purchases
made by the Company's European distributors and the weak economic conditions in
Europe. U.S. revenues were approximately the same for 1994 and 1993.
International revenues decreased 48% for 1994 compared to 1993. Disk products
decreased 24% from 1993 to 1994 and tape products decreased 29% for the same
period.
Gross margins were 10% in 1994 compared with 33% in 1993. The decrease in
margins of approximately 61% was due to provisions for bad debts and excess and
obsolete inventory, including $3,317,000 in reserves for doubtful accounts
receivable from one of the Company's distributors. The remaining decrease was
due to competitive market conditions.
Selling, general and administrative expenses increased 3% in 1994 compared with
1993. This was primarily due to a $666,000 reduction in the value of the
Company's customer support spare parts in the fourth quarter of 1994.
15
<PAGE> 16
Engineering and development expenses decreased 18% in 1994 compared with 1993.
In 1994 the Company introduced and shipped a number of tape and disk products.
In addition, the 1994 development program produced the Company's Enterprise
Storage Server Series, which was introduced in January 1995.
The Company recorded a $1,971,000 charge to restructure the Company's operations
in the fourth quarter of 1994. The Company's restructuring plan reduced the
scale of its business operation and refocused product development and sales
efforts on the open systems market. The restructuring reduced occupied space,
leasehold improvements and idle assets and provided for severance costs for the
reduction of employees.
Total other income decreased from $512,000 in 1993 to $288,000 in 1994 primarily
due to the Company's lower average cash balance and reduced interest rates.
The Company's effective tax benefit rate was 7.2% in 1994 compared with 36.1% in
1993. During 1994, the Company utilized its benefit from the tax net operating
loss carryback, and had approximately $3,050,000 in federal tax loss
carryforwards available through 2009.
In 1994 the Company had a net loss of $15,046,000 or $2.80 per share, compared
with the net loss of $2,451,000, or $0.47 per share in 1993.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and equivalents as of December 3, 1995 were $3,595,000
compared with $2,239,000 at December 31, 1994. Accounts receivable decreased
53% from $8,615,000 at December 31, 1994 to $4,019,000 at December 31, 1995.
This decrease is the result of a twenty-nine day improvement in the days' sales
outstanding and the reduction in revenue. Inventories increased 10% to
$3,375,000 December 31, 1995 from $3,060,000 at December 31, 1994, principally
due to new technology material costs. Accounts payable and accrued expenses
decreased by $2,213,000 primarily due to reduced purchasing requirements and
operating expenses.
Management believes that the Company's cash and cash equivalents are sufficient
to meet the operating requirements for its existing business. The Company
continues to evaluate external financing requirements for the future growth of
its business and alternatives for such financing during 1996. The Company
remains free of any short-term and long-term obligations.
16
<PAGE> 17
Item 8. Financial Statements and Supplementary Data.
-------------------------------------------
See Item 14 for Financial Statement and supplementary data filed as
part of this Form 10-K.
Item 9. Changes in and Disagreement with Accountants on Accounting and
--------------------------------------------------------------
Financial Disclosure.
--------------------
None.
17
<PAGE> 18
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
1996 Annual Meeting of Stockholders under the caption "Election of Directors"
and "Compliance with Section 16 (a) of the Securities Exchange Act of 1934".
See Item 1A "Executive Officers of the Registrant" of this Form 10-K, with
respect to information on the Company's executive officers, which is
incorporated herein by reference.
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
1996 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
1996 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
1996 Annual Meeting of Stockholders under the caption "Certain Transactions"
and Note 10 of the Notes to Consolidated Financial Statements contained
elsewhere in this report.
18
<PAGE> 19
PART IV
<TABLE>
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 10-K.
-----------------------------------------------------------------
<CAPTION>
Page Number
-----------
<S> <C> <C>
(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, 1995 and 1994 24
Consolidated Statements of Operations - Years Ended
December 31, 1995, 1994 and 1993 25
Consolidated Statements of Stockholders' Equity --
Years Ended December 31, 1995, 1994, and 1993 26
Consolidated Statements of Cash Flows --
Years Ended December 31, 1995, 1994 and 1993 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 35
Independent Auditors' Consent and Report
on Schedule 46
</TABLE>
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.
19
<PAGE> 20
<TABLE>
(a) (3) The following exhibits are filed as part of this Form 10-K:
<CAPTION>
Exhibit
Number Exhibit
- - ------ -------
<S> <C>
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) (the "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 Policy Regarding Reimbursement of Relocation Expenses, filed as
Exhibit 10.14 to the 1993 Form 10-K and incorporated herein by
reference.
10.8 1991/1993 Consolidated Equity Incentive Plan, filed as Exhibit 10.9 to
the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994 (the "1994 Form 10-K") and incorporated herein by
reference.
10.9 Consulting Agreement dated as of January 1, 1995 between the Company
and Firecracker Technology Corp., filed as Exhibit 10.10 to the 1994
Form 10-K and incorporated herein by reference.
</TABLE>
20
<PAGE> 21
<TABLE>
<S> <C>
10.10 Employment Agreement with Ronald J. Gellert dated as of December 4,
1995 between the Company and Ronald J. Gellert, filed herewith as
Exhibit 10.10.
10.11 Stock Option Agreement dated as of December 4, 1995 between the
Company and Ronald J. Gellert, filed herewith as Exhibit 10.11.
11. Computation of Net Income per Common Share, filed herewith as Exhibit
11.
21. List of subsidiaries, filed as Exhibit 22.1 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.
</TABLE>
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
Exhibits 10.3 and 10.5 through 10.11 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, 1995.
21
<PAGE> 22
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, 1996
<TABLE>
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.
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/Ronald J. Gellert President, Chief Executive March 26, 1996
- - ------------------------ Officer and Director (Principal
Ronald J. Gellert Executive Officer)
/s/Eugene F. Tallone Vice President - Finance, Chief March 26, 1996
- - ------------------------ Financial Officer and Treasurer
Eugene F. Tallone (Principal Financial and
Accounting Officer)
/s/Stephen J. Ippolito Director March 26, 1996
- - ------------------------
Stephen J. Ippolito
/s/Cornelius P. McMullan Director March 26, 1996
- - ------------------------
Cornelius P. McMullan
/s/Harris Ravine Director March 26, 1996
- - ------------------------
Harris Ravine
/s/Jeanne M. Sullivan Director March 26, 1996
- - ------------------------
Jeanne M. Sullivan
</TABLE>
22
<PAGE> 23
INDEPENDENT AUDITORS' 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, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1995. 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, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, the Company
changed its method of accounting for income taxes effective January 1, 1993 to
conform with the Statement of Financial Accounting Standards No. 109.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
Boston, Massachusetts
February 16, 1996
23
<PAGE> 24
IPL SYSTEMS, INC.
<TABLE>
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
- - -------------------------------------------------------------------------------------
<CAPTION>
ASSETS 1995 1994
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 3,595,268 $ 2,238,812
Accounts receivable - trade (net of allowance
for doubtful accounts of $2,111,000 and $3,668,000) 4,018,511 8,614,855
Inventories 3,375,652 3,060,366
Refundable income taxes - 1,425,000
Prepaid expenses and other current assets 404,564 357,965
----------- ------------
Total current assets 11,393,995 15,696,998
----------- ------------
EQUIPMENT, FIXTURES AND
LEASEHOLD IMPROVEMENTS:
Manufacturing equipment 4,883,499 4,814,688
Office equipment and fixtures 2,319,517 2,412,037
Customer support equipment 3,500,011 3,167,518
Leasehold improvements 1,334,788 1,334,788
----------- ------------
12,037,815 11,729,031
Less accumulated depreciation and
amortization 9,689,630 8,661,743
----------- ------------
2,348,185 3,067,288
----------- ------------
$13,742,180 $ 18,764,286
=========== ============
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS'
EQUITY 1995 1994
<S> <C> <C>
CURRENT LIABILITIES:
Trade accounts payable $ 3,583,605 $ 5,497,975
Accrued payroll expenses 688,595 927,751
Accrued restructuring expenses 594,782 559,286
Other accrued expenses 332,390 427,328
----------- -----------
Total current liabilities 5,199,372 7,412,340
----------- -----------
STOCKHOLDERS' EQUITY:
Class A common stock, $.01 par value -
authorized, 20,000,000 shares; issued
and outstanding, 5,200,590 shares and
4,501,776 shares at December 31, 1995
and 1994, respectively 52,006 45,018
Class C common stock, $.01 par value -
authorized, 2,250,000 shares; issued
and outstanding, 386,929 shares and
879,743 shares at December 31, 1995
and 1994, respectively 3,869 8,797
Additional paid-in capital 17,230,023 16,577,458
Deficit (8,743,090) (5,279,327)
----------- -----------
Total stockholders' equity 8,542,808 11,351,946
----------- -----------
$13,742,180 $18,764,286
=========== ===========
</TABLE>
See notes to consolidated financial statements.
24
<PAGE> 25
IPL SYSTEMS, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- - -------------------------------------------------------------------------------------------------------
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
NET REVENUE $24,763,815 $29,948,525 $39,721,199
----------- ------------ -----------
COSTS AND EXPENSES:
Cost of sales 15,251,668 26,938,094 26,738,605
Selling, general and administrative expenses 11,436,222 15,759,705 15,352,051
Engineering and development 1,317,299 1,784,113 2,164,123
Restructuring expenses 496,880 1,970,587 -
----------- ------------ -----------
28,502,069 46,452,499 44,254,779
----------- ------------ -----------
OPERATING LOSS (3,738,254) (16,503,974) (4,533,580)
OTHER INCOME:
Interest 199,568 162,857 269,046
Other, net 74,923 124,906 242,656
----------- ------------ -----------
LOSS BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE (3,463,763) (16,216,211) (4,021,878)
----------- ------------ -----------
INCOME TAX BENEFIT - Federal - (1,170,000) (1,450,000)
----------- ------------ -----------
LOSS BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGE (3,463,763) (15,046,211) (2,571,878)
----------- ------------ -----------
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR
INCOME TAXES - - 121,000
----------- ------------ -----------
NET LOSS $(3,463,763) $(15,046,211) $(2,450,878)
=========== ============ ===========
LOSS PER COMMON AND COMMON EQUIVALENT
SHARE BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGE $ (0.63) $ (2.80) $ (0.49)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR
INCOME TAXES - - 0.02
----------- ------------ -----------
NET LOSS PER COMMON AND COMMON EQUIVALENT
SHARE $ (0.63) $ (2.80) $ (0.47)
=========== ============ ===========
COMMON AND COMMON EQUIVALENT SHARES USED IN
CALCULATION OF NET LOSS PER SHARE 5,469,177 5,381,519 5,235,964
=========== ============ ===========
</TABLE>
See notes to consolidated financial statements.
25
<PAGE> 26
IPL SYSTEMS, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- - ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
COMMON STOCK
---------------------------------------
CLASS A (VOTING) CLASS C (VOTING) ADDITIONAL RETAINED
------------------- ------------------ PAID-IN EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1993 4,267,101 $42,671 914,418 $ 9,144 $16,129,458 $12,217,762 $28,399,035
Net loss for the year - - - - - (2,450,878) (2,450,878)
Exercise of stock options 200,000 2,000 - - 448,000 - 450,000
Conversion of Class C to Class A stock 34,675 347 (34,675) (347) - - -
--------- ------- ------- ------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1993 4,501,776 45,018 879,743 8,797 16,577,458 9,766,884 26,398,157
Net loss for the year - - - - - (15,046,211) (15,046,211)
--------- ------- ------- ------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1994 4,501,776 45,018 879,743 8,797 16,577,458 (5,279,327) 11,351,946
Net loss for the year - - - - - (3,463,763) (3,463,763)
Exercise of stock options 206,000 2,060 - - 652,565 - 654,625
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) $ 8,542,808
========= ======= ======= ======= =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
26
<PAGE> 27
IPL SYSTEMS, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- - ---------------------------------------------------------------------------------------------------------
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,463,763) $(15,046,211) $(2,450,878)
----------- ------------ -----------
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization 1,213,005 2,614,596 865,141
Loss on the sale of equipment and fixtures 27,072 46,223 -
Restructuring expenses - 1,185,790 -
Bad debt expense (recoveries) (1,374,995) 3,173,526 -
Inventory reserves (1,422,474) 1,382,055 -
Cumulative effect of change in accounting for income
taxes - - (121,000)
Changes in assets and liabilities:
Accounts receivable - trade 5,971,339 6,279,971 (3,676,758)
Inventories 1,107,188 3,436,420 355,264
Prepaid expenses and other current assets (46,599) 177,095 (124,790)
Refundable income taxes 1,425,000 475,000 (1,270,000)
Deferred income taxes - 395,000 411,000
Accounts payable and accrued expenses (2,248,464) (4,506,131) 403,222
Accrued restructuring expenses 35,496 559,286 -
----------- ------------ -----------
Total adjustments 4,686,568 15,218,831 (3,157,921)
----------- ------------ -----------
Net cash provided by (used for) operating
activities 1,222,805 172,620 (5,608,799)
----------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to equipment, fixtures and leasehold
improvements (568,488) (2,064,398) (2,022,420)
Proceeds from sale of equipment and fixtures 47,514 - -
----------- ------------ -----------
Cash used for investing activities (520,974) (2,064,398) (2,022,420)
----------- ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES -
Exercise of stock options 654,625 - 450,000
----------- ------------ -----------
CASH AND EQUIVALENTS:
Net increase (decrease) 1,356,456 (1,891,778) (7,181,219)
Balance, beginning of year 2,238,812 4,130,590 11,311,809
----------- ------------ -----------
Balance, end of year $ 3,595,268 $ 2,238,812 $ 4,130,590
=========== ============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - Income taxes paid $ - $ 23,000 $ 391,000
=========== ============ ===========
</TABLE>
See notes to consolidated financial statements.
27
<PAGE> 28
IPL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
- - --------------------------------------------------------------------------------
1. INDUSTRY
IPL Systems, Inc. (the "Company"), founded in 1973, provides open
architecture storage solutions for multi-host computer environments. The
Company supplies its products through direct, indirect, Storage Authorized
Resellers ("STAR") and OEM sales and service channels throughout the world.
2. MANAGEMENT PLANS
The Company incurred an operating loss in 1995, primarily from reduced sales
levels; however, gross margins and cash available to fund future operations
increased over 1994 levels. Management continued to take measures to
re-engineer the business and reduce costs. Management believes that the
absence of a single dominant supplier in the open systems storage market
will result in the opportunity for increased sales compared to 1995 results.
In addition, the Company is in the process of negotiating a secured line of
credit to provide additional working capital, including that required for
planned growth of the business. In the event such a line of credit is not
obtained, management believes the Company has sufficient working capital to
sustain its current level of operations through 1996.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
period. Actual results could differ from those estimates. In 1995, the
allowance for doubtful accounts was reduced by $1,557,000, principally as a
result of a partial collection of previously reserved balances.
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.
28
<PAGE> 29
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
REVENUE RECOGNITION - Sales are recorded when products are shipped under the
terms of firm purchase contracts.
WARRANTY COSTS - The costs of warranty services, whether subcontracted or
provided by the Company, are recorded at the time of sale.
INCOME TAXES - Effective January 1, 1993, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income
Taxes," which 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.
This standard permitted the Company to recognize the benefit of certain
deferred tax assets at the rate at which the benefits are expected to be
realized, which was higher than was permitted under the previous method. The
cumulative effect of adopting SFAS No. 109 was to increase income by
$121,000 ($0.02 per share). Prior year financial statements were not
restated.
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.
RECENTLY ISSUED ACCOUNTING STANDARDS - Effective January 1, 1996, the
Company will be required to adopt, prospectively, SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
Of." SFAS No. 121 requires that long-lived assets to be held and used by an
entity be reviewed for impairment whenever circumstances indicate that the
carrying value of an asset may not be recoverable. The Company does not
believe that the adoption of SFAS No. 121 will have a material effect on its
consolidated financial position or results of operations.
4. INVENTORIES
<TABLE>
Inventories consist of the following at December 31:
<CAPTION>
1995 1996
<S> <C> <C>
Raw materials $ 1,460,423 $ 1,430,302
Work-in-process 651,245 223,654
Finished goods 1,263,984 1,406,410
--------- ---------
$ 3,375,652 $ 3,060,366
=========== ===========
</TABLE>
29
<PAGE> 30
5. INCOME TAXES
<TABLE>
Income tax benefit consists of the following for the years ended December
31:
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Current - federal $ - $(1,565,000) $(1,861,000)
Deferred:
Federal (974,000) (4,255,000) 91,000
State (305,000) (1,125,000) -
Change in valuation allowance 1,279,000 5,775,000 320,000
--------- ----------- -----------
$ - $(1,170,000) $(1,450,000)
========== =========== ===========
</TABLE>
<TABLE>
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 taxes for the years ended December 31, 1995, 1994 and
1993:
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
U.S. federal statutory rate (35.0)% (35.0)% (35.0)%
Change in valuation allowance 36.9 35.6 -
Benefit of prior year tax credits - (5.3) -
Benefit of foreign sales corporation - - (2.9)
Other, net (1.9) (2.5) 1.8
---- ---- ---
0.0 % ( 7.2)% (36.1)%
=== = === =====
</TABLE>
<TABLE>
The tax effects of significant items comprising the Company's deferred tax
assets as of December 31, 1995 and 1994 are as follows:
<CAPTION>
1995 1994
<S> <C> <C>
Reserves and accruals not currently deductible:
Accounts receivable $ 865,000 $ 1,433,000
Inventory 238,000 502,000
Warranty 294,000 566,000
Compensation 56,000 66,000
Restructuring 238,000 201,000
Other 131,000 60,000
----------- -----------
1,822,000 2,828,000
Depreciation 467,000 568,000
Loss carryforward amounts 4,280,000 1,925,000
Tax credits 945,000 914,000
--------- -----------
7,514,000 6,235,000
Valuation allowance (7,514,000) (6,235,000)
----------- -----------
$ - $ -
=========== ===========
</TABLE>
30
<PAGE> 31
5. INCOME TAXES (CONTINUED)
The Company has approximately $9,194,000 in net federal operating loss
carryforwards which expire in 2010, and approximately $21,245,000 in state
operating loss carryforwards which expire through 2000. 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
<TABLE>
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 required under these leases:
<CAPTION>
<S> <C>
1996 $520,126
1997 447,282
1998 108,238
</TABLE>
Rental expense amounted to approximately $264,000, $564,000 and $893,000 in
1995, 1994 and 1993, respectively.
7. CLASS C COMMON STOCK
Class C common stock is convertible into an equal number of shares of Class
A common stock at any time at the option of the holder but is required to be
converted if the number of shares of Class C common stock outstanding is
less than 5% of all shares outstanding. Restrictions are imposed as to
certain actions by the Company without the approval of the Class C common
stockholders, including any merger, consolidation, liquidation and sale or
lease of substantially all assets of the Company, and issues of its capital
stock other than pursuant to employee stock plans and certain public
offerings.
As part of the sale of Class C common stock in 1980, certain major
stockholders executed agreements providing each other and the Company with
rights of first refusal on certain transfers of their shares.
At December 31, 1995, the Company reserved 386,929 shares of Class A common
stock for issuance upon conversion of the outstanding shares of Class C
common stock.
On February 6, 1996, all of the remaining shares of Class C common stock
were automatically converted pursuant to their terms into an equal number of
shares of Class A common stock.
8. EMPLOYEE STOCK PLANS
The Consolidated 1991/1993 Equity Incentive Plan (the "Consolidated 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 Consolidated Plan.
31
<PAGE> 32
8. EMPLOYEE STOCK PLANS (CONTINUED)
Under the 1993 Director Stock Option Plan (the "Director Plan"), directors
who are not employees of the xompany are granted initial options of 10,000
shares of Class A common stock, which become 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.
In connection with the employment of the Company's new Chief Executive
Officer in December 1995, the Company granted him an option (the "1995
Plan") with respect to 115,000 shares not covered by the Consolidated Plan.
At December 31, 1995, all of the options, which are priced at $3.125 a
share, are outstanding.
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 Consolidated Plan, whereby options were repriced to market
value on that date. There was no financial statement impact as a result of
this change.
<TABLE>
The number and prices of options are as follows:
<CAPTION>
CONSOLIDATED PLAN
AND 1995 PLAN DIRECTOR PLAN
---------------------------- --------------------------
NUMBER NUMBER
OF SHARES PRICE OF SHARES PRICE
<S> <C> <C> <C> <C>
Balance, January 1, 1993 456,000 $2.25 - $31.88 - $ -
Granted 477,500 6.25 - 8.75 20,000 9.25
Terminated (143,000) 4.63 - 31.88 - -
Exercised (200,000) 22.50 - -
-------- -------
Balance, December 31, 1993 590,500 2.25 - 20.50 20,000 9.25
Granted 570,000 2.4375 - 9.25 4,000 7.25
Terminated (520,500) 2.25 - 19.25 - -
-------- -------
Balance, December 31, 1994 640,000 2.4375 - 20.50 24,000 7.25 - 9.25
Granted 209,500 3.25 - 4.125 20,000 3.25 - 5.625
Terminated (121,200) 2.4375 - 20.50 (12,000) 7.25 - 9.25
Exercised (206,000) 2.4375 - 6.25 - -
-------- -------
Balance, December 31, 1995 522,300 2.4375 - 8.75 32,000 3.25 - 9.25
======== =======
Exerciseable, December 31, 1995 139,400 4,400
======== =======
</TABLE>
32
<PAGE> 33
8. EMPLOYEE STOCK PLANS (CONTINUED)
Effective for the year ending December 31, 1996, the Company will be
required to adopt SFAS No. 123, "Accounting for Stock-Based Compensation."
SFAS No. 123 requires that the fair values of stock-based compensation to
employees and nonemployees be either disclosed or reported in the financial
statements. The Company does not believe that the adoption of SFAS No. 123
will have a material effect on its consolidated financial position or
results of operations. The Company currently accounts for stock options in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees."
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,
1995, 1994 and 1993.
10. RELATED PARTY
SALES - The Company has a distribution agreement with certain affiliates of
Olivetti Holding N.V. ("Olivetti"), the beneficial owner of the issued and
outstanding Class C common stock. Sales to these entities, all in Europe,
totaled $3,630,000, $7,763,000 and $14,624,000 in 1995, 1994 and 1993,
respectively. Related amounts outstanding, included in accounts receivable
trade, are $1,147,000 and $4,530,000 at December 31, 1995 and 1994,
respectively.
PURCHASES - In 1993, the Company contracted 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 $1,612,000, $1,759,000 and
$2,492,000 in 1995, 1994 and 1993, respectively, of which $251,000 and
$1,294,000 are included in trade accounts payable at December 31, 1995 and
1994, respectively.
11. SALES INFORMATION
MAJOR CUSTOMERS - The Company had sales to an unaffiliated major customer of
$3,675,000 in 1994, and to two different customers of $7,246,000 in 1993.
EXPORTS - Export sales to unaffiliated customers which are principally in
Europe, on materially the same terms as to domestic customers, totaled
$4,741,000, $6,115,000 and $9,215,000 in 1995, 1994 and 1993, respectively.
CONCENTRATION OF CREDIT RISK - The Company had outstanding net accounts
receivable due totaling $1,402,000 and $5,372,000 at December 31, 1995 and
1994, respectively, from both related and unaffiliated customers located in
Europe. While the Company monitors individual customer balances to limit
risk, the ability of these customers to meet their obligations to the
Company may depend on a number of factors, including the capitalization of
these customers and the state of the European economy.
33
<PAGE> 34
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 the Plan and recorded an additional
restructuring charge of $496,880 related to the lease obligation on certain
idle facilities.
<TABLE>
Restructuring charges were recorded and payments were made in 1995 and 1994
as follows:
<CAPTION>
1994 1995
------------------------------------- -----------------------------------
BALANCE, BALANCE
RESTRUCTURING DECEMBER 31, ADDITIONAL DECEMBER 31,
EXPENSES PAID 1994 RESERVE PAID 1995
<S> <C> <C> <C> <C> <C> <C>
Excess space:
Occupancy costs, net $ 473,652 $ 2,269 $ 471,383 $ 496,880 $ 373,481 $ 594,782
Write-down of leasehold
improvements 850,914 - - - - -
Write-down of idle assets 334,876 - - - - -
Severance costs 311,145 223,242 87,903 - 87,903 -
---------- --------- --------- --------- --------- ---------
$1,970,587 $ 225,511 $ 559,286 $ 496,880 $ 461,384 $ 594,782
========== ========= ========= ========= ========= =========
</TABLE>
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 financial position.
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
Summarized unaudited quarterly financial data for 1995 and 1994 (dollars in
thousands, except per share amounts) is as follows:
<CAPTION>
1995 - THREE MONTHS ENDED
-------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
<S> <C> <C> <C> <C>
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)
1994 - THREE MONTHS ENDED
-------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
Revenue $ 7,542 $ 6,158 $ 8,025 $ 8,224
Net loss (1,166) (2,058) (2,220) (9,602)
Net loss per common share (0.22) (0.38) (0.41) (1.78)
</TABLE>
The fourth quarter of 1994 includes charges relating to doubtful accounts
receivable, principally from a distributor ($3,137,526), inventory reserves
($1,382,055) and the restructuring charges discussed in Note 12
($1,970,587).
* * * * * *
34
<PAGE> 35
<TABLE>
IPL SYSTEMS, INC. SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 1995 (DOLLARS IN THOUSAND)
- - ------------------------------------------------------------------------------
<CAPTION>
Charged
Balance at Charged to to Other Balance
Beginning Cost and Accounts at End
of Period Expenses Describe Write off of Period
---------- ---------- -------- --------- ---------
Description
- - -----------
<S> <C> <C> <C> <C> <C>
DEDUCTED FROM ASSETS
TO WHICH THEY APPLY:
Allowed for doubtful
accounts - sales:
Year ended December 31, 1995 3,668 (1,519) (C) (38) (B) ---- 2,111
Year ended December 31, 1994 463 3,165 40 (B) ---- 3,668
Year ended December 31, 1993 424 53 (14) (A)(B) ---- 463
<FN>
- - -------------------
(A) Charged against allowance provided in the prior year
(B) Charged against sales for product not returned by year end
(C) Includes partial recovery of a doubtful account receivable totalling $1,607
</TABLE>
35
<PAGE> 1
Exhibit 10.10
IPL SYSTEMS, INC.
124 ACTON STREET
MAYNARD, MA 01754
Dated as of December 4, 1995
Ronald Gellert
[ADDRESS]
Dear Ron:
On behalf of IPL Systems, Inc., I am very pleased that you have indicated a
willingness to join our Company as President and CEO. As such you will also be a
member of the Board of Directors.
Your compensation will initially consist of the following components:
1. A base salary at the rate of $185,000 per annum, payable in accordance
with our customary payroll procedures, and subject to customary
deductions and withholding, as required by law. Thereafter, your
salary will be reviewed annually by the Board of Directors of the
Company or a duly appointed committee thereof, beginning in December
1996.
2. Beginning in 1996, a bonus based on individual and Company performance
criteria to be established according to a 1996 business plan for IPL
mutually acceptable to you and the Compensation Committee. The bonus
will be equal to 50% of your base salary assuming achievement of the
quarterly and annual goals to be derived from the 1996 business plan;
provided, however, that the bonus plan will provide that a portion of
the bonus for each of the Company performance criteria will be payable
upon achievement of less than 100% of the target for such criteria,
and the total bonus may increase depending upon the extent to which
IPL exceeds the business plan, in each case under terms to be
determined by the Compensation Committee.
3. Eligibility to participate in IPL's employee benefits programs,
including health and other insurance and a 401(k) plan. To the extent
that you have portable benefits from prior employment which will
continue to be available to you after you join IPL and which are
substantially duplicative of any of IPL's
37
<PAGE> 2
standard benefits, IPL shall in good faith seek to offer you other
mutually acceptable benefits at a cost to IPL comparable to the cost
of providing the duplicated benefits.
4. An incentive stock option to purchase up to 115,000 shares of IPL's
Class A Common Stock at the current fair market value per share
determined under the IPL's Equity Incentive Plan for a grant as of the
date your employment commences. Options are subject to grant by IPL's
Board of Directors and to the applicable requirements of the Internal
Revenue Code. Your options will be evidenced by IPL's standard-form
stock option certificate and will become exercisable as to 20% of such
shares on each of the next five anniversaries of your employment date.
In addition, the Compensation Committee will grant you an additional
option with respect to 25,000 shares upon your completion of a
three-year strategic plan for the Company which is satisfactory to the
Board of Directors. This second option will be priced at the current
fair market value at the date of grant and will become exercisable as
to 20% of such shares on each of the next five anniversaries of that
date. Due to the fact that IPL does not have sufficient options
previously approved by stockholders to cover your options, the first,
and perhaps the second (depending upon the date of grant), of these
options will be granted under a new plan rather than a so-called
Section 16b-3 plan (which is of concern only if you have any matching
transactions in IPL stock), and their continuing status as incentive
stock options will be subject to stockholder approval within the next
twelve months.
5. You will also be offered the benefits of the Company's standard
Executive Severance Agreement for senior executives, a copy of which
is enclosed; provided, however, that your form of Executive Severance
Agreement shall provide, in the event that your employment is
terminated after a change in control of the Company (a) by the Company
other than for "cause" or "disability" or (b) by you for "good reason"
(in each case as such terms are defined in the agreement), the
additional benefit that your options referenced in this agreement (and
any additional options unless expressly provided to the contrary)
shall be fully vested.
Your starting date shall be December 4, 1995. Except as provided in the
Executive Severance Agreement, your employment at IPL is "at will" and not for a
specific term. Your employment can be terminated by you or by IPL at any time
for any reason, with or without cause.
If IPL terminates your employment, other than with cause, it will continue
to pay your base salary and continue to provide or pay for medical insurance
which is comparable to what you received as an employee for a period of nine
months after your termination date. These termination benefits are subject to
the return by you of all of the Company's property,
38
<PAGE> 3
including any documents or other Company confidential information which may be
in your possession, and the execution by you and the Company of mutually
satisfactory termination agreements and releases. For this purpose termination
"with cause" shall mean termination for gross neglect of duties or commission of
an act of dishonesty or moral turpitude in connection with employment, as
determined by the Board of Directors.
Upon joining IPL, you also agree to execute the Company's standard-form
employment agreement regarding invention and confidential information. In that
agreement, you will confirm the representation which you have previously made to
us to the effect that your employment with IPL as contemplated will not cause
you to breach any fiduciary or other duty, covenant or understanding to which
you are a party or by the terms of which you are bound.
The foregoing terms supersede any prior discussions, oral or written, which
we have had relating to your employment and the other matters discussed in this
letter, including without limitation your original employment letter dated
November 27, 1995.
If the foregoing terms are acceptable to you, please sign, date and return
the original of this letter. An extra copy is enclosed for your records.
Sincerely,
IPL SYSTEMS, INC.
/s/ Stephen J. Ippolito
Chairman of the Board
ACCEPTED:
/s/ Ronald J. Gellert
Enclosures: Executive Severance Agreement
Employment Agreement
Copy of this letter
39
<PAGE> 1
Exhibit 10.11
OPTION AGREEMENT
IPL Systems, Inc. (the "Company"), a Massachusetts corporation, as an
incentive and inducement to Ronald J. Gellert (the "Optionholder"), who is
presently President and Chief Executive Officer of the Company, to devote his
best efforts to the affairs of the Company, which incentive and inducement the
Board of Directors of the Company through its Joint Compensation and Stock
Option Committee (the "Committee") has determined to be sufficient consideration
for the grant of this Option, hereby grants to the Optionholder the right and
option (the "Option") to purchase from the Company up to 115,000 shares of its
Class A Common Stock, $0.01 par value per share ("Common Stock"). This Option
shall be exercisable only on the following terms and conditions:
1. OPTION PRICE. The price to be paid for each share of Common Stock upon
exercise of the whole or any part of this Option shall be $3.125, which is not
less than the closing price of a share of Common Stock, as reported on the
Nasdaq Stock Market, on the last trading day prior to December 4, 1995 (the
"Date of Grant"), the date that the Optionholder commenced his employment with
the Company.
2. EXERCISABILITY SCHEDULE. This Option may be exercised:
at any time after December 3, 1996, as to 23,000 shares,
at any time after December 3, 1997, as to an additional 23,000 shares,
at any time after December 3, 1998, as to an additional 23,000 shares,
at any time after December 3, 1999, as to an additional 23,000 shares,
at any time after December 3, 2000, as to an additional 23,000 shares.
provided, however, that this Option may not be exercised as to any shares after
the expiration of ten (10) years from the Date of Grant.
3. METHOD OF EXERCISE. This Option may be exercised at any time and from
time to time, subject to the limitation of Section 2 above, up to the aggregate
number of shares specified herein, but in no event for the purchase of other
than full shares. To exercise this Option, written notice of exercise shall be
delivered to the Company specifying the number of shares with respect to which
the Option is being exercised accompanied by payment of the Option Price for
such shares in cash, by personal or certified check or in such other form,
including shares of Common Stock of the Company valued at their Fair Market
Value (as defined below) on the date of delivery, as the Committee may approve.
If the Company determines that the notice of exercise and payment are in order
(which in the case of payment by personal check may include the clearing of
funds for payment), the Company will promptly proceed to have prepared and
delivered to the Optionholder a certificate for the number of shares with
respect to which the Option is being exercised.
40
<PAGE> 2
Fair Market Value shall mean the fair market value of Common Stock as
determined by the Committee in good faith or in the manner established by the
Committee from time to time.
4. INCENTIVE STOCK OPTION. This Option is intended to be treated as an
Incentive Stock Option under Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"). The continuing status of this Option as an Incentive
Stock Option is subject to the approval of the stockholders of the Company
within twelve months of the Date of Grant.
5. RIGHTS AS A STOCKHOLDER OR EMPLOYEE. The Optionholder shall not be
deemed, for any purpose, to have any rights whatever in respect of shares to
which the Option shall not have been exercised and payment made as aforesaid.
The Optionholder shall not be deemed to have any rights to continued employment
by the Company by virtue of the grant of this Option.
6. RECAPITALIZATIONS, MERGERS, ETC. In the event that the Committee
determines, in its discretion, that any stock dividend, extraordinary cash
dividend, creation of a class of equity securities, recapitalization,
reorganization, merger, consolidation, split-up, spin-off, combination, exchange
of shares, warrants or rights offering to purchase Common Stock at a price
substantially below fair market value, or other similar transaction affects the
Common Stock such that an adjustment is required in order to preserve the
benefits or potential benefits intended to be made available hereunder, then the
Committee, subject to any limitation required under the Code, shall equitably
adjust either or both of (i) the number and kind of shares subject to this
Option and (ii) the exercise price with respect to this Option, and if
considered appropriate, the Committee may make provision for a cash payment with
respect to this Option, provided that the number of shares subject to this
Option shall always be a whole number.
In the event of a consolidation or merger of the Company with another
corporation, or the sale or exchange of all or substantially all of the assets
of the Company, or a reorganization or liquidation of the Company, the
Optionholder shall be entitled to receive upon exercise and payment in
accordance with the terms of this Option the same shares, securities or property
as he would have been entitled to receive upon the occurrence of such event if
he had been, immediately prior to such event, the holder of the number of shares
of Common Stock purchasable under this Option, or if another corporation shall
be the survivor, such corporation shall substitute therefor substantially
equivalent shares, securities or property of such other corporation; provided,
however, that in lieu of the foregoing the Committee may upon written notice to
the Optionholder provide that this Option shall terminate on a date not less
than twenty (20) days after the date of such notice unless theretofore
exercised. In connection with such notice, the Committee may in its discretion
accelerate or waive any deferred exercise period.
7. OPTION NOT TRANSFERABLE. This Option is not transferable by the
Optionholder otherwise than by will or the laws of descent and distribution, and
is exercisable, during the Optionholder's lifetime, only by the Optionholder.
41
<PAGE> 3
8. EXERCISE OF OPTION AFTER TERMINATION OF EMPLOYMENT. If the
Optionholder's employment with (i) the Company, (ii) a parent or subsidiary
corporation of the Company or (iii) a corporation (or parent or subsidiary
corporation of such corporation) issuing or assuming a stock option in a
transaction to which Section 424(a) of the Code applies, is terminated for any
reason otherwise than by his death or disability (within the meaning of Section
22(e)(3) of the Code), the Optionholder may exercise the rights which were
available to the Optionholder at the time of such termination only within three
(3) months from the date of termination. If the Optionholder's employment is
terminated for reason of disability, such rights may be exercised within twelve
(12) months from the date of termination. Upon the death of the Optionholder,
those entitled to do so by the Optionholder's will or the laws of descent and
distribution shall have the right, at any time within twelve (12) months after
the date of death, to exercise in whole or in part any rights which were
available to the Optionholder at the time of his death. This Option shall
terminate, and no rights hereunder may be exercised, after the expiration of the
applicable exercise period. Notwithstanding the foregoing provisions of this
Section 8, no rights under this Option may be exercised after the expiration of
ten (10) years from the Date of Grant.
9. COMPLIANCE WITH SECURITIES LAWS. It shall be a condition to the
Optionholder's right to purchase shares of Common Stock hereunder that the
Company may, in its discretion, require (a) that the shares of Common Stock
reserved for issue upon the exercise of this Option shall have been duly listed,
upon official notice of issuance, upon any national securities exchange on which
the Company's Common Stock may then be listed, (b) that either (i) a
registration statement under the Securities Act of 1933, as amended, with
respect to said shares shall be in effect, or (ii) in the opinion of counsel for
the Company the proposed purchase shall be exempt from registration under said
Act and the Optionholder shall have made such undertakings and agreements with
the Company as the Company may reasonably require, and (c) that such other
steps, if any, as counsel for the Company shall deem necessary to comply with
any law, rule or regulation applicable to the issue of such shares by the
Company shall have been taken by the Company or the Optionholder, or both. The
certificates representing the shares purchased under this Option may contain
such legends as counsel for the Company shall deem necessary to comply with any
applicable law, rule or regulation.
10. PAYMENT OF TAXES. Any exercise of this Option is conditioned upon the
payment, if the Company so requests, by the Optionholder or his heirs by will or
by the laws of descent and distribution, of all state and federal taxes imposed
upon the exercise of this Option and the issue to the Optionholder of the shares
of Common Stock covered hereby. In the Committee's discretion, such tax
obligations may be paid in whole or in part in shares of Common Stock, including
retention of shares being purchased by the Optionholder, valued at their Fair
Market Value on the date of delivery. The Company may to the extent permitted by
law deduct any such tax obligations from any payment of any kind otherwise due
to the Optionholder.
11. NOTICE OF SALE OF SHARES REQUIRED. The Optionholder agrees to
notify the Company in writing within thirty (30) days of the disposition of one
or more shares of stock purchased upon exercise of this Option if such
disposition occurs within two years of the Date of Grant or within one year
after such purchase.
42
<PAGE> 4
12. BINDING OBLIGATION. By acceptance of this Option, the Optionholder
agrees to the terms and conditions hereof.
IN WITNESS WHEREOF, the Company has caused this Option to be executed on
its behalf and its corporate seal to be hereunto affixed as of December 4, 1995.
IPL SYSTEMS, INC.
By: /s/ Eugene F. Tallone
43
<PAGE> 1
<TABLE>
IPL SYSTEMS, INC.
COMPUTATION OF NET INCOME PER COMMON SHARE EXHIBIT 11
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(Thousands of Dollars Except Per Share Amounts)
- - ------------------------------------------------------------------------------
<CAPTION>
Primary 1995 1994 1993
- - ------- ---- ---- ----
<S> <C> <C> <C>
Income (loss) before cumulative
effect of change in accounting $ (3,464) $ (15,046) $ (2,572)
Cumulative effect of change in
accounting for income taxes -- -- 121
---------- ---------- ----------
Net Income (loss) $ (3,464) $ (15,046) $ (2,451)
========== ========== ==========
Weighted average shares
outstanding 5,469,177 5,381,519 5,235,964
Dilutive stock options based on
the treasury stock method using
average market price for the
period -- -- --
---------- ---------- ----------
Common shares used in
calculation of income (loss)
per share 5,469,177 5,381,519 5,235,964
========== ========== ==========
Income (loss) per common and
common equivalent share:
Income before cumulative effect
of change in accounting $ (0.63) $ (2.80) $ (0.49)
Cumulative effect of change in
accounting for income taxes -- -- 0.02
---------- ---------- ----------
NET INCOME (LOSS) $ (0.63) $ (2.80) $ (0.47)
========== ========== ==========
</TABLE>
44
<PAGE> 2
<TABLE>
IPL SYSTEMS, INC.
- - -----------------
COMPUTATION OF NET INCOME PER COMMON SHARE EXHIBIT 11
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(Thousands of Dollars Except Per Share Amounts)
- - ------------------------------------------------------------------------------
<CAPTION>
Fully Diluted 1995 1994 1993
- - ------------- ---- ---- ----
<S> <C> <C> <C>
Income (loss) before cumulative
effect of change in accounting $ (3,464) $ (15,046) $ (2,572)
Cumulative effect of change in
accounting for income taxes -- -- 121
---------- ---------- ----------
Net Income (loss) $ (3,464) $ (15,046) $ (2,451)
========== ========== ==========
Weighted average shares
outstanding 5,469,177 5,381,519 5,235,964
Dilutive stock options based on
the treasury stock method using
the higher of average or period
and market price 211,600 (A) 128,963 (A) 153,359 (A)
---------- ---------- ----------
Common shares used in
calculation of income (loss)
per share 5,680,777 5,510,482 5,389,323
========== ========== ==========
Income (loss) per common and
common equivalent share:
Income before cumulative effect
of change in accounting $ (0.61) $ (2.73) $ (0.47)
Cumulative effect of change in
accounting for income taxes -- -- 0.02
---------- ---------- ----------
NET INCOME (LOSS) $ (0.61) $ (2.73) $ (0.45)
========== ========== ==========
<FN>
- - ------------------------
(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.
</TABLE>
45
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
IPL Systems, Inc.
Maynard, Massachusetts
We consent to the incorporation by reference in Registration Statements (No.
33-50090), (No. 33-79078), (No. 33-79080), of IPL Systems, Inc. on Form S-8 of
our report dated February 16, 1996 appearing in this Annual Report on Form 10-K
of IPL Systems, Inc. for the year ended December 31, 1995.
Our audits of the consolidated financial statements referred to in our
aforementioned report also included the financial statement schedule of IPL
Systems, Inc., listed in Item 14(a)(2). 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 consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 26, 1996
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EXHIBIT 99.1
------------
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 projected 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, production, 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 Corporation, 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 data base ("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 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
47
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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.
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 (sales of which made outside the United States through third
party distributors are often difficult to forecast), the Company's ability to
close significant sales in that quarter, and 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.
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
48
<PAGE> 3
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 damage relationships with
customers and could have a material adverse effect on the Company's business and
operating results.
Future Capital Needs; Availability of Capital. Management believes that the
Company's cash and cash equivalents are sufficient to meet the operating
requirements for its existing business. Nonetheless, changes in technology or a
substantial growth of sales beyond the Company's current plans could require
additional capital resources. To the extent that internally generated funds are
insufficient to fund the Company's operating requirements, it may be necessary
for the Company to seek additional funding either through debt financing or
public or private equity financing. There can be no assurance that any such
additional financing will be available on acceptable terms or at all. If
adequate funds are not available, the Company's business would be adversely
affected.
49
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